Month: April

1. Sedco Forex International Inc. vs. Commissioner of
Income Tax, Meerut and Ors. (2017) 399 ITR 1 (SC). A. Ys.: 1986-87, 1987-88, 2000-2001.

Non-resident
– Prospecting for, or extra production of mineral ore – All amounts pertaining
to the aforesaid activity which are received on account of provisions of
services and facilities in connection with the said facility are treated as
profits and gains of the business under section 44BB – The fixed amount which
was paid to the Assessees in respect of the contract which was indivisible was
towards mobilisation fee and the same was not for reimbursement of expenses as
the same was payable irrespective of the amount of expenditure incurred and
thus was covered by the provisions of section 44BB.

In the group of appeals
that came up for hearing before the Supreme Court, the appeals filed by Sedco
Forex International Inc., M/s. Transocean Offshore Inc., M/s. Sedco Forex
International Drilling Inc. respectively were taken up as lead matters and,
therefore, for the sake of brevity, the factual matrix from the said appeals,
was considered for answering the question involved.

During the years under
consideration, the Assessees were engaged in executing the contracts all over
the world including India in connection with exploration and production of
mineral oil. The Assessees were companies incorporated outside India and,
therefore, non-resident within the meaning of section 6 of the Act. The
Assessees entered into agreements with ONGC, Enron Oil and Gas India Ltd. The
aforesaid agreements provided for the scope of work along with separate
consideration for the work undertaken. Since the dispute was about mobilisation
charges, the Supreme Court noted clauses in respect thereof which read as
under:

“Operating
Rate-Receipts for undertaking drilling operations computed by per day rates
provided in the contract. The operating rates shall be payable from the time
the drilling unit is jacked-up and ready at the location to spud the first
well.

Mobilisation-charges
for the transport of the drilling unit from a location outside India to a
location in India as may be designated by ONGC”.

In addition to the above,
Assessees also received amounts from the operator towards reimbursement of
expenses like catering, boarding/lodging, fuel, customs duty, the supply of
material etc., with which the Supreme Court was not concerned.

The Assessees filed their
return of income declaring income from charter hire of the rig. The same was
offered to tax u/s. 44BB of the Act. In the case of Sedco Forex International
Inc., the Assessee did not include the amount received as mobilisation charges
to the gross revenue for the purpose of computation u/s. 44BB of the Act. In
the case of Transocean Offshore Inc., the Assessee included 1% of the
mobilisation fees. The mobilisation fees were offered to tax on a 1% deemed
profit basis on the ratio of the CBDT Instruction No. 1767 dated July 1, 1987.

The AO
included the amounts received for mobilisation/demobilisation to the gross
revenue to arrive at the “profits and gains” for the purpose of
computing TAX u/s. 44BB of the Act. The Commissioner of Income Tax (Appeals)
confirmed the action of the AO. The Income Tax Appellate Tribunal in the case
of Sedco Forex International Inc. dismissed the appeal of the Assessee and the
action of the AO was upheld insofar as the mobilisation charges were concerned.
In the case of Transocean Offshore Inc., the ITAT upheld the view taken by the
Assessee and directed the AO to assess the profits on mobilisation charges at
1% of the amount received. This was done following the Circular of CBDT
Instruction No. 1767 dated July 1, 1987 and decision of the third Member in the
case of Saipem S.P.A. vs. Deputy Commissioner of Income Tax 88 ITD 213 (Del).
The High Court held that the mobilization charges reimbursed inter alia
even for the services rendered outside India were taxable u/s. 44BB of the Act
as the same were not governed by the charging provisions of sections 5 and 9 of
the Act. Even on the issue of reimbursement in M/s. Sedco Forex International
Drilling Inc., the High Court followed its earlier judgments dated September
20, 2007 and May 22, 2009 to hold that reimbursement of expenses incurred by
the Assessee was to be included in the gross receipts, and taxable u/s. 44BB of
the Act.

According to the Supreme
Court the issue that needed  examination
was as to whether mobilisation charges received by the Assessees could be
treated as ‘income’ u/s. 5 of the Act and would fall within the four corners of
section 9, namely, whether it could be attributed as having arisen or deemed to
arise in India.

The Supreme Court noted
that the argument of the learned Counsel appearing for the Assessees was that
the amount was received by way of reimbursement of expenses for the operation
carried outside India and the payment was also received outside India. It was
on this premise, entire edifice was built to argue that it was not an
“income” and, in any case, not taxable in India at the hands of the
Assessees which were foreign entities.

The Supreme Court noted
Clause 3.2 of the Agreement dated September 3, 1985 and Clause 4.2 of the
Agreement dated July 12, 1986. Clause 3.2 of the Agreement dated September 3,
1985 pertained to providing the Shallow Dash Water Jack Up Rig against which
payment was made to the Assessees. This Clause said that the Assessees shall be
paid ‘mobilisation fee’ for the mobilisation of drilling unit from its present
location in Portugal to the well location designated by ONGC, offshore Mumbai,
India. Fixed amount was agreed to be paid which was mentioned in the said
Clause. The aforesaid mobilisation fee was payable to the Assessees after the
jacking up of the drilling at the designated location and ready to spud the
well. After the aforesaid operation, Assessees were required to raise invoice
and ONGC was supposed to make the payment within 30 days of the receipt of this
invoice. Insofar as Clause 4.2 of Agreement dated July 12, 1986 was concerned,
it related to mobilisation of drilling unit. Here again, ‘mobilisation fee’ was
payable for the mobilisation of the drilling unit from the place of its origin
to the port of entry (Kandla Port, Mumbai). Hence, a fixed amount of
mobilisation fee was payable under the aforesaid contracts as
“compensation”. Contracts specifically described the aforesaid
amounts as ‘fee’. According to the Supreme Court it was in this hue, it had to
consider as to whether it would be treated as “income” u/s. 5 of the
Act and could be attributed as income earned in India as per section 9 of the
Act. For this purpose, section 44BB(2) had to be invoked.

The Supreme Court noted that
section 44BB starts with non-obstante clause, and the formula contained
therein for computation of income is to be applied irrespective of the
provisions of sections 28 to 41 and sections 43 and 43A of the Act. It was not
in dispute that Assessees were assessed under the said provision which was
applicable in the instant case. For assessment under this provision, a sum
equal to 10% of the aggregate of the amounts specified in sub-section (2) shall
be deemed to be the profits and gains of such business chargeable to tax under
the head ‘profits and gains of the business or profession’. Sub-section (2)
mentions two kinds of amounts which shall be deemed as profits and gains of the
business chargeable to tax in India. Sub-clause (a) thereof relates to amount
paid or payable to the Assessee or any person on his behalf on account of
provision of services and facilities in connection with, or supply of plant and
machinery on hire used, or to be used in the prospecting for, or extraction or
production of, mineral oils in India. Thus, according to the Supreme Court all
amounts pertaining to the aforesaid activity which are received on account of
provisions of services and facilities in connection with the said facility are
treated as profits and gains of the business.

This Clause clarifies that
the amount so paid shall be taxable whether these are received in India or
outside India. Clause (b) deals with amount received or deemed to be received
in India in connection with such services and facilities as stipulated therein.
Thus, whereas Clause (a) mentions the amount which is paid or payable, Clause
(b) deals with the amounts which are received or deemed to be received in
India. The Supreme Court therefore was of the opinion that in respect of amount
paid or payable under Clause (a) of sub-section (2), it was immaterial whether
these were paid in India or outside India. On the other hand, amount received
or deemed to be received have to be in India.

The Supreme Court held that
from the bare reading of the clauses, amount paid under the aforesaid contracts
as mobilisation fee on account of provision of services and facilities in
connection with the extraction etc. of mineral oil in India and against the
supply of plant and machinery on hire used for such extraction, Clause (a)
stood attracted. Thus, this provision contained in Section 44BB had to be read
in conjunction with sections 5 and 9 of the Act and sections 5 and 9 of the Act
could not be read in isolation.

The aforesaid amount paid
to the Assessees as mobilisation fee had to be treated as profits and gains of
business and, therefore,  would be
“income” as per section 5. This provision also treats this income as
earned in India, fictionally, thereby satisfying the test of section 9 of the
Act as well.

The Supreme Court
reiterated that the amount which was paid to the Assessees was towards
mobilisation fee. It did not mention that the same was for reimbursement of
expenses. In fact, it was a fixed amount paid which could be less or more than
the expenses incurred. Incurring of expenses, therefore, would be immaterial.
According to the Supreme Court, it was also to be borne in mind that the
contract in question was indivisible. Having regard to these facts in the
present case as per which the case of the Assessees got covered under the
aforesaid provisions, the Supreme Court did not find any merit in any of the
contentions raised by the Assessees.

In the batch of appeals,
before the Supreme Court there was a solitary appeal which was preferred by the
Director of Income Tax, New Delhi (Revenue) against the judgment of the High
Court of Uttarakhand. The computation of income of the Assessee was done u/s.
44BB of the Act.

However, the amount which
was sought to be taxed was reimbursement of cost of tools lost in hole by ONGC.
The Supreme Court held that it was thus, clear that this was not the amount
which was covered by sub-section (2) of section 44BB of the Act as ONGC had
lost certain tools belonging to the Assessee, and had compensated for the said
loss by paying the amount in question. On these facts, conclusion of the High
Court was correct. Even otherwise, the tax effect is Rs. 15,12,344/-.
Therefore, that Civil Appeal filed by the Revenue was dismissed.

2.  K. Lakshmanya and Company vs. Commissioner of
Income Tax and Ors. (2017) 399 ITR 657 (SC) A.Y.s:
1993-94, 1994-95.

Refund –
Interest on refund – Section 244A is even wider than section 244 and is not
restricted to refund being issued to the Assessee in pursuance to an order
referred to in section 240. Under this section, it is enough that the refund
becomes due under the Income-tax Act, in which case the Assessee shall, subject
to the provisions of this section, be entitled to receive simple interest.

The Assessee, being a
partnership firm, filed a return for assessment years 1993-94 and 1994-95 and
once the order of assessment was completed, interest under sections 234(A) to
(C) was levied.

Aggrieved by this levy of
interest, the Assessee filed an application before the Settlement Commission,
requesting the Commission to waive the interest on the ground that it caused
hardship to it. The Settlement Commission, by its order dated 22.03.2000,
referred to a circular of the CBDT which gave it the power to waive such interest;
and by the aforesaid order, interest was partially waived for the assessment
years in question. On an application made by the Assessee, the Assessing
Officer, by his order dated 25.04.2000 refused to grant interest on the refund
that was payable, and was not paid, within three months from the specified
date. This was done on two grounds, namely, that the provisions of section
244A  do not provide for payment of
interest on refund due on account of waiver of interest that is charged under
sections 234(A)-(C) of the Act and second, that the power assumed by the
Settlement Commission for waiver of interest, by following the CBDT circular
referred to, does not enable the Commission to provide for payment of interest
u/s. 244A.

An appeal that was filed
before the C.I.T. (Appeals) was allowed. This was done by referring to a
judgment of the Madras High Court in Commissioner of Income-Tax vs. Needle
Industries Pvt. Ltd. 233 ITR 370 and with reference to the CBDT circular
which enabled the Settlement Commission to waive interest. An appeal by the
Revenue to the Income-Tax Appellate Tribunal was dismissed. However, in appeal
to the High Court, by the judgment dated 09.12.2009, the High Court of
Karnataka held that, since waiver of interest was within the discretion of the
Settlement Commission, no right flowed to the Assessee to claim refund as a
matter of right under law. In the aforesaid circumstances, the judgements of
the Tribunal and C.I.T. (Appeals) were set aside and the Assessing Officer’s
order was restored.

The question that arose
before the Supreme Court therefore was whether the High Court of Karnataka at
Bangalore was correct in holding that the Assessee in the present case was not
entitled to interest u/s. 244A of the Income-Tax, 1961 Act, when refund arose
to it on account of interest that was partially waived by an order of the
Settlement Commission.

According to the Supreme
Court, a reading of the section 240 showed that refund may become due to the
Assessee, either as a result of an order passed in appeal or other proceedings
under this Act. It was clear that refund that arises as a result of an order
passed u/s. 245(D)(4) was an order passed in “other proceedings under this
Act”. Thus, it was clear that the Assessee in the present case was covered
by section 240 of the Act.

The Supreme Court noted
that when it comes to interest on refund, section 244, which applied to
assessment years up to and including assessment year 1989-90, makes it clear
that it would apply where a refund is due to the Assessee in pursuance of an
order referred to in section 240. It is only if the Assessing Officer does not
grant the refund within three months from the end of the month in which such
order is passed, that the Central Government shall pay to the assesses simple
interest on the amount of refund due.

According to the Supreme
Court, section 244A is even wider than section 244 and is not restricted to
refund being issued to the Assessee in pursuance to an order referred to in
section 240. Under this section, it is enough that the refund becomes due under
the Income-tax Act, in which case the Assessee shall, subject to the provisions
of this section, be entitled to receive simple interest.

The Supreme Court was of
the view that the present case would fall outside sub-clauses (a) and (aa) of
this provision and, therefore, fall within the residuary clause, namely
sub-clause (b) of section 244A.

The Supreme Court held that
the Madras High Court in Needle Industries Pvt. Ltd. (supra) concerned
itself with the position prior to the advent of section 244A. It found that the
expression “refund of any amount” used by section 240 and 244 would
include not only tax and penalty but interest also. It was, therefore, held
that the clear intention of Parliament is that the right to interest will
compensate the Assessee for the excess payment during the intervening period
when the Assessee did not have the benefit of use of such money paid in
whatsoever character. The Supreme Court further noted that in Sandvik Asia
Ltd. vs. CIT (2006) 280ITR 643 (SC), it had expressly approved the decision
of the Madras High Court.

The Supreme Court also
referred to its decision in CIT vs. HEG Ltd. (2010) 324 (331) (SC) which
considered the meaning of the expression “where refund of any amount become due
to the assessee” in section 244A(1).

The Supreme Court referred
to its decision in UOI vs. Tata Chemicals Ltd. (2014) 363 ITR 658 (SC)
and observed that it clearly showed that a corresponding right exists, to
refund to individuals any sum paid by them as taxes which are found to have
been wrongfully existed or believed to be, for any reason, inequitable.

The statutory obligation to
refund, being non discretionary, carries with it the right to interest, also
making it clear that the right to interest is parasitical. The right to claim
refund is automatic once the statutory provisions have been complied with.

The Supreme Court held that
of the view that the expression “due” only means that a refund
becomes due if there is an order under the Act which either reduces or waives
tax or interest. It is of no matter that the interest that is waived is
discretionary in nature, for the moment that discretion is exercised, a concomitant
right springs into being in favour of the Assessee. According to the Supreme
Court the C.I.T. (Appeals) and the ITAT were therefore correct in their view
and that consequently, the High Court was incorrect in its view that since a
discretionary power has been exercised, no concomitant right was found for
refund of interest to the Assessee.

The appeals were
accordingly allowed by the Supreme Court.

3.  Commissioner of Income Tax vs. Modipon Ltd.
(2018) 400 ITR 1 (SC)A.Y.:1993-94,
1996-97,1998-99

Business
expenditure – The advance deposit of central excise duty constitutes actual
payment of duty within the meaning of Section 43B and, therefore, the Assessee
is entitled to the benefit of deduction of the said amount.

The question that was
involved in the appeals before the Supreme Court was formulated as under:

“Whether the Assessee is
entitled to claim deduction under 43B of the Income Tax Act, 1961 in respect of
the excise duty paid in advance in the Personal Ledger Account (“PLA”
for short)?”

The Revenue urged that
though levy of excise is on manufacture of excisable goods, actual payment of
duty is at the stage of removal. The advance duty paid in the PLA is
adjusted/debited from time to time, against clearances/removal made by the
Assessee. Unless such clearances/removal are made and excise duty is debited
from the advance deposit there is no actual payment of duty so as to entitle an
Assessee to the benefit of deduction u/s. 43B of the Income-tax Act which
contemplates deduction only against actual payment as distinguished from
accrual of liability. It was urged on behalf of the Revenue that the amount in
deposit was akin to a loan and under the provisions of Central Excise Rules,
part or whole of the said amount could be refunded to the Assessee. It was
further submitted that Under Rule 21 of the Central Excise Rules, 1944, at any
time before removal, the Commissioner or the other authorities prescribed
therein may remit duty in respect of manufactured goods lost or damaged or
otherwise unfit for consumption or marketing. The amount of advance deposit,
therefore, did not represent actual payment of duty so as to entitle an
Assessee to the benefit of deduction under section 43B. Accordingly the orders
of the High Courts challenged in the appeals were liable to interference.

In reply, the learned
senior Counsel appearing for the Assessee has submitted that u/s. 3 of the
Central Excise Act, the event for levy of excise duty is the manufacture of
goods though the duty is to be paid at the stage of removal of the goods.
Pointing out the provisions of Rule 173G of the Central Excise Rules, 1944 it
was submitted that the advance deposit of central excise duty in a current
account is a mandatory requirement from which adjustments are made, from time to
time, against clearances effected. Though, Sub-rule (1)(A) contemplates refund
from the current account, such refund could be granted only on reasons being
recorded by the concerned authority i.e., the Commissioner on the application
filed by the Assessee. Refund is not a matter of right. The amount deposited in
the PLA is irretrievably lost to the Assessee. Payment of central excise duty
takes place at the time of deposit in the PLA, though the deposit is on the
basis of an approximation and the precise amount of duty qua the goods removed
is ascertained at the stage of removal/clearances. The said facts, according to
the learned Counsel, would not make the deposit anything less than actual
payment of duty.

The Supreme Court noted
that deposit of Central Excise Duty in the PLA is a statutory requirement. The
Central Excise Rules, 1944, specify a distinct procedure for payment of excise
duty leviable on manufactured goods. It is a procedure designed to bring in
orderly conduct in the matter of levy and collection of excise duty when both
manufacture and clearances are a continuous process. Debits against the advance
deposit in the PLA have to be made of amounts of excise duty payable on
excisable goods cleared during the previous fortnight. The deposit once made is
adjusted against the duty payable on removal and the balance is kept in the
account for future clearances/removal. No withdrawal from the account is
permissible except on an application to be filed before the Commissioner who is
required to record reasons for permitting an Assessee to withdraw any amount
from the PLA. Sub-rules (3), (4), (5) and (6) of Rule 173G indicates a strict
and vigorous scrutiny to be exercised by the central excise authorities with
regard to manufacture and removal of excisable goods by an Assessee. According
to the Supreme Court, the self removal scheme and payment of duty under the Act
and the Rules clearly showed that upon deposit in the PLA the amount of such
deposit stood credited to the Revenue with the Assessee having no domain over
the amount(s) deposited.

The Supreme Court was of
the view that the analogy of decisions in C.I.T. vs. Pandavapura Sahakara
Sakkare Karkhane Ltd. 198 ITR 690 (Kar.) and C.I.T. vs. Nizam Sugar
Factory Ltd. 253 ITR 68 (AP) would apply to the case in hand, in which, it
was held that where Assessee had no control over the amounts received, the same
could not be taxed in its hands.

The Supreme Court observed
that the Delhi High Court in the appeals arising from the orders passed by it
had also taken the view that the purpose of introduction of section 43B was to
plug a loophole in the statute which permitted deductions on an accrual basis
without the requisite obligation to deposit the tax with the State.
Resultantly, on the basis of mere book entries an Assessee was entitled to
claim deduction without actually paying the tax to the State. Having regard to
the object behind the enactment of section 43B and the preceding discussions,
the Supreme Court held that the legislative intent would be achieved by giving
benefit of deduction to an Assessee upon advance deposit of central excise duty
notwithstanding the fact that adjustments from such deposit are made on
subsequent clearances/removal effected from time to time.

The Supreme Court concluded
that the High Courts were justified in taking the view that the advance deposit
of central excise duty constitutes actual payment of duty within the meaning of
section 43B and, therefore, the Assessee is entitled to the benefit of deduction
of the said amount.

The Supreme Court dismissed
the appeals and affirmed the orders of the High Courts of Delhi and Calcutta
impugned in these appeals.

4. ITO
vs. Venkatesh Premises Co-op. Society Ltd. (Civil Appeal No. 2708 of 2018 dated
12.3.2018 arising from SLP(C) No. 30194/2010)

Principle
of mutuality – Certain receipts by cooperative societies, from its members i.e.
non-occupancy charges, transfer charges, common amenity fund charges and
certain other charges, are exempt from income tax based on the doctrine of
mutuality.

A common question of law
that arose for consideration in a batch of appeals before the Supreme Court was
as to whether certain receipts by cooperative societies, from its members i.e.
non-occupancy charges, transfer charges, common amenity fund charges and
certain other charges, are exempt from income tax based on the doctrine of
mutuality.

The challenge was based on
the premise that such receipts were in the nature of business income,
generating profits and surplus, having an element of commerciality and
therefore exigible to tax.

The assessee in one of the
appeals (Civil Appeal No.1180 of 2015 – Sea Face Park Co.Op. Housing Society
Ltd. vs. Income Tax Officer) assailed the finding that such receipts, to
the extent they were beyond the limits specified in the Government notification
dated 09.08.2001 issued u/s. 79A of the Maharashtra Cooperative Societies Act,
1960 (hereinafter referred to as ‘the Act’) was exigible to tax falling beyond
the mutuality doctrine.

The Supreme Court noted the
primary facts, for better appreciation from SLP (C) No.30194 of 2010 (ITO
vs. Venkatesh Premises Co-op. Society Ltd.). The assessing officer held
that receipt of non-occupancy charges by the society from its members, to the
extent that it was beyond 10% of the service charges/maintenance charges
permissible under the notification dated 09.08.2001, stands excluded from the
principle of mutuality and was taxable. The order was upheld by the
Commissioner of Income Tax (Appeals). The Income Tax Appellate Tribunal held
that the notification dated 09.08.2001 was applicable to cooperative housing
societies only and did not apply to a premises society. It further held that
the transfer fee paid by the transferee member was exigible to tax as the transferee
did not have the status of a member at the time of such payment and, therefore,
the principles of mutuality did not apply. The High Court set aside the finding
that payment by the transferee member was taxable while upholding taxability of
the receipt beyond that specified in the government notification.

The Supreme Court held that
the doctrine of mutuality, based on common law principles, is premised on the
theory that a person cannot make a profit from himself. An amount received from
oneself, therefore, cannot be regarded as income and taxable. Section 2(24) of
the Income-tax Act defines taxable income. The income of a cooperative society
from business is taxable u/s. 2(24)(vii) and will stand excluded from the
principle of mutuality. The essence of the principle of mutuality lies in the
commonality of the contributors and the participants who are also the
beneficiaries. The contributors to the common fund must be entitled to
participate in the surplus and the participators in the surplus are contributors
to the common fund. The law envisages a complete identity between the
contributors and the participants in this sense. The principle postulates that
what is returned is contributed by a member. Any surplus in the common fund
shall therefore not constitute income but will only be an increase in the
common fund meant to meet sudden eventualities. A common feature of mutual
organisations in general can be stated to be that the participants usually do
not have property rights to their share in the common fund, nor can they sell
their share. Cessation from membership would result in the loss of right to
participate without receiving a financial benefit from the cessation of the
membership.

The Supreme Court noted
that in the appeals before it, transfer charges were payable by the outgoing
member. The Supreme Court held that if for convenience, part of it was paid by
the transferee, it would not partake the nature of profit or commerciality as
the amount is appropriated only after the transferee is inducted as a member.
In the event of non-admission, the amount is returned. The moment the
transferee is inducted as a member the principles of mutuality apply. Likewise,
non-occupancy charges are levied by the society and is payable by a member who
does not himself occupy the premises but lets it out to a third person. The
charges are again utilised only for the common benefit of facilities and
amenities to the members. Contribution to the common amenity fund taken from a
member disposing property is similarly utilised for meeting sudden and regular
heavy repairs to ensure continuous and proper hazard free maintenance of the
properties of the society which ultimately enures to the enjoyment, benefit and
safety of the members. These charges are levied on the basis of resolutions
passed by the society and in consonance with its byelaws. The receipts in the
present cases are indisputably been used for mutual benefit towards maintenance
of the premises, repairs, infrastructure and provision of common amenities.

The Supreme Court further
held that any difference in the contributions payable by old members and fresh
inductees cannot fall foul of the law as sufficient classification exists.
Membership forming a class, the identity of the individual member not being
relevant, induction into membership automatically attracts the doctrine of
mutuality. If a Society has surplus FSI available, it is entitled to utilise
the same by making fresh construction in accordance with law. Naturally such
additional construction would entail extra charges towards maintenance,
infrastructure, common facilities and amenities. If the society first inducts
new members who are required to contribute to the common fund for availing
common facilities, and then grants only occupancy rights to them by draw of
lots, the ownership remaining with the society, the receipts cannot be
bifurcated into two segments of receipt and costs, so as to hold the former to
be outside the purview of mutuality classifying it as income of the society
with commerciality.

The Supreme Court with
reference to decision in The New India Cooperative Housing Society vs. State
of Maharashtra 2013 (2) MLJ 666 relied upon by the Revenue to contend that
any receipt by the society beyond that permissible in law under the
notification was not only illegal but also amounted to rendering of services
for profit attracting an element of commerciality and thus was taxable held
that the challenge by the aggrieved was to the transfer fee levied by the
society in excess of that specified in the notification, which was a completely
different cause of action having no relevance to the present controversy.

According to the Supreme
Court, it was not the case of the Revenue that such receipts has not been
utilized for the common benefit of those who have contributed to the funds.

Also, there was no reason
to take a view different from that taken by the High Court, that the notification
dated 09.08.2001 is applicable only to cooperative housing societies and has no
application to a premises society which consists of non-residential premises.

In the result, all appeals
preferred by the Revenue were dismissed by the Supreme Court and Civil Appeal
No.1180 of 2015 preferred by the assessee society was allowed.

BCAJ Admin

1.      
CIT (Exemptions) vs. Jagannath
Gupta Family Trust (2019) 411 ITR 235 (SC)

Charitable purpose – The High Court allowed
the appeal mainly on one ground, namely, that one bogus donation would not
establish that the activities of the trust are not genuine – According to the
Supreme Court, the High Court had committed error in entertaining the appeal
against the remand order passed by the appellate-authority, and in quashing the
order of cancellation of registration

Jagannath Gupta Family Trust (the Trust), a
registered Trust u/s. 12AA of the Income Tax Act, 1961, (for short ‘the Act’)
and also approved u/s. 80G(5)(vi) of the Act, was created with an avowed object
of public and charitable purposes, namely, medical relief, education, any other
causes of public utility etc. The Trust is running an Engineering College.

A survey was conducted u/s. 133A of the Act,
in the premises of School of Human Genetics and Population Health (SHGPH),
Kolkata by the Investigation Wing on 27.01.2014. During the said survey the
Income-tax Department noticed a donation entry of Rs. 37,00,000/- (Rupees
Thirty-Seven Lakh) in two tranches in the months of February and March, 2013.
According to the Department, such donation given to the Trust was bogus and
sham. The donor did not actually donate such amount, such entry was shown by
receiving the amount in cash from the Trust, by retaining commission.

In view of such allegation, the Commissioner
of Income-tax (Exemptions) initiated the proceedings for cancellation of
registration and issued a show-cause notice to the Trust on 04.12.2015. The
Trust replied to the same and contested the proceedings. The main plank of the
defence was that the procedure adopted by the Department was contrary to the
principles of natural justice. It was also the case of the Trust, that though a
statement of the representative of the donor was recorded and on the said basis
proceedings were initiated for cancellation of registration, but the Trust was
not given any opportunity to cross examine such representative.

After receipt of the explanation to the
show-cause notice, alleging that the activities of the Trust were neither
genuine nor as per the objects of the trust, further alleging that the
transaction in question was only a money laundering, therefore, receipt of
donation in lieu of cash was never the object of the trust and as such it was
to be treated as ingenuine and illegal activity. It was also held that such activities
were carried out by the Trust not only in one year but in several years.

By recording the aforesaid findings, the
primary authority, by order dated 15.03.2016, in exercise of power u/s. 12AA(3)
of the Act, cancelled the registration of the Trust.

Aggrieved by the order of cancellation dated
15.03.2016, the Trust filed an appeal before the Income Tax Appellate Tribunal,
at Kolkata. The appellate authority, recorded a finding that, though the
statement of the donor was made basis for initiating proceedings for
cancellation of registration of the Trust, but the Trust was not given an
opportunity to cross-examine the representative. The appellate-authority held
that an opportunity of cross-examination of the representative of the donor was
to be given to the Trust. The appellate-authority set aside the order dated
15.03.2016 and remanded the matter for fresh consideration by primary
authority.

Aggrieved by the order of the appellate
authority dated 10.04.2017, the Trust filed an appeal, before the High Court of
Calcutta. By the impugned order, the High Court allowed the appeal by order
dated 18.09.2017 and quashed the order of cancellation of registration. The
High Court held that while it was possible that a particular donation may be
bogus or fictitious and, the Trust may be assessed to tax therefor and other
steps could be taken but the single donation which was allegedly bogus, would
not establish that the activities of the trust were not genuine and not being
carried out in accordance with the objects of the trust. It also held that if
there were multiple bogus transactions of similar kind, it may lead to
reasonable assessment for the Competent Authority to hold that the trust was
engaged in such activities which could be said to be not genuine or not in
conformity with the objects of the trust.

The Commissioner of Income tax (Exemptions),
Kolkata, aggrieved by the Order dated 18.09.2017 passed by  the High Court of Calcutta filed an appeal before the Supreme Court.

The Supreme Court noted that in the
proceedings initiated for the cancellation of registration, mainly it was the
case of the Trust that proceedings for cancellation were initiated only on the ex-parte
statement of the representative of the donor, without giving any opportunity to
the Assessee. It noted that though a survey was also conducted on the Trust,
but nothing adverse was found during such survey to support the case of the
Revenue, to cancel the registration. The Supreme Court, on the perusal of the
order passed by the High Court, found that the High Court had allowed the Writ
Petition mainly on one ground, namely, that one bogus donation would not
establish that the activities of the trust are not genuine.

According to the Supreme Court, such a reason
assigned by the High Court was erroneous and ran contrary to the plain language
of section 12AA(3) of the Act. In view of the serious allegations made against
the Trust, it was a matter for consideration of the issue, after giving
opportunity as pleaded by the Trust but the High Court had committed error in
entertaining the appeal against the remand order passed by the
appellate-authority, and in quashing the order of cancellation of registration.

The Supreme
Court therefore set aside order of the High Court, but however, clarified that
it had not expressed any opinion on merits, and it was open to the Commissioner
of Income Tax (Exemptions), Kolkata to consider all the issues on its own
merit, uninfluenced by the observations made by the appellate authority, the
High Court or in this order by it.

BCAJ Admin