Month: February

22 Urban Improvement Co. (P) Ltd. v.

ITAT ‘D’ Bench, Delhi

A.Y. : 2003-04. Decided on : 5-9-2008

Counsel for assessee/revenue : Rano Jain/

Nikhil Choudhary

The assessee-company is engaged in the business of developing
land. It debited to its profit & loss account a sum of Rs.15,66,172 towards
interest on earnest money. On 13th June 1997, the assessee had entered into a
memorandum of understanding (‘MOU’) with certain educational societies for
construction of school buildings and had accepted certain amounts as earnest
monies. The MOU provided that in the event that the permission for construction
from the concerned authority was not received, the assessee shall refund the
entire amount with interest. During the previous year relevant to the assessment
year under consideration, the Board of Directors of the assessee company passed
a resolution to refund the said earnest money together with interest. Since the
amount of interest paid pertained to the period from the date of receipt of the
amounts of earnest deposit, the Assessing Officer disallowed the sum of
Rs.15,66,172 as prior period expenses. The AO justified his action by making a
reference to the Madras High Court decision in the case of K. Sankaranarayana
Iyer & Sons. On an appeal, the CIT(A) upheld the action of the AO. The CIT(A)
observed that merely by passing a resolution by the Board of Directors of the
company, the assessee cannot create a liability in the year under consideration
when it was maintaining the books of account on mercantile system. Aggrieved by
the order of the CIT(A), the assessee preferred an appeal to the Tribunal.

23 Kuber Tobacco Products Pvt. Ltd.
v. DCIT

The Tribunal referred to two of the Supreme Court decisions
viz., the case of H. V. Thakur and the case of Maharaj Chintamani Saran
Nath Shahdeo to examine the present issue. According to it,
‘First and foremost rule of
construction of interpretation is that in the absence of anything in the
enactment to show that it is to have retrospective operation, the said enactment
cannot be construed to have retrospective operation and when amendment relates
to a procedural provision resulting into creating a new disability or obligation
and which imposes new duty in respect of transactions already completed, then,
the said procedural provision also cannot be applied retrospectively. Similar is
the position where a statute which not only changes the procedure, but also
creates new rights and liabilities which shall be construed to be prospective in
operation, unless otherwise provided either expressly or by necessary
implication.”

The assessee was engaged in the business of manufacturing
electro porcelain products. W. S. Telesystems (WSTL), a subsidiary of the
assessee, was supplying to the assessee the material required by the assessee
for executing its contracts. For this purpose, the assessee used to make
advances to WSTL from time to time. Over a period of time, amounts aggregating
to Rs 6.11 crores were advanced by the assessee in excess of the amounts billed.
The assessee had issued corporate guarantees in respect of borrowings of WSTL
from ICICI, Central Bank of India and Kirloskar Finance Ltd. Upon WSTL becoming
sick and being under the threat of invocation of guarantees, the assessee
entered into a onetime settlement with the lenders of WSTL, whom the assessee
had given corporate guarantees and paid amounts aggregating to Rs 13.07 crores
in consideration of discharge of corporate guarantees. Thus, a total Rs 19.18
crores was shown as receivable from WSTL. Upon closure of the WSTL factory and
WSTL becoming sick, the assessee, with the approval of the High Court of Madras,
u/s 391 of the Companies Act, 1956, debited the sum of Rs 19.18 crores to share
premium account in the books of the company, but claimed it as a deduction in
the course of assessment. The Assessing Officer (AO) allowed the deduction of Rs
6.11 crores, but did not allow the deduction of Rs 13.07 crores.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
allowed the deduction of Rs 13.07 crores towards discharge of corporate
guarantee obligation.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Giving corporate guarantee was one of the objects under the
Memorandum of Association; and also since the subsidiary company was supplying
materials which were important for the assessee’s business, the action of giving
corporate guarantee as well as advances was held to be incidental to the
assessee’s business, and a commercially expedient decision. The Tribunal
observed that when the writing off of advances has been allowed as a deduction,
there is no reason why the amount paid towards discharge of corporate guarantee
should be treated any differently. Incurrence of expenditure was incidental to
the interest of the business of the assessee.

The appeal filed by the Revenue was dismissed.

The assessee was engaged in the business of real estate
development. The assessee held land costing Rs 4.40 crores as its
stock-in-trade. Vide a Memorandum of Partnership executed on 23rd March, 1992,
the assessee entered into a partnership with four of its subsidiaries and one
individual. The assessee contributed all its rights in the five plots of land to
the newly constituted partnership firm in which the assessee became a partner
with 76% share. The rights of the assessee in the land so contributed became the
property of the firm from 16th March, 1992. A sum of Rs 11.50 crores,
representing the market value of the land, was credited by the partnership firm
to the capital account of the assessee. The assessee credited its ‘profit and
loss’ account with Rs 6.01 crores, the sum being the difference between market
value of the land introduced into the firm and its book value. However, in the
return of income filed by the assessee, this sum of Rs 6.01 crores was claimed
to be not taxable on the ground that the introduction of an asset into a
partnership firm does not constitute sale. In support of its contention, the
assessee placed reliance on the decision of the Apex Court in the case of Hind
Construction Ltd. (83 ITR 211)(SC). The AO and the CIT (A), relying on the ratio
of the decision of the Apex Court in the case of Sunil Siddharthbhai, taxed this
amount.

Aggrieved, the assessee preferred an appeal to the Tribunal.

The Special Bench of the Tribunal, by the majority, held as
follows:

ACIT v. Bhaumik Colour Pvt. Ltd.

Bhaumik Colour Pvt. Ltd. (BCPL), the assessee, was a company
engaged in the business of manufacture of pencil-paints. The assessee took an
interest-bearing loan of Rs.9 lakhs from UPPL. The AO found that though the
assessee was not a shareholder of UPPL, both the companies had one common
shareholder i.e., NNT. The said trust was holding 20% shares in
assessee-company i.e., holding substantial interest and 10% shares in
UPPL. The shares were held by the trust in the name of three trustees for and on
behalf of the trust and the beneficiaries of the trust were five in number and
none of the trustees was the beneficiary of the trust. The AO was of the view
that this transaction was covered by the second limb of provisions of S.
2(22)(e) of the Act. The AO taxed the sum of Rs.9 lakhs in the hands of the
assessee. The CIT(A) deleted the addition made by the AO for the reason that NNT
was not beneficial shareholder of shares in BCPL or UPPL and therefore the
second limb of the provisions of S. 2(22)(e) could not be applied vis-à-vis
the assessee. Aggrieved by the order of the CIT(A), the Revenue preferred an
appeal to the Tribunal. The Division Bench noted that there was a direct
conflict between the decisions in Nikko Technologies (I) Pvt. Ltd. and Seamist
Properties (P) Ltd., and was, therefore, of the opinion that the matter should
be heard by a Special Bench on the following questions :

The Special Bench held as under :

Kotak Securities Ltd. v. Addl.CIT

For the relevant assessment year, the Assessing Officer
invoked S. 40(a)(ia) in respect of transaction charges paid by the
assessee-broker to the stock exchanges and disallowed the transaction charges
paid on account of non-deduction of tax at source. The CIT(A) upheld the
disallowance.

The Tribunal, relying on the decisions in the following
cases, deleted the disallowance :

The Tribunal noted as under :

ITO v. Mahyco Vegetable Seeds Ltd.

The assessee-company came into effect following demerger of a
division of ‘M’ Ltd. The assessee claimed the benefit of S. 72A(4) read with S.
35(4) in respect of unabsorbed depreciation and expenditure on scientific
research. The AO allowed the benefit of S. 72A(4) in respect of unabsorbed
depreciation. However, benefit of carry forward in respect of expenditure on
scientific research was denied. The CIT(A) allowed the assessee’s claim.

The Tribunal upheld the CIT(A)’s order and allowed the
unabsorbed capital expenditure on scientific research to be carried forward.

The Tribunal noted as under :

Coastal Corporation Ltd. v. Jt. CIT

During the relevant assessment year, the company had, under
the Rehabilitation Scheme of the Government of India, opted for a one-time
settlement of term loans and interest. The reduction of principal amount payable
was credited to Capital Reserve. The waiver of the interest portion was
reflected as income and offered to tax. The Assessing Officer considered the
same in the assessment.

Subsequently, after the expiry of four years, a notice
u/s.148 was issued in respect of depreciation claimed by assessee on the fixed
assets in respect of which the term loan was reduced. The Assessing Officer held
that the claim of deduction towards depreciation is in the nature of expenditure
as it reduced the liability of the assessee to pay income-tax on such amount
and, thus, upon waiver of the loan liability which was utilised for purchase of
the asset, the consequent depreciation claimed thereon can be said to have been
recovered by the assessee and, therefore, provisions of S. 41(1) of the Act are
applicable. The CIT(A) upheld the disallowance.

The Tribunal, relying on the decisions in the following cases
held that remission of principal portion of loan does not fall within the
purview of S. 41(1) :

The Tribunal noted as under :

Skyline Caterers (P) Ltd. v. ITO

As per agreement dated 16-8-2000, the assessee paid Rs.27
lacs for acquiring the catering business for HLL along with equipment, etc.
lying at HLL canteen and debited the same to ‘Goodwill’ account in its books.
Depreciation @ 25% claimed by the assessee was disallowed by the Assessing
Officer on the following grounds :

The assessee’s appeal did not find favour with the CIT(A) who
upheld the disallowance on the grounds that :

The Tribunal, applying the decision in the case of
Kedarnath Jute Mfg. Co. Ltd. v. CIT, (1971) 82 ITR 363 (SC), held in favour
of the assessee. The Tribunal noted as under :

C. K. Govindankutty Nair v. WTO

For A.Y. 1989-90, the assessee has adopted a particular value
of land (with area of 40 cents) and building for determining value of his
interest in the firm. Subsequently he filed a revised return to avail the
benefit of valuation under Schedule III read with S. 7(2) and declared a much
lower value of the said land and building. The Assessing Officer accepted such
lower valuations. The said firm was dissolved in 1986 and the Assessing Officer
held that assessee’s share — 10.580 cents of land and building was distinctly
identifiable and hence valuation of entire plot of 40 cents and building as one
unit resulted in escapement of wealth. The Assessing Officer initiated
reassessment u/s.17 which was upheld by the Commissioner (Appeals).

On further appeal by the assessee, the ITAT held that :

Thomas Kurian v. ACIT

The assessee, an exporter, did not claim deduction u/s.80HHC
in the return of income and not even before the Assessing Officer. Such claim
was made for the first time before the Commissioner (Appeals), who rejected the
claim.

On assessee’s appeal, the ITAT held that :

Based on the above reasonings, the ITAT restored the matter
to the Assessing Officer for considering the assessee’s claim for deduction
u/s.80HHC in accordance with law.

Colorcraft v. ITO (Mum.)

The assessee filed its return for A.Y. 2000-01 claiming
deduction u/s.80HHC, which was allowed by the Assessing Officer during
assessment u/s.143(3). Subsequently, the Commissioner issued notice u/s. 263.
One of the grounds for revision stated in the notice was that deduction
u/s.80HHC was allowed on export profits including duty drawbacks which did not
qualify for deduction u/s.80HHC. However, subsequently a revision order was
passed holding that excessive deduction u/s.80HHC was allowed for 3 reasons :

On assessee’s appeal against the above order of revision
u/s.263, the ITAT held that :

Applying the above principles, the ITAT held that since in
the instant case, notice was issued for excluding duty drawback from the quantum
of deduction u/s.80HHC, but the revision order was passed on 3 altogether
different grounds, the revision order was not valid.

Part A: Reported
Decisions

Income-tax Act, 1961 — S. 244A — Interest on excess payment of self-assessment
tax becomes due from the date of payment of self-assessment tax.

The assessee, an autonomous
body controlled by the Government of Haryana, short deducted tax at source. The
Assessing Officer (AO) issued a notice of demand for the amount of tax short
deducted by the assessee. He also levied interest u/s.201(1A).

Aggrieved the assessee
preferred an appeal to CIT(A) and contended that since the deductees have paid
their tax dues, the tax cannot be recovered from the assessee. Proof with regard
to some of the deductees was sought to be filed before the CIT(A) but the
assessee could not explain why the same was not filed before the AO. The CIT(A)
did not take into consideration the said evidence filed by the assessee and
rejected the appeals filed by the assessee.

Aggrieved, the assessee
preferred an appeal to the Tribunal where it was contended that the short
deduction was due to the fact that the assessee being government-controlled body
did not have provision of engaging private consultant and the staff being not
conversant with the provisions of the Act could not deduct proper TDS, deductees
have paid the taxes due from them, interest cannot be levied for a period after
the date when the deductees have paid their taxes and in respect of delay in
depositing TDS interest be levied up to the date of tender of the cheque and not
up to the date of its encashment.

The Tribunal held this to be
a case of genuine hardship faced by the assessee and observed that if such
payment is made by the assessee, then from whom the payment can be recovered as
the deductees are stated to have already paid the taxes and have submitted their
returns.

The Tribunal restored the
matter back to the file of the AO with a direction to verify the contention of
the assessee that deductees having paid their taxes, the assessee cannot be held
liable to make good the short deduction of tax. It also held that interest
cannot be levied after the date on which the tax has actually been paid by the
deductees. The AO was directed to give reasonable opportunity to the assessee to
place the evidence on record and thereafter re-compute the liability of the
assessee u/s.201 and u/s.201(1A).

As regards interest on
belated payments, following the decision of the Supreme Court in the case of CIT
v. Ogala Glass Works Ltd., (25 ITR 529) (SC), the Tribunal directed the AO that,
for computing interest u/s.201(1A), date of tendering of cheque be taken into
consideration and if the cheque is tendered within the due date and has also not
been dishonoured, then no interest be charged on the assessee for belated
payment on account of late encashment of cheques.

The appeal filed by the
assessee was allowed.

The assessee company,
registered with RoC, Delhi, was having its office at Delhi and it had filed its
tax returns for A.Y. 1998-99 to 2000-01 in Delhi. On the basis of enquiry
conducted by the Investigation Wing of the IT Department, reassessment
proceedings were initiated against the assessee for A.Y. 2001-02 by issuance of
notice u/s.148 by the AO at Agra. Then subsequently the case was transferred to
the AO at Delhi for completion of assessment, it having been found by the AO at
Agra that the return had been filed with AO at Delhi. The CIT(A) annulled the
reassessment on the ground that reassessment notice issued from Agra was without
any jurisdiction.

It is only an AO within the
meaning of S. 2(7A) of the Act, who can assess or reassess any escaped income
u/s.147 of the Act, of an assessee. It is only an AO within the meaning of S.
2(7A) of the Act, who can serve a notice u/s.148 of the Act on an assessee.
Herein, the AO at Agra not being the AO qua the assessee, he could not have
assessed or reassessed any escaped income of the assessee and he could not have
served the assessee with a notice u/s.148 of the Act.

S. 292BB seeks to deem an
action as provided under the Act, to have been done in accordance with the
provisions of the Act. But when, as in the present case, the notice itself was
not in accordance with the provisions of the Act, it was a jurisdictional
defect, which the provisions of S. 292BB of the Act cannot, by any stretch of
imagination, be canvassed to cure.

A ‘proceeding’ as envisaged
by S. 292BB has to be a legally valid proceeding which here it is not, since the
notice for reassessment is bad in law. This also goes for the ‘inquiry’
mentioned in S. 292BB. The assessee, therefore, never appeared in any
proceeding, nor co-operated in any inquiry as required u/s.292BB and so S. 292BB
does not at all come into play.

Further, in the present
case, the assessee is nowhere aggrieved of any of the three situations i.e., (1)
that the notice has not been served on him, or (2) it has not been served on him
in time, or (3) it has been served on him in an improper manner. Rather, the
grievance of the assessee is that the notice served on him was not issued by an
AO having jurisdiction over him. Now this is a jurisdictional issue which goes
to the very root of the matter.

The jurisdictional defect of
the notice having been issued by an AO not having jurisdiction over the assessee,
as such, is not a mere irregularity, but an incurable illegality and is
incapable of being cured by seeking recourse to the provisions of S. 292BB.

During the relevant assessment year, the assessee sold land
and invested the capital gains in a plot of land on which a residential house
was under construction and claimed exemption u/s.54F. The assessee also claimed
exemption u/s.54F in respect of investment in another continuous plot of land
which, according to him, was land appurtenant to the building constructed on the
first plot. The Assessing Officer held that exemption u/s.54F is provided only
if investment is in respect of a residential house and not for an empty plot.
He, therefore, held that the consideration invested in the purchase of the
second plot was not entitled to exemption u/s.54F, and restricted the exemption
to the extent of amount invested in purchase of the first plot. On appeal, the
CIT(A) held that the Assessing Officer had not adduced any evidence that the
second plot was not a contiguous one and it did not constitute a land
appurtenant to the building constructed within the statutory time limit u/s.54F.
He therefore, allowed the claim of deduction u/s.54F in respect of second plot.

The Tribunal allowed the assessee’s claim. The Tribunal noted
as under:

During the relevant assessment year, the assessee sold one of
its four office premises. The Assessing Officer revoked Section 50C and taxed
the difference between the agreement value and the value adopted by the stamp
duty authorities as short-term capital gains u/s. 50. The CIT (A) deleted the
addition observing that Section 50 does not have any mention of stamp duty
valuation as is mentioned in Section 50C.

The Tribunal upheld the CIT (A)’s order. The Tribunal noted
as under:

Pursuant to an agreement, the assessee acquired the foreign
exchange broking business of a company for which it paid a certain amount
towards broking rights and towards goodwill and claimed depreciation on the
same. The Assessing Officer allowed depreciation on the business rights (being
commercial rights), but disallowed deprecation on goodwill on the ground that
goodwill had not been included in the definition of intangible assets which
included know-how, patents, copyrights, trademarks, licenses, franchises or any
other business or commercial right. The CIT (A) confirmed the order of the
Assessing Officer.

The Tribunal, following the decision in the case of Skyline
Caterers (P.) Ltd. V. ITO [2008] 20 SOT 266 (Mum.) (SMC), allowed the assessee’s
claim. The Tribunal noted as under:

The assessee was engaged in the business of financing second
hand motor vehicles on hire purchase basis. The assessee financed the vehicles
identified by the purchaser and entered into hire purchase agreement. The
assessee in its profit and loss account had shown purchase price of these second hand motor vehicles as Rs.
79,14,700 and on the credit side, there was a contra entry of Rs.79,14,700
showing it as sale on hire purchase. The AO found that payments in excess of Rs.
20,000 aggregating to Rs. 23,37,000 were made to 32 parties. The AO required the
assessee to explain as to why 20% of the sum of Rs. 79,14,000 should not be
disallowed. The assessee submitted that transactions were not in the nature of
expenditure. They were simply loan transactions.

The AO observed that the real test, whether a particular
transaction was in the nature of expenditure was to be decided taking into
account how the transactions were entered in the books of account and treatment
thereof. The alleged advances formed part of trading activity. The AO further
observed that in the balance sheet stock on hire under hire purchase basis was
shown, which was nothing but stock in trade. Therefore, such transactions could
not be treated as advances. On this basis, the AO made a disallowance under
section 40A(3) of the Act.

Held:

On appeal, the Hon’ble tribunal held that assessee was not a
dealer in second hand motor cars. He let out the same. Only part of the amount
was financed by the assessee. The invoices were made in the name of the
purchaser. The past behaviour of the assessee also showed that it did not intend
to deal in cars. The assessee did not earn any profit on purchase or sale of
vehicles. It earned income on hire purchase transactions. For invoking the
provisions of section 40A(3), the amount must be claimed as expenditure. When
amounts paid have not been claimed as deductible expenditure while computing
business income, provisions of section 40A(3) cannot be applied. Mere entries in
the books of account will not change the character of financial transactions.
The addition so made was thus deleted.

The assessee is a retired employee of State Bank. During the
year under consideration, the assessee opted for voluntary retirement under a
scheme named “Early Separation Plan” (ESP) floated by the bank. He received a
compensation of Rs. 18,87,798. The employer, vide its letter, stated that
employees availing the ESP Scheme are not eligible for exemption u/s 10(10C) of
the Act as the scheme was not in conformity with Rule 2BA(i) to (v). Therefore,
no deduction under section 10(10C) was allowed in the Form 16 issued by the
employer. The assessee, however, claimed exemption under section 10(10C) in the
return of income filed. The same was processed under section 143(1) of the Act.
The assessment was reopened u/s 147 and the claim u/s 10(10C) was disallowed by
the AO.

The CIT(A) allowed the assessee’s claim. On Revenue’s appeal,
there was a difference of opinion between the members, and the matter was
referred to the “Third Member”.

The Third Member, in his order, relied on the case of SAIL
DSP VR Employees Association v UOI (262 ITR 638) (Cal.) which squarely applied
to the assessee. Their Lordship in the said judgment observed that section
10(10C) was inserted in order to make voluntary retirement attractive so as to
reduce human complements for securing economic viability of certain companies.
This object was elaborated by various departmental circulars and explanatory
statements issued from time to time. All these go to show that this was intended
to make voluntary retirement more attractive and beneficial to the employees
opting for voluntary retirement. Therefore, this has to be interpreted in a
manner beneficial to the optee for voluntary retirement, if there is any
ambiguity. A similar view was taken by the Hon’ble Bombay High Court in the case
of CIT vs. Nagesh Devidas Kulkarni (291 ITR 407) and the Karnataka High Court in
the case of CIT v P. Surendra Prabhu (279 ITR 402).

Following the above decisions, the amount received by the
assessee was allowed.

The assessee, a public sector company, had provided
residential accommodation to its employees in addition to salaries. The rent in
respect of such accommodation was recovered from the employees. The rent charged
to employees was as per the Service Regulations, approved by the central
government.

The assessing officer, relying on the Supreme Court’s
judgment in the case of Arun Kumar vs. Union of India [2006] (286 ITR 89),
required the assessee to deduct tax and pay the tax on the concessional
accommodation provided to its employees, from assessment year 2001-02, i.e.,
retrospectively. As per the AO, the difference in the rate specified in amended
Rule 3 and the rent charged by the assessee was a benefit in the nature of
concession and, therefore, perquisite under Section 17(2) of the Income-tax Act,
1961 (‘the Act’). The assessee ought to have deducted tax. Since the tax had not
been deducted, the assessee was in default under Section 192 read with Section
201(1A) of the Act.

On appeal to the Tribunal, the ITAT observed that a
retrospective amendment was to be given effect to, as it was there in existence
on the date from which it came into effect. The Tribunal, therefore, held that
the perquisite value is to be worked out on the basis of the amended provision
of Section 17(2) of the Act.

The Tribunal also held that a retrospective amendment could
be valid for levy of tax on the employee, but there exists no force in the
contention of the revenue that the employer would also be under responsibility
to deduct tax at source retrospectively.

Further, it observed, analysing the provisions of Sections
192(1), 192(1A) and 192(1B), Section 200 and Rule 30, that liability to deduct
tax is there on the date(s) when the salary is actually paid. If there was no
perquisite at the time when the tax was to be deducted at source, there would be
no liability to deduct tax. If a perquisite value is assumed by the
retrospective amendment after the period during which it was deducted, how can a
deduction be made on an earlier date? The retrospective amendment is for deeming
valuation of perquisites and cannot extend to deduction of tax at source
thereon.

During the year, the assessee had sold a tenancy right for Rs.
30 lakhs. In her return of income, the assessee had computed the long term
capital gain based on the said consideration. However, the AO observed that for
the purpose of stamp duty, the Sub-Registrar had adopted the market value of Rs.
33.11 lakhs. Therefore, applying the provisions of section 50C, he computed the
capital gain based on the market value of Rs. 33.11 lakhs.

One of the issues raised before the tribunal was whether the
provisions of section 50C were applicable to a tenancy right.

The tribunal noted that by virtue of section 50C, a legal
fiction had been created for assuming the value adopted or assessed by any
authority of the State Government as the full value of sale consideration
received in respect of transfer of land or building. Relying on the decisions of
the Supreme Court in the case of Amar Chand Shroff and in the case of Mother
India Refrigeration Industries Pvt. Ltd., the tribunal observed that the legal
fiction cannot be extended beyond the purpose for which it was enacted.
Accordingly, it noted that as per the plain reading of the provisions of section
50C, it applies only to those items of capital assets which are either land or
building or both. Since in the case of the assessee, the capital assets
transferred was tenancy right, it held that the provisions of section 50C were
not applicable.

Cases referred to:

25 Accelerated Freeze Drying Co. Ltd.
v. DCIT