Month: June

Satvinder Singh Kalra v. Dy. CWT

For the relevant assessment years, four office premises owned
by the assessee and let out by him were claimed as specifically exempt from net
wealth u/s.2(ea)(i)(5) as commercial establishments. The Assessing Officer
treated them as ‘assets’ defined u/s.2(ea). The CWT(A) confirmed the Assessing
Officer’s order.

The Tribunal held as under :

Datamatics Ltd. v. ACIT

For the A.Y. 1993-94, the total tax payable by the assessee
in accordance with intimation u/s.143(1)(a) of the Income-tax Act, 1961, dated
March 21, 1995, was Rs.8,39,528. The assessee paid TDS at Rs.4,48,873 and
advance tax of Rs.59,00,000. An amount of Rs.68,06,075, including interest of
Rs.13,17,288 u/s. 244A was refunded. There was no interest u/s.234B payable by
the assessee in terms of intimation u/s.143(1)(a). The assessee received a huge
refund as a result of processing of the return u/s.143(1)(a). Subsequently, the
tax component was enhanced as a result of the reassessment done u/s.143(3) read
with S. 147. Interest was levied on the assessee u/s.243B.

The Commissioner (Appeals) held that from the date of the
order u/s.143(1)(a), i.e., December 15, 1996, to the date of the order
under appeal interest chargeable was to be worked out in terms of Ss.(3) of S.
234B, based on the shortfall due to enhancement.

On appeal to the Tribunal, it was held that the charging of
interest u/s.234B is mandatory when the conditions are fulfilled. The condition
is that the assessee should have defaulted. A reading of S. 234B(3) makes it
clear that where, as a result of an order of reassessment or recomputation
u/s.147 or S. 153A, the amount on which interest was payable U/ss.(1) is
increased, the assessee shall be liable to pay simple interest at the rate of
one percent. The Section further makes it clear that first of all there should
be a default on the part of the assessee in the regular assessment and the
assessee should have been held liable to pay interest u/s.234B. In that case, if
there was reassement or recomputation u/s.147 or u/s.153A, the liability of the
assessee is increased and not otherwise.

In the instant case, there was no default on the part of the
assessee in paying the advance tax. For the first time the dispute arose
consequent to the reassessment done u/s.143(3) read with S. 147. Interest could
not be charged u/s.234B.

The assessee-company, promoted by the members of one family,
owned various properties including one building. The said property was given by
the assessee on leave-and-licence basis to another company ‘N’ promoted by the
same family. Under the agreement, the licensee i.e., N, could use and
occupy the premises for carrying on the business of selling fastfood under the
name ‘Croissants’, subject to payment of commission by way of certain percentage
of sale proceeds received by N. Within a period of few months, disputes arose
between the family members in respect of their properties. Thereafter various
family settlements were arrived at, including the settlement that consequent to
the termination of licence created in favour of ‘N’ in respect of property in
question, N shall vacate the said premises on or before 31-3-1992.

The members decided to implement the family settlements and
also to have all suits decreed by a consent decree. As a result, the Supreme
Court decreed all the suits. Pursuant to the said order, the licence created by
the assessee in favour of ‘N’ was cancelled and agreed to hand over quiet,
peaceful and vacant possession of the said premises to the assessee on or before
1-1-2002 and also to pay the arrears of commission for occupation of the said
premises along with the interest and further to simultaneously pay damages and
mesne profits for wrongful use and occupation of the said premises from 1-4-1992
till 31-12-2001, at the rate of Rs.10 lakhs per month along with interest.
Accordingly, the assessee received Rs.33,47,01,137 during the A.Y. 2002-03.
However, in return of the relevant assessment year, the assessee did not offer
the said amount as income, on the grounds that the damages/mesne profits
received by it were on capital account and, hence, not liable to tax. The AO,
however held that the amount received by the assessee could not be treated as
mesne profits as the same represented arrears of commission payable by ‘N’ to
the assessee under the licence agreement and that the same were revenue in
nature.

On appeal, the Commissioner (Appeals) held that the amount
received by the assessee under the consent decree passed by the Apex Court
represented mesne profits. As regards the nature of the same receipt, he
observed that the judgment of the Madras High Court in CIT v. P. Mariappa
Gounder (1984) 147 ITR 676/17 Taxman 292 was in Revenue’s favour and the
same was affirmed by the Supreme Court in P. Mariappa Gounder v. CIT,
(1998) 232 ITR 2. He, therefore, held that the mesne profits received by the
assessee constituted revenue receipt.

On second appeal, the dispute before the Division Bench was
whether the mesne profit received by the assessee pursuant to the consent decree
passed by the Supreme Court constituted revenue receipt assessable to tax. The
revenue contended that the issue stood concluded against the assessee by the
decision of the Special Bench of the Tribunal in Sushil Kumar & Co. v. Jt.
CIT (2004) 88 ITD 35 (Kol.), wherein it was held that the judgment of the
Madras High Court in P. Mariappa Gounder (supra), holding that the mesne
profit received by the assessee was revenue receipt chargeable to tax got merged
in the subsequent judgment of the Supreme Court and consequently the mesne
profit received by the assessee was taxable as revenue receipt.

However, the assessee contended that the issue was not
correctly decided by the Special Bench in Sushil Kumar & Co. (supra),
inasmuch as the issue that the taxability of mesne profit was neither raised
before nor considered by the Supreme Court.

The assessee further contended that the Madras High Court had
decided two issues — (1) the issue regarding the taxability of the mesne profit,
and (2) the year of assessability; the High Court decided both the issues
against the assessee; however, the issue regarding the taxability of mesne
profit was never raised before nor considered by the Supreme Court, since the
assessee challenged only the issue regarding the year in which the mesne profit
could be taxed; the Apex Court held that the High Court rightly held the same to
be taxable in the A.Y. 1963-64 and, therefore the judgment of the Madras High
Court regarding the issue of taxability of mesne profit did not merge in the
judgment of Supreme Court. In view of assessee’s contentions, the Division Bench
found it difficult to concur with the view expressed by the Special Bench in
Sushil Kumar & Co. (supra). Consequently, it referred the matter to the
Special Bench of three Members.

The Special Bench was of the view that the correctness of the
Special Bench’s decision in Sushil Kumar (supra) could be decided only by
a Larger Bench. Accordingly, a Special Bench comprising of five Members was
constituted.

Amway India Enterprises v. Dy. CIT

For A.Y. 2001-02, the assessee claimed deduction in respect
of software expenditure incurred for purchase of various types of application
software for use in its business. The Assessing Officer held that the softwares
were part of plant and machinery and gave enduring benefit to the assessee,
since they had long-lasting use of more than three four years. This treatment of
software being capital expenditure was confirmed by the CIT(A), since he found
that the assessee had not upgraded or replaced the software frequently.

The Division Bench of the ITAT found that divergent views
were expressed on the issue by the various Division Benches in various cases
and, since this issue was expected to occur regularly in many cases, it felt the
need for a Special Bench to consider this matter.

The Special Bench noted as under :

The matter was remanded to the Assessing Officer for deciding
the issue afresh based on the above criteria.

Shah Originals v. ACIT

For the relevant assessment years, the Assessing Officer
disallowed the assessee’s claim u/s.80HHC in respect of the following incomes :

The Tribunal allowed the assessee’s claim in respect of all
these incomes. The Tribunal noted as under :

1. In respect of allowability of foreign exchange rate
fluctuation gain, the tribunal relied on the following decisions :

2. In respect of allowability of interest on EEFC account,
the Tribunal relied on the decision in the case of Fountainhead Exports (supra).

3. In respect of allowability of interest on Bank FDRs
maintained as guarantee for export business, the Tribunal held that since
furnishing of guarantees is closely linked up with the export business, there is
no reason why the interest earned on such FDRs should not be considered as
business income of the assessee.

4. In respect of allowability of DEPB credits, the Tribunal
noted that DEPB credits arise directly out of the export business operations
and, hence, should be considered as business income of the assessee.

The Statesman Ltd. v. ACIT

The assessee-company owned and held a plot of land on
perpetual lease. It transferred 56.8% of the land to a developer under a
development agreement, retaining 43.2% ownership. Pursuant to the agreement, the
developer constructed two superstructures on the land and handed over one
building to the assessee-company. The assessee sold 4 floors of this building
during this year. The assessee computed long-term capital gain arising on
transfer of proportionate undivided portion of the land attributable to the 4
floors sold by it. It also computed short-term capital gains arising on transfer
of the built-up superstructure area of the 4 floors sold by it. The Assessing
Officer treated the entire amount as short-term capital gains, ignoring the
bifurcation done by the assessee. This was upheld by the CIT(A).

The Tribunal, relying on the decisions in the following
cases, allowed the claim of the assessee :

Navneet Kumar Thakkar v. ITO

For the relevant assessment year, the Assessing Officer
observed that the fair market value of the plot of land sold by the assessee
seemed to be much higher than the sale consideration shown in the sale
agreement. He referred the matter to the Asst. Valuation Officer u/s.55A and
made additions for the differential amount. The CIT(A) accepted the sale value
adopted by the Assessing Officer and confirmed the additions.

The Tribunal, applying the decisions in the following cases,
held that unless the property transferred has been registered by sale deed and
for that purpose the value has been assessed and stamp duty has been paid by the
parties, S. 50C cannot come into operation :

Notice u/s.148 was issued to the assessee before the expiry
of the time limit for issue of notice u/s.143(2). The assessee preferred an
appeal before the CIT(A) and challenged the validity of reassessment
proceedings. The CIT(A) rejected the plea of the assessee.

Upon further appeal to the Tribunal, the learned Accountant
Member took a view that the decision in the case of Trustees of H.E.H. The
Nizam’s Supplemental Family Trust v. CIT, 242 ITR 381 (SC) pertains to A.Y.
1962-63 which was prior to the amendment to S. 147 w.e.f. 1st April, 1989. Prior
to the amendment of S. 147, there was no provision equivalent to cl. (b) of
Expln. 2 in the amended S. 147. In a subsequent decision of the Supreme Court in
the case of ACIT v. Rajesh Jhaveri Stock Brokers (P) Ltd., 291 ITR 500 (SC) it
has been held that so long as the ingredients of S. 147 are fulfilled, the AO is
free to initiate proceeding u/s.147 and failure to take steps u/s.143(3) will
not render the AO powerless to initiate reassessment proceedings even when
intimation u/s.143(1) had been issued. Applying the jurisdictional High Court’s
decision in the case of ITO v. K. M. Pachiappan, 311 ITR 31, the validity of
reassessment proceedings was upheld.

The learned Judicial Member distinguished the decision of
Rajesh Jhaveri Stock Brokers (P) Ltd. on the ground that the notice u/s.148 was
issued after the expiry of the time available for issuing notice u/s.143(2) in
that case. Following the latest decision of the jurisdictional High Court in the
case of CIT v. Qatalys Software Technologies Ltd., 308 ITR 249, the notice
issued by the AO u/s.148 was quashed.

Upon difference of opinion between the members, the matter
was referred to the Third Member.

The Department wants to interpret the expression ‘no
assessment has been made’ in the clause (b) of Expln. 2 in the amended S. 147 to
mean that it also includes situation where assessment u/s. 143(3) is still
possible but not yet made. If this interpretation is to be accepted, it will set
at naught the fundamental principles underlying S. 147.

As per the principles laid down by the Supreme Court in
several cases :

(a) the proceedings are said to have commenced once the
return is filed, and

(b) the proceedings terminate when,

(i) the return is processed u/s.143(1) and the time to
issue notice u/s.143(2) is over,

(ii) assessment is made u/s.143(3) or,

(iii) assessment is no longer possible u/s. 143(3).

Proceedings u/s.147 can be initiated only after the earlier
proceedings have terminated as mentioned in (b) above.

Observation of the Supreme Court in the case of Rajesh
Jhaveri Stock Brokers (P) Ltd. has to be understood in the right perspective. It
is mentioned that failure to take steps u/s.143(3) will not render the AO
powerless to initiate reassessment proceedings even when intimation u/s.143(1)
had been issued. The failure of the AO which the Court is talking about will be
deemed to have occurred only when the hands of the AO are tied down by law and
he is unable to initiate the proceedings u/s.143(3). Hence order passed
u/s.143(3) read with S. 147 was quashed.

The assessee is engaged in the business of weaving job work
and grey cloth. He declared profits from sale of shares as short-term capital
gains and long-term capital gains. The AO treated the entire sum as business
income on the basis of frequency of transactions and holding periods.

The CIT(A) partly confirmed the order of the AO and
short-term capital gains were treated as business income. However, long-term
capital gains were not allowed to be treated as business income.

The assessee has shown the transactions in shares as
investment and not as stock-in-trade. It has been shown consistently for several
years in the past and the Department has not challenged the book-keeping or
accounting of shares as investment. No contrary materials or facts have been
pointed out by the Revenue to show that facts in the current year are different
than the facts in earlier years. The entire portfolio has been valued at cost as
at the end of the accounting year. If in the past, the Department has accepted
the sale of shares of holding of more than a year as investment and profits
thereon has been assessed under the head ‘Capital Gains’, then there is no
reason to hold differently this year.

In respect of short-term capital gains, the assessee has
discharged the onus of showing that it is making investment, but the Revenue is
able to show that there are high frequencies and low holdings in many
transactions of shares indicating that the assessee has some intention of
purchasing and selling shares as a trader. Considering the totality and
peculiarity of the facts of the case, it was held that the assessee is neither
fully acting as a trader nor as investor. Therefore, a criterion was fixed for
determining as to when he is acting as trader and when as investor. Accordingly,
if shares are not held even, say, for a month, then the intention is clearly to
reap profit by acting as a trader and he did not intend to hold them in
investment portfolio. If a person intends to hold his purchases of shares as
investment, he would watch the fluctuation of rates in the market for which a
minimum time is necessary, which was estimated at one month. Where shares are
held for more than a month, they should be treated as investment and on their
sale short-term capital gains should be charged. When shares are held for less
than a month, gain on them should be treated as profit from business.

The assessee had debited a sum of Rs.88 lakhs in the profit &
loss account as provision for mezzanine capital. On enquiry, the assessee
provided a detailed explanation of the nature of this provision, that this
provision was made for redemption of unsecured bonds in the nature of mezzanine
capital (Tier II) and was provided over the tenure of bond. The assessee also
submitted that the amount of provision is ascertained at the time of issue of
bonds and therefore the liability is ascertained liability, thus allowable
u/s.115JB. However, the AO disallowed the same holding it as unascertained
liability. The CIT(A) allowed the same on the reasoning that the bonds issued by
the company would earn annual interest for the bond holder. The bond holder was
also required to be paid premium and face value. The premium was to be paid in
equal instalments spread over the tenure of bonds. The provision of Rs.88 lakhs
related to premium payable in respect of previous year under consideration. The
CIT(A) further observed that the face value of the bond is known and amount of
premium and tenure of bond is also fixed. Therefore, it cannot be said the
premium payable on bonds is incapable of being computed in a scientific manner.
Accordingly addition was deleted.

The Tribunal held that there was a scientific method of
calculation of liability on account of premium on mezzanine capital. Therefore,
it cannot be said that the liability was not an ascertained liability.

The assessee received an amount of Rs.19,00,000 as sale
consideration on account of sale of basement of a building. The stamp valuation
authorities adopted the value of Rs.28,73,000. Since the assessee objected to
valuation of the stamp valuation authorities on various grounds, the AO referred
the matter to the DVO who valued the property at Rs.20,55,000. The AO thereafter
substituted this value for the purpose of calculating the capital gain.

The CIT(A) observed that the assessee has not objected to
this valuation either before the DVO or before the AO or even before him.
Distinguishing the decision of the Supreme Court in the case of C. B. Gautam v.
UOI, 199 ITR 530, the CIT(A) upheld the action of the AO.

As against value of Rs.28,73,000 adopted by stamp valuation
authorities, DVO has determined the FMV on the date of transfer at Rs.20,55,000.
This shows that there is wide variation between the two values. Further, value
adopted by the DVO is also based on some estimate. The difference between sale
consideration shown by the assessee and FMV determined by the DVO is less than
10%. Since such difference is less than 10% and considering that valuation is
always a matter of estimation where some degree of difference is bound to occur,
it was held that FMV determined by the DVO cannot be substituted for the sale
consideration received by the assessee.

The assessee was engaged in business of real estate
development and construction. During assessment, it was found by the AO that the
assessee has claimed a sum of Rs.63 lakhs as payment made to sister concern for
job work. After examination of details, the AO found that the value of job
entrusted to the sister concern was only Rs.32,09,974 for which the appellant
made a payment of Rs.63,00,000. He thus disallowed a sum of Rs.30,82,026
u/s.40A(2)(b). This was confirmed by the CIT(A). The AO initiated penalty
proceedings and levied penalty.

Since, no specific disclosure is required to be made in
respect of income subject to scrutiny u/s.40A(2)(b) in Act or in Rules or in the
form of return of income, the assessee cannot be held guilty of non-disclosure
of income. It is not a case of concealment of income or furnishing of inaccurate
particulars. When additions are made on the basis of estimate and not on account
of any concrete evidence of concealment, penalty was not leviable.

The assessees are beneficiaries of a trust and enjoy 50%
share of interest in the assets of this trust. The trust owned a flat which was
a residential house. As per the assessment order of the trust, the value of
assets owned by it was to be included in the hands of beneficiaries. Since no
interest in the assets of trust was shown in the original return of
beneficiaries, notice u/s.17 was issued to the beneficiaries. The assesses
submitted that the flat was exempt u/s.5(1)(vi) of the Wealth-tax Act since they
had no other residential house in their names. Thus the value of the flat was
shown as NIL. It was contended on behalf of Department that since the assessee
claimed deduction at the assessment stage and not in the return of wealth, it
should not be allowed.

S. 5(1)(vi) of the Wealth-tax Act clearly provides for the
exemption of one house and as such, the law as it stood should have been applied
by the AO for granting exemption. There is no need for the assessee to seek
exemption as per law. Even when the assessee has not sought exemption expressly,
the AO should apply the statutory provisions and grant exemption.

The assessee received interest u/s.244A of Rs.34.33 crores
which was included in its total income under the head “Income from Business” and
deduction was claimed u/s.80P(2)(a)(i). This interest has arisen upon favourable
order of Tribunal for earlier assessment years and the resultant refund of
assessment dues collected. The AO denied the deduction u/s.80P(2)(a)(i) in
respect of the same.

Upon further appeal, the CIT(A) confirmed the order of the AO
and has held as under :

(i) The interest was assessable under the head ‘Income from
other sources’.

(ii) The interest on income-tax refund was not attributable
to the banking business.

(iii) The favourable decision of the Tribunal in assessee’s
own case for A.Y. 2001-02 was distinguishable, because in that case the issue
was about the interest u/s.244A arising out of excess deduction of tax at
source.

The principle of consistency qua the judicial forums is not
unexceptionable. If the subsequent Bench finds it difficult to follow the
earlier view due to any convincing reason such as change in the factual or legal
position or non-raising or non-consideration of an important argument by the
earlier Bench having bearing on the issue, then the earlier view cannot be
thrust upon it and in such a case a reference should be made to a larger Bench.
The appeal in the present case needs to be decided on merits rather than
following the earlier view taken by the Tribunal in its own case. Upon merits,
three issues were identified :

(1) Head of income under which interest on income-tax
refund falls :

In order to categorise income under the head ‘Profits and
gains of business of profession’, it is imperative that income should have
arisen from business carried on by the assessee and Business refers to a
systematic, real and organised activity conducted with a view to earn income.
Payment of income-tax is an event which takes place after the determination of
profits of the business for the year. Eventually when the income-tax was
refunded along with interest u/s.244A, that would also, naturally, be an event
after the determination of income on year-to-year basis. Payment of income-tax
cannot be held to be a business activity or a transaction done during carrying
on of the business. There cannot be an intention of the assessee to earn income
by paying income-tax. Interest on refund of income-tax does not and can never
fall under the head ‘Profits and gains of business or profession’, irrespective
of the fact that the assessee is in banking or non-banking business.

(2) Meaning of expression ‘profits and gains’ of
business as used in S. 80P :

The use of the expression ‘profits and gains of business’ in
S. 80P(2) is to be seen in contradiction to the expression ‘income chargeable
under the head ‘Profits and gains of business or profession’. The latter
expression is used in several Sections of the Act including S. 80E, S.
80HHC(baa), etc. The employment of the expression ‘profits and gains’ in S.
80P(2) demonstrates the intention of the Legislature that the benefit of
deduction is not confined to the income arising directly from the banking
business (as covered by ‘profits’), which falls under the head ‘Profits and
gains of business or profession’, but also includes other items of income (as
covered by ‘gains’), which have some relation with the business of banking even
though they do not fall under the head of business income. Since income-tax was
paid in relation to the banking business, the interest on income-tax refund will
be considered as ‘gain’ (not ‘profit’) of banking business covered within the
expression ‘profit and gains’ of banking business.

(3) Scope of phrase ‘attributable to’ eligible business
:

The scope of the phrase ‘attributable to’ is wider than
‘derived from’. Whereas in the case of the latter, the relation of the income
with the source must be direct and that of the first degree, but in the former
even some commercial or casual connection suffices the test. The expression
‘attributable to’ covers ‘receipts from sources other than the actual conduct of
the business’. The income-tax, on which interest was granted, was utilised to
satisfy the demand raised in relation to the banking business. It is for the
banking business that income-tax was originally paid and subsequently the amount
was refunded along with interest. There exists a commercial and causal
connection between the interest on income-tax refund and the banking business
and hence it can be regarded as attributable to the banking business.

During course of search, certain cheques were found from
premises of the assessee, which were received from various parties as a security
against loans advanced to them by the assessee in cash out of undisclosed
income. Loans were not repaid as confirmed by the parties. Addition was made by
the AO as an undisclosed income.

Upon further appeal to the CIT(A), addition was deleted on
the basis of his own order in the assessee’s brother’s case on the inference
that on the face of evidence, money lent for money-lending business had not been
recovered as per the statements of debtors placed on record.

The decision of CIT(A) in the assessee’s brother’s case was
upheld by the Tribunal. However, the learned Judicial Member set aside the
matter on the ground that the decision of the Tribunal in the case of the
assessee’s brother is entirely on different point. The learned Accountant Member
did not agree and the matter was referred to the Third Member.

In the assessee’s brother’s case, the Tribunal accepted the
assessee’s plea that no income accrued to the assessee as the cheques remained
unencashed. The amount not recovered by the assessee is telescoped against the
undisclosed income assessed on the basis of same cheques. This ratio is
applicable in the present case also. On the same set of facts, a Co-ordinate
Bench of the Tribunal cannot come to a diametrically opposite conclusion than
arrived at in the earlier case. The names of creditors do not matter. Therefore,
the addition was deleted.