BCAJ | Bombay Chartered Accountant Journal

Perquisite — Exceptions — Treatment of prescribed ailment in approved hospital — Application for approval filed by hospital before outbreak of Covid-19 pandemic — Renewal denied on ground that State Government Authority had revoked approval granted to assessee for treating Covid-19 patients — Order of Principal CIT rejecting application unsustainable

33 Park Health Systems Pvt. Ltd. vs. Principal CIT [2021] 439 ITR 643 (Telangana) Date of order: 28th September, 2021 S. 17(2)(viii) Proviso (II)(B) of ITA, 1961

Perquisite — Exceptions — Treatment of prescribed ailment in approved hospital — Application for approval filed by hospital before outbreak of Covid-19 pandemic — Renewal denied on ground that State Government Authority had revoked approval granted to assessee for treating Covid-19 patients — Order of Principal CIT rejecting application unsustainable

The assessee was a hospital, and it was granted approval by the Principal Chief Commissioner under proviso (ii)(b) to section 17(2)(viii) of the Income-tax Act, 1961 initially in the year 2011-12, with each renewal being valid for three years and the last of the renewal granted being valid till 21st March, 2020. The assessee made an application on 13th January, 2020 seeking renewal of approval granted two months prior to the expiry of the validity period of the existing approval granted. While the application was pending for renewal of approval, the Covid-19 pandemic struck and the assessee was granted approval by the State Government Department of Public Health and Family Welfare for providing treatment for Covid-19 patients. Thereafter, based on complaints, the State Government Medical and Health Officer, on 3rd August, 2020 revoked the permission granted to the assessee. The assessee submitted its explanation and sought for recalling the revocation order. While the explanation offered by the assessee was under consideration by the State authorities, the second respondent issued a notice dated 12th October, 2020 calling upon the assessee to show cause why the cancellation order of the State Government should not be considered for deciding the application for recognition under proviso (ii)(b) to section 17(2)(viii). The assessee submitted in its letter to the Principal Chief Commissioner that when it made the application for renewal of approval, there was no Covid-19 pandemic outbreak, that the State Government Department of Public Health and Family Welfare revoked the permission for Covid-19 treatment only and not for other medical treatments, that the State authority’s action was based on misinformation and baseless propaganda made by the media without taking into consideration the actual facts, that the assessee was under the process of getting permission again for Covid-19 treatment from the State Government Department of Public Health and Family Welfare and requested to grant the renewal of application under proviso (ii)(b) to section 17(2)(viii). The Principal Chief Commissioner rejected the application for renewal of approval by an order dated 19th October, 2020.

On a writ petition challenging the order, the Telangana High Court allowed the writ petition and held as under:

“i) The order rejecting the renewal of approval under proviso (ii)(b) to section 17(2)(viii) had been passed by the Principal Chief Commissioner by traversing beyond the notice and was in violation of principles of natural justice causing prejudice to the assessee. The order read with the notice showed that it was passed as a chain reaction to the order of the State Government, which dealt with determination of corona virus disease as a respiratory disease and it was a prescribed disease under clause (a) of sub-rule (2) of rule 3A of the Income-tax Rules, 1962.

ii) The order indicated that it had taken into consideration various issues which had not been mentioned in the notice issued to the assessee. The only ground mentioned in the notice was with regard to the State Government revoking the mandate given for covid treatment, whereas the order, apart from dealing with the revocation of mandate for covid treatment by the State Government, also dealt with other aspects as to the nature of the corona virus disease being a respiratory disease and the assessee having resorted to excessive, exorbitant and unconscionable pricing being a misconduct or an offence, without putting the assessee on notice of the allegations and to offer its explanation. The claim of the Principal Chief Commissioner that Covid-19 treatment was a respiratory disease was not backed by any material or scientific data. Since the notice issued relied only on the revocation of permission for providing medical treatment for Covid-19 by the State Government, and the revocation having been lifted by the State authority by proceedings dated 13th September, 2020 and the assessee was permitted to provide treatment for Covid-19 patients, the very basis of the notice dated 12th October, 2020 issued was removed.

iii) The order rejecting the renewal of approval granted under proviso (ii)(b) to section 17(2)(viii) was unsustainable.”

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CONTROVERSIES

ISSUE FOR CONSIDERATION

Charitable institutions generally receive donations (voluntary contributions) from various donors for carrying out their charitable activities. Earlier, till A.Y. 1972-73, section 12(1) provided that voluntary contributions would not be included in income, while section 12(2) provided that voluntary contributions from another trust referred to in section 11, would be deemed to be income from property held in trust for charitable purposes. These voluntary contributions now fall within the definition of ‘income’ by virtue of insertion of section 2(24)(iia) of the Income Tax Act, 1961, with effect from A.Y. 1973-74. Such contributions (other than corpus donations) are also deemed to be income from property held under trust for charitable purposes, by virtue of section 12(1) of the Act, since A.Y. 1973-74. The exemption under section 11 of a charitable trust, registered under section 12A/12AA (now section 12AB), is therefore now computed by considering such voluntary contributions and adjusting the same by the application and accumulation of income, for charitable purposes, by applying the various sub-sections of section 11.

At times, charitable institutions receive grants from other institutions or persons, Indian or foreign, Government or non-government, with the condition that such grants are to be utilised only for specific purposes (“tied-up grants”). In most such cases, there is also a stipulation that in case the tied-up grants are not used for the specified purposes within a specific period of time, the unutilised amounts are to be refunded to the grantor of the aid.

The issues in the context of taxation have arisen before the courts as to whether such tied-up grants could be termed as voluntary contributions and whether, where not utilized during the year, are income of the recipient institution, as the same are to be refunded and represent a liability to be discharged in the future. While the Bombay High Court has taken the view that such grants are voluntary contributions, the Delhi High Court has taken the view that such receipts are not voluntary contributions and are liabilities and not in the nature of income of the recipient institution. A similar view has been taken by the Gujarat High court following the Delhi High court decision.

GEM & JEWELLERY EXPORT PROMOTION COUNCIL’S CASE
The issue had first come up before the Bombay High Court in the case of CIT vs. Gem & Jewellery Export Promotion Council 143 ITR 579.

In this case relating to A.Y. 1967-68, the assessee was a company set up for the advancement of an object of general public utility, i.e., to support, protect, maintain, increase and promote exports of gems and jewellery, including pearls, precious and semi-precious stones, diamonds, synthetic stones, imitation jewellery, gold and non-gold jewellery and articles thereof, whose income was applied only for charitable purposes as defined in section 2(15).

The assessee received grants-in-aid from the Government of India for meeting the expenditure on specified projects. Some of the conditions on which those grants-in-aid were given were the following:
1. The funds should be kept with the State Bank of India, the total expenditure should not be more than the expenditure approved by the Central Government for each project; separate accounts should be kept for Code and non-Code projects and the accounts were to be audited by chartered accountants approved by the Government.
2. Any amount unspent was to be surrendered to the Government by the end of the financial year unless allowed to be adjusted against next year’s grant.
3. The grant should be spent upon the object for which it had been sanctioned. The assets acquired wholly or substantially out of grant-in-aid would not, without prior sanction of the Central Government, be disposed of, encumbered or utilised for purposes other than those for which the grant was sanctioned.

At that point of time, relying on section 12(1), which provided that any income derived from voluntary contributions applicable solely to charitable or religious purposes would not be includible in the total income, the assessee claimed that the grants-in-aid were in the nature of voluntary contributions, and were therefore not taxable, whether spent or not. The assessing officer taxed such unspent grants-in-aid, allowing accumulation of 25% of such amount.

In first appeal, the assessee’s claim was allowed, holding that such grants-in-aid were not taxable, being voluntary contributions. Before the Tribunal, the Department argued that the grants-in-aid could not be considered as voluntary contribution for the purpose of section 12(1), having regard to the fact that the grants were made subject to conditions mentioned above. The Tribunal confirmed the first appellate order, holding that the amounts given by the Government were voluntary contributions and were not in the nature of any price paid for any benefit or privilege, nor were they for any consideration. According to the Tribunal, the conditions imposed by the Government did not change the nature of the payment, which was initially a voluntary contribution.

Before the Bombay High Court, on behalf of the revenue, it was argued that while making contributions, the Government imposed certain conditions and having regard to the fact that the conditions governed the grants, the grants could not be considered to be a donation or a voluntary contribution or, in other words, it was not a pure and simple gift by the Government.

The Bombay High Court observed that it was well known that grants-in-aid were made by the Government to provide certain institutions with sufficient funds to carry on their charitable activities. The institutions or associations to which the grant was made had no right to ask for the grant. It was solely within the discretion of the Government to make grants to institutions of a charitable nature. The Government did not expect any return for the grants given by it to such institutions. There was nothing which was required to be done by these institutions for the Government, which can be considered as a consideration for the grant.

The Bombay High Court noted the meaning of the words ‘voluntarily contributed’ as held in Society of Writers to the Signet vs. CIR 2 TC 257, as “the meaning of the word ‘voluntary’ is ‘money gifted voluntarily contributed in the sense of being gratuitously given’.” The Bombay High Court held that the conditions attached to the grant did not affect the voluntary nature of the contribution. The conditions were merely intended to see that the amounts were properly utilised, and therefore did not detract from the voluntary nature of the grant.

The Bombay High Court accordingly held that the grants-in-aid were voluntary contributions, and were exempt under section 12(1), as it then stood.

SOCIETY FOR DEVELOPMENT ALTERNATIVES’ CASE
The issue again came up before the Delhi High Court in the case of DIT vs. Society for Development Alternatives 205 Taxman 373 (Del).

In this case, relating to A.Y. 2006-07 and 2007-08, the assessee was a society, which was registered under Section 12A and Section 80G. It was undertaking activities relating to research, development and dissemination of (i) Technologies for fulfillment of basic needs of rural households (ii) Solutions for regeneration of natural resources and the environment and (iii) Community based institution strengthening methods to improve access to for the poor.

It had received grants for specific purposes/projects from the government, non-government, foreign institutions etc. These grants were to be spent as per the terms and conditions of the project grant. The amount, which remained unspent at the end of the year, got spilled over to the next year and was treated as unspent grant. The Assessing Officer treated such unspent grants as income of the assessee, invoking the provisions of section 12(1). This section then provided that any voluntary contributions received by a trust created wholly for charitable or religious purposes (other than corpus donations) were, for purposes of section 11, deemed to be income from property held under trust wholly for charitable or religious purposes.

The Commissioner (Appeals) deleted the addition, noting that:
1. The amounts were received/sanctioned for a specific purpose/project to be utilized over a particular period.
2. The utilisation of the said grants was monitored by the funding agencies who sent persons for inspection and also appointed independent auditors to verify the utilisation of funds as settled terms.
3. The assessee had to submit inter/final progress/work completion reports along with evidences to the funding agencies from time to time.
4. The agreements also included a term that separate audited accounts for the project would be maintained.
5. The unutilised amount had to be refunded back to the funding agencies in most of the cases.
6. All the terms and conditions had to be simultaneously complied with, otherwise the grants would be withdrawn.
7. The assessee had to utilise the funds as per the terms and conditions of the grant. If it failed to utilise the grants for the purpose for which grant was sanctioned, the amount was recovered by the funding agency.

The Commissioner (Appeals) was therefore of the view that the assessee was not free to use the funds voluntarily as per its sweet will and, thus, these were not voluntary contributions as per Section 12. He concluded that these were tied-up grants, where the appellant acted as a custodian of the funds given by the funding agency to channelise the same in a particular direction. The Tribunal upheld the order passed by the Commissioner (Appeals).

The Delhi High Court agreed with the findings of the Tribunal, holding that these were not voluntary contributions, and were therefore not income under section 12(1).

A similar view has been taken by the Gujarat High Court in the case of DIT(E) vs. Gujarat State Council for Blood Transfusion, 221 Taxman 126, for AY 2009-10, holding that the grant received from the State Government was not income of the trust for the purposes of section 11.

OBSERVATIONS
Though both the Bombay and Delhi High Court decisions were decided in favour of the assessee and held that the tied-up grants were not taxable, since the law in both the years was different, the ratio of these decisions is opposite to that of each other – while the Bombay High Court has held that tied-up grants are ‘voluntary contributions’, the Delhi High Court has taken the view that these tied-up grants are not ‘voluntary contributions’.

The Bombay High Court, in examining whether the tied-up grants were voluntary contributions or not, looked at the receipt from the perspective of the grantor – was the grant voluntary, or was it for some consideration, and held that since it was voluntary from the viewpoint of the donor, the receipt was a voluntary contribution; and applying the then applicable law, it held that voluntary contributions were not income, as the definition of ‘income’ at the relevant time did not include voluntary contributions. The Bombay High Court did not have to consider the subsequent amendment, under which such amounts were independently in the nature of income.

The law presently applicable provides that a ‘voluntary contribution’ is an income, and hence it has become necessary to examine whether a tied-up grant, not spent by the year end or not accumulated, is a voluntary contribution, more so where it is attached with the condition of refunding the unspent amount. Following the Bombay High Court, the receipt is a voluntary contribution, and once so accepted, the same has to be subjected to the rules of application and accumulation. In contrast, where the Delhi High court is followed, the receipt in the first place shall not be construed as a voluntary contribution and would not be subjected to the rules of application and accumulation.

In order for a receipt to be regarded as a voluntary contribution and for it to bear the character of income, the recipient has to have some element of domain over the receipt – the freedom to apply such income as it desires. If the recipient has to necessarily spend the receipt as per the directions of the grantor, and under the supervision of the donor, it has no control over such spending and over such amounts. Such receipts should be considered as held in trust for the grantor and when spent, the expenditure be held to be the expenditure of the grantor, and not that of the recipient trust, which disburses the amounts. Besides, where the unspent amount is refundable, it is a liability and cannot be regarded as income at all.

The Hyderabad bench of the Tribunal has therefore held, in the case of Nirmal Agricultural Society vs. ITO 71 ITD 152, that ‘The grants which are for specific purposes do not belong to the assessee-society. Such grants do not form corpus of the assessee or its income. Those grants are not donations to the assessee so as to bring them under the purview of section 12 of the Act. Voluntary contributions covered by section 12 are those contributions freely available to the assessee without any stipulation which the assessee could utilise towards its objectives according to its own discretion and judgment. Tied-up grants for a specified purpose would only mean that the assessee, which is a voluntary organisation, has agreed to act as a trustee of a special fund granted by Bread for the World with the result that it need not be pooled or integrated with the assessee’s normal income or corpus. In this case, the assessee is acting as an independent trustee for that grant, just as same trustee can act as a trustee of more than one trust. Tied-up amounts need not, therefore, be treated as amounts which are required to be considered for assessment, for ascertaining the amount expended or the amount to be accumulated.’

According to the Tribunal, such unspent grants should be shown as a liability, and the expenditure incurred for the specified purposes adjusted against such liability, and not be treated as the expenses of the assessee. Only any non-refundable credit balance in the liability account of the grantor would be treated as income in the year in which such non-refundable balance was ascertained.

A similar view has been taken by the Mumbai bench of the Tribunal in the case of NEIA Trust v ADIT ITA No 5818-5819/Mum/2015 dated 24th December 2019 (A.Y. 2011-12 and 2012-13), where the Tribunal has held:
‘upon perusal of stated terms & conditions, it could not be said that the funds received by the assessee were not in the nature of voluntary contributions rather they were more in the nature of specific grants on certain terms and conditions and liable to be refunded, in case the same were not utilized for specific purposes. It is trite law that entries in the books of accounts would not be determinative of the true nature / character of the transactions and the same could not be held to be conclusive. Therefore, the mere fact that the assessee credited the receipts as corpus contribution, in our considered opinion, would not make much difference and would not alter the true nature of the stated receipts. The said funds / receipts, as stated earlier, were more in the nature of specific grants and represent liability for the assessee and liable to be refunded in case of non-utilization.’

The Hyderabad Bench decision in Nirmal Agricultural Society’s case has also been followed by the Tribunal in the cases of Handloom Export Promotion Council vs. ADIT 62 taxmann.com 288 (Chennai) and JB Education Society vs. ACIT 55 taxmann.com 322 (Hyd).

Besides, in the cases of various Government Corporations set up to implement Government policies, grants received from the Government by such corporations have been held not to constitute income of the Corporation, since the Corporation acts as an agency of the Government in spending for the Government schemes. The funds therefore really belong to the Government, until such time as the funds are spent. This view has been taken by the High Courts in the following cases:
• CIT vs. Karnataka Urban Infrastructure Development and Finance Corpn. 284 ITR 582 (Kar.)
• Karnataka Municipal Data Society vs. ITO 76 taxmann.com 167 (Kar)

The position may be slightly different in case of grants from the Government and a few specified bodies, with effect from A.Y. 2016-17. Clause (xviii) of section 2(24) has been inserted in the definition of ‘income’, which provides for taxation of grants from the Central Government, State Government, any authority, body or agency as income. Such grants would therefore be taxable as income of the recipient trust, and the fact anymore may or may not be material that the receipt is not a voluntary contribution. This inserted provision in any case would not apply to grants received from other non-governmental organisations.

In case the Government tied-up grant is refundable if not spent, can it be regarded as income at all post insertion of clause (xviii)? One way to minimize the harm on the possible application of clause (xviii) of section 2(24) could be to tax such unspent receipts in the year in which the fact of the non-utilisation is final; even in such a case, a possibility of claiming deduction for the refund of unspent amount should be explored. Alternatively, in that year, the expenditure, where incurred, should be treated as an application of income. The other possible view is that clause (xviii) applies only to recipient persons, other than charitable organisations, to whom the specific provisions of clause (iia) of section 2(24) applies, rather than generally applying the provisions of clause (xviii) to all and sundry.

The better view therefore seems to be that of the Delhi and Gujarat High Courts, that tied-up grants are not voluntary contributions and/or income of the recipient institution.

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Book profits — Company — Provision for bad and doubtful debts — Corresponding amount reduced from loans and advances on assets side of balance sheet and at end of year loans and advances shown net of provision for bad debts — Provision not to be added in computation of book profits

32 Principal CIT. vs. Narmada Chematur Petrochemicals Ltd. [2021] 439 ITR 761 (Guj) A.Y.: 2004-05; Date of order: 14th July, 2021 S. 115JB of ITA, 1961

Book profits — Company — Provision for bad and doubtful debts — Corresponding amount reduced from loans and advances on assets side of balance sheet and at end of year loans and advances shown net of provision for bad debts — Provision not to be added in computation of book profits

The assessee claimed deduction u/s 80HHC of the Income-tax Act, 1961 and after setting off unabsorbed loss and depreciation of the preceding years, the assessee filed a nil return for the A.Y. 2004-05 and declared the book profits under the provisions of section 115JB. The Assessing Officer made various disallowances in his order u/s 143(3).

The Commissioner (Appeals) deleted the addition made on account of bad and doubtful debts holding that the provision for bad and doubtful debt was not a provision for a liability but for diminution in value of assets and therefore, clause (c) of the Explanation to section 115JB would not be applicable. The assessee and the Department filed appeals before the Tribunal. The Tribunal held that since the assessee had simultaneously obliterated the provision from its accounts by reducing the corresponding amount from the loans and advances on the assets side of the balance-sheet and consequently, at the end of the year shown the loans and advances on the assets side of the balance sheet as net of the provision for bad debts, it would amount to a write-off and such actual write-off would not be hit by clause (i) of the Explanation to section 115JB.

On appeal by the Revenue, the Gujarat High Court upheld the decision of the Tribunal and held as under:

“The Tribunal was right in deleting the addition on account of the provision for bad and doubtful debts in the computation of the book profits for computation of minimum alternate tax liability in the light of clause (i) of the Explanation to section 115JB. No question of law arose.”

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Exemption u/s 54 was available even if the new residential property was purchased in the joint names of assessee, her daughter and son in law

26 ITO vs. Smt. Rachna Arora [2021] 90 ITR(T) 575 (Chandigarh – Trib.) ITA No.: 1112 (Chd) of 2019 A.Y.: 2015-16 Date of Order: 31st March, 2021

Exemption u/s 54 was available even if the new residential property was purchased in the joint names of assessee, her daughter and son in law

FACTS
Assessee sold a residential property and invested entire amount on purchase of a new residential property in joint names of assessee with her daughter and son in law and claimed exemption under Section 54. Assessing Officer held that assessee was entitled for claim of exemption only to extent of her share in new residential property.

The CIT (A) allowed the assessee’s appeal.

Consequently, the revenue filed an appeal before the ITAT.

HELD
The ITAT confirmed the order passed by the CIT(A) and dismissed the revenue’s appeal on the following grounds:

The CIT(A) had followed the ratio contained in the decision of Jurisdictional High Court in the case of CIT vs. Dinesh Verma 2015 233 Taxman 409 (Punj. & Har.)

The Hon’ble High Court in the case of Dinesh Verma (supra) held that the assessee would be entitled to the benefit of exemption u/s 54B only on the amount invested by him after the sale of his original property and not on the amount invested by his wife jointly in the same property. The high court also held that the plain reading of provisions of section 54 of the Act indicated that in order to claim the benefit of exemption u/s 54, the assessee should, invest the capital gain arising out of sale of residential property in purchase of another residential property within stipulated time. Nothing contained in Section 54 precluded the assessee to claim the exemption in case the property was purchased jointly with close family members, who are not strangers or unconnected to her provided the assessee invested the entire amount of Long Term Capital Gain.

Based on the principle, he held that in the instant case, since the entire investment is made by the assessee herself, albeit in joint names with daughter and son-in-law, the assessee is entitled to exemption u/s 54. The ITAT also observed that the Ld. DR was neither able to controvert the facts of the present case as noted by the CIT(A) nor had he pointed out how the decision in the case of Dinesh Verma (supra) was applicable against the assessee in the facts of the present case.

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A society formed with the primary object of construction of chambers for its members and their allotment is eligible to be registered u/s 12AA since the objects amount to advancement of object of general public utility within the meaning of Section 2(15) of the Income Tax Act

25 Building Committee (Society) Barnala vs. CIT (Exemption) [2021] 89 ITR(T) 1 (Chandigarh – Trib.) ITA No.: 1295 (Chd) of 2019 Date of Order: 18th May, 2021

A society formed with the primary object of construction of chambers for its members and their allotment is eligible to be registered u/s 12AA since the objects amount to advancement of object of general public utility within the meaning of Section 2(15) of the Income Tax Act

FACTS
Assessee-society applied for registration u/s 12AA. However, the CIT (Exemption) rejected the application of the assessee inter alia holding that genuineness of the activities of the assessee could not be established; and that the assessee had not incurred any expenditure for activities of general public importance. Main ground for rejecting the application was that purpose for which the society was formed was for the benefit of specific group of professionals which does not come within the purview of ‘advancement of object of general public utility’ under Section 2(15) of the Act.

Aggrieved, the assessee filed appeal to the ITAT.

HELD
The ITAT analysed the case on hand in the context of provisions of Section 2(15) which define ‘charitable purpose’ and Section 12AA which provide for grant of registration.

The ITAT observed that the bye-laws of the society provided that society was established for the welfare, construction and allotment of chambers in the District Court Complex, Barnala for the members of District Bar Association, Barnala. It further provided that all the incomes/earnings would be solely utilized and applied towards the promotion of its aims and objectives only as set forth in the memorandum of association, and that the society will work on no profit and no loss basis. Bye-laws also provided social welfare activities such as growing of trees for environments, de-addiction drug campaign, welfare of girl child, and also provide legal awareness among the general public.

The CIT (Exemptions) proceeded only on the basis that since the society was formed for construction of building for members, benefits thereof only restricted to the members, and not to the general public at large and failed to comprehend the role of Bar Association in judicial dispensation. Attainment of justice for all the parties of the case and the society at large is the main object of our judicial system.

The Bench and Bar were the essential partners in judicial dispensation, and therefore, considering the importance of Bar Association in every adjudicating body, particular space was being earmarked and maintained for Bar Association and for litigants. Thus, since working space for professionals was an integral part of infrastructure for judicial dispensation, the ITAT held that the CIT (Exemptions) was wrong in rejecting the assessee’s application u/s 12AA, disregarding the bye-laws and not considering the object of the assessee from a larger perspective.

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Since income from TDR is inextricably linked to the project and its cost, the cost of building has to be deducted against the income from sale of TDR. TDR receipts cannot be considered in isolation of assessee’s obligation under the SRA agreement to complete the SRA project

24 DBS Realty vs. ACIT [TS-1096-ITAT-2021(Mum)] A.Ys.: 2010-11 and 2011-12; Date of order: 24th November, 2021 Section: 28

Since income from TDR is inextricably linked to the project and its cost, the cost of building has to be deducted against the income from sale of TDR. TDR receipts cannot be considered in isolation of assessee’s obligation under the SRA agreement to complete the SRA project

FACTS
The assessee, a partnership firm, engaged in the business of real estate development entered into an agreement with the Slum Rehabilitation Authority (SRA) to develop a project over a plot of land spread over 31.9 acres. The said plot of land was purchased by the assessee for a consideration of Rs. 44.21 crore and handed over to SRA as per SRA scheme. As per the terms of the agreement with SRA, the assessee was to develop the SRA project at its own cost. In return of the land surrendered to SRA and the project cost to be incurred the assessee was granted Land TDR of 93,623 sq. mts. and construction TDR of 4,78,527 sq. mts.

Since the assessee was required to fund the entire cost of the project itself, the TDR granted to the assessee in a phased manner was sold from time to time to incur the cost of the project. In the process, the assessee received various amounts aggregating to about Rs. 304 crore in financial years 2009-10 to 2013-14.

In the course of assessment proceedings for the assessment year under consideration, the Assessing Officer (AO) called upon the assessee to explain why the amount received from the sale of TDR should not be treated as income of the assessee in respective assessment years. In response, the assessee submitted that since it is following percentage completion method for recognising the revenue from the SRA project and since 25% of the total estimated project is not completed till date, TDR income cannot be treated as income but has to be shown as current liability.

The AO did not accept the contentions of the assessee and held that the amount received by the assessee from sale of TDR has to be added to the income of the assessee in the respective assessment years.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal where it contended that-

(i) sale of TDR is integrally connected to the SRA project, hence, cannot be considered in isolation;

(ii) since SRA is not funding the project, the assessee has to incur the cost of project by utilizing the amount received from sale of TDR;

(iii) the very idea of granting TDR to the assessee is for enabling it to finance the project;

(iv) since the project is not complete even to the extent of 25%, no amount is taxable, much less, the amount received from sale of TDR, that too, without looking at the corresponding cost incurred by the assessee.

HELD
The Tribunal noted that the issue for its consideration is whether the amount received by the assessee from the sale of TDR granted in respect of the SRA project is taxable in the year of receipt or the assessee’s method of revenue recognition following percentage of completion method is acceptable. It also noted that the assessee has received certain amount from the sale of TDR in A.Ys. 2012-13 and 2013-14 as well.

While completing the assessment, the AO accepted the method of accounting followed by the assessee. However, PCIT held the assessment orders to be erroneous and prejudicial to the interest of the revenue since AO failed to tax the amount received by the assessee from the sale of TDR. While setting aside the assessments, the PCIT directed the AO to assess the amounts received from the sale of TDR.

However, while deciding the assessee’s appeals challenging the aforesaid direction of PCIT, the Tribunal held that percentage completion method followed by the assessee is a well-recognised method as per ICAI guidelines and judicial precedents; the sale of TDR cannot be considered in isolation of assessee’s obligation under the SRA agreement to complete the SRA project; the assessee was under obligation to complete the project as per the agreement; the TDR was granted to provide finance to the assessee to complete the project. Thus, the assessee’s income from TDR cannot be considered independently without taking the corresponding expenses, more so when the TDR receipts are directly linked to execution of the project. Since income from TDR is inextricably linked to the project and its cost, the cost of building has to be deducted against the income from sale of TDR.

Since the project has been stalled due to dispute and litigations and the assessee has not been able to complete the project, the bench observed that though assessee has earned income from sale of TDR, however, no income from SRA project, as yet, has been offered to tax. It also observed that the Tribunal has in appeals against orders passed under Section 263 has recorded findings touching upon the merits of the issue, which indeed, are favourable to the assessee and the said order of the Tribunal was not available before the AO or CIT(A) the applicability of the said order to the facts of the case needs to be examined. The Tribunal set aside the order of CIT(A) and restored the issue to the file of the AO for fresh adjudication after examining the applicability of the order of the Tribunal for A.Ys. 2012-13 and 2013-14.

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Where premises were let along with furniture and fixture and rent for furniture and fixtures has been bifurcated by the assessee, deduction under Section 24(a) held to be allowable even for rent of furniture and fixture, etc Reimbursement of member’s share of contribution for repairing the entire society building held to be not taxable as it has no income element in it

23 Lewis Family Trust vs. ITO [TS-1121-ITAT-2021(Mum)] A.Y.: 2012-13 ; Date of order: 30th November, 2021 Sections: 23, 24

Where premises were let along with furniture and fixture and rent for furniture and fixtures has been bifurcated by the assessee, deduction under Section 24(a) held to be allowable even for rent of furniture and fixture, etc

Reimbursement of member’s share of contribution for repairing the entire society building held to be not taxable as it has no income element in it

FACTS I
The assessee, in its return of income, declared rental income of Rs 57,56,998 under the head `Income from House Property’ and claimed deduction under Section 24(a) of the Act. The Assessing Officer (AO) on perusal of the leave and license agreement, found that the assessee trust had let out premises along with furniture, fixtures and decoration, air-conditioning, etc, and the rent for furniture and fixtures has been separately bifurcated by the assessee. The AO held that rent of premises amounting to Rs. 34,54,199 is only taxable under the head `income from house property’ and deduction under Section 24(a) allowable in respect thereof and rent of furniture, fixtures, etc amounting to Rs. 23,02,799 would get taxed under the head `income from other sources’ and therefore, standard deduction @ 30% thereon would not be allowable.

Aggrieved, the assessee preferred an appeal to CIT(A) where it contended that the total rent has been bifurcated into rent for premises and hire charges for furniture, fixtures, etc. only for the purpose of enabling property tax charged by MCGM at a lower amount and there was no intention to defraud the income-tax department; furniture is attached with the property and cannot be removed without damaging the wall or the floor; and that without furniture rent cannot be equivalent to the amount agreed upon. The CIT(A) confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

FACTS II
During the previous year relevant to the assessment year under consideration, the assessee made a payment of Rs. 4,45,266 towards members’ share of contribution for repairing the entire society building. This payment was made by account payee cheque through regular banking channels by the assessee to the housing society. Since repairs costs were to be borne by the tenant, the assessee got a sum of Rs. 4,45,266 reimbursed from the lessee bank. The AO taxed this sum of Rs. 4,45,266 under the head `income from other sources’.

Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD I
The Tribunal noted that the assessee had received composite rent from its tenant State Bank of Patiala. The lessee bank had treated the entire payment of rental and hire charges as the composite payment and had charged tax at source in terms of Ssection 194I of the Act. It observed that this aspect is not a relevant consideration for determining the taxability of rental under the head of income in the hands of the assessee. However, it noted that for A.Y. 2010-11, the AO, in order giving effect to order of CIT(A), had accepted the stand of the assessee vide his order dated 19th March, 2014 and in scrutiny assessments framed for A.Ys. 2016-17 and 2018-19 also the stand of the assessee has been accepted. Applying the principle laid down by the Apex Court in Radhasoami Satsang [193 ITR 321 (SC)], namely that the revenue cannot take a divergent stand for one particular year, ignoring the rule of consistency, the Tribunal allowed this ground of appeal filed by the assessee.

HELD II
The Tribunal held that since the assessee had merely got the reimbursement of the amount paid by it to the society, there is no income element in it. Hence, it held that the reimbursement received by the assessee cannot be taxed under the head `income from other sources’.

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CSR expenses, if given by way of donation to a trust eligible for 80G deduction, can be claimed under Section 80G. Restriction under Explanation 2 Section 37 does not apply to claim under section 80G

22 Naik Seafoods Pvt. Ltd. vs. PCIT [TS-1157-ITAT-2021(Mum)] A.Y.: 2016-17; Date of order: 26th November, 2021 Sections: 37, 80G, 263

CSR expenses, if given by way of donation to a trust eligible for 80G deduction, can be claimed under Section 80G. Restriction under Explanation 2 Section 37 does not apply to claim under section 80G

FACTS
During the previous year relevant to the assessment year under consideration, assessee company in its computation of total income disallowed a sum of Rs. 2.80 lakh being CSR expenses debited to Profit & Loss Account but claimed the same under Section 80G. While assessing assessee’s total income under Section 143(3) of the Act, the Assessing Officer (AO) did not disallow the claim so made under Section 80G.

The PCIT issued a show-cause notice to the assessee interalia observing that claim of Rs. 1.40 lakh has been made under Section 80G regarding CSR expenses of Rs. 2.80 lakh. CSR expenses are the assessee’s responsibility as per the Companies Act, 2013, and if it is spent through other trusts, then also, as per Rule 4(2) of CSR Rules, it is spent on behalf of the assessee. Therefore, the assessee cannot give a donation of CSR expenses even if it is given to a trust eligible for an 80G deduction. Hence, the same is not allowable. Failure of AO to consider CSR expense as disallowable as rendered the assessment order erroneous in so far as it is prejudicial to the interest of the revenue.

In response, the assessee made its submission (the submission made by the assessee to the PCIT on this issue is not reproduced in the order of the tribunal). However, the PCIT rejected the submission by holding that since both CSR expense and 80G donations are two different modes of ensuring fund for public welfare, treating the same expense under two different heads would defeat the very purpose of it. In the budget memorandum as well, the legislative intent was to ensure that companies with certain strong financials make the expenditure towards this purpose and by allowing deduction, the Government would be subsidizing one-third of it by way of revenue foregone thereon and hence the same was required to be disallowed in the assessment. Failure of the AO to examine the CSR expense as disallowable expense and to examine disallowance of deduction under Section 80G rendered the order erroneous and prejudicial to the interest of the revenue. He set aside the order of the AO with a direction to the AO to examine the above aspects with regard to allowability of deduction claimed under Section 80G as per law and frame a fresh assessment after affording an opportunity to the assessee of being heard.

Aggrieved, the assessee preferred an appeal to the Tribunal where relying on the decisions of the Bangalore Bench of the Tribunal in the case of FNF India Pvt. Ltd. vs. ACIT in ITA No. 1565/Bang./2019 dated 5th January, 2021 and Goldman Sachs Services Pvt. Ltd. vs. JCIT in ITA(TP) No. 2355/Bang./2019 it supported the action of the AO by contending that Explanation 2 under Section 37 is restricted to Section 37 only and nothing more and since the Explanation has been inserted below Section 37, it can be invoked only when expenditure is claimed as deduction as being for the purpose of business under Section 37 of the Act. Since the assessee has not claimed the said expenditure under Section 37 but has claimed it under Section 80G and the Act nowhere states that expenditure disallowed in terms of Explanation 2 to Section
37 cannot be allowed by way of deduction in terms of Section 80G.

HELD
The Tribunal noted that the Bangalore bench of the Tribunal in FNF India Pvt. Ltd. vs. ACIT (supra) while deciding the issue of deduction under Section 80G relating to donations which is part of CSR has remitted the issue to the AO to verify the additions necessary to claim deduction under Section 80G of the Act with a clear direction to the AO. Since in the present case the AO himself allowed the deduction under Section 80G, as claimed by the assessee, and the issue is debatable issue and the AO has taken one of the possible view, the Tribunal held that PCIT cannot invoke the provisions of Section 263 of the Act in order to bring on record his possible view.

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DOES TRANSFER OF EQUITY SHARES UNDER OFFER FOR SALE (OFS) DURING THE PROCESS OF LISTING TRIGGER ANY CAPITAL GAINS?

The calendar year 2021 was a blockbuster year for Indian primary markets, with 63 companies collectively garnering Rs. 1.2 lakh crore through initial public offerings. The Indian primary market witnessed the largest and most subscribed public offers in this period. A large part of public offering was by way of Offer For Sale (OFS), i.e. promoters offloading (selling) their stake in companies to financial institutions / public. What follows the transfer of equity shares is the determination of capital gains income and income-tax liability thereon.

Finance Act, 2018 brought a paradigm shift in taxation of long-term capital gains arising from the transfer of equity shares and equity-oriented mutual funds. Finance Act, 2018 withdrew the exemption granted on long-term capital gains arising on transfer of equity shares and equity-oriented mutual funds. With the withdrawal of exemption, special provisions in the form of Sections 112A and 55(2)(ac) of the Income Tax Act, 1961 (‘the Act’) were inserted to determine capital gains income.

This article seeks to examine capital gains tax liability arising from the transfer of equity shares under an OFS in an IPO process under the new taxation regime.

BRIEF BACKGROUND OF THE PROVISIONS
Section 112A of the Act provides for a tax rate of 10% in case where (a) total income includes income chargeable under the head capital gains (b) capital gains arising from the transfer of long-term capital asset being equity shares (c) securities transaction tax is paid on acquisition and transfer of those equity shares1.

Section 55(2)(ac) of the Act provides a special mechanism for computation of cost of acquisition in respect of assets covered by Section 112A. Cost of acquisition of equity shares acquired prior to 1st February, 2018 is higher of (a) or (b) below:

(A) Cost of acquisition of an asset.
(B) Lower of:

1. Fair market value of the asset as on 31st January, 2018, and
2. Full value of consideration received or accruing on the transfer of equity shares.

The essence of the insertion of Section 55(2)(ac) is to provide grandfathering in respect of gains up to 31st January, 2018 regarding equity shares. This is with a rider that adopting fair market value does not result in the generation of loss.

1 Section 112A(4) of the act provides relief
from payment of securities transaction tax on acquisition of shares in respect
of certain transaction covered by Notification No. 60/2018 Dated 1^st
October, 2018.

CASE UNDER EXAMINATION AND ANALYSIS

Mr. A, an individual, is the promoter of A Ltd. Mr. A had subscribed to equity shares of A Ltd. on 1st April, 2011 when the company was unlisted at their face value of Rs. 10. Since then, Mr. A has been holding these equity shares as a capital asset. Mr. A decides to sell the equity shares under the IPO process as an offer for sale at Rs. 1,000 per share in February, 2022. The question to be examined is: what should be the cost of acquisition of the shares, and how should one compute the capital gains?

In this case, the transfer of shares is covered by Section 112A of the Act since (a) total income of Mr. A includes income chargeable under the head ‘capital gains’; (b) capital gains arise from the transfer of long-term capital asset2 being equity shares; (c) in terms of Section 98 (entry no. 6) r.w.s. 97(13)(aa) of Finance (No.2) Act, 2004, Mr. A is required to pay securities transaction tax on the transfer of equity shares; (d) the requirement of payment of securities transaction tax on acquisition of equity shares is relieved in terms of Notification No. 60/2018 dated 1st October, 20183 as shares were acquired when equity shares of A Ltd. were not listed on a recognised stock exchange.

The provisions of Section 112A cover the case on hand and therefore the cost of acquisition of equity shares shall be determined in terms of Section 55(2)(ac), which requires identification of three components, namely cost of acquisition, fair market value as on 31st January, 2018 and full value of consideration. In the facts of the case, the cost of acquisition of each equity share is Rs. 10, and the full value of consideration accruing on the transfer of each share is Rs. 1,000. What remains for determination is the fair market value of the asset as on 31st January, 2018 to compute the cost of acquisition under Section 55(2)(ac).

Before determining the fair market value of equity shares as on 31st January 2018, one may refer to Section 97(13)(aa) of Finance (No. 2) Act, 2004, which provides that sale of unlisted equity shares under an OFS to the public in an initial public offer and where such shares are subsequently listed on recognised stock exchange shall be considered as taxable securities transaction and securities transaction tax is leviable on the same.

From the above, it is pertinent to note that when the equity shares are transferred under an OFS, such shares are unlisted and are listed on a recognised stock exchange only subsequent to the transfer. Further, the practical experience of applying for shares under an IPO suggests that consideration for equity shares is paid, and equity shares are credited to the purchaser’s account, prior to the date of listing of equity shares on a recognised stock exchange. This also corroborates that when the promoter transfers the equity shares under an OFS, such shares are still unlisted.

2 Equity
shares held by Mr. A qualifies as ‘long-term capital asset’ as equity shares
are held for a period exceeding 12 months.

3 Notification
No. 60/2018/F. No.370142/9/2017-TPL.

Determination of fair market value of equity shares as on 31st January, 2018

Clause (a) of Explanation to Section 55(2)(ac) of the Act provides a methodology for the determination of fair market value.

Sub-clause (i) of clause (a) of Explanation to Section 55(2)(ac) provides that where equity shares are listed on a recognised stock exchange as on 31st January, 2018, the highest price prevailing on the recognised stock exchange shall be the fair market value. In the present case, shares will only be listed post the IPO in February, 2022 (i.e. Equity shares were not listed on a recognised stock exchange as on 31st January, 2018). Accordingly, the case is not covered by said sub-clause.

Sub-clause (ii) of clause (a) of Explanation to Section 55(2)(ac) does not apply to the present case as the subject matter of transfer is equity shares and not units of equity-oriented mutual fund/business trust.

Sub-clause (iii) of clause (a) of explanation to Section 55(2)(ac) provides that where equity shares are not listed on any recognised stock exchange as on 31st January, 2018, but listed as on the date of transfer, the fair market value of equity shares shall be the indexed cost of acquisition up to F.Y. 2017-18.

The literal reading of sub-clause (iii) of clause (a) of Explanation to Section 55(2)(ac) of the Act suggests that the case of Mr. A will not be covered by said sub-clause as equity shares are not listed as on the date of transfer.

Considering the above, an important issue arises that when the fair market value of an asset cannot be determined basis the methodology provided in clause (a) of Explanation to Section 55(2)(ac), what shall be the impact of the same?

TAX AUTHORITIES MAY PUT FORTH FOLLOWING ARGUMENTS
With the withdrawal of exemption under Section 10(38) of the Act, the intent of insertion of Section 55(2)(ac) of the Act is to provide grandfathering of gains on equity shares up to 31st January, 2018. The legislature, in its wisdom, may provide the grandfathering in any manner.

In respect of equity shares, which are not listed on a recognised stock exchange as on 31st January, 2018, legislature has provided for the benefit of indexation in terms of sub-clause (iii) of clause (a) of Explanation to Section 55(2)(ac) of the Act.
In the case under consideration, Mr. A’s equity shares were unlisted as on 31st January, 2018 and the transfer of shares took place subsequently. And although the equity shares held by Mr. A were not listed as on the date of transfer, considering the legislative intent, the case of Mr. A shall be covered by sub-clause (iii) of clause (a) of Explanation to Section 55(2)(ac) of the Act. Accordingly, capital gains computation does not fail. In this regard, reference may be made to Supreme Court (‘SC’) ruling in the case of CIT vs. J. H. Gotla [1985] 156 ITR 323. In this case, the taxpayer had suffered a significant business loss in the earlier assessment years, which were carried forward. The taxpayer gifted certain oil mill machinery to his wife. A partnership firm was floated where the wife and minor children were partners. Income earned by wife and minor children from the firm was clubbed in the hands of the taxpayer, who claimed set-off of clubbed income against the business losses carried forward. Tax authorities denied such set off on the ground that for setting off losses business was required to be carried on by taxpayer and in this case, business was carried out by the firm and not the taxpayer. SC allowed the set-off of losses in the hands of the taxpayer against the clubbed income and made the following observations on interpretation of the law:

“Now where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the legislature, the Court might modify the language used by the legislature so as to achieve the intention of the legislature and produce a rational construction. The task of interpretation of a statutory provision is an attempt to discover the intention of the legislature from the language used. If the purpose of a particular provision is easily discernible from the whole scheme of the act which, in the present case, was to counteract, the effect of the transfer of assets so far as computation of income of the assessee was concerned, then bearing that purpose in mind, the intention should be found out from the language used by the legislature and if strict literal, construction leads to an absurd result, i.e., result not intended to be subserved by the object of the legislation found out in the manner indicated above, then if other construction is possible apart from strict literal construction, then that construction should be preferred to the strict literal construction. Though equity and taxation are often strangers, attempts should be made that these do not remain so always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction.”

In the present case, legislative intent for providing grandfathering benefit in respect of equity shares which are not listed as on 31st January, 2018 and transferred subsequently can be gathered from the language employed in sub-clause (iii) of clause (a) of Explanation to Section 55(2)(ac) of the Act and accordingly, the said sub-clause covers the case of Mr. A.

AS AGAINST THE ABOVE, THE TAXPAYER MAY SUBMIT AS UNDER
The computation of capital gains is carried out in terms of Section 48 of the Act. The computation of capital gains begins with the determination of full value of consideration which is reduced by (a) expenditure incurred wholly and exclusively in connection with transfer, (b) cost of acquisition of capital asset, and (c) cost of improvement of a capital asset. Accordingly, the before mentioned are four important elements of computing capital gains.

Section 55(2) of the Act provides for the determination of the cost of acquisition of capital assets for the purpose of Sections 48 and 49 of the act. Section 55(2)(ac) is a special provision for determining the cost of acquisition in certain specified cases. Unlike Section 55(2)(b) of the act4, Section 55(2)(ac) of the Act is not optional. Once the taxpayer’s case is covered by provisions of Section 55(2)(ac), the cost of acquisition of a specified asset has to be determined under that Section.

Clause (a) of Explanation to Section 55(2)(ac) defines the term ‘fair market value’ in an exhaustive manner, and accordingly, no other methodology can be read into Section 55(2)(ac) of the Act to determine the fair market value.

In order to determine the cost of acquisition under Section 55(2)(ac), one of the important components is the fair market value of the asset as on 31st January, 2018. In the absence of a determination of the same, the exercise of determination of cost of acquisition under Section 55(2)(ac) of the Act cannot be completed.

The SC, in the case of CIT vs. B. C. Srinivasa Setty [1981]128 ITR 2945, held that since the cost of acquisition of self-generated goodwill cannot be conceived, the computation of capital gains fails. On failure of computation provision, it was held that such asset is not covered by Section 45 of the Act and hence not subjected to capital gains. Similarly, in the case of Sunil Siddharth Bhai vs. CIT [1985] 156 ITR 509 (SC)6, where the taxpayer had contributed capital asset to a partnership firm, it was held that full value of consideration accruing or arising on transfer of capital asset cannot be determined and accordingly such asset is beyond the scope of capital gains chapter. Also, in the case of PNB Finance Ltd. vs. CIT [2008] 307 ITR 757, on the transfer of undertaking by the taxpayer pursuant to the nationalisation of the bank, SC held that undertaking comprises of various capital assets and in the absence of determination of cost of acquisition of undertaking, the charge fails and accordingly, capital gains cannot be charged.

4 Section
55(2)(b) of the act provides an option to taxpayer to either adopt the actual
cost of acquisition or fair market value as on 1st April, 2001 where capital
asset is acquired prior to 1st April, 2001.

5 Rendered
prior to insertion of Section 55(2)(a) of the Act.

6 Rendered
prior to insertion of Section 45(3) of the Act.

Reference may also be made SC ruling in case of Govind Saran Ganga Saran vs. CST [1985] 155 ITR 144 rendered under Bengal Finance (Sales Tax) Act, 1941 (‘Sales Tax Act’) as applied to the Union Territory of Delhi. The case revolved around the interpretation of Sections 14 and 15 of the Sales Tax Act. Cotton yarn was classified as one of the goods of special importance in inter-state trade or commerce as envisaged by Section 14 of the Sales Tax Act. Section 15 of the Sales Tax Act provided that sales tax on goods of special importance should not exceed a specified rate and further that they should not be taxed at more than one stage. The issue arose because the stage itself had not been clearly specified, and accordingly, it was not clear at what stage the sales tax shall be levied. The Financial Commissioner held that in the absence of any stage, there was a lacuna in the law and consequently, cotton yarn could not be taxed under the sales tax regime. The Delhi High Court reversed the decision of the Financial Commissioner. However, SC held that the single point at which the tax may be imposed must be a definite ascertainable point, and in the absence of the same, tax shall not be levied. While rendering the ruling, SC has made the following observations which are worth quoting:

“The components which enter into the concept of a tax are well known. The first is the character of the imposition known by its nature which prescribes the taxable event attracting the levy, the second is a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax, the third is the rate at which the tax is imposed, and the fourth is the measure or value to which the rate will be applied for computing the tax liability. If those components are not clearly and definitely ascertainable, it is difficult to say that the levy exists in point of law. Any uncertainty or vagueness in the legislative scheme defining any of those components of the levy will be fatal to its validity.”

The SC ruling in the case of Govind Saran Ganga Saran (supra) has been approved by Constitution Bench of SC in case of CIT vs. Vatika Township (P.) Ltd. [2014] 367 ITR 466. In the facts of the case, the measure or value to which the rate will be applied is uncertain in the absence of determination of cost of acquisition, and accordingly, a levy will be fatal.

The cardinal principles of interpreting tax statutes centre around the observations of Rowlatt J. In the case of Cape Brandy Syndicate vs. Inland Revenue Commissioner [1921] 1 KB 64, which has virtually become the locus classicus. In the opinion of Rowlatt J.:
“. . . . . . . . . in a Taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.”8

AUTHOR’S VIEW
Considering that: (a) in terms of a literal reading, fair market value of equity shares as on 31st January 2018 cannot be determined, (b) computation provision and charging provision both together form an integrated code, and on the failure of computation provision, charge fails, (c) judicial precedents holding that uncertainty or vagueness in legislative scheme lead to the levy becoming invalid, and (d) requirement of taxing provisions to be construed in terms of language employed only, in the view of the author, the taxpayer stands on a firm footing that in the absence of a determination of the fair market value of equity shares as on 31st January, 2018 in terms of methodology supplied in Section 55(2)(ac) of the act, cost of acquisition of equity shares cannot be determined. In the absence of a determination of the cost of acquisition, the computation mechanism fails. Accordingly, one may vehemently urge that the equity shares transferred under the OFS are beyond the capital gains chapter.

One may also note that the issue discussed herein may not be restricted in its applicability to promoters transferring their equity shares under an offer for sale. It may equally apply to private equity players, institutions, financial investors, individuals etc., who have either subscribed to the shares of an unlisted company or have purchased the shares of an unlisted company from the market and are selling the shares under an offer for sale.

One shall note that courts may be slow in adopting a position of total failure of charge and transfer of capital asset falling beyond the provisions capital gains chapter. Further, considering the impact of the position stated above, one may expect high-rise litigation.

[The views expressed by author are personal. One may adopt any position in consultation with advisors.]

________________________________________________________________
8 The above passage has been quoted with approval in several SC rulings. Illustratively, refer PCIT vs. Aarham Softronics [2019] 412 ITR 623 (SC), CIT vs. Yokogawa India Ltd. [2017] 391 ITR 274 (SC), Orissa State Warehousing vs. CIT [1999] 237 ITR 589 (SC), Smt. Tarulata Shyam vs. CIT [1977] 108 ITR 345 (SC), Sole Trustee, Loka Shikshana Trust [1975] 101 ITR 234 (SC), CIT vs. Ajax Products Ltd. [1965] 55 ITR 741 (SC), CIT vs. Shahzada Nand and Sons [1966] 66 ITR 392 (SC).

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THE GHOST OF B.C. SRINIVASA SETTY IS NOT YET EXORCISED IN INDIA

In this article, the taxability of capital gains arising on the transfer of internally generated goodwill and other intangible assets has been deliberated upon. We have also discussed whether the ratio laid down by the Hon’ble Supreme Court in CIT vs. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) still holds the field in the case of self-generated goodwill and other internally generated intangible assets. Before we do so, it would be relevant to understand briefly the history of past litigation on this issue and the series of judicial amendments made.

DECISION IN B.C. SRINIVASA SETTY’S CASE AND INSERTION OF SECTION 55(2)(a)
The question as to whether ‘goodwill’ generated in a newly commenced business can be described as an ‘asset’ for the purposes of Section 45 came for consideration before a 3-judge bench of the hon’ble supreme court in the case of B.C. Srinivasa Setty’s case (supra).

While concluding that the self-generated goodwill was undoubtedly an asset of the business, the court, however held that self-generated goodwill was not an asset within the contemplation under Section 45.

The court took note of the provisions relating to capital gains and laid down the important principle that the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply, it is evident that such a case was not intended to fall within the charging section. The court observed that Section 48(ii) required deduction of the cost of acquisition from the full value of consideration in computing the capital gains chargeable under Section 45. Thus, the court held that what is contemplated under the provisions of Section 45 and 48 is an asset for which it is possible to envisage a cost of acquisition. Taking note of the fact that in case of goodwill of a new business acquired by way of generation, no cost element can be identified or envisaged, the court reached the conclusion that the goodwill of a new business, though an asset could not be regarded as an asset within the contemplation of the charge under Section 45.

In paragraph 12 of the said judgement, the court has observed that in the case of internally generated goodwill, it is not possible to determine the date when it comes into existence. It has been observed that the date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gains. It has been held that the ‘cost of acquisition’ mentioned in Section 48 implies a date of acquisition.

To overcome the above decision in B.C. Srinivasa Setty’s case (supra), Section 55(2)(a) was inserted vide Finance Act, 1987 with effect from 1st April, 1988. The said section originally contained two clauses. Clause (i) dealt with capital asset being goodwill of a business acquired by purchase from a previous owner, and clause (ii) dealt with the residual clause.

However, a reading of the memorandum to Finance Bill, 1987 would indicate that the amendment sought to deal with two classes of goodwill being – a) purchased goodwill and b) self-generated goodwill.

Section 55(2)(a)(ii), which dealt with the latter, i.e. self-generated goodwill, provided that for the purposes of Sections 49 and 50, the cost of acquisition of such self-generated goodwill would be taken to be nil.

The said section has been amended from time to time to include various classes of intangible assets.

PERIOD OF HOLDING AND LEVY OF TAX IN CASE OF SELF-GENERATED GOODWILL AND INTERNALLY GENERATED INTANGIBLE ASSETS

As discussed earlier, in order to overcome the decision in B.C. Srinivasa Setty’s (case), Section 55(2)(a)(ii) [currently Section 55(2)(a)(iii)] was inserted to deem the ‘cost of acquisition’ of the self-generated goodwill and other classes of internally generated intangible assets to be nil.

However, while making such an amendment, the legislature has not made any amendment to the provisions of the act to provide for the manner of computation of the period of holding in case of such assets.

As discussed earlier, it was observed by the Supreme Court that the date of acquisition in case of self-generated goodwill cannot be determined. The court has also observed that the date of acquisition is a material factor in applying the computation provisions relating to capital gains. It has also been held that the ‘cost of acquisition’ mentioned in Section 48 implies a date of acquisition.

The date of acquisition is a material factor in applying computation provisions considering that 2nd proviso to Section 48 replaces the ‘cost of acquisition’ in Section 48(ii) with ‘indexed cost of acquisition’ in case of gains arising from transfer of a long-term capital asset. The determination of whether a capital asset is a long-term capital asset would entail the determination of the period of holding in the hands of the assessee, which would, in turn, require the date of acquisition. Since the date of acquisition in the case of self-generated goodwill cannot be determined, the computation under Section 48 would not be possible.

By providing that the cost of acquisition in case of self-generated goodwill and other internally generated intangible assets as referred to in Section 55(2)(a) would be nil, the legislature may overcome the issue relating to the benefit of indexation under 2nd proviso to Section 48. However, this is not the end of the matter.

It would be pertinent to note that once the capital gains under Section 48 are computed and the charge under Section 45 is attracted, the tax payable on such capital gains would have to be determined based on whether such capital gain is a ‘short-term capital gain’ under Section 2(42B) or a ‘long-term capital gain’ under Section 2(29B). This exercise would, in turn, involve the determination of whether the capital asset is a ‘short-term capital asset’ under Section 2(42a) or a ‘long-term capital asset’ under Section 2(29AA).

A combined reading of sub Sections 42A, 42B, 29AA and 29B of Section 2 would indicate the following:

• The period of holding of a capital asset will have to be determined in the hands of the assessee. In determining the same one will have to reckon the actual period for which the capital asset has been held by the assessee.

• Having determined the period of holding in respect of the capital asset in the hands of an assessee, one will have to examine whether the capital asset would fall within the definition of ‘short-term capital asset’ under Section 2(42A) read with the provisos thereto based on such period of holding.

• If such capital asset meets the definition of ‘short-term capital asset’, the gain arising from the transfer of the same would amount to short-term capital gain by virtue of Section 2(42B).

• If such capital asset does not meet the definition of ‘short-term capital asset’ under section 2(42A), it will become a ‘long-term capital asset’ by virtue of Section 2(29AA). Thus, in order to invoke the residuary provision of Section 2(29AA), such a capital asset must clearly not be a ‘short-term capital asset’ within the meaning of Section 2(29AA). Thus, where it cannot be conclusively concluded that a capital asset is not a ‘short-term capital asset’, it cannot, by virtue of the residuary provision under Section 2(29aa), become a ‘long-term capital asset’.

• This is clear from the fact that ‘long-term capital asset’ has been defined to mean a capital asset that is not a ‘short-term capital asset‘. Firstly, the use of the word ‘means’ in Section 2(29AA) indicates that the definition given under Section 2(29aa) to the term ‘long-term capital asset’ is exhaustive. In this regard, reliance is placed on Kasilingam vs. P.S.G. College of Technology [1995] SUPP 2 SCC 348 (SC), wherein it has been held that the use of the term ‘means’ indicates that the definition is a hard and fast definition. Secondly, Section 2(29AA) defines a ‘long-term capital asset’ to mean a capital asset which is not a short-term capital asset. Thus, only where a capital asset is conclusively found not to be a ‘short-term capital asset’ within the meaning contemplation of Section 2(42A), it would fall within the purview of Section 2(29AA), and any gain arising from the transfer of the same would be a ‘long-term capital gain’ by virtue of Section 2(29B).

Since the period of holding of self-generated goodwill and other internally generated intangible assets cannot be determined, it would not be possible to conclusively rule out that such capital assets are not ‘short-term capital assets’ under Section 2(42A). Resultantly, such assets cannot be ‘long-term capital assets’. As a result, it would not be possible to determine whether the capital gains arising from the transfer of such assets are ‘short-term capital gains’ or ‘long-term capital gains’.

A fortiori, the applicable tax rates in respect of such capital gains cannot be determined as the nature of capital gains is unknown.

It may be noted that the impossibility in determination of the period of holding would further impact an assessee who acquires it from such previous owner who generated the goodwill or other intangible assets, under any of modes provided in clauses (i) through (iv) of Section 49(1).

In such case, by virtue of explanation 1(b) to Section 2(42A), in determining the period of holding in the hands of such assessee, the period of holding of the previous owner is required to be included. Since, the period of holding in the hands of the previous owner cannot be determined, the period of holding in the hands of the assessee would also be
indeterminate.

Can one argue that where the period of holding in the case of the previous owner is indeterminate, such period will have to be ignored for the purposes of explanation 1(b) to Section 2(42A)? However, such a view is clearly contrary to the mandate of the said explanation which provides that the period of holding of the previous owner ‘shall be included’.

Such being the case, it would also not be possible to determine the tax rates applicable to an assessee who acquires self-generated goodwill or internally generated intangible assets under the modes mentioned in Section 49(1)(i) to (iv), upon subsequent transfer of such assets by him. In Govind Saran Ganga Saran vs. CST, 1985 SUPP SCC 205 : 1985 SCC (Tax) 447 at page 209:

‘6. The components which enter into the concept of a tax are well known. The first is the character of the imposition known by its nature which prescribes the taxable event attracting the levy, the second is a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax, the third is the rate at which the tax is imposed, and the fourth is the measure or value to which the rate will be applied for computing the tax liability. If those components are not clearly and definitely ascertainable, it is difficult to say that the levy exists in point of law. Any uncertainty or vagueness in the legislative scheme defining any of those components of the levy will be fatal to its validity.’

From the above extract, it can be observed that there are four components of tax:

•   The first component is the character of the imposition,
•   The second is the person on whom the levy is imposed,
•   The third is the rate at which tax is imposed, and
•   The fourth is the value to which the rate is applied for computing tax liability.

Further, the court has held that if there is any ambiguity in any of the above four concepts, the levy would fail.

In the following cases, the ratio laid down in Govind Saran Ganga Saran’s case (supra) has been followed:

•   CIT vs. Infosys Technologies Ltd. [2008] 297 ITR 167 (SC) (para 6);
•   CIT vs. Vatika Township (P.) Ltd. [2014] 367 ITR 466 (SC) (para 39);
•   Commissioner of Customs (Import) vs. Dilip Kumar & Co. [2018] 95 taxmann.com 327 (SC) (para 42);
•   CIT vs. Govind Saran Ganga Saran [2013] 352 ITR 113 (Karnataka) (para 15);
•   CIT vs. Punalur Paper Mills Ltd. [2019] 111 taxmann.com 50 (Kerala) (para 9).

Thus, it is clear that the rate of tax is one of the important components of tax and any uncertainty in the legislative scheme in defining it will be fatal to the levy.
Thus, in case of self-generated goodwill and other intangible assets, the charge under Section 45 in respect of capital gains upon transfer of the same would fail as the rate of tax cannot be determined. The charge would fail not only in respect of the assessee who acquired it through self-generation but also another assessee who acquires it from the former under modes provided in Section 49(1).

COMPARISON WITH SECTION 45(4) AS RECAST BY FINANCE ACT, 2021
Section 45(4), as inserted by Finance Act, 2021 with effect from 1st April, 2021, creates a charge in respect of profits or gains arising from a receipt of any money or capital asset or both by a specified person from a specified entity in connection with the reconstitution of such specified entity. It also provides the formula for the determination of such profits
or gains.

The said section provides that such profits or gains shall be chargeable to income tax as income of such specified entity under the head ‘capital gains’ and shall be deemed to be the income of such specified entity of the previous year in which the specified person received such money or capital asset or both.

It may be noted that in a given case, a specified person may receive two or more capital assets from the specified entity, comprising of a combination of short-term and long capital assets. In such a case, it would not be possible to apportion the aggregate profits or gains between short-term and long-term capital gains as no such mechanism has been provided in Section 45(4).

Further, there may be cases where only cash is received by the specified person from the specified entity. In such case, there is no transfer of a capital asset (be it long-term or short-term) by the specified entity to the specified person.

However, irrespective of the above situations, the entire profit or gain as determined by applying the provisions of Section 45(4) would be chargeable to tax in the hands of the specified entity under the head ‘capital gains’.

Thus, Section 45(4) is indifferent to whether there is actually a transfer of a capital asset, let alone whether such capital asset is long-term or short-term. Likewise, it is indifferent to the classification of the gains as ‘short-term capital gains’ or ‘long-term capital gains’. The trigger point in Section 45(4), unlike Section 45(1), is not the transfer of a short-term or long-term capital asset, but is rather the receipt of any money or capital asset or both by a specified person from a specified entity in connection with the reconstitution of such specified entity.

Further, Section 45(4), unlike Section 45(1), provides the mechanism for the computation of the profits and gains. The said computation is independent of the existence of any capital asset or, if it existed, the nature of such capital asset (i.e. short-term or long-term), unlike the computation under Section 48.

At this juncture, the question that would arise is what rate of tax would apply to the capital gains under Section 45(4). This is for the reason that the tax rate is dependent on the classification of the gains as ‘short-term capital gains’ or ‘long-term capital gains’ as discussed earlier.

According to the authors, the normal tax rates applicable to the assessee as per the first schedule to the relevant finance act would be applicable. This would be similar to the case of short-term capital gains other than those referred to in Section 111A.

A reference may be made to Section 2(1) of the Finance Act, 2021. The said Section, subject to exceptions under Sections 2(2) and 2(3) of the said Act, provides for charge of income-tax at the rates specified in part I of the first schedule. In other words, the tax rates mentioned in Section 2(1) read with part I of the first schedule of the Finance Act, 2021 would generally apply for computing the tax chargeable subject to the exceptions provided in Sections 2(2) and 2(3) of the said Act. One of the exceptions under Section 2(3) of the Finance Act, 2021 is with respect to cases falling under Chapter XII of the Income Tax Act where the said Chapter prescribes a rate. In such a case, the rate provided in the said Chapter would be applicable and not the rates provided in Part I of First Schedule to the Finance Act, 2021.

It may be noted that Section 111A, falling within Chapter XII, deals with short-term capital gains arising from transfer of certain capital assets and provides the rate of tax in respect of the same. Sections 112 and 112A deal with long-term capital gains and provide the tax rates in respect of the same. However, with regard to short-term capital gains other than those covered under Section 111A, no rate of tax is provided either in Chapter XII or any other provisions of the Income Tax Act. Thus, by virtue of Section 2(1) read with Section 2(3) of the Finance Act, 2021, with respect to such short-term capital gains, the rates provided in Part I of First Schedule to Finance Act, 2021 would apply.

The capital gains under Section 45(4) are not covered by Sections 111A, 112 and 112A. Such gains, therefore, form part of normal income and would suffer normal rates of tax as provided in Part I of First Schedule to Finance Act, 2021.

From the above, it can be observed that wherever the legislature has sought to do away with the requirement of the classification of the gains as short-term or long-term, it has done so.

However, the above would not apply in the case of self-generated goodwill and other internally generated intangible assets. Unless the period of holding of these assets is found, it cannot be determined whether they are ‘long-term capital assets’ or ‘short-term capital assets’ and the gains arising from the transfer thereof as short-term capital gain or long-term capital gain. In the absence of such determination, it would not be known whether such gain would fall under Section 112 and hence covered by Section 2(3) of the Finance Act. Unless its case is conclusively excluded from Section 2(3) of the Finance Act, Section 2(1), which provides for the normal rate cannot be pressed into service. Thus, the determination of the correct rate of tax becomes impossible, thereby frustrating the very levy.

CONCLUSION
Based on the foregoing analysis, it would not be unreasonable to take a stand that the charge under Section 45 and the subsequent levy of tax in respect of capital gains arising from transfer of capital assets, being self-generated goodwill and other intangible assets, would fail, despite the amendment under Section 55(2)(a). Thus, it would not be wrong to state that the ratio laid down by the Hon’ble Supreme Court in the case of B.C. Srinivasa Setty’s case (supra) is still good law, and the same continues to hold the field.

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Reopening of assessment – Within 4 years – Regular assessment completed u/s 143(3) after verifying the issue – Changing of opinion – Reopening bad in law

8 Conopco Inc. vs. UOI & Anr. [W.P. No. 7388 of 2008; Date of order: 17th December, 2021; A.Y.: 2004-05 (Bombay High Court)]

Reopening of assessment – Within 4 years – Regular assessment completed u/s 143(3) after verifying the issue – Changing of opinion – Reopening bad in law

The petitioner / assessee challenged the notice dated 13th March, 2008 issued u/s 148 and the order dated 14th October, 2008 passed by the A.O. rejecting its objections to the proposed reopening of the assessment.

The petitioner was issued 420,000 shares of Rs. 10 each in Ponds (India) Limited at the time of its incorporation in 1977. It was allotted a further 159,250 equity shares of Rs. 10 each by way of a rights issue at Rs. 90 per share in 1987. Further, 51,39,75,000 equity shares of Rs. 1 each were issued by way of bonus shares from time to time. Upon merger of Ponds (India) Ltd. with Hindustan Lever Ltd. and thereafter, the petitioner was holding 6,00,86,250 shares of Rs. 1 each of Hindustan Lever Ltd.

It filed a return of income for the A.Y. 2004-2005 on 14th October, 2004 declaring long-term capital gain of Rs. 10,108,653,163. It paid Rs. 1,010,865,316 as tax on long-term capital gain @ 10% as per the proviso to section 112 and surcharge of Rs. 25,271,633 @ 2.5%.

During the course of assessment proceedings, the petitioner vide letter dated 10th November, 2006 answered the questions raised by respondent No. 2 as to why the rate of tax on capital gains in its case should be computed @ 10% and the applicability of the first proviso to section 48. The petitioner submitted a without-prejudice working of capital gains without considering the benefit of the first proviso to section 48. The A.O. thereafter passed an assessment order dated 15th November, 2006 computing the income of the petitioner after accepting its contentions.

Thereafter, the petitioner received the impugned notice dated 13th March, 2008 proposing to reassess its income for A.Y. 2004-2005 on the alleged belief that its income had escaped assessment within the meaning of section 147.

The Court observed that in the reasons for reopening provided by the A.O. vide a letter dated 11th September, 2008, the main contentions of the A.O. were (i) the petitioner admitted to the working of capital gains without considering the benefit of the first proviso to section 48; and (ii) tax had to be calculated @ 20% against 10% determined while passing the assessment order.

It is settled law that before a proceeding u/s 148 can be validly initiated certain preconditions which are jurisdictional have to be complied with. One such condition is that the A.O. must have reason to believe that income chargeable to tax has escaped assessment and such reasons must be recorded in writing prior to the initiation of the proceedings. The second condition is that reassessment must not be based merely on change of opinion by a succeeding A.O. from the view taken by his predecessor.

The Court held that both these conditions have not been complied with. In the reasons recorded, the A.O. has opined that the rate of tax to be applied to the capital gains that arose to the petitioner was 20% in terms of section 112(1)(c) and not 10% as was determined whilst passing the order u/s 143(3).

Further, the Court observed that the A.O. had examined all the relevant provisions of the Act, including sections 48 and 112, and completed the assessment by applying the rate of income tax as per the proviso to section 112(1). It was also clear from the reasons that during the assessment proceedings the A.O. had asked why capital gain should not be taxed @ 20% as provided u/s 112(1)(c)(ii) and in response the petitioner vide letter dated 10th November, 2006 had submitted an explanation and revised (without prejudice) the working of the capital gain without considering the benefit of the first proviso to section 48. It was also clear from the reasoning given by respondent No. 2 that the issue now sought to be raised in the purported reassessment proceedings was very much examined by the A.O. and he had completed the assessment proceedings after giving due consideration to the submissions made by the petitioner.

Therefore, the reassessment proceedings are initiated purely on change of opinion with regard to the rate of tax payable by the petitioner on the long-term capital gain made by it on the sale of shares of Hindustan Lever Ltd. The issue of applicability of the first proviso to section 48 as well as the rate of tax u/s 112 were discussed and considered at the time of the said assessment proceedings u/s 143(3).

The Court further observed that the reasons of reopening the assessment have to be based / examined only on the basis of reasons recorded at the time of issuing a notice u/s 148 seeking to reopen the assessment. These reasons cannot be improved upon and / or supplemented, much less substituted, by an affidavit and / or oral submissions.

Once a query has been raised by the A.O. through the assessment proceeding and the assessee has responded to that query, it would necessarily follow that the A.O. has accepted the petitioner’s submissions so as not to deal with that issue in the assessment year. Even if the assessment order passed u/s 143(3) does not reflect any consideration of the issue, it must follow that no opinion was formed by the A.O. in the regular assessment proceedings. It is also settled law that once all the material was placed before the A.O. and he chose not to refer to the deduction / claim which was being allowed in the assessment order, it could not be contended that the A.O. had not applied his mind while passing the assessment order.

When a query has been raised, as has been done in this case, with regard to a particular issue during regular assessment proceedings, it must follow that the A.O. had applied his mind and taken a view in the matter as is reflected in the assessment order. It is clear that once a query has been raised in the assessment proceedings with regard to the rate at which capital gains should be taxed u/s 112(1)(c)(ii) and the petitioner has responded to the query to the satisfaction of the A.O. as is evident from the facts in the assessment order dated 15th November, 2006, he accepts the petitioner’s submissions as to why taxation should be only 10% u/s 112 read with section 148, it must follow that there is due application of mind by the A.O. to the issue raised. Non-rejection of the explanation in the assessment order would amount to the A.O. accepting the view of the petitioner, thus taking a view / forming an opinion. Where on consideration of the material on record one view is conclusively taken by the A.O., it would not be open to reopen the assessment based on the very same material with a view to take another view.

Accordingly, the petition was allowed.

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Waiver of interest – Charged u/s 215 –The phrase ‘regular assessment’ means first order / original assessment

7 Bennett Coleman & Co. Ltd. vs. Dy. CIT & Ors. [ITA No. 100 of 2002; Date of order: 20th December, 2021; A.Y.: 1985-86; (Bombay High Court)] [Arising out of ITAT order dated 30th August, 2001]

Waiver of interest – Charged u/s 215 –The phrase ‘regular assessment’ means first order / original assessment

On 4th September, 1985, the applicant filed its return of income for A.Y. 1985-86 disclosing a total income of Rs. 1,53,41,650. The A.O. passed an assessment order dated 28th March, 1988 u/s 143(3) and, after making various additions and disallowances, assessed a total income of Rs. 2,74,47,780. In the assessment order, he inter alia directed interest to be charged u/s 215. He levied interest of Rs. 13,67,999 u/s 215 vide the computation sheet.

Aggrieved by the action of the A.O. in charging interest u/s 215, the appellant filed an application dated 8th July, 1988 for waiver of interest u/s 215(4) read with Rule 40 of the Income-tax Rules, 1962 (the Rules). The DCIT passed an order dated 20th March, 1989 under Rule 40(1) holding that the delay in finalisation of the assessment was not attributable to the appellant and waived the interest u/s 215 beyond one year of the filing of the return of income. The DCIT accordingly recalculated the interest chargeable u/s 215 at Rs. 4,13,630 and waived the balance of Rs. 4,40,020.

The appellant received a show cause notice dated 6th March, 1990 u/s 263 from the Commissioner of Income-tax (CIT). It filed its objections by a letter dated 26th March, 1990 objecting to the proposed action. The CIT then passed an order dated 30th March, 1990 u/s 263 setting aside the assessment in its entirety with directions to the A.O. to reframe the assessment after proper verification and application of mind.

In compliance with this order u/s 263, the A.O. passed a fresh assessment order dated 9th March, 1992 u/s 143(3) r.w.s. 263. The A.O. gave effect to the order dated 30th March, 1990 by making certain additions and disallowances and computed the income of the appellant at Rs. 4,04,37,692. There was no direction in the said order regarding the charging of interest u/s 215. However, in the computation sheet annexed to the said order, interest of Rs. 23,91,413 u/s 215 had been charged. The A.O. had also charged interest u/s 139(8).

Aggrieved by the various additions and disallowances made and the interest under sections 215 and 139(8) levied by the A.O., the appellant filed an appeal before the CIT (Appeals). The said appeal was disposed of vide an order dated 28th September, 1992 holding that interest could not be charged under sections 215 or 139(8) unless it has been charged earlier or it falls within the meaning of sections 215(3) or 139(8)(b).

Being aggrieved by the order of the CIT (Appeals) with regard to the issue of levy of interest u/s 215, the A.O. filed an appeal before the Tribunal. While challenging the said order, the A.O. accepted that part of the order of the Commissioner (Appeals) which deleted the levy of interest u/s 139(8) and confined the appeal to the deletion of interest u/s 215(6). The Tribunal restored the interest levied by the A.O. by way of the computation sheet annexed to the said order.

It was contended on behalf of the appellant that the phrase ‘regular assessment’ in the ITA has been used in no other sense than the first order of assessment passed under sections 143 or 144 and any consequential order passed by the Income-tax Officer giving effect to subsequent orders passed by a higher authority cannot be treated as regular assessment. It was further submitted that in the regular assessment there was no direction to charge interest u/s 215 and therefore interest cannot be charged in the reassessment order.

The Department fairly accepted that the word ‘regular assessment’ needs to be interpreted as the original assessment. However, it was submitted that if the appellant was seeking waiver of interest, it was required to file a new application for waiver after the order of reassessment and in the absence of such application the Tribunal was justified in restoring the order of the A.O. directing the appellant to pay interest as per section 215.

The High Court observed that section 215 makes it clear that the assessee is required to pay interest where he has paid advance tax less than 75% of the assessed tax; the assessee is required to pay simple interest @ 15% p.a. from the first day of April following the financial year up to the date of regular assessment.

The Supreme Court has summed up in the case of Modi Industries Ltd. and Others vs. Commissioner of Income-Tax and Another ([1995] 216 ITR 759) by saying that the expression ‘regular assessment’ has been used in the ITA in no other sense than the first order of assessment under sections 143 or 144. Any consequential order passed by the ITO to give effect to an order passed by the higher authority cannot be treated as a regular assessment.

The Court observed that for A.Y. 1985-86, in the regular assessment proceeding completed on 28th March, 1988, the total income was determined at Rs. 2,74,47,780 and interest u/s 215 amounting to Rs. 13,67,999 was charged. In the facts of the case, since the interest u/s 215 was charged in the regular assessment order, the A.O. had the power to charge interest u/s 215 while carrying out the reassessment.

Further, the Court observed that section 215(4) empowers the A.O. to waive or reduce the amount of interest chargeable u/s 215 under circumstances prescribed in Rule 40 of the Income-tax Rules, 1962. One such prescribed circumstance is:
(1) When without any laches or delay on the part of assessee, the assessment is completed more than one year after the submission of the return; or…….

Finally, the Court observed that the order of the Dy. CIT, Bombay dated 20th March, 1989 held that the delay in finalisation of assessment is not attributable to the assessee and therefore it is not liable to pay interest u/s 215 beyond the period of one year from the date of filing of the return. Accordingly, the appellant was held to be liable to pay an amount of Rs. 4,40,020. The order of the Dy. CIT had not been challenged by the Revenue or the appellant, with the result that the said order attained finality. In the absence of a challenge to the order under Rule 40(1), the appellant is not entitled to the benefit of the judgment of the Division Bench of this Court in the case of CIT vs. Bennett Coleman & Co. Ltd. (217 ITR 216). Therefore, the appellant is not entitled to waiver of interest for a period of one year. The appellant is entitled to the benefit of the order dated 20th March, 1989 passed under Rule 40(1) only to the extent stated therein.

Therefore, it was held that the appellant was liable to pay an amount of Rs. 4,13,630as per the order dated 20th March, 1989.

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Vivad se Vishwas Scheme – Declaration – Condition precedent – Appeal should be pending on specified date – Application for condonation of delay in filing appeal filed before specified date and pending before Commissioner (Appeals) – Communication from Commissioner (Appeals) of NFAC asking assessee to furnish ground-wise submissions in appeal – Implies delay condoned – Order of rejection set aside

31 Stride Multitrade Pvt. Ltd. vs. ACIT [2021] 439 ITR 141 (Bom) A.Y.: 2017-18;
Date of order: 21st September, 2021 S. 246A of ITA, 1961; Ss. 2(1)(a)(i), 2(1)(a)(n) of Direct Tax Vivad se Vishwas Act, 2020

Vivad se Vishwas Scheme – Declaration – Condition precedent – Appeal should be pending on specified date – Application for condonation of delay in filing appeal filed before specified date and pending before Commissioner (Appeals) – Communication from Commissioner (Appeals) of NFAC asking assessee to furnish ground-wise submissions in appeal – Implies delay condoned – Order of rejection set aside

For the A.Y. 2017-18, the assessee declared loss in its return of income. An assessment order was passed u/s. 144. The assessee filed an appeal u/s 246A before the Commissioner (Appeals) with an application for condonation of delay of 19 days in filing the appeal. Thereafter, the assessee received a communication from the Commissioner (Appeals) of the National Faceless Appeal Centre inquiring whether the assessee wished to opt for the Vivad se Vishwas Scheme or would contest the appeal. The assessee admittedly made its declaration in form 1 on 21st January, 2021, within the specified date of 31st January, 2020 u/s 2(1)(a)(n) of the 2020 Act. The Principal Commissioner rejected the declaration of the assessee under the 2020 Act on the ground that there was no order condoning the delay in filing the appeal before the Commissioner (Appeals).

The Bombay High Court allowed the writ petition filed by the assessee and held as under:

‘i) Section 2(1)(a)(i) of the Direct Tax Vivad se Vishwas Act, 2020 provides that a person in whose case an appeal or a writ petition or special leave petition has been filed either by himself or by Income-tax authority or by both, before an appellate forum and such appeal or petition is pending as on the specified date is entitled to make a declaration under the Act. The specified date u/s 2(1)(a)(n) of the 2020 Act is 31st January, 2020. Where the time limit for filing of appeal has expired
before 31st January, 2020 but an appeal with an application for condonation of delay is filed before the date of the Circular, i.e., 4th December 2020 [2020] 429 ITR (St.) 1, issued by the Central Board of Direct Taxes such appeal will be deemed to be pending as on 31st January, 2020.

ii) The communication dated 20th January, 2021 from the Commissioner (Appeals) asking the assessee to furnish ground-wise written submissions on the grounds of appeal itself would mean that the delay had been condoned by the Commissioner (Appeals). Therefore, it was incorrect for the Principal Commissioner to state that there was no order condoning the delay and hence, reject the declaration of the assessee under the 2020 Act.

iii) The time limit to file appeal had expired on 18th January, 2020 and the condonation of delay application was filed on 6th February, 2020, before 4th December, 2020, the date of the Board’s Circular. The appeal would be pending as required under the 2020 Act. The order of rejection of the assessee’s declaration under the 2020 Act was bad in law and accordingly set aside. The Principal Commissioner was directed to process the forms filed by the assessee under the provisions of the 2020 Act.’

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Search and seizure – Assessment of third person – Absence of any incriminating documents or evidence against assessee discovered during course of search – Jurisdiction to assess third person could not be assumed

30 Principal CIT vs. S.R. Trust [2021] 438 ITR 506 (Mad) A.Ys.: 2009-10 to 2015-16; Date of order: 24th November, 2020 Ss. 132 and 153C of ITA, 1961

Search and seizure – Assessment of third person – Absence of any incriminating documents or evidence against assessee discovered during course of search – Jurisdiction to assess third person could not be assumed

The assessee was a charitable trust. A search was conducted u/s 132 of one SG who was a doctor and managing trustee of the assessee which established and administered a hospital. Simultaneously, a search action was conducted in the case of one TJ who
supplied medical and surgical equipment and other accessories to the hospital run by the assessee. Pursuant to the search, the Department was of the prima facie view that funds were siphoned off through TJ allegedly resorting to huge inflation of expenses through salaries paid to staff members by transfer of funds to the bank accounts of the employees as if salaries were paid to them. Based on the seized documents, a notice u/s 153C was issued for the A.Ys. 2009-10 to 2015-16 against the assessee. An order u/s 143(3) read with section 153C was passed.

The Commissioner (Appeals) and the Tribunal found that TJ did not admit that money was paid back to the managing trustee of the assessee-trust, that the materials seized did not indicate any inflation of purchase by the assessee and that the deposits in the bank account of the managing trustee of the assessee stood explained. The Commissioner (Appeals) and the Tribunal held that there was no material brought on record to prove the nexus between withdrawal of the amount from the bank account of TJ and the deposits made in the bank accounts of the managing trustee of the assessee.

The appeal filed by the Department was dismissed by the Madras High Court. The High Court held as under:

‘i) The Tribunal was right in holding that the A.O. ought not to have assumed jurisdiction u/s 153C. In proceedings u/s 153C, in the absence of any incriminating documents or evidence discovered during the course of search u/s 132 in the case of searched person against the assessee, the jurisdiction under the provisions of section 153C could not be assumed. The Commissioner (Appeals) had allowed the appeals filed by the assessee as confirmed by the Tribunal.’

ii) The order of the Tribunal was confirmed. No question of law arose.

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Reassessment – Notice u/s 148 – Query raised with regard to a particular issue during regular assessment implies A.O. has applied his mind – Reassessment on change of opinion – Impermissible

29 Principal CIT vs. EPC Industries Ltd. [2021] 439 ITR 210 (Bom) A.Y.: 2007-08; Date of order: 26th October, 2021 Ss. 147, 148 of ITA, 1961

Reassessment – Notice u/s 148 – Query raised with regard to a particular issue during regular assessment implies A.O. has applied his mind – Reassessment on change of opinion – Impermissible

For the A.Y. 2007-08, the A.O. issued a notice u/s 148 to reopen the assessment u/s 147 on the ground that the assessee had claimed deduction for depreciation on the assets acquired with the bank loan, which the bank had written off under a one-time settlement as bad debts and the write-back by the assessee was to be treated as income. The assessee’s objections were rejected. In the reassessment order the A.O. brought to tax the waiver of principal amount of bank loan as income of the assessee u/s 41(1) / 28(iv).

The Tribunal held that the assessment was reopened based on information which was already on record and no new tangible material was brought on record to suggest escapement of income in respect of waiver of loan on one time settlement by the bank which was claimed by the assessee as deduction. The Tribunal allowed the assessee’s appeal.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

‘i) The reason to believe that any income chargeable to tax had escaped assessment u/s 147 has to arise not on account of a mere change of opinion but on the basis of some tangible material. Once there was a query raised with regard to a particular issue during the regular assessment proceedings, it must follow that the A.O. had applied his mind and taken a view in the matter as reflected in the assessment order.

ii) A query was raised by the A.O. in the original assessment in respect of the waiver of loan on account of the one-time settlement with the bank and the assessee had filed a detailed submission as to why the principal amount waived by the bank on account of the one-time settlement was not taxable. Reassessment on a change of opinion was impermissible. No question of law arose.’

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CLAIM FOR RELIEF OF REBATE OUTSIDE REVISED RETURN OF INCOME

ISSUE FOR CONSIDERATION
It is usual to come across cases where an assessee, in filing the return of income, fails to make a claim for relief on account of a rebate or deduction or exemption and also overlooks the filing of the revised return within the time prescribed u/s 139(5). His attempt to remedy the mistake by staking a claim for relief before the A.O. or the CIT(A) afresh is usually dismissed by the authority. At times, even the appellate Tribunal or the courts have not appreciated the bypassing of the statutory remedy entrusted u/s 139(5), more so after the decision of the Supreme Court in the case of Goetze (India) Ltd., 284 ITR 323 was delivered, a decision interpreted by the authorities and at times by the Courts to have laid down the law that requires an assessee to stake a fresh claim, not made while filing the return of income, only by revising the return within the prescribed time.

Several Benches of the Tribunal and the Courts, after due consideration of the said decision of the Apex Court, have permitted the assessee to stake a fresh claim, which claim was not made while filing the return of income or by revising the same in time, either by filing an application during the course of the assessment or, at the least, while adjudicating the appeal. At a time when it appeared that the law was reasonably settled on the subject, the recent decision of the Kerala High Court has warned the assessee that the last word on the subject has not yet been said. It held that the claim for relief, not made vide a return, revised or otherwise, could not be made before the A.O. or even before the appellate authorities.

RAGHAVAN NAIR’S CASE
The issue recently came up for the consideration of the Kerala High Court in the case of Raghavan Nair, 402 ITR 400. The assessee had received a certain sum of money during F.Y. 2014-15 pertaining to A.Y. 2015-16 by way of compensation for land acquired from him for a Government project. The assessee offered the receipt for taxation in filing the return of income under the head capital gains. During the course of the scrutiny assessment, the assessee claimed that the compensation received was not taxable in the light of section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013. The assessee requested for the relief vide a letter which was denied by the A.O., against which the assessee filed a writ petition before the Court.

The Court noted that the assessee, when he was made to understand that he had no liability to pay tax on capital gains, could not file a revised return since the time for filing the revised return had expired by the time he came to know that there was no such liability to pay tax.

At the hearing, the Court held that it was the duty of the A.O. to refrain from assessing an income even if the same had been included by mistake by the assessee in his return of income filed. The Court held that the decision of the Supreme Court was not applicable to the facts of the case by explaining the implication of the decision of the Apex Court as: ‘The question that arose in Goetze (India) Ltd.’s case (Supra) was whether an assessee could make a claim for deduction other than by filing a revised return. As noted above, the question in the case on hand is whether the A.O. is precluded from considering an objection as to his authority to make an assessment u/s 143 merely for the reason that the petitioner has included in his return an amount which is exempted from payment of tax and that he could not file a revised return to rectify the said mistake in the return. The decision of the Apex Court in the Goetze case has, therefore, no application to the facts of the present case.’

The High Court held that this was a clear case where the A.O. had penalised the assessee for having paid tax on an income which was not exigible to tax. It noted that in the light of the mandate under article 265 of the Constitution, no tax should be levied or collected except by authority of law. The Court relied on the observations of the Apex Court in the case of Shelly Products 129 Taxman 271:

‘We cannot lose sight of the fact that the failure or inability of the Revenue to frame a fresh assessment should not place the assessee in a more disadvantageous position than in what he would have been if a fresh assessment was made. In a case where an assessee chooses to deposit by way of abundant caution advance tax or self-assessment tax which is in excess of his liability on the basis of the return furnished, or there is any arithmetical error or inaccuracy, it is open to him to claim refund of the excess tax paid in the course of the assessment proceeding. He can certainly make such a claim also before the authority concerned calculating the refund. Similarly, if he has by mistake or inadvertence or on account of ignorance, included in his income any amount which is exempted from payment of Income-Tax, or is not income within the contemplation of law, he may likewise bring this to the notice of the assessing authority, which if satisfied, may grant him relief and refund the tax paid in excess, if any. Such matters can be brought to the notice of the authority concerned in a case when refund is due and payable, and the authority, on being satisfied, shall grant appropriate relief. In cases governed by section 240 of the Act, an obligation is cast upon the Revenue to refund the amount to the assessee without his having to make any claim in that behalf. In appropriate cases, therefore, it is open to the assessee to bring facts to the notice of the authority concerned on the basis of the return furnished, which may have a bearing on the quantum of the refund, such as those the assessee could have urged u/s 237 of the Act. The authority, for the limited purpose of calculating the amount to be refunded u/s 240 of the Act, may take all such facts into consideration and calculate the amount to be refunded. So viewed, an assessee will not be placed in a more disadvantageous position than what he would have been, had an assessment been made in accordance with law.’

Accordingly, the Court held that the A.O. should not have taxed the income that was not liable to tax even where the assessee had offered such an income for taxation and had not filed the revised return of income.

PARAGON BIOMEDICAL INDIA (P) LTD.’S CASE
The issue recently again came before the Kerala High Court in the case of Paragon Biomedical India (P) Ltd. 438 ITR 227 (Ker). In this case, the assessee had claimed a deduction u/s 10B which was disallowed by the A.O. In the appeal to the CIT(A), the assessee modified the claim for deduction from section 10B to section 10A, which was allowed by the CIT(A). On appeal by the Revenue, the Tribunal held that the CIT(A) was justified in allowing the alternative claim of deduction u/s 10A and confirmed the order of the Commissioner (Appeals) that permitted the assessee to claim the deduction under a different provision of law than the one that was applied for while filing the return of income.

On further appeal, the High Court, however, reversed the order of the Tribunal and held the order to be contrary to the principles laid down by the Apex Court in the cases of Goetze (India) Ltd. (Supra) and Ramakrishna Deo 35 ITR 312. In the light of the said decisions, the High Court termed the orders of the CIT(A) and the Tribunal as both illegal and untenable. The Court, in deciding the case, found that the decisions in the cases of National Thermal Power Co. Ltd. 229 ITR 383 (SC) and Goetze did not conflict with each other, as NTPC’s decision did not in any way relate to the power of the A.O. to entertain a claim for deduction otherwise than by filing a revised return.

OBSERVATIONS
Article 265 of the Constitution of India provides that any retention of tax collected, which is not otherwise payable, would be illegal and unconstitutional. Retaining the mandate of the Constitution, the Board vide Circular 14(XL-35) dated 11th July, 1955 reiterated that the taxing authority cannot collect or retain tax that is not authorised by law and further that it was the duty of the assessing authority to ensure that a relief allowable to an assessee in law shall be allowed to him even where such a claim is not made by him in filing the return of income.

An A.O. has been vested with the power to assess the total income and in doing so he has wide powers to bring to tax any income, whether or not disclosed in the return of income. He also has the powers to rectify any mistakes. The Board has invested in him the power to grant the reliefs and rebates that an assessee is entitled to but has failed to claim while filing the return of income. [CBDT Circular No. 14 dated 11th July, 1955]. This Circular is relied upon by the Courts to hold that an A.O. is duty-bound to grant such reliefs and rebates that an assessee is entitled to, based on the records available, even where not claimed by the assessee in filing the return of income or otherwise.

Section 139(5) provides for filing of a revised return of income in cases where the return furnished contains any omission or any wrong statement within the prescribed time independent of the powers and the duties of the A.O. It was a largely settled understanding that an assessee could make a claim for a relief or rebate, during the course of assessment, by filing a petition without filing a revised return of income even after the time of filing such return has expired. The Apex Court, however, in one of the decisions (Goetze), held that a rebate or a relief can be claimed by an assessee only by filing of a revised return of income. This decision has posed various challenges, some of which are:

• Whether an A.O. can entertain a petition outside of the revised return and allow a relief claimed by the assessee.
• Whether an A.O. is duty-bound to allow a relief even where not claimed in the return filed by the assessee where no petition or revised return is filed.
• Whether an A.O. is bound to allow such a relief where the material for such relief is available on his records though no petition or revised return is filed.
• Whether an A.O. is required to allow a petition for a modified claim for relief, which was otherwise claimed differently in the return of income filed, without insisting on the revised return of income.
• Whether an appellate authority, being CIT(A) or the Tribunal, can entertain a petition for a relief not claimed or allowed in any of the above situations.

Section 143, as noted above, has invested the A.O. with wide powers in assessing the total income and bringing to tax the true or real income of the assessee, whether or not disclosed in the return of income, even where no return has been filed by an assessee. Sections 250(5) and 251(1) have invested a CIT(A) with powers that are consistently held by the Courts to be coterminus with the powers of an A.O.; he can do everything that an A.O. could have done and has all those powers which an A.O. has, besides the power of enhancement of an income that has not been brought to tax by the A.O. in the course of adjudicating an appeal, subject to a limitation in respect of the new source of income. The appellate Tribunal is vested with powers u/s 254(1) that are held to be wide enough to include entertaining a claim for the first time, subject to certain limitations.

By now it is the settled position in law that the appellate authorities have the power to entertain a new or a fresh claim for relief made by the assessee for the first time before them subject to providing an opportunity to the A.O. to put up his case. This is clear from the reference to the following important decisions:

The Supreme Court in the case of Jute Corporation of India Ltd., 187 ITR 688 dealt with a case where the assessee, during the pendency of its appeal before the AAC, raised an additional ground claiming deduction of certain amount on account of liability of disputed purchase tax, not claimed while filing the return of income. The AAC permitted the assessee to raise the additional ground and after hearing the ITO, accepted the assessee’s claim and allowed the deduction. However, the Tribunal held that the AAC had no jurisdiction to entertain the additional ground or to grant relief to the assessee on a ground which had not been raised before the ITO. On appeal to the Supreme Court, the Court, following its decision in the case of Kanpur Coal Syndicate, 53 ITR 225, delivered by a Bench of three judges and dissenting from its later decision in the case of Gurjaragraveurs (P) Ltd., 111 ITR 1 delivered by a Bench of two judges, held as under:

‘The Act does not contain any express provision debarring an assessee from raising an additional ground in appeal and there is no provision in the Act placing restriction on the power of the appellate authority in entertaining an additional ground in appeal. In the absence of any statutory provision, the general principle relating to the amplitude of the appellate authority’s power being coterminous with that of the initial authority should normally be applicable. If the tax liability of the assessee is admitted and if the ITO is afforded an opportunity of hearing by the appellate authority in allowing the assessee’s claim for deduction on the settled view of law, there appears to be no good reason to curtail the powers of the appellate authority u/s 251(1)(a). Even otherwise an appellate authority while hearing an appeal against the order of a subordinate authority has all the powers which the original authority may have in deciding the question before it, subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. There appeared to be no good reason to justify curtailment of the power of the AAC in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the ITO.’

The Supreme Court in the case of Nirbheram Deluram, 91 Taxman 181 (SC) held that the first appellant authority could modify an assessment on a ground not raised before an A.O. following Jute Corporation of India Ltd.’s case (Supra) which had held that the first appellate authority could permit an additional ground not raised before the A.O.

The Kerala High Court, in the case of V. Subhramoniya Iyer, 113 ITR 685, held that the first appellate authority had the power to substitute the order of an A.O. with his own order and the Gujarat High Court in the case of Ahmedabad Crucible Co., 206 ITR 574 held that the powers of the first appellate authority extended beyond the subject matter of assessment, which powers were held to include the power to make an addition on a ground not considered by the A.O.

The Supreme Court in the National Thermal Power Corporation case (Supra) confirmed the judicial view that in cases where a non-taxable receipt was taxed or a permissible deduction was denied, there was no reason why the assessee should be prevented from raising the claim before the second appellate authority for the first time, so long as the relevant facts were on record pertaining to the claim. This condition of the availability of the evidence on records is also waived where the fresh issue relates to the moot question of law or goes to the root of the appeal. Even otherwise, the courts are liberal in upholding the powers of the second appellate authorities generally to entertain a lawful claim.

This understanding and the contours of law are not sought to be disturbed even by the decision of the Apex Court delivered in the Goetze case, which rather confirmed that the said decision was independent of the powers of the appellate authorities. In fact, the appellate authorities regularly entertained a fresh claim by relying on the said decision. It is this settled position of law, even post-Goetze, that is sought to be disturbed by the recent Kerala High Court decision in the case of Paragon Biomedical (Supra) when holding that the claim made before the A.O., outside the revised return of income, was not entertainable. Even when the CIT(A) entertained and allowed such a claim, the said claim was found to be not permissible in law by the Court.

And even prior to the decision of the Kerala High Court, the Madras High Court in the case of Shriram Investments Ltd. (TCA No. 344 of 2005) and the Chennai Bench of the Tribunal in the case of Litostroj, 54 SOT 37 (URO) following the said Madras High Court decision, had held that relief could have been claimed only by filing a revised return of income.

We are of the considered opinion that the position in law settled by the series of Supreme Court decisions permitting the assessee to raise a new or a fresh claim before the appellate authorities is nowhere unsettled by the decision in Paragon Biomedical and a few other cases. In fact, had these decisions of the Supreme Court been cited before the High Court, the decision of the Court would surely have been otherwise. The case before the Kerala High Court was not represented by the assessee before the Court and the representative of the Revenue seems to have failed to bring these cases to the notice of the Court. [Please see Pruthvi Stock Brokers Ltd., 23 taxmann.com 23 (Bom); Kotak Mahindra Bank Ltd., 130 taxmann.com 352 (Kar); Ajay G. Piramal Foundation, 228 Taxman 332 (Del).]

The real issue of the assessee’s power to claim a relief or a rebate outside of a revised return of income, under a petition to the A.O. during the course of assessment, appears to have been soft-pedalled by the Courts either by holding that the A.O. was duty-bound, under the Circular No. 14 of 1955, to allow the relief on his own based on records available, as was done in the cases of Sesa Goa Ltd., 117 taxmann.com 548 (Bom) or CMS Securitas, 82 taxmann.com 319 (Mum) or Perlos, ITA No. 1037/Madras/2013, to name a few, and alternatively by holding that the claim for relief, made outside the revised return before the A.O. was not a new or a fresh claim but was a modified claim based on a mistaken provision of law or the quantum or the failure to claim a relief for which the reports and other material were available on record, as was held in the cases of Malayala Manorama, 409 ITR 358 (Ker), Ramco Engineering, 332 ITR 306 (P&H), Influence, 55 taxmann.com 192 (Del), Shri Balaji Sago Agro, 53 SOT 15 (Mad), Perlos, ITA No. 1037/Madras/2013 and also in Raghavan Nair (Supra), 402 ITR 400 by the same Kerala High Court. [Please also see Sam Global, 360 ITR 682 (Del), Jai Parabolic, 306 ITR 42 (Del), Natraj Stationery, 312 ITR 22 (Del) and Rose Services, 326 ITR 100 (Del).]

A fresh claim for relief is different from a revised claim for relief. In cases where a claim has been made while filing the return of income and is modified or is enhanced or is made under a different provision of the law, the case can be classified as a case of a revised claim, and not a fresh claim. The outcome can be different in cases where the evidence in support of the fresh claim is available on record, from cases where such evidence is not available on record.

The issue of an assessee’s right to claim a relief or a rebate, outside the revised return of income post Goetze, has been addressed directly in the case of CMS Securitas Ltd., 82 taxmann.com 319 by the Mumbai Bench of the Tribunal in favour of the assessee, while the Chennai Bench of the Tribunal in the case of Litostroj, 54 SOT 37 (URO), following an unreported decision of the Madras High Court in the case of Shriram Investments Ltd. [T.C. (A) No. 344 of 2005, dated 16th June, 2011] restored the matter to the file of the A.O. to verify the facts, instead of upholding the power of the CIT(A) to entertain a fresh claim.

In Goetze the question raised in the appeal by the assessee related to whether the assessee could make a claim for deduction other than by filing a revised return by way of a letter before the A.O. The deduction was disallowed by the A.O. on the ground that there was no provision under the Act to make an amendment in the return of income by an application at the assessment stage without revising the return. In the appeal, the assessee had relied upon the decision in the case of National Thermal Power Co. Ltd. (Supra) to contend that it was open to the assessee to raise the points of law even before the appellate Tribunal. The Court noted that the said decision dealt with the power of the Tribunal to entertain a claim where the facts relating to the law were available on record, and that it did not in any way relate to the power of the A.O. to entertain a claim for deduction otherwise than by filing a revised return; and that the NTPC decision could not be relied upon to allow the claim before the A.O. outside the revised return of income. The appeal of the assessee was dismissed by clarifying that the issue in the case was limited to the power of the assessing authority and did not impinge on the power of the appellate Tribunal u/s 254.

The better view therefore is that the appellate authority certainly has the right to consider a fresh or revised claim made by the assessee in appeal, and certainly so in respect of a claim made for which the relevant facts are already on record.

Besides the issue under consideration w.r.t. section 139(5), the issues regularly arise where a fresh claim is sought to be made while filing the return in response to a notice u/s 153A / 153C, abated or not, or section 148, or where such a claim is sought to be made in a revision application u/s 264 or by filing rectification u/s 154 or on application u/s 119(2)(b).

A fresh claim was held to be permissible in the return filed in response to notice u/s 153A / 153C in case of abated assessment [JSW Steel Ltd., 422 ITR 71 (Bom), B.G. Shirke Construction Technology (P) Ltd., 79 taxmann.com 306 (Bom)] and where assessment was unabated and incriminating documents were found for that year [Sheth Developers (P) Ltd., 210 Taxman 208 (Mag)(Bom), Neeraj Jindal, 393 ITR 1 (Del), Kirit Dahyabhai Patel, 80 taxmann.com 162 (Guj), Shrikant Mohta, 414 ITR 270 (Cal)]. In contrast, the courts in a few other cases have held that the assessee is not permitted to stake such a fresh claim that was not made in the return filed u/s 139.

In the context of the return of income filed in response to a notice u/s 148, it was held that a fresh claim was not permissible in the cases of Caixa Economica De Goa, 210 ITR 719 (Bom), Satyamangalam Agricultural Producer’s Co-operative Marketing Society Ltd.,357 ITR 347 (Mad) and K. Sudhakar S. Shanbhag, 241 ITR 865 (Bom).

In contrast, a fresh claim was held to be permissible in filing a revision application u/s 264. [Vijay Gupta, 386 ITR 643 (Del), Assam Roofing Ltd., 43 taxmann.com 316 (Gau), S.R. Koshti, 276 ITR 165 (Guj), Sharp Tools, 421 ITR 90 (Mad), Shri Hingulambika Co-operative Housing Society Ltd. 81 taxmann.com 157 (Kar), Agarwal Yuva Mandal, 395 ITR 502 (Ker), EBR Enterprises, 415 ITR 139 (Bom), Kewal Krishan Jain, 42 taxmann.com 84 (P&H).]

In the cases of Curewel (India) Ltd., 269 Taxman 397 (Del) it was held permissible to place a fresh claim while an assessment is being made afresh in pursuance of an order setting aside the original order of assessment. But see also Saheli Synthetics (P) Ltd., 302 ITR 126 (Guj).

In filing an application for rectification u/s 154, it was held permissible to file a fresh claim [Nagaraj & Co. (P) Ltd., 425 ITR 412 (Mad), Anchor Pressings (P) Ltd., 161 ITR 159 (SC), Gujarat State Seeds Corpn. Ltd., 370 ITR 666 (Guj) and NHPC Ltd., 399 ITR 275 (P&H).]

An assessee who has missed making a claim in the return of income, may explore the possibility of filing an application to the CBDT u/s 119(2)(b) for permitting the filing of a revised return of income after the expiry of the time u/s 139(5). [Mrs. Leena R. Phadnis,387 ITR 721 (Bom), Mahalakshmi Co-operative Bank Ltd., 358 ITR 23 (Kar) and Labh Singh, 111 taxmann.com 53 (HP).]

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Section 23 – Annual Letting Value of house property is to be determined on the basis of municipal rateable value

4 Anand J. Jain vs. DCIT Amarjit Singh (J.M.) and Manoj Kumar Aggarwal (A.M.) ITA No.: 6716/Mum/2018 A.Y.: 2015-16 Date of order: 18th January, 2021 Counsel for Assessee / Revenue: Anuj Kishnadwala / Michael Jerald

Section 23 – Annual Letting Value of house property is to be determined on the basis of municipal rateable value

FACTS
During the previous year relevant to the assessment year under consideration, the assessee owned 19 flats at Central Garden Complex out of which seven were lying vacant whereas the remaining were let out. The assessee, in his return of income, offered an aggregate income of Rs. 1.26 lakhs on the basis of municipal rateable value (MRV). The A.O., applying the provisions of section 23(1)(a), opined that the annual letting value (ALV) shall be deemed to be the sum for which the property might reasonably be expected to be let out from year to year. Therefore, the municipal value was not to be taken as the ALV of the property. He applied the average rate per square metre at which the other 12 flats were let out by the assessee and worked out the ALV at Rs. 64.57 lakhs; after reducing municipal taxes and statutory deductions, he added a differential sum of Rs. 42.57 lakhs to the total income of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) where it relied upon a favourable decision of the Bombay High Court in the case of CIT vs. Tip Top Typography (48 taxmann.com 191) and also on the favourable orders of the Tribunal in its own case for A.Ys. 2009-10 and 2010-11 wherein the A.O. was directed to adopt the municipal rateable value as the ALV of the vacant flats held by the assessee. It was also mentioned that the predecessor CIT(A) has taken a similar view for A.Ys. 2012-13 to 2014-15. The CIT(A) distinguished the facts of the year under consideration by noticing that out of 19 flats, 12 were actually let out and that in the earlier years the A.O. did not make proper inquiry to estimate the rental income, but since this year 12 flats were actually let out, the same would give a clear indication of the rate at which the property might reasonably be expected to be let out. He confirmed the estimation made by the A.O.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noticed that the issue of determination of ALV was a subject matter of cross-appeals for A.Ys. 2013-14 and 2014-15 before the Tribunal in the assessee’s own case vide ITA No. 6836/Mum/2017 & Others, order dated 27th February, 2019 wherein the bench took note of the earlier decision of the Tribunal in A.Y. 2012-13 in ITA Nos. 3887 & 3665/Mum/2017. In the decision for A.Y. 2012-13, the co-ordinate bench after considering the relevant provisions of the Act and also following the decision of the Bombay High Court in Tip Top Typography [(2014) 368 ITR 330] and also Moni Kumar Subba [(2011) 333 ITR 38], upheld the determination of ALV on the basis of the municipal rateable value.

The Tribunal observed that it is the consistent view of the Tribunal in all the earlier years that municipal rateable value was to be taken as the annual rental value. There is nothing on record to show that any of the aforesaid adjudications has been reversed in any manner. The Tribunal held that the distinction of facts as made by the CIT(A) was not to be accepted. Following the consistent view of the Tribunal in earlier years in the assessee’s own case, the Tribunal directed the A.O. to adopt the municipal rateable value as the annual letting value. This ground of appeal filed by the assessee was allowed.

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Sections 45, 48 – Extinguishment of assessee’s right in flat in a proposed building is actually extinguishment of any right in relation to capital assets and accordingly compensation received upon extinguishment of rights falls under the head ‘capital gain’

3 Shailendra Bhandari vs. ACIT Rajesh Kumar (A.M.) and Amarjit Singh (J.M.) ITA No.: 6528/Mum/2018 A.Y.: 2015-16 Date of order: 21st January, 2021 Counsel for Assessee / Revenue: Porus Kaka / T.S. Khalsa

Sections 45, 48 – Extinguishment of assessee’s right in flat in a proposed building is actually extinguishment of any right in relation to capital assets and accordingly compensation received upon extinguishment of rights falls under the head ‘capital gain’

FACTS
During the year under consideration the assessee cancelled an agreement entered into for purchase of a flat and received Rs. 2,50,00,000 as compensation along with refund of money already paid towards purchase of the flat amounting to Rs. 10,75,99,999. The said flat was booked by the assessee, as confirmed by the builder, vide a letter of intent dated 9th February, 2010 wherein the terms and conditions for the purchase of the property were duly mentioned. The letter of intent had to be cancelled as the sellers were not allowed to raise the building height up to the level on which the flats were to be constructed. The assessee, after giving various reminders and legal notices to the builders, succeeded in getting a compensation of Rs. 2,50,00,000 along with refund of money already paid, as evidenced by a letter dated 29th March, 2014.

These rights were transferred to the assessee by three persons, viz., Ms Vibha Hemant Mehta, Mrs. Anuja Badal Mittal and Mr. Sunny Ramesh Bijlani, who were shareholders in Kunal Corporation Pvt. Ltd. which was the owner of the plot and was to construct the building after obtaining necessary permissions from the Government authorities.

The A.O. held that the asset for which the letter of intent was issued in favour of the assessee did not exist on the date 9th February, 2010 when the letter of intent was issued by the assessee. The assessee has merely made a deposit with the developers which is refundable to the assessee along with compensation subject to certain terms and conditions. The A.O. also held that when an asset does not exist it is not a capital asset and therefore the assessee is not entitled to claim capital gain on the same. He rejected the claim of the assessee.

Instead of the long-term capital loss of Rs. 3,37,09,596 claimed by the assessee, the A.O. taxed Rs. 2,50,00,000 as income from other sources by holding that the said receipt is not from transfer of capital assets.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the A.O.

The aggrieved assessee preferred an appeal to the Tribunal where on behalf of the Revenue it was contended that the letter of intent issued by the builder for the purpose of allotment of flat, which was not in existence on the date of execution of the letter of intent as well as on the date of execution of the letter of intent and also not on the date of cancellation of the said letter of intent, is not an agreement. Since the seller has not followed the provisions of MOFA which are applicable in the state of Maharashtra, the letter of intent cannot be treated as having created any interest, right, or title in a capital asset in favour of the assessee.

HELD
The Tribunal held that the provisions of MOFA cannot regulate the taxability of any income in the form of long-term capital gain / loss which may arise from the cancellation of any letter of intent / agreement which is not registered. The Tribunal held that the assessee has rightly calculated the long-term capital loss upon cancellation of the letter of intent dated 9th February, 2010. It observed that the case of the assessee finds support from the decision of the jurisdictional High Court in the case of CIT vs. Vijay Flexible Containers [(1980) 48 taxman 86 (Bom)] and it is also squarely covered by the decision of the co-ordinate bench of the Tribunal in the case of ACIT vs. Ashwin S. Bhalekar ITA No. 6822/M/2016 A.Y. 2012-13 wherein the Tribunal has held that the extinguishment of the assessee’s right in a flat in a proposed building is actually extinguishment of any right in relation to capital assets and accordingly held that the compensation received upon extinguishment of a right which was held for more than three years falls under the head ‘capital gain’ u/s 45. Following these decisions, the Tribunal set aside the order of the CIT(A) and directed the A.O. to allow the claim of the assessee on account of long-term capital loss.

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Extension for conducting special audit u/s 142(2A) cannot be granted by CIT, only the A.O. can grant such extension – Assessment concluded after such extended limitation period shall be considered as void ab initio

15 [2020] 82 ITR (Trib) 399 (Del) ACIT vs. Soul Space Projects Ltd. ITA Nos.: 193 & 1849/Del/2015 A.Ys.: 2007-08 & 2008-09 Date of order: 3rd June, 2020

Extension for conducting special audit u/s 142(2A) cannot be granted by CIT, only the A.O. can grant such extension – Assessment concluded after such extended limitation period shall be considered as void ab initio

FACTS
During assessment proceedings, the A.O. arrived at the conclusion that it was necessary to conduct a special audit u/s 142(2A) of the books of accounts of the assessee. The assessee raised objections to the proposed special audit and the A.O., after rejecting the objections and with the approval of the CIT, ordered a special audit in accordance with the provisions of section 142(2A). Thereafter, the Special Auditor requested for extension of time period and the A.O. forwarded this request to the CIT. The CIT granted extension of time. The assessments were completed after limitation period on account of the extension granted for special audit.

The assessment orders were challenged before the CIT(A) which provided relief to the assessee on merits. The orders of the CIT(A) were challenged by the Revenue before the Tribunal and the assessee filed cross-objections raising the issue of limitation in completing the assessment.

Before the Tribunal, the assessee argued that as per the proviso to section 142(2A) it was only the A.O. who had the power to extend the time period for conducting the audit; hence, the extension granted by the CIT was legally invalid. It was argued that the exercise of the statutory power of an authority at the discretion of another authority vitiates the proceedings.

On the other hand, the Department contended that the A.O. had applied his mind and was satisfied that the matter required extension; however, the extension application was forwarded only for the administrative approval of the CIT; even otherwise, since the CIT was the approving authority for special audit, therefore his involvement for extension of time as per the proviso was inherent. The Revenue argued that since on a substantial basis the requirement of the proviso to section 142(2A) was met, just on account of administrative approval of the CIT for sanctioning the extension, it should not vitiate the extension of time for the special audit.

HELD
The issue before the Tribunal was whether or not the action of the CIT in granting an extension for a further period u/s 142(2A) was legally valid.

The Tribunal held that the proviso to section 142(2A) clearly provides that the A.O. shall extend the said time period if the conditions as mentioned in the said proviso are satisfied. While the initial direction is to be given with the approval of the CCIT / CIT, however, for extension it is only the A.O. who has to take a decision for extension, the sole power to extend vests only with him.

There was no need for the higher authorities to be involved in the issue of extension. It may be an administrative phenomenon to inform the CIT about the extension, but statutorily that power is vested with the A.O.

The Tribunal held that the statutory powers vested with one specified authority cannot be exercised by another authority unless and until the statute provides for the same. The statute has accorded implementation of various provisions to specified authorities which cannot be interchanged. A power which has been given to a specified authority has to be discharged only by him and substitution of that authority by any other officer, even of higher rank, cannot legalise the said order / action.

Accordingly, it was held that the extension given by the CIT was beyond the powers vested as per the statute and therefore the assessment completed after the due date was void ab initio.

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Section 147 – Reopening of assessment – A.O. to provide complete reasons as recorded by him to the assessee and not merely an extract of reasons

14 [2020] 82 ITR(T) 235 (Del) Wimco Seedlings Ltd. vs. Joint CIT ITA Nos.: 2755 to 2757 (Delhi) of 2002 A.Ys.: 1989-90 to 1991-92 Date of order: 22nd June, 2020

Section 147 – Reopening of assessment – A.O. to provide complete reasons as recorded by him to the assessee and not merely an extract of reasons

FACTS
The assessee was a company engaged in the business of providing consultancy services in the field of agricultural forestry plants by undertaking research and development (R&D) activities. The A.O. had initiated reassessment proceedings u/s 147 for A.Ys. 1989-90 to 1991-92 and passed the order u/s 143(3) r.w.s. 147. These orders were challenged by the assessee and the matter went up to the Delhi High Court which remanded the appeals to the ITAT for a fresh adjudication on all issues, including on the aspect of reassessment.

In the remanded appeals, the assessee had challenged the reopening of the assessment proceedings u/s 147 for A.Ys. 1989-90 to 1991-92 on various grounds wherein the first ground of appeal was that the reasons provided by the A.O. in the course of reassessment proceedings and the reasons filed by the Department before the Delhi High Court were different.

HELD
One of the disputes arising in this case was whether while initiating reassessment proceedings the A.O. is supposed to provide complete details of reasons recorded and not merely a few extracts of the said reasons so that the assessee can prepare its defence effectively against the proposed reopening of the assessment. It was held that in all circumstances the A.O. is supposed to provide the complete reasons recorded for reopening of the assessment to facilitate the assessee to raise appropriate objections to the reopening. It cannot be the case of the Revenue that it gives a few extracts of the reasons to the assessee to defend it and when cornered before the higher authorities, the Revenue comes out with the detailed reasons recorded by the A.O. The reasons produced before the High Court were quite different from the reasons provided to the assessee and hence the ITAT held the reassessment proceedings to be invalid and quashed the assessment orders.

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Section 56(2)(vii) r.w.s. 2(14) – The term ‘property’ has been defined to mean capital asset, namely, immovable property being land or building or both and hence where immovable property does not fall in the definition of capital asset, it will not be subject to the provisions of section 56(2)(vii)

13 [2020] 82 ITR (T) 522 (Jai) Prem Chand Jain vs. Asst. CIT ITA No.: 98 (JP) of 2019 A.Y.: 2014-15 Date of order: 8th June, 2020

Section 56(2)(vii) r.w.s. 2(14) – The term ‘property’ has been defined to mean capital asset, namely, immovable property being land or building or both and hence where immovable property does not fall in the definition of capital asset, it will not be subject to the provisions of section 56(2)(vii)

FACTS

The assessee had purchased two plots of land during the year claiming these to be agricultural land. The sale consideration as per the respective sale deeds was Rs. 5,50,000 and their stamp duty value [SDV] as determined by the Stamp Duty Authority amounted to Rs. 8,53,636; therefore, there was a difference to the tune of Rs. 3,03,636. The A.O. invoked the provisions of section 56(2)(vii)(b) and held that agricultural land falls within the definition of property and, thus, added the differential amount under the head other sources. The CIT(A) upheld the addition. Consequently, the assessee filed an appeal before the ITAT.

HELD
The dispute in this case was whether agricultural land was to be included in the definition of immovable property and whether it was covered by the provisions of section 56(2)(vii)(b). It was the contention of the Department that there was no express exclusion provided for agricultural land from the operation of section 56(2)(vii). But it was submitted on behalf of the assessee that vide the Finance Act, 2010 in clause (d) in the Explanation, in the opening portion, for the word ‘means—‘ the words ‘means the following capital asset of the assessee, namely:—’ were substituted with retrospective effect from 1st October, 2009. It was further submitted that the substitution of the words ‘means’ for the words ‘means the following capital asset of the assessee, namely’ made the intention of the Legislature very clear, that henceforth the deeming provision of 56(2)(vii)(b) would apply in case of those nine specified assets, if and only if they were capital assets.

The ITAT referred to the provisions of clause (d) of the Explanation to section 56(2)(vii) where the term ‘property’ was defined to mean capital asset of the assessee, namely, immovable property being land or building or both. Hence, the ITAT held that if the agricultural land purchased by the assessee did not fall in the definition of capital asset u/s 2(14), they cannot be considered as property for the purpose of section 56(2)(vii)(b). The ITAT remanded the matter to the A.O. to determine whether or not the agriculture land so acquired falls in the definition of capital asset. It was further concluded that where it is determined by the A.O. that the agricultural land so acquired doesn’t fall in the definition of capital asset, the difference in the SDV and the sales consideration cannot be brought to tax under the provisions of section 56(2)(vii)(b) and relief should be granted to the assessee.

Further, it was also held that where the assessee had objected to the adoption of SDV as against the sale consideration, the matter should be referred by the A.O. to the Departmental Valuation Officer [DVO] for determination of fair market value.

Editorial Note:
In ITO vs. Trilok Chand Sain [2019] 101 taxmann.com 391/174 ITD 729 (Jaipur-Trib), the Tribunal had upheld the applicability of section 56(2)(vii) to the purchase of agricultural land. The decision in Trilok Chand Sain was not referred to by the ITAT in the above case. However, in another decision in Yogesh Maheshwari vs. DCIT [2021] 125 taxmann.com 273 (Jaipur-Trib), the ITAT, after considering the decision of co-ordinate benches at Pune in Mubarak Gafur Korabu vs. ITO [2020] 117 taxmann.com 828 (Pune-Trib) and at Jaipur in ITO vs. Trilok Chand Sain (Supra) and this decision held that if the agricultural land purchased by the assessee is not a capital asset, the provisions of section 56(2)(vii)(b) are not applicable.

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Section 56(2)(viib) – Issue of shares at face value to shareholders of amalgamating company, in pursuance of scheme is outside the ambit of section 56(2)(viib)

12 126 taxmann.com 192 DCIT Circle 3(1) vs. Ozone India Ltd. IT Appeal No. 2081 (Ahd) of 2018 A.Y.: 2013-14 Date of order: 27th January, 2021

Section 56(2)(viib) – Issue of shares at face value to shareholders of amalgamating company, in pursuance of scheme is outside the ambit of section 56(2)(viib)

FACTS
The assessee company was amalgamated with another company (KEPL) and in the process all the assets (except land) and all the liabilities of KEPL were taken in the books of the assessee at book value. Land parcels were taken at revalued price. The excess value of net assets vis-à-vis corresponding value of shares issued towards consideration for amalgamation was thus credited in the books of the assessee company as ‘capital reserve’.

The A.O. observed that the assessee received assets worth Rs. 60.26 crores and liabilities worth Rs. 6.05 crores of the amalgamating company, i.e., KEPL. Thus, the assessee received net assets worth Rs. 54.21 crores against the corresponding issue of shares having face value of Rs. 15 crores to the shareholders of KEPL. The A.O. taxed the excess net assets worth Rs. 39.21 crores received on account of amalgamation and credited as capital reserve of the amalgamated company, as being excess consideration for issue of its shares under the provisions of section 56(2)(viib). On appeal to the CIT(A), he held that the provisions of section 56(2)(viib) were not applicable and reversed the additions made by the A.O. Aggrieved, the Revenue preferred an appeal with the Tribunal.

HELD
The issue of shares at ‘face value’ by the amalgamated company (assessee) to the shareholders of the amalgamating company in pursuance of the scheme of amalgamation legally recognised in the Court of Law is outside the ambit of section 56(2)(viib). Section 56(2)(viib) creates a deeming fiction to imagine and fictionally convert a capital receipt into revenue income and its application should be restricted to the underlying purpose. Further, section 56(2)(viib), when read in conjunction with the Memorandum of Explanation to the Finance Bill, 2012 and CBDT Circular No. 3/2012 dated 12th June, 2012, is to be seen as a measure to tax hefty or excessive share premium received by private companies on issue of shares without carrying underlying value to support such premium.

Thus, the provisions of section 56(viib) would not be applicable where the assessee company has admittedly not charged any premium at all and the shares were issued at face value.

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Section 28 – Loss arising on capital reduction by a subsidiary company in whose shares investment was made for purpose of business of assessee, for setting up supply chain system and manufacturing units in global market, is a business loss

11 TS-189 ITAT-2021 (Ahd) DCIT vs. GHCL ITA Nos.: 1120/Ahd/2017 & CO 29/Ahd/2018 A.Y.: 2012-13 Date of order: 5th March, 2021

Section 28 – Loss arising on capital reduction by a subsidiary company in whose shares investment was made for purpose of business of assessee, for setting up supply chain system and manufacturing units in global market, is a business loss

FACTS
The assessee invested in the share capital of its subsidiary, namely, Indian Britain BV consisting of 2,285 shares @ Euro 100 each in A.Y. 2006-07. During the year under consideration, the said subsidiary reduced its share capital due to heavy losses. Consequently, the number of shares of the assessee company was reduced to 1,85,644 from 2,21,586 shares acquired in A.Y. 2006-07. Due to the aforesaid capital reduction, the assessee company incurred a loss of Rs. 99.89 crores on investment made in the equity shares of Indian Britain BV. The assessee claimed long-term capital loss of Rs. 157,97,38,428. In the course of assessment proceedings, it revised its claim of loss to Rs. 99,89,96,245 and claimed that loss on account of capital reduction be allowed as a business loss while computing income chargeable to tax under the head ‘profits and gains from business and profession’ on the ground that investment in the subsidiary was made for the purpose of business of the assessee company for setting up of a supply chain system and manufacturing units in the global market, i.e., overseas.

The assessee submitted that it was incorporated in 1983 and started its soda ash manufacturing in Gujarat in 1988. It entered the textile business in 2001. The entire investment in the wholly-owned subsidiary Indian Britain BV was made by the assessee acquiring global units of a soda ash manufacturing and textile business chain as a measure of commercial expediency to further its business objective. In its desire for expansion in the overseas market, the assessee looked for various acquisitions of home textile businesses in the U.S. and retail chains in the U.K. In this effort at expansion, after setting up of the Vapi home textile plant it showed that Indian products can be sold in the U.S. and the U.K. and, as such, India could become the processing hub for home furnishing textile items.

The A.O. rejected the claim made by the assessee in the course of the assessment proceedings by relying on the decision of the Supreme Court in Goetze (India) Ltd. vs. CIT (157 taxman 1).

Aggrieved, the assessee preferred an appeal to the CIT(A) who adjudicated the issue in favour of the assessee.

HELD
The Tribunal observed that it has adjudicated the issue determining the nature of transaction relating to business loss of acquiring of Rosebys Retail chain in the appeal of the Revenue vide ITA No. 976/Ahd/2014 for A.Y. 2009-10 wherein business loss allowed by the DRP in favour of the assessee was sustained on the ground that the assessee had acquired Rosebys Operation Ltd. to expand its textile business operation globally based on a study carried out by KSA Tech Pak, a renowned global consultant.

The Tribunal observed that:

(i) it is an undisputed fact that the assessee acquired S.C. Bega UPSAM (renamed as GHCL UPSAM Ltd.) in Romania for soda ash manufacturing and similarly acquired Rosebys U.K. Ltd. in the U.K. and Ban River Inc. in the U.S. to expand its home textile business as the company was having plants for textile manufacturing at Madurai and Vapi. The purpose of investment in the subsidiaries was to expand its business globally. After such acquisition, the sales and export shot up substantially and international concerns started taking the company’s products even after reduction in shares and liquidation of the subsidiary Indian Britain B.V. The assessee had explained its business expansion by making investment in a subsidiary company in Netherland from a commercial angle;

(ii) before the CIT(A), the assessee made a detailed submission demonstrating that loss claimed on account of investment in shares of the wholly-owned subsidiary company was a business loss. The assessee gave a detailed submission pointing out that there was recession in Europe and the U.S. Due to continued financial difficulty and other diverse factors, its subsidiaries incurred huge losses and became sick units. The assessee submitted to the CIT(A) that due to huge loss, its subsidiary company, Indian Britain BV passed a resolution to reduce its share capital of Euro 1,85,64,400 (1,85,644 shares) to 1,85,45,835.60 (1,85,644 shares) out of 2,21,586 shares so that such amount can be set off against the accumulated deposit. This resulted in loss amounting to Rs. 99,89,96,245 due to reduction in the value of the share of its subsidiary company.

The Tribunal held that the assessee has made investments in the subsidiary company for business development out of commercial expediency and thus on reduction of capital of the said subsidiary the loss incurred in the value of shares was in the nature of business loss. In the light of the facts and findings reported in the decision of the CIT(A), the Tribunal did not find any infirmity in the decision of the CIT(A) in allowing the losses on reduction in value of shares on investment in the subsidiary company as business losses in the hand of the assessee company. This ground of the appeal of the Revenue was dismissed.

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Section 115JB – Provision made for Corporate Social Responsibility, in accordance with the guidelines issued by the Department of Public Enterprises, constitutes an unascertained liability and needs to be added back while computing ‘book profits’ when how the amount is to be spent has neither been determined nor specified by the assessee

10 TS-205 ITAT-2021 Delhi Pawan Hans Ltd. vs. DCIT A.Y.: 2014-15 Date of order: 18th March, 2021

Section 115JB – Provision made for Corporate Social Responsibility, in accordance with the guidelines issued by the Department of Public Enterprises, constitutes an unascertained liability and needs to be added back while computing ‘book profits’ when how the amount is to be spent has neither been determined nor specified by the assessee

FACTS
The assessee, a public sector undertaking, filed its return of income for A.Y. 2014-15 declaring its total income to be a loss of Rs. 1,89,90,55,165 and paying taxes u/s 115JB on a declared book profit of Rs. 66,18,51,561. In the course of assessment proceedings, the A.O. noticed that the assessee has created a provision for Corporate Social Responsibility (CSR) in its books of accounts. The A.O. held that the said provision was an unascertained liability as the assessee had only created the provision but where the amount was to be spent was unascertained. He rejected the assessee’s contention that the provision had been created on the basis of the guidelines issued by the Department of Public Enterprises (DPE) which the assessee was bound to follow. The A.O. disallowed the sum of Rs. 35,09,480 being provision of CSR u/s 115JB considering it as an unascertained liability.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O. who, while holding the disallowance to be justified, noted that the guidelines issued by the DPE were not the determinative factor to decide the allowability of the provisions.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The essential question before the Tribunal was whether or not the provision for CSR as made by the assessee amounting to Rs. 35,09,480 can be considered as an ascertained liability. The Tribunal noted that the assessee has made the impugned provision in terms of the calculation provided as per the DPE guidelines. However, although the amount to be provided towards meeting the liability of the CSR expenditure has been quantified in accordance with the said guidelines, how the amount is to be spent has neither been determined nor specified by the assessee. Considering the meaning of the word ‘ascertained’ as explained by dictionaries, the Tribunal held that, at best, it is just an amount which has been set aside for being spent towards CSR but without any further certainty of its end-use. Thus, it cannot be said that the liability is an ascertained liability. The decisions relied upon on behalf of the assessee were held to be distinguishable on facts as in those cases the nature / mode of expenditure ear-marked for CSR spending was very much determined and specified, i.e., the nature / mode of expenditure was ‘ascertained’. The Tribunal dismissed the ground of appeal filed by the assessee.

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Section 263 – A non est order cannot be erroneous and prejudicial to the interest of the Revenue – Assessment order passed without jurisdiction is bad in law and needs to be quashed – Order passed u/s 263 revising such an order is also bad in law

9 2021 (3) TMI 1008-ITAT Delhi Shahi Exports Pvt. Ltd. vs. PCIT ITA Nos.: 2170/Del/2017 & 2171/Del/2017 A.Y.: 2008-09 Date of order: 24th March, 2021

Section 263 – A non est order cannot be erroneous and prejudicial to the interest of the Revenue – Assessment order passed without jurisdiction is bad in law and needs to be quashed – Order passed u/s 263 revising such an order is also bad in law

FACTS
In both the appeals filed by the assessee, it raised an additional ground challenging the jurisdiction of the PCIT to review and revise the order passed by the A.O. u/s 153C which assessment order itself was illegal and bad in law due to invalid assumption of jurisdiction as contemplated u/s 153A/153C.

For A.Y. 2008-09, the A.O. on 30th March, 2015 framed an order u/s 153A read with sections 153C and 143(3) wherein the additions made while assessing the total income u/s 143(3) were repeated and consequently the total income assessed was the same as that assessed earlier in an order passed u/s 143(3).

The PCIT invoked provisions of section 263 and set aside the assessment order dated 30th March, 2015 on the ground that after the merger of Sarla Fabrics Pvt. Ltd. with Shahi Exports Pvt. Ltd. whatever additions were made in the hands of Sarla Fabrics Pvt. Ltd. were to be assessed in the hands of Shahi Exports Pvt. Ltd.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that since the income assessed in an assessment framed u/s 153A read with sections 153C and 143(3) was the same as that assessed earlier in an order passed u/s 143(3), the additions made had no link with incriminating material found at the time of the search. The Tribunal noted the ratio of the decision of the Delhi High Court in the case of CIT vs. Kabul Chawla in 380 ITR 573. In view of the ratio of the decision of the Apex Court in the case of Singhad Technical Educational Society (397 ITR 344) holding that in the absence of any incriminating material no jurisdiction can be assumed by the A.O. u/s 153C, the Tribunal quashed the assessment framed u/s 153C by holding it to be without jurisdiction and, therefore, bad in law.

In view of the decision of the Supreme Court in the case of Kiran Singh & others vs. Chaman Paswan & Ors. [(1955) 1 SCR 117] holding that the decree passed by a Court without jurisdiction is a nullity, the Tribunal held that the assumption of jurisdiction u/s 263 in respect of an assessment which is non est is also bad in law as a non est order cannot be erroneous and prejudicial to the interest of the Revenue.

The Tribunal quashed the order framed u/s 263 on the principle of sublato fundamento cadit opus, meaning that in case the foundation is removed, the super structure falls. In this case, since the foundation, i.e., the order u/s 153C has been removed, the super structure, i.e., the order u/s 263, must fall.

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Section 68 – Once the total turnover of the assessee is much more than the total cash deposit in the bank account, no addition is called for on account of unexplained cash deposit in said account

8. 2021 (3) TMI 1012-ITAT Delhi Virendra Kumar vs. ITO ITA No.: 9901/Del/2019
A.Y.: 2011-12 Date of order: 24th March, 2021

Section 68 – Once the total turnover of the assessee is much more than the total cash deposit in the bank account, no addition is called for on account of unexplained cash deposit in said account

FACTS
The assessee is an individual who derives his income from wholesale business. The assessment for A.Y. 2011-12 was reopened on the basis of information that he had deposited Rs. 12,07,200 in cash in his savings bank account with ICICI Bank Ltd. during the F.Y. 2010-11. In response to the said notice u/s 148, the assessee furnished his return of income on 16th October, 2018 declaring the total income at Rs. 1,57,440. In the course of reassessment proceedings, the A.O. asked the assessee to explain the source of deposit. He observed that cash from different places like Delhi, Jaipur and Narnaul was deposited in the account. In the absence of any satisfactory explanation, the A.O. held that the assessee has no valid and genuine explanation with regard to the cash deposit of Rs. 8,57,200 after giving benefit of Rs. 3,50,000.

Aggrieved, the assessee preferred an appeal to the CIT(A) where it was contended that full details were given before the A.O., stating that most of the cash deposit was from sale receipts and an amount of Rs. 3,50,000 was taken from his brother. The complete break-up of the cash deposit in the account was filed before the A.O. and, therefore, the addition made by the A.O. was not justified. The CIT(A), after considering the remand report of the A.O. and the rejoinder of the assessee to the remand report, sustained an addition of Rs. 3,62,000 being cash deposit of Rs. 3,16,000 at Jaipur, Rs. 15,000 at Jamnagar and Rs. 36,000 at Delhi, holding the same to be not out of regular sale.

The aggrieved assessee then preferred an appeal to the Tribunal where it was contended that he has declared gross receipt of Rs. 19,25,140 and has offered income u/s 44AD by applying the net profit rate of 8.16%. Therefore, once the gross receipts are accepted and not disputed and such gross receipt is much more than the total deposits in the bank accounts, no addition is called for merely by stating that the deposits are not out of sale proceeds.

HELD
The Tribunal noted that:
(i) The A.O. accepted an amount of Rs. 3,50,000 received by the assessee as gift from his brother and made an addition of Rs. 8,57,200 on the ground that the assessee could not successfully discharge his onus by providing evidence in support of the cash deposits;
(ii) Of the addition of Rs. 8,57,200 made by the CIT(A), it has already given relief to the extent of Rs. 4,90,200 and the Revenue is not in appeal before the Tribunal;
(iii) The CIT(A) sustained the addition of Rs. 3,67,000 on the ground that the assessee could not substantiate with evidence of sales the cash deposits made at Jamnagar, Delhi and Jaipur;
(iv) The assessee did furnish explanations about the deposits made at Jamnagar and Jaipur.

The Tribunal held that once the total turnover of the assessee is much more than the total cash deposit in the bank account (in this case sales is 227% of the cash deposit), no addition is called for on account of unexplained cash deposit in the bank account. The explanation of the assessee appears to be reasonable. The Tribunal held that the CIT(A) is not justified in sustaining the addition of Rs. 3,67,000, it set aside the order of the CIT(A) and directed the A.O. to delete the addition.

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CHANGES IN PARTNERSHIP TAXATION IN CASE OF CAPITAL GAIN BY FINANCE ACT, 2021

A. INTRODUCTION
In the case of partnership, there may be transfer of capital asset by a partner to a firm or vice versa. Section 45(3) deals with transfer of a capital asset by a partner to a firm; before its substitution by the Finance Act, 2021, section 45(4) dealt with transfer by way of distribution of a capital asset by a firm to a partner on dissolution or otherwise. These provisions were inserted with effect from 1st April, 1988 to provide for full value of consideration in respect of the aforesaid transfer of capital assets between firm and partner.

While the aforesaid sections apply to even AOPs and BOIs, for the purpose of this article reference is made only to firm and partners.

When a partner’s account is settled on retirement or dissolution, he may be given one or more of the following;

(a) Cash, (b) Capital asset, (c) Stocks.

The aforesaid provisions dealt with transfer of capital asset in the limited circumstances provided thereunder.These sections generated a lot of controversies and have given rise to a number of court rulings. A prominent issue is, when a partner upon retirement or dissolution takes home more cash than his capital account balance at the time of retirement, whether he or the firm is liable to pay any tax. The courts are almost unanimous in holding that mere payment of cash would not give rise to any taxable capital gains either in the hands of the firm or in the hands of the partner. It has been held that what he gets is in settlement of his account and nothing more.

B. FINANCE ACT, 2021
The changes proposed in the Finance Bill, 2021 by way of substitution of section 45(4) and insertion of section 45(4A) were not carried through. The Finance Act, 2021 discarded the proposed changes but seeks to change the scheme of taxation of capital gain in the following manner:

(a) Existing section 45(3) is retained,
(b) Existing section 45(4) is replaced by a new sub-section,
(c) New section 9B is introduced,
(d) New clause (iii) is added to section 48.

The new scheme, through the combination of sections 45(4) and 9B, provides for taxation in the hands of the firm in the case of receipt of capital asset or stock-in-trade or cash (or a combination of two or more of them) by the partner on reconstitution or dissolution of the firm. Section 48(iii) seeks to mitigate the impact of double taxation.

Sections 9B and 45(4) apply to receipts by partner from the firm on or after 1st April, 2020 in connection with dissolution / reconstitution. A question arises as to whether these sections apply to such receipts in connection with dissolution / reconstitution which took place prior to 1st April, 2020. The literal interpretation suggests that the date of receipt being critical, the date of dissolution / reconstitution is immaterial as long as the receipt is in connection with dissolution / reconstitution. One possible counter to this interpretation is that the erstwhile section 45(4) dealt with distribution of capital asset on dissolution or otherwise of the firm and it held the field till 31st March, 2020. Section 9B deals with receipt in connection with reconstitution or dissolution, while substituted section 45(4) deals with receipt in connection with reconstitution. One could notice some overlap between erstwhile section 45(4) and section 9B insofar as receipt of capital asset on dissolution is concerned.

On the basis of this reasoning, it is not unreasonable to expect that new provisions should be considered as applicable only when both the dissolution / reconstitution and receipt have taken place on or after 1st April, 2021. One more reason for this interpretation could be that once dissolution / reconstitution has taken place prior to 1st April, 2021, respective rights arising from such dissolution / reconstitution crystallised on the date of such dissolution / reconstitution. Any receipt thereafter is only in relation to such rights which crystallised before the effective date of the new provisions.

C. SECTION 9B
The Finance Bill, 2021 did not propose section 9B. It rather proposed a substitution of existing section 45(4) and insertion of new section 45(4A). However, while enacting the Finance Act, 2021, section 9B is introduced.

Explanation (ii) to section 9B defines ‘specified entity’ as a firm or other association of persons or body of individuals (not being a company or a co-operative society). Explanation (iii) defines ‘specified person’ as a person who is a partner of a firm or member of other association of persons or body of individuals (not being a company or a co-operative society) in any previous year. For the sake of convenience, in this article, specified entity is referred to as a firm and specified person is referred to as a partner.

Section 9B(1) provides that where a partner receives, during the previous year, any capital asset or stock-in-trade or both from a firm in connection with the dissolution or reconstitution of such firm, the firm shall be deemed to have transferred such capital asset or stock-in-trade, or both, as the case may be, to the partner in the year in which such capital asset or stock-in-trade or both are received by the partner.

Section 9B(2) provides that any profits and gains arising from such deemed transfer of capital asset or stock-in-trade, or both, as the case may be, by the firm shall be deemed to be the income of such firm of the previous year in which such capital asset or stock-in-trade or both were received by the partner. Such income shall be chargeable to income-tax as income of such firm under the head ‘Profits and gains of business or profession’ or under the head ‘Capital gains’ in accordance with the provisions of this Act.

As per section 9B(3), fair market value of the capital asset or stock-in-trade, or both, on the date of its receipt by the partner shall be deemed to be the full value of the consideration received or accruing as a result of such deemed transfer of the capital asset or stock-in-trade, or both, by the firm.

As per Explanation (i), reconstitution of the firm means, where
(a) one or more of its partners of firm ceases to be partners; or
(b) one or more new partners are admitted in such firm in such circumstances that one or more of the persons who were partners of the firm, before the change, continue as partner or partners after the change; or
(c) all the partners, as the case may be, of such firm continue with a change in their respective share or in the shares of some of them.

D. SALIENT FEATURES OF SECTION 9B
The purpose of placing section 9B outside the heads of income appears to be to avoid replication of charging and computation provisions under both heads of income, i.e., profits and gains from business or profession, and capital gains.

Section 9B would apply when a partner receives during the previous year any capital asset / stock-in-trade or both from a firm in connection with dissolution or reconstitution of firm.

Upon such receipt, the firm shall be deemed to have transferred such capital asset / stock-in-trade or both to the partner in the year of receipt of the same by the partner.

The business profits or capital gains arising from aforesaid deemed transfer shall be chargeable under the respective heads of income. Fair market value (FMV) of capital asset / stock-in-trade or both on the date of receipt shall be deemed to be the full value consideration (FVC) for determination of the business profits / capital gain.

Reconstitution would include the case of admission / retirement / change in profit-sharing ratio.

E. CERTAIN ISSUES ASSOCIATED WITH SECTION 9B
Section 9B(2) deems the profits and gains on deemed transfer of capital asset or stock-in-trade as the income of the firm in the year of receipt of asset by the partner. If receipts by one or more partners spread over to more than one year, the taxability thereof on the firm follows suit.

In the case of dissolved firm, it is interesting to note how the above fiction works when the partners receive the assets in the years subsequent to the year of dissolution. While there is a fiction to deem such receipt as a transfer by firm, there is no fiction to deem that the firm is not dissolved. In such a situation, whether the machinery provision of section 189(1) which permits the A.O. to proceed to assess the firm as if it is not dissolved, applies or not is a debatable issue.

The fair market value of the allotted asset shall be deemed to be the full value of consideration. For this purpose, the balance in the capital account of the partner is not relevant.

Section 9B does not as such provide for prescription of the rules for determination of the FMV. Therefore, recourse has to be had to section 2(22B) which defines FMV. Special provisions like sections 43CA and 50C do not apply in a case covered by section 9B.

The business profit arising u/s 9B, though chargeable under the head ‘profits and gains from business or profession’, does not fall u/s 28. Therefore, section 29 which provides that ‘the income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D’ may not apply. This is for the reason that section 29 refers only to income referred to in section 28. Therefore, business profits may have to be computed on commercial principles, without recourse to the aforesaid provisions providing any allowance or disallowance.

Unlike in the case of section 29 which refers only to section 28, section 48 refers to the head ‘capital gains’. Therefore, capital gains arising from section 9B will have to be computed after considering section 48. Therefore, the cost of acquisition, cost of improvement, their indexation and incidental transfer expenditure will be available as deduction.

While section 45 is saved by sections 54 to 54GB, there is no such saving provision in section 9B. Therefore, whether a firm is eligible for exemption u/s 54EC, etc., in respect of capital gains arising u/s 9B is an open question. While on a stricter note such exemption is not available, on a liberal note one may contend that exemption should be available if related conditions are fulfilled. Proponents of a stricter interpretation may argue that exemption u/s 54EC is inconceivable as there is no inflow in terms of actual consideration for satisfying the requirement of rollover. The proponents of a liberal interpretation may counter such contention by pointing out that deeming fiction requires logical extension and rollover sections do not require rupee-to-rupee mapping. If the liberal theory is accepted, the date of receipt being deemed to be the date of transfer, is relevant for reckoning the time limit irrespective of the date of change in constitution or dissolution.

F. SECTION 45(4)
Section 45(4) as it stood before substitution by Finance Act, 2021 read as follows:
‘(4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.’

The substituted section 45(4) by the Finance Act, 2021 reads as follows:
‘(4) Notwithstanding anything contained in sub-section (1), where a specified person receives during the previous year any money or capital asset or both from a specified entity in connection with the reconstitution of such specified entity, then any profits or gains arising from receipt of such money by the specified person shall be chargeable to income-tax as income of such specified entity under the head “capital gains” and shall be deemed to be the income of such specified entity of the previous year in which such money or capital asset or both were received by the specified person, and notwithstanding anything to the contrary contained in this Act, such profits or gains shall be determined in accordance with the following formula, namely:…’

The following table depicts some key differences between the two provisions:

Earlier section 45(4)	Substituted section 45(4)
It would apply to transfer of capital asset by a partner on the dissolution of a firm	It would apply upon receipt of capital asset or money or both by a partner *in connection with reconstitution of a firm*
Profits and gains arising from transfer are chargeable to tax as the income of firm	Profits and gains arising from such receipt by partner are chargeable to tax as income of the firm
Chargeable to tax in the PY in which the transfer took place	Such profits and gains chargeable to tax as income is deemed to be the income of the firm in the PY in which money or capital asset or both is received by partner
Capital gains are computed u/s 48	Capital gains are computed as per the formula provided therein notwithstanding anything to the contrary contained in the Act
FMV of the asset on the date of transfer shall be deemed to be the FVC	Formula does not provide for any full value of consideration However, aggregate of amount of money received and fair market value of capital asset received on the date of receipt constitutes consideration
Cost of acquisition, cost of improvement and incidental expenditure upon transfer are reduced from FVC	Amount of capital account balance of partner in the books of firm at the time of reconstitution is reduced from the above aggregate amount
Benefit of indexation is available	There is no element of cost of acquisition and cost of improvement, hence no indexation

Earlier
section 45(4)

Substituted
section 45(4)

It would apply to transfer of capital asset by a partner on
the dissolution of a firm

It would apply upon receipt of capital asset or money or both by
a partner in connection with reconstitution of a firm

Profits and gains arising from transfer are chargeable to tax as
the income of firm

Profits and gains arising from such receipt by partner are
chargeable to tax as income of the firm

Chargeable to tax in the PY in which the transfer took place

Such profits and gains chargeable to tax as income is deemed to
be the income of the firm in the PY in which money or capital asset or both
is received by partner

Capital gains are computed
u/s 48

Capital gains are computed as per the formula provided therein
notwithstanding anything to the contrary contained in the Act

FMV of the asset on the date of transfer shall be deemed to be
the FVC

Formula does not provide for any full value of consideration

However, aggregate of amount of money received and fair market
value of capital asset received on the date of receipt constitutes
consideration

Cost of acquisition, cost of improvement and incidental
expenditure upon transfer are reduced from FVC

Amount of capital account balance of partner in the books of
firm at the time of reconstitution is reduced from the above aggregate amount

Benefit of indexation is available

There is no element of cost of acquisition and cost of
improvement, hence no indexation

G. SALIENT FEATURES OF SECTION 45(4)
Section 45(4) would apply when a partner receives during the previous year any money or capital asset or both from a firm in connection with the reconstitution of a firm.

Any profits and gains arising from such receipt shall be chargeable in the hands of the firm under the head ‘capital gains’.

Such capital gain shall be deemed to be chargeable to tax in the previous year of receipt of such money or capital or both by the partner.

Reconstitution is defined in the same manner as is defined u/s 9B.

H. COMPUTATION OF CAPITAL GAIN U/S 45(4)
Capital gain shall be computed u/s 45(4) as per the formula provided therein, i.e., A=B+C-D.

The capital gain is computed by considering the following components:
B = Amount of cash received by the partner,
C = Amount of FMV of capital asset received by the partner,
D = Amount of capital account balance of a partner in the books of the firm at the time of its reconstitution.

The difference between capital account balance on the date of receipt and aggregate of cash received and FMV of capital asset received constitutes capital gains in the hands of the firm.

I. CORRIGENDUM TO SECTION 45(4)
On 22nd March, 2021, the Finance Ministry sent a notice of amendments to the Lok Sabha, wherein section 45(4) as proposed in the Bill was substituted completely by a new section 45(4). The newly-proposed section 45(4) had the words ‘…any profits or gains arising from receipt of such money by the specified person…’

On 23rd March, 2021, the Lok Sabha approved the Bill as amended by notice of amendments dated 22nd March, 2021. The Presidential Assent to the Bill was given on 28th March, 2021. The Finance (No. 13) Act, of 2021 was notified on 28th March, 2021. The Notified Finance (No. 13) Act, of 2021 carried Section 45(4) with the aforesaid words.

Two corrigenda were issued on 6th April, 2021 and 15th April, 2021. In the first corrigendum, for the words ‘…from receipt of such money by’, the words ‘…from such receipt by…’ were substituted. While it is not known as to the exact content of section 45(4) as approved by the Lok Sabha, on the basis of Notified Finance (No. 13) Act, of 2021 it can be inferred that the Lok Sabha has approved the Bill which carried section 45(4) as stated in the notice of amendments dated 22nd March, 2021.

The aforesaid substitution is not just correcting a clerical error, but it has substantial implications. The originally introduced words would have confined the scope of section 45(4) only to receipt of money, whereas the substituted words would extend it not only to receipt of money but also to receipt of capital asset.

Unless an Amendment Act is enacted, substituted words by a corrigendum having the effect of amending a law passed by the Parliament may be open to challenge on the ground of overreach by the executive.

J. COMPARISON BETWEEN SECTION 9B AND SECTION 45(4)
The following table compares above two provisions;

Section 9B	Section 45(4)
It would apply upon receipt of capital asset or stock-in-trade or both by a partner from the firm on the dissolution or reconstitution of a firm	It would apply upon receipt of capital asset or cash or both by a partner from the firm in connection with reconstitution of the firm
Allotment of stock-in-trade is covered	Allotment of stock-in-trade is not covered
For the purpose of computation u/s 9B, FMV is deemed to be FVC and computation would be in accordance with Chapter IV-C or D, i.e., ‘Profits and gains of business or profession’ or ‘Capital gains’	Computation mechanism is given u/s 45(4) in the form of formula

Section
9B

Section
45(4)

It would apply upon receipt of capital asset or stock-in-trade
or both by a partner from the firm on the dissolution or reconstitution of a
firm

It would apply upon receipt of capital asset or cash or both by
a partner from the firm in connection with reconstitution of the firm

Allotment of stock-in-trade is covered

Allotment of stock-in-trade is not covered

For the purpose of computation u/s 9B, FMV is deemed to be FVC
and computation would be in accordance with Chapter IV-C or D, i.e., ‘Profits
and gains of business or profession’ or ‘Capital gains’

Computation mechanism is given u/s 45(4) in the form of formula

The following table summarises the applicability of the above two sections:

	Section 9B	Section 45(4)
Reconstitution	Yes	Yes
Dissolution	Yes	No
Cash to partner	No	Yes
Capital asset to partner	Yes	Yes
Stock-in-trade to partner	Yes	No

Section
9B

Section
45(4)

Reconstitution

Yes

Dissolution

Yes

Cash to partner

Yes

Capital asset to partner

Yes

Stock-in-trade to partner

Yes

K. DOUBLE TAXATION AND ITS MITIGATION
As may be seen from a close reading of sections 9B and 45(4), in the event of receipt of capital asset by a partner from a firm in connection with its reconstitution, the firm is liable to tax under both section 9B and section 45(4).

Explanation 2 to section 45(4) clarifies that when a capital asset is received by a partner from a firm in connection with the reconstitution of such firm, the provisions of section 45(4) shall operate in addition to the provisions of section 9B and the taxation under the said provisions thereof shall be worked out independently.

Therefore, it is a clear case where double taxation is explicitly intended or provided for. Where Parliament in its wisdom chooses to explicitly provide for double taxation, it has a plenary power to do so.

In this regard, reliance is placed on the following decisions:

Jain Bros vs. Union of India [1970] 77 ITR 107 (SC);

Laxmipat Singhania vs. CIT [1969] 72 ITR 291 (SC);

CIT vs. Manilal Dhanji [1962] 44 ITR 876 (SC);

Escorts Limited vs. UOI [1993] 199 ITR 43 (SC); and

Mahaveer Kumar Jain vs. CIT [2018] 404 ITR 738 (SC).

Thus, while double taxation cannot be inferred or implied, the same can be explicitly provided for.

Thus, it is a clear case of Parliament wanting to apply both sections in case of receipt of capital asset by a partner in connection with the reconstitution of a firm.

Section 48 is also amended by Finance Act, 2021 where Clause (iii) is inserted which reads as follows:
‘(iii) in case of value of any money or capital asset received by a specified person from a specified entity referred to in sub-section (4) of section 45, the amount chargeable to income-tax as income of such specified entity under that sub-section which is attributable to the capital asset being transferred by the specified entity, calculated in the prescribed manner:’

Section 48(iii) provides that the amount chargeable to tax u/s 45(4) to the extent attributable to the capital asset being transferred by a firm shall be reduced from the FVC of a capital asset being transferred by a firm. Such reduction, however, needs to be calculated in the prescribed manner. The rules in this regard are awaited. These provisions are applicable for PY 2020-21 and the rules were not out as on 1st April, 2021. Therefore, such rules when notified will have to be made retrospective so as to be applicable to PY 2020-21. If the retrospective application of rules causes prejudice to the taxpayer, the same may be open to challenge in terms of section 295(4).

As noted earlier, section 45(4) applies when a partner receives capital asset or money or both from a firm in connection with its reconstitution. If a partner receives capital asset with or without money, capital gain attributable to such receipt of capital asset will not be available for relief u/s 48(iii). This is for the obvious reason that the subject capital asset having already been given to a partner, could not be subsequently transferred by the firm to any other person. Upon allotment to a partner, the capital asset concerned ceases to exist with the firm.

However, if a firm is liable to tax on transfer of money with or without capital asset to the partner in connection with reconstitution of a firm, the capital gain on such transfer of money chargeable u/s 45(4) would be available for relief u/s 48(iii). This relief is given on the premise that when cash is paid to the retiring partner on reconstitution, the same may be attributed wholly or partly to the revaluation of one or more capital assets which are retained by the firm. Subsequently, when a firm transfers such revalued capital asset, it would be liable to pay tax on capital gain. In such a case, capital gain may include the revalued portion on which the firm would have discharged tax u/s 45(4). This will result in double taxation. In order to mitigate such double taxation, it is provided that capital gains already charged to tax u/s 45(4) to the extent attributable to the capital asset that is being transferred by a firm would be allowed as deduction u/s 48(iii).

It is interesting to note that section 48(iii) may also apply in a situation where both sections 9B and 45(4) are applied simultaneously in the same previous year.

As stated earlier, section 8 applies not only to capital gain chargeable u/s 45, but to any capital gains chargeable under the head ‘capital gain’. As section 9B provides for capital gains to be chargeable to tax under the head ‘capital gain’, section 48 is applicable to the capital gain covered u/s 9B as well.

While computing the capital gain chargeable u/s 9B read with section 48, capital gain chargeable u/s 45(4) to the extent attributable to the capital asset dealt with by section 9B would be reduced from the FVC determined u/s 9B(3). Section 48 does not provide for determination of the FVC. It only provides for deductions from the same. Therefore, there is no disharmony between section 9B(3) and deduction u/s 48(iii).

L. CERTAIN OTHER ISSUES OF SECTION 45(4)
What is the meaning of receipt of money? Whether receipt of money includes constructive receipt by way of credit to account? A mere credit to the account of the partner cannot be equated with the receipt of money. Upon reconstitution, certain sum may be credited to a partner’s account which is allowed to remain in the firm. In such case, it cannot be said that he received money from the firm upon a mere credit. However, when the amount so credited is withdrawn by him, section 45(4) is attracted. The answer could be different if the ratio of Raghav Reddy in 44 ITR 760 SC is applied to such credit unless such ratio is distinguished on the basis of Toshiku in 125 ITR 525 SC.

Whether receipt of rural agricultural land covered: As rural agricultural land is not a capital asset, section 45(4) is not attracted.

Receipt by legal heirs of deceased partner: Section 45(4) would apply to receipt by a partner from the firm. A receipt by the legal heir of the deceased partner cannot be regarded as receipt by the partner. Therefore, section 45(4) is not applicable.

Would capital balance include balances in current account and loan of partners: While the balance in current account could be appropriately called as part of capital balance, the same may not be so in the case of loan by partners.

Is proportionate share of reserves to be considered as part of capital: Credit balance in the profit and loss account or balances in the reserves should be credited to partners’ accounts before dissolution / reconstitution. In any case, payment from such credit / reserves cannot be regarded as payment in connection with dissolution / reconstitution.

How to compute if there is negative capital balance: A negative balance in the capital account represents money due by the partner to the firm. If such balance is not made good by him on dissolution / reconstitution, it amounts to a waiver which may in turn amount to payment of cash in the light of the ratio in Mahindra and Mahindra 404 ITR 1 SC.

M. WHEN GOODWILL IS TRANSFERRED
If goodwill, being a capital asset, is transferred to a partner, sections 45(4) and 9B as discussed earlier would apply. This is so irrespective of whether the goodwill is self-generated or acquired.

If goodwill is self-generated, in terms of section 55(2)(a) and section 55(1)(a) the cost of acquisition and cost of improvement shall be deemed to be nil.

If goodwill is purchased for a consideration, newly-introduced proviso to section 55(2)(a) would apply. This proviso provides that the actual cost of goodwill shall be reduced by the depreciation allowed up to A.Y. 2020-21.

Provisions of section 50 along with the newly-introduced proviso to section 50(2) may not apply in view of the fact that sections 45(4) and 9B are special provisions.

Additionally, upon such transfer, if no consideration is received or is accrued, provisions of section 50 may not operate unless the fiction of section 9B(3) is read into section 50. In any case, section 45(4) does not have any such fiction.

ACKNOWLEDGEMENTS: The author acknowledges the inputs from Mr. S. Ramasubramanian and Mr. H. Padam Chand Khincha and the support of Mrs. Sushma Ravindra for the purposes of this analysis.

shailesh.kwebmaker

JDA STRUCTURING: A 360-DEGREE VIEW

“When a subject is multidimensional, a different approach is necessary. Instead of a series of standalone articles on the topic, a single article covering important aspects of the subject (JDA here) and have domain experts comment on each aspect of the subject was deemed worthwhile. The uniqueness of the article is in its subject coverage from the standpoint of each of the four perspectives: accounting, direct and indirect taxes and general and property law at once. This has resulted in an integrated piece where each facet is at once analysed from each of the four perspectives. Sunil Gabhawalla, CA, conceptualised the content and format of this article and shared the outline with three other domain experts. Through the medium of video calls, each one of them shared his perspectives on a number of touch-points outlined by Sunil. These were eventually compiled into this article. Ameet Hariani, advocate and solicitor, covered the Legal side; Pradip Kapasi, CA, covered the Direct tax aspects; Sudhir Soni, CA, covered Accounting aspects; and Sunil took on the Indirect taxation aspects. Thus, the article is a ‘joint development’ by all of them! – Editor”

Joint development of real estate – A win-win for both landowner and developer?

In today’s scenario, joint development is the preferred mode of development of urban land. A joint development agreement (JDA) is beneficial for both the landowner as well as the developer. It is a win-win situation for both. Conceptually, the resources and the efforts of the landowner and the developer are combined together so as to bring out the maximum productive result post-construction.

What are the possible risk factors?

Having said so, real estate development is spread over quite a few years and is fraught with risks as diverse as price risk (the expected market price of the developed property at the end of the project not commensurate with the expectations), regulatory risk (frequent changes in development regulations at the local level), tax risk (significant lack of clarity on the tax implications of the present law as well as the risk of possible amendments therein before the project completion), business risk (inability of the landowner / developer to fulfil the commitments resulting in either substantial losses or disputes), financial risk (inability to match the regular cash outflows till the time the project becomes self-sustaining) and so on. Like many other businesses, there are risks involved in real estate development in general and joint development projects in particular.

Why this article?

It is not only the diversity of the risks but also the interplay of these risks which makes the entire subject complex and also results in varying models or transaction structures between the landowner and the developer for the joint development of the real estate project. This article attempts to draw upon the experiences of the respective domain experts to apprise the readers of the complex interplay of the risk factors which go into the structuring of the joint development agreements and provide a holistic view of this complex topic. It aims to introduce the nuances and niceties across multiple domains but is not intended to be an exhaustive treatise on the topic.

What are the possible transaction structures?

Well, there are choices galore. Each joint development agreement is customised to suit the specific needs of the stakeholders. While in most of these structures the landowner would pool in the development rights in the property already held by him, the developer would undertake development obligations and compensate the landowner either in the form of money or developed area (either fixed or variable, again either upfront or in instalments). Within this broad conceptual definition of the ‘deliverables’ by the respective stakeholders, a multitude of factors and a complex interplay between them will determine the ‘terms and conditions’ and, therefore, the essence of the joint development agreement. Without diluting the specificity of each joint development agreement, one may compartmentalise the scenarios into a few baskets as listed below:

1. Outright sale of land / grant of development rights by the landowner to the developer against a fixed monetary consideration either paid upfront or in deferred instalments over the project period.
2. Grant of development rights by the landowner to the developer against sharing of gross revenue earned by the developer from the sale of the project.
3. Grant of development rights by the landowner to the developer against sharing of net profits earned by the developer from the project.
4. Grant of development rights by the landowner to the developer against sharing of area developed by the developer in a pre-determined ratio.

How does one choose an appropriate structure?

Well, this is the million-dollar question. The experts spent a considerable amount of time brainstorming this question and identifying various parameters which will help in choosing an appropriate structure.

From the landowners’ perspective, the structure could be determined based on the fine balancing of the timing of the transfer of legal title in the property from the landowner and the timing of the flow of consideration to him. Throw in the subjective metrics of the risk-taking ability of the stakeholders and the level of comfort that the landowner and the developer have with each other in terms of the extent of trust and / or mistrust, and the entire equation starts becoming fuzzy. To add to the fizz, compliance obligations under regulations like RERA and restrictions under FEMA could also act as show-stoppers.

Ameet Hariani says, ‘For example, under RERA it is the promoter’s obligation to obtain title insurance of the real estate project. The relevant section of RERA, among other things, requires a promoter to obtain all such insurances as may be notified by the appropriate Government, including in respect of the title of the land and building forming the real estate project and in respect of the construction of the said project. Since both the landowner as well as the developer will be classified as promoters, it would be prudent for parties entering into a JDA to specify which party (among the “promoters”) will be responsible for obtaining the title insurance for the project.’

In some transaction structures, tax obligations (both direct tax as well as indirect tax – GST and, not to forget, stamp duty) could act as the final nail in the coffin. For example, the upfront exposure towards payment of stamp duty and income-tax coupled with the ab initio parting of the title may rule out the possibility of an outright sale of land by the landowner against deferred consideration from the developer. As stated by Ameet Hariani, ‘From a legal perspective, legal rights should be retained by the landowner till the performance by the developer of the developer’s obligations. Only then should legal rights be transferred.’

While stamp duty is a duty on the execution of the document and could be paid by either of the parties, Ameet Hariani has this to say, ‘So far as stamp duty implications are concerned, normally these are borne by the developer. All documents relating to immovable property should be registered and consequently the quantum of stamp duty is an important determinant to be worked out.’

The above factors are relevant from the developer’s perspective as well. However, many more aspects become relevant. While the landowner would like to protect and retain his title in the property to the last possible milestone, for the developer a restricted right in the land could present significant constraints in financing the project, especially if he is dependent on funding from banks. Ameet Hariani has a word of advice, ‘Legally speaking, agreements for development rights are significantly different from those for sale of land. Courts have held that some types of development agreements cannot be specifically enforced. The key is to ensure that the development agreements that are executed should be capable of being specifically enforced.’ More importantly, the marketability of the project to the end customer / investor depends significantly on the buyer taking a loan from the bank. Therefore, the customer’s and the customer’s lending institution’s perception of the transaction structure and the clarity of the title of land become very important factors.

Hence, Ameet Hariani warns, ‘Financial institutions normally will not give finance in respect of the development agreement unless there is a specific clause in the development agreement entitling the developer to raise finance on the property; and the developer must also have the right to also mortgage the developer’s proportionate share in the land. This often makes the landowner extremely uncomfortable, especially because the landowner’s contribution, i.e., the land comes into the “hotchpotch” almost immediately. This is a matter that is often debated strongly while financing the development agreement’. The local development regulations and restrictions may also play an important part. ‘Is the plot size economically viable? Is there some arbitrage available due to an adjacent plot of land also available for development? Does the development fit within the overall vision of the developer?’ These are some questions which occupy the mind-space of the developer.

Is there one dominant parameter determining the transaction structure?

With such a high level of subjectivity and associated complexity, the discussion amongst the panel of experts tried to focus on identifying whether there was one dominant factor for determining the transaction structure. ‘Cash, Cash and Cash’ was the vocal emphasis factor from the experts. Let’s see what Ameet Hariani has to say: ‘The essential part of the transaction is the cash flow requirement of the landowners. Based on this, all the other issues can be structured.’

Sudhir Soni concurs: ‘The commercial considerations are largely dependent on the cash flow requirements of the developer and the landowner. Grant of development rights against sharing of revenue or developed area are the more prevalent JDA structures and there is not much difference in the business context. Grant of development rights against share of net profits is rare. The commercial considerations for a landowner to select between an area share or revenue share arrangement also depend on the cash flow requirements and taxation implications.’

There is a financial facet other than cash which is equally important – the timing of revenue recognition. Says Ameet Hariani, ‘So far as the developer’s requirements are concerned, since revenues can now only be recognised effectively upon the Occupation Certificate being obtained, and keeping the RERA perspective in mind, the speed of completion of the project is of paramount importance. This is especially true so far as listed developers are concerned.’

Practically, joint development arrangements have specific performance clauses for both the parties and will not allow a mid-way exit to either party. However, the future is uncertain. What if a developer runs out of cash mid-way and needs to exit and bring in another developer? Ameet Hariani opines, ‘Normally, a landowner would be uncomfortable to have a provision whereby development rights can be transferred / assigned without the landowner’s consent. It will be a very rare case where such right is allowed to the developer. There is a high likelihood of litigation where there is a transfer of rights proposed to a third party developer by the current developer’.

The litigation risk is not only at the developer’s end but also at the landowner’s end. Ameet Hariani continues, ‘Also, in the event the landowner wants the developer to exit and wants to appoint a new developer, once again there is a high likelihood of litigation.’ But Ameet Hariani has a golden piece of advice suggesting the incorporation of an arbitration clause in the agreement. ‘Earlier, there was a debate as to whether developer agreements could be made subject to arbitration or not. Recent judgments read with the amendments to the Specific Relief Act and the Arbitration Act have now clarified the position significantly and a well-drafted arbitration clause would be key to ensure protection for both the parties’, he says.

But new transaction structures are emerging

While the discussion was around the traditional options of transaction structuring, the experts did agree that the scenario is fluid and specific situations may suggest the evolution of new transaction structures. While income-tax and stamp duty outflows act as a deterrent to the transaction structure of an outright sale of land, the grant of development rights could possibly be a subject matter of GST. There appears to be a notification which obliges the developer to pay GST on acquisition of development rights (under reverse charge) and another notification which obliges him to also pay GST on the area allotted to the landowner (under forward charge). Much to the chagrin of the developer, the valuation of such a barter transaction is far away from business reality and input tax credits (ITC) are also not allowed. Perhaps the only sigh of relief is that the substantial cash outflow on this account is deferred till the date of receipt of the completion certificate.

But wait! Weren’t transactions in immovable property expected to be outside the purview of GST? ‘Though there is a strong case to argue that such transactions should not be subjected to GST, there are conflicting interpretations on this front and the lower judicial forums are divided. One therefore has to wait for the Supreme Court to provide a final stand on this aspect,’ says Sunil Gabhawalla. Unluckily, businesses can’t wait and the stakes involved are phenomenal. The industry therefore tries to adapt and innovate newer transaction structures which are perhaps more tax-efficient.

Welcome the new concept of ‘Development Management Agreement’ wherein the developer acts as a project manager or a consultant to the landowner in developing the identified real estate. Suitable clauses are inserted to ensure that the developer and the landowner appropriate the profits of the venture in the manner desired. Essentially, this concept turns the entire relationship topsy-turvy and the key challenge is to ensure that the developer has a suitable title in the property while under development. ‘Safeguarding the developer’s rights and title in the property being developed becomes the most important aspect in this structure. Further, the brand value of the developer and past experience of other landowners with the developer is crucial for the landowner to make a choice as to which developer the landowner will go with,’ says Ameet Hariani.

It’s not really new for a tax aspect to be an important determinant for deciding a transaction structure. In case of corporate-owned properties put up for redevelopment, it is not uncommon to explore the route of demerger or slump sale and seek the associated benefits under the income-tax law. Pradip Kapasi says, ‘In case of demerger, the transfer of land by the demerged company to the resulting company would be tax-neutral provided the provisions of section 2(19AA) and sections 47(vib) and 47(vic) are complied with. No tax on transfer would be payable by the company or the shareholders. The cost of the land in the hands of the resulting company would be the same as was its cost in the hands of the demerged company’. Sunil Gabhawalla supports this approach, ‘GST is not payable on a transaction of transfer of business under a scheme of demerger’.

Well, the devil lies in the details. The provisions referred to above effectively require continuity of shareholding to the extent of at least 75%. This may not be possible in all cases. There comes up another option, of slump sale. Pradip Kapasi suggests, ‘The provisions of section 2(42C) r/w/s 2(19AA) and section 50B would apply on transfer of land as a part of the undertaking. No separate gains will be computed in respect of land. The company, however, would be taxed on the gains arising on transfer of the business undertaking in a slump sale. The amendments of 2021 in sections 2(42C) and 50B would have to be considered in computing the capital gains in the hands of the assignor company’. Effectively, income-tax becomes due on slump sale. What happens to GST? Sunil Gabhawalla opines, ‘There is an exemption from payment of GST.’

While such exotic products and arrangements may exist and appeal to many, there would always be takers for the plain vanilla example. The essential business case is that of the landowner and the developer coming together to jointly develop the property. A simple transaction structure could be to recognise the same as a joint venture, as an unincorporated association of persons. In fact, this is a risk parameter always at the back of the mind of any tax consultant. A less litigative route would be to grant such concept a legal recognition by entering into a partnership. To limit the liability of the stakeholders, the LLP / private limited company route can be considered. What could be the tax consequences of introduction of land into the entity?

Pradip Kapasi has this to say, ‘In such an event, of introduction in the partnership firm or LLP, provisions of section 45(3) of the Income-tax Act would be attracted and the landlord’s income under the head capital gains would be computed as per section 45(3) read with or without applying the provisions of section 50C. The profit / loss on subsequent development by the SPV would be computed under the head profits and gains of business and profession. In computing the income of the SPV, a deduction for the cost of land would be allowed on adoption of the value at which the account of the partner introducing the land is credited’. Would such introduction of land into the partnership have any GST implications? ‘Apparently, no, since such transactions are structured as in the nature of supply of land per se’, says Sunil Gabhawalla. He further comments, ‘If the transaction is structured as an introduction of a development right in the partnership firm, things can be different and reverse charge mechanism as explained earlier could be triggered’.

The next steps

Having dabbled with the possible transaction structures with an overall understanding of the complex factors at play in determining the possible transaction structures, we now proceed to dive into the accounting and tax issues in some of these specific structures. Since the landowner and the developer would be distinct legal entities, the discussion can be undertaken from both the perspectives separately.

Landowner’s perspective

Fundamentally different direct tax outcomes arise depending on whether the land or the development rights are contributed by the landowner as an investor or as a business venture.

Landowner as an investor
Essentially, in case the immovable property is held as an investor, it would be treated as a capital asset and the transfer of the capital asset or any rights therein would attract income-tax in the year of transfer itself under the head ‘capital gains’. While a concessional long-term capital gains tax rate and the benefits of reinvestment may be available, in order to curb the menace of tax evasion the Government prescribes that the value of consideration will be at least equivalent to the stamp duty valuation. This provision can become a spoilsport especially in situations where the ready reckoner values prescribed by the Government are not in alignment with the ground-level reality. However, Pradip Kapasi offers some consolation. While the said provisions would apply with full force to transactions of outright sale of land, the application of section 50C to grant of development rights transferred could be a matter of debate. But is the minor tax advantage (if at all) so derived really worth it? Remember the jigsaw puzzle of GST discussed above. But again, someone said that GST applies only on supplies
made in the course or furtherance of business. Did we not start this paragraph with the assumption that the landowner is an investor and is not undertaking a business venture?

Sunil Gabhawalla agrees with this thought process but at the same time cautions that the term ‘business’ is defined differently under the GST law and the income-tax law. He adds, ‘The valuation based on ready reckoner may be prescribed under income-tax law, but the same does not apply to GST where either the transaction value or equivalent market value become the key criteria’. Sudhir Soni endorses this thought from the accounting perspective as well, ‘The ready reckoner value will not necessarily be the fair value for accounting. The valuation for accounting purposes will be either based on the fair value of the entire land parcel received by the developer [or] based on the standalone selling price of constructed property given by the developer’.

In many cases, both the developer as well as the landowner wish to share the risks and rewards of the price fluctuations and also align cash flows. Accordingly, the consideration for the grant of development is both deferred as well as variable – either by way of share of gross revenue or share of profits, or sharing of area being developed. In cases where the landowner does not receive the money upfront and is keen on deferring the taxation to a future point of time, is it possible? The views of Pradip Kapasi are very clear, ‘Provision in agreement or deed for deferred payment or even possession may not help in deferring the year of taxation’. In the case of sharing of gross revenue, he further cautions that the fact of uncertainty of the quantum of ‘full value of consideration’ and its time of realisation may be impending factors but may not be conclusive for computation of capital gains, unless ‘arising’ of profits and gains on transfer itself is questioned. There could be debatable issues about the year of taxation of overflow or the underflow of consideration.

How does one really question or defer the timing of ‘arising’ of profits and gains on transfer? Without committing to the conclusiveness of the end position, which would be based on multiplicity of factors, Pradip Kapasi has a ray of hope to offer. In his words, ‘The cases where either the profit or developed area is shared could be differentiated on the ground that the landlord here has agreed to share the net profits of a business and therefore has actively joined hands to carry on a business activity for sharing of profits of such business. In such circumstances, his “share of profits” could arise as and when it accrues to the business’.

But tax law is full of caveats and provisos. Pradip Kapasi further warns, ‘There is a possibility that the landowner’s association with the developer here could be viewed as constituting an AOP and his action or treatment could activate the provisions of section 45(2) dealing with conversion of capital asset into stock-in-trade and / or the provisions of section 45(3) for introduction of capital asset into an AOP. In case of application of section 45(2) and / or 45(3), there would arise capital gains in the hands of the landlord and would be subjected to tax as per the respective provisions. The surplus, if any, could be the business profits; however, where the transactions are viewed as constituting an AOP, he would be receiving a share in the net profits of the AOP and the share of profit received from the AOP would be computed as per provisions of sections 67B, 86 and 110 of the Income-tax Act’.

Phew, that’s a barrage of cryptic sections to talk about! Let’s keep our fingers crossed and assume that the landlord survives this allegation of the transaction being treated as an AOP. The battle is then nearly won. Pradip Kapasi continues, ‘Where no profits and gains are brought to tax in the year of grant of development rights under the head “capital gains”, the capital gains can be held to have arisen in the year of receipt of the ready flats, where the gains would be computed by reducing the COA (cost of acquisition) of land from the SDV (stamp duty value) of the flats received. Further, if the transaction is structured such that no capital gains tax is levied in the year of receipt of ready flats, the capital gains may be taxed in the year of sale of the flats allotted by the developer’. He further warns about some practical difficulties in this stand being taken; ‘where the landlord on receipt of flats does not sell them but lets them out, difficulties may arise for bringing to tax the notional gains in the hands of the landlord’.

In case all this mumbo-jumbo has dumbed your senses, a landlord who is an individual or HUF may consider the possibility of entering into a ‘specified agreement’ prescribed u/s 45(5A) that involves the payment of consideration in kind, with or without cash consideration in part, for grant of development rights. Under the circumstances, the capital gains on execution of the development agreement shall stand deferred to the year of issue of the completion certificate of the project or part thereof where the full value of consideration for the purpose of computation of capital gains would be taken as the aggregate of the cash consideration and the stamp duty value of his share of area in the project in kind on the date of the issue of the completion certificate. This assumed concession is made available on compliance of the strict conditions including ensuring that the landlord does not transfer his share in the project prior to the date of issue of the completion certificate. Subsequent sale of the premises received under the agreement would be governed as per the provisions of section 45 r/w/s 48.

That’s too much of income-tax. Let’s divert our attention to GST. As a welcome change, Sunil Gabhawalla has a bit of advice for the landowners entering into joint development agreements after 1st April, 2019, ‘Sit back and relax. As stated earlier, the burden of paying the tax on supply of development rights has been transferred to the developer’. What happens when the landowner resells the developed area allotted to him under the area-sharing agreement? Sunil Gabhawalla adds, ‘If the developed area is sold after the receipt of the completion certificate, there is no tax. If the developed area is sold while the property is under construction, the landowner can argue that he is not constructing any area and therefore he is not liable for payment of GST. Remember, the GST on the area allotted to the landowner would also be paid by the developer’.

But life in GST cannot be so simple, right? Nestled in the by-lanes of a condition to a Rate Notification disentitling a developer from claiming input tax credit (ITC) for residential projects is an innocent-looking sentence which permits the landowner to claim ITC on units resold by him if he pays at least equivalent output tax on the units so resold. Sunil Gabhawalla says, ‘Well, the legal tenability of such a position can be questioned. But in tax laws, with the risk of litigation and retrospective amendments, the writing on the wall is that the boss is always right. If the landowner opts to fall in line, he would require a registration and would be paying additional GST on the difference between the tax charged to him and that which he charges to the end buyer. While this also brings commercial parity vis-à-vis the buyers for landowner’s inventory and the developer’s inventory, it could also result in some cash flow issue if not structured appropriately.’

In a nutshell, therefore, the key tax issue bothering the landowner in case of joint development agreements is not really GST but the upfront liability towards a substantial capital gains tax irrespective of actual cash realisation.

Landowner as a businessman
Will things change if the land is held as stock-in-trade? Actually, yes, and substantially. As a businessman, the landowner forfeits his entitlement of concessional long-term capital gains tax rate. But that pain comes with commensurate gain – the tax is attracted not when the transfer takes place but at a point of time when the income accrues in relation to such land. Says Pradip Kapasi, ‘The point of accrual of income is likely to arise on acquisition of an enforceable right to receive the income with reasonable certainty of realisation. The method of accounting and sections 145 and 28 may also play a vital role here. Provisions of ICDS and Guidance Note, where applicable, would apply’. Welcome to the wonderland of accounting and its impact on taxation!

Sudhir Soni says, ‘There may be alternatives. If it is treated as a capital gain, the amounts received as revenue share will be accumulated as advance and recognised at the end of the project, on giving possession. If it is treated as a business, at each reporting date apply percentage of completion to the extent of its share’. But is it really that simple? Well, the situation is fluid and the conflict is nicely summarised by Pradip Kapasi, ‘The fact that there was a “transfer” would not be a material factor in deciding the year of taxation. At the same time, the deferment of receipt may not be the sole factor for delaying the taxation where the enforceability of realisation is reasonably certain’.

Pradip Kapasi further cautions, ‘The provisions of section 43CA may play a spoilsport by introducing a deeming fiction for quantifying the revenue receipts.’ He has an additional word of advice. He suggests the preference of variable consideration models like gross revenue sharing, profit sharing or area sharing over the fixed consideration model. To quote him, ‘The case of the landlord here to defer the year of taxation could be better unless an income can be said to have accrued as per section 28 r/w/s 145, ICDS, where applicable, and Guidance Note of 2012’.

As usual, he has a few words of caution: firstly, ‘There is a possibility that the development rights held by the landlord are considered as a capital asset within the meaning of section 2(14) by treating such rights as a sub-specie of the land owned by him. In such case, a challenge may arise on the income-tax front where transfer of such
rights to the developer is subjected to taxation in the year of transfer itself. This possibility, however remote, could not be ignored though the better view is that even this sub-specie is a part of this stock-in–trade’; and secondly, ‘The possibility of treating the association with the developer as an AOP is not altogether ruled out especially in view of the amendment of 2002 for insertion of Explanation of section 2(31) dealing with the definition of “person” w.e.f. 1st April, 2002. In such an event, though remote, issues can arise in application of the provisions of section 45 to 55, particularly of sections 45(2), 45(3), 50C and 50D.’ Again, a plethora of sections to study and analyse. Well, that’s for the homework of the readers.

What happens on the GST front if the landowner is a businessman? Sunil Gabhawalla reiterates, ‘Sit back and relax if the development agreement is entered into after 1st April, 2019’. But what happens in cases where the development agreement is prior to that date? ‘I’m afraid, definitive answers are elusive. Whether transfer of development rights is liable for GST or not is itself a subject matter of debate. The issues of valuation and the timing of payment of tax are also not settled. We may need a separate article to deal with this,’ he adds.

Is Development Management Agreement a panacea for the landowner?
The concept of Development Management Agreement (DMA) has already been explained earlier. A quick sum and substance recap of the transaction structure would help us appreciate that the appointment of a development manager by the landowner vide a DMA would tantamount to the landowner donning the hat of a real estate developer and the development manager acting as a mere service provider. It will effectively mean that the landowner is the real estate developer who is developing a real estate project in his own land parcel. While this model offers significant respite in the GST outflow on development rights and also avoids the stretched interpretation of barter and consequent GST on free units allotted to existing members for self-consumption (remember, a redevelopment agreement entered into by a co-operative society is a sub-specie of a development agreement), it also helps the landowner in deferring the income-tax liability to a subsequent stage due to his becoming a businessman.

In the words of Pradip Kapasi, ‘In this case, the appointment of a Development Consultant under a DMA would itself be treated as a business decision in most of the cases. The appointment would signal the undertaking of an enterprise by the landlord on a systematic and continuous basis, constituting a business. Such an appointment would not be regarded as a “transfer” of capital asset and no capital gains tax would be payable on account of such an appointment. The first effect of such a decision would be to invite the application of section 45(2) providing for conversion or treatment of a capital asset into stock-in-trade and as a consequence lead to computation of capital gains that would be chargeable in the year of transfer of the stock-in-trade being developed. The market value of the land on such happening would be treated as the cost of the stock-in-trade and the rest would be governed by the computation of Profits and Gains of Business and Profession r/w/s 145, ICDS and Guidance Note’.

But is all hunky-dory as far as GST is concerned? Sunil Gabhawalla cautions, ‘While there is a respite in taxation for the landowner, it may be important to note that the developer relegates himself to the position of a contractor rather than a developer. This would disentitle him from claiming the concessional tax rate of 5% for developers and instead he would be liable for the general tax rate of 18% on the value of the services provided by him. However, this higher rate of tax comes with the eligibility towards claiming input tax credit.’

Developer’s perspective
Well, that was a lot of discussion from the point of view of the landowner. What happens at the developer’s end? Pradip Kapasi has a very simple and affirmative answer on this front. ‘The payment agreed to be made towards the development rights / land acquisition to the landowner would constitute a business expenditure that will be allowed to be deducted against the sale proceeds of the developed area, and if not sold by the yearend, would form the stock-in-trade and would be reflected in the books of accounts as its carrying cost’.

But what happens if the payment towards the development rights is deferred like in gross revenue sharing arrangements? ‘The net receipts subject to his method of accounting would be taxed in respective years of sale and / or realisation. The carrying cost of the stock would be represented by the amount of direct expenditure incurred by him excluding the notional cost of acquiring DR. In the alternative, the payment to be made to the landlord would constitute a business expenditure that will be allowed to be deducted against the gross sale proceeds, and if remaining to be sold by the yearend, would form part of the stock-in-trade and would be reflected in the books of accounts as its carrying cost’, says Pradip Kapasi.

In case of profit-sharing arrangements, however, he cautions about the risk of constitution of an AOP and the associated perils of sections 67B, 86 and 110. He is also afraid that the land cost may not be available as a deduction to the AOP. How does one deal with area-sharing agreements? Pradip Kapasi responds, ‘The net receipts of the balance area coming to the share of the developer would be taxed in respective years of sale and / or realisation where the cost of construction of all the flats would be allowed to be deducted as business expenditure. The carrying cost of the stock could be represented by the amount of direct expenditure incurred by him excluding the notional cost of acquiring DR. In the alternative, the payment to be made to the landlord in kind would constitute a business expenditure that will be allowed to be deducted against the gross sale proceeds, and if remaining unsold by the yearend, would form a part of the stock-in-trade and would be reflected in the books of accounts as its carrying cost.’

The clear essence of the above discussion is that the accounting treatment is important. But depending on certain criteria, enterprises are required to follow either IGAAP or Ind AS. Let us check out what Sudhir Soni has to say. ‘While there is very limited guidance available under IGAAP for accounting of joint development agreements, the cost that is incurred by the developer towards construction of the entire project is treated as cost towards earning the revenue from sale to the developer’s customers. Accordingly, in case of area share for landowner there is no separate accounting and in case of revenue share to landowner it is accounted through the balance sheet. Elaborate guidance is, however, available under Ind AS 115’.

He adds, ‘The JDA is a contract for specific performance and does not have a cancellation clause. For projects executed through joint development arrangements, it is evaluated that the arrangement with land owners are contracts with customers. The transaction is treated as if the developer is buying land from the landowner and selling the constructed area to the landowner. This results in a “grossing” of revenue and land cost, which is a difference from the accounting under Indian GAAP.’ Whether such a difference in accounting treatment will have any ramifications under the income-tax or GST law, only time will tell.

Having treated the transaction as a barter, there comes the issue of accounting for such a transaction. Sudhir Soni says, ‘For real estate projects executed through JDA not being jointly controlled operations, wherein the landowner provides land and the developer undertakes the development work on such land and agrees to transfer certain percentage of constructed area / revenue proceeds to the landowner, the revenue from the development and transfer of agreed share of constructed area / revenue proceeds in exchange of such development rights / land is accounted on gross basis. Revenue is recognised over time (JDA being specific performance arrangements) using input method, on the basis of the inputs to the satisfaction of a performance obligation relative to the total expected inputs to the satisfaction of that performance obligation. The gross accounting at fair value for asset in form of land inventory (subsequently recognised as land cost over time basis stage of project completion) and the corresponding liability to the landowner (subsequently recognised as revenue over time basis stage of project completion) may be accounted on signing of JDA, but in practice the accounting is done on the launch of the project, considering the time gap between the signing of the JDA and the actual launch of the project. The developer’s commitments under the JDA, which is executed and pending completion of its performance obligation, are disclosed in the financial statements.’

Further, ‘For real estate projects executed through a JDA being jointly controlled operations, which provide for joint control to the contracting parties for the relevant activities, the respective parties would be required to account for the assets, liabilities, revenues and expenses relating to their interest in such jointly controlled JDA.’

Now comes the next accounting issue of measurement of fair value for such a barter. Sudhir Soni says, ‘The fair value for the gross accounting of JDA is the market value of land received by the developer or based on the standalone selling price of the share of constructed property given by the developer. In case the same cannot be obtained reliably, the fair value is then measured at the fair value of construction services provided by the developer to the landowner’. Well, but the valuation provisions under GST are different. Sunil Gabhawalla agrees and says that each domain will have to be independently respected.

The bottom line, it seems, is that the direct tax consequences for the developer will closely follow the generally accepted accounting principles for determination of net profit for a year. But are things equally simple in GST? Not really. Sunil Gabhawalla shares his inputs. ‘Unless the developer in essence constitutes a contractor, all new residential projects attract 5% GST on the sale proceeds of the units sold while under construction. Even area allotted to the landowner attracts this 5% GST on the equivalent market value of the units allotted to the landowner. Affordable housing projects enjoy a concessional tax rate of 1%. However, no input tax credit is available to the developer’.

But wait a minute! This is not all. A plethora of reverse charge mechanism Notifications require the developer to pay tax on the expenses incurred by him. For example, the proportionate value of the development rights acquired by him from the landowner is liable to GST in the hands of the developer at the time of receipt of the occupation certificate. As Sunil Gabhawalla adds, ‘It may make sense for the developer to procure goods and services from registered dealers only since another Notification requires the developer to pay GST on reverse charge if the procurement from unregistered dealers exceeds 20%. Notably, no tolerance limit has been provided for procurement of cement, where reverse charge mechanism triggers from the first rupee of procurement from unregistered dealers.’

Summing up
This article was an attempt to apprise the readers of the nuances of this complex topic. All experts agreed that the tax efficiencies of each structure over the other would be determined largely by the available circumstances and the needs of the parties. No structure, in such an understanding, is superior to other structures, nor inferior to any.

shailesh.kwebmaker

PREMIUM RECEIVED BY LANDLORD ON TRANSFER OF TENANCY RIGHTS – CAPITAL OR REVENUE?

ISSUE FOR DISCUSSION

A person acquiring the right to use an immovable property on a month-to-month basis without acquiring the ownership right is known as the tenant and the person continuing to be the owner of the property is known as the landlord. The monthly compensation paid for the use of the property is known as the rent. Various States in India have tenancy laws, whereby tenants are protected from eviction by the landlord from premises in which they are tenants. The rights so acquired by the person to use the property are known as tenancy rights. These rights may be acquired for a consideration known as salami or premium, though many States prohibit payment of such consideration.

On the other hand, many States permit the transfer of tenancy rights by the tenant for a consideration with the consent of the landlord, who may consent to the transfer on receipt of a payment or even without it. These tenancy rights are recognised by the tax laws as capital assets of the tenant and accordingly the gains if any on their transfer are taxed under the head capital gains. Section 55 provides that the cost of acquisition of the tenancy is to be taken as Nil unless paid for, in which case the cost would be the one that is paid for acquiring the tenancy. Tenancy rights when acquired for a fixed period under a written instrument are known as leasehold rights. Acquisition of a license to use the property, although similar to lease or tenancy, is not the same.

An interesting issue has arisen as to the manner of taxation of the receipt by the landlord for consenting to such transfer of tenancy – whether it is capital in nature and therefore not taxable or taxable as capital gains, or whether it is revenue in nature and taxable as income. There have been conflicting decisions of the Mumbai Bench of the Tribunal on this issue. The taxation of such receipt under the provisions of section 56(2)(x) is another aspect that requires consideration.

THE VINOD V. CHHAPIA CASE
The issue came up before the Mumbai Bench of the Tribunal in the case of Vinod V. Chhapia vs. ITO (2013) 31 taxmann.com 415.

In this case, the assessee was a HUF which owned an immovable property. Part of the property was let out to a tenant since 1962 and part of the property was occupied by the members of the HUF. The tenant expired in 1986 and the tenancy rights were inherited by her daughter.

A tripartite agreement was entered into between the daughter, new tenants and the landlord for surrender of tenancy by the daughter and grant of tenancy by the landlord in favour of the new tenants. The daughter surrendered her tenancy rights in favour of the landlord to facilitate renting of the property to the new tenants. The incoming tenants paid an amount of Rs. 14.74 lakhs to the daughter and an amount of Rs. 7.26 lakhs to the assessee-landlord simultaneously. The assessee accepted the surrender of tenancy rights and possession of the property and received the amount from the new tenants as consideration for granting the new tenants monthly tenancy of the flat.

The assessee invested the amount of Rs. 7.26 lakhs in bonds issued by NABARD, treated the amount received from the new tenants as capital gains and claimed exemption u/s 54EC.

During assessment proceedings, the assessee claimed that the amount was received towards surrender of a right, which was part of the bundle of rights owned by the assessee in respect of the property. The assessee claimed that the receipt of the consideration of Rs. 7.26 lakhs was for the extinguishment of the rights and therefore was capital gains eligible for exemption u/s 54EC. Various decisions were cited by the assessee in support of the proposition that the amount received on surrender of tenancy rights was a capital receipt, which was taxable under the head ‘capital gains’.

But the A.O. brought out the distinction between transfer of tenancy rights vis-à-vis surrender of tenancy rights. According to him, the receipt by the landlord was for consenting to a transfer of the right of residence by the existing tenant to the new tenants. He sought to support this view by the fact of payment of consideration by the new tenants to both the original tenant and the landlord. The A.O. distinguished the judgments cited before him, since all of those related to surrender of tenancy rights.

According to the A.O., the outgoing tenant (the daughter) surrendered (transferred) the tenancy rights in favour of the new tenants and not to the assessee-landlord. He held that the amount of Rs. 7.26 lakhs was received by him from the new tenants for consenting to the transfer of tenancy to the new tenants, and not for surrender of tenancy, and was therefore not a capital receipt. The A.O. therefore taxed the amount of Rs. 7.26 lakhs as income of the assessee under the head ‘income from other sources’, rejecting the claim of exemption u/s 54EC.

Before the Commissioner (Appeals), the assessee submitted that consent of the landlord was mandatory for the new tenants to enjoy the right of residence. Thus, by consenting, the assessee gave up (transferred) some of the rights out of the bundle of rights attached to the said property, a capital asset. Reliance was placed on the Supreme Court decision in the case of CIT vs. D.P. Sandu Bros. Chembur (P) Ltd. 273 ITR 1 and on the Bombay High Court decision in the case of Cadell Weaving Mill Co. (P) Limited vs. CIT 249 ITR 265, for the proposition that the amount received on surrender of tenancy rights is a capital receipt taxable under the head ‘capital gains’, and not ‘income from other sources’.

The Commissioner (Appeals) rejected the appeal, confirming the order of the A.O. and held that the assessee continued to hold the ownership rights even after the new tenants entered the house and that the outgoing tenant transferred the tenancy rights to the new tenants. The assessee merely gave its consent for such transfer, for which it received the sum of Rs. 7.26 lakhs which could not be termed as a receipt for surrender of tenancy rights. Had it amounted to a surrender of tenancy rights in favour of the landlord, the consideration would have been paid by the landlord to the outgoing tenant. Therefore, it was a case of encashment of the power of consent for transfer of the tenancy rights to the new tenants. The Commissioner (Appeals) next observed that if the new tenants further transferred the property to some other tenant, the assessee would be entitled to receive a similar amount and the ownership rights of the property would continue to vest with the assessee.

Before the Tribunal, on behalf of the assessee it was submitted that the rights attached to an immovable property constituted a bundle of rights. Exploitation of these rights gives rise to capital gains. Without the surrender of tenancy rights by the original tenant to the assessee, the assessee could not have consented to the transfer of residence in favour of the new tenant. Therefore the consideration received by the assessee was for surrender of tenancy rights, which was a capital receipt, taxable as capital gains.

Attention was drawn by the assessee to the tripartite agreement between the assessee, the original tenant and the new tenants, which mentioned that the original tenant was the sole owner of the tenancy rights and she surrendered the flat to the landlord including the tenancy rights.

On behalf of the Revenue it was argued that normally in the case of surrender of tenancy rights the tenant would receive the consideration from the landlord for surrender of the same. In the case before the Tribunal, the landlord did not pay the consideration to the original tenant, but it was the new tenants who paid the consideration to the original tenant. Further, the assessee continued to hold the right of ownership of the property and tenancy rights were transferred from the old tenant to the new tenants. It was therefore submitted that the amount was rightly taxed as ‘income from other sources.’

The Tribunal noted that all the decisions cited before it, whether by the assessee or by the Revenue, were in the context of undisputed surrender of tenancy rights and were therefore distinguishable on facts. Analysing the facts of the case, the Tribunal was of the view that the consideration paid by the new tenants was for consent of the landlord for the transfer of tenancy rights between the new and old tenants and the amount of Rs. 7.26 lakhs was the consideration for consent. According to the Tribunal, generally in matters of tenancy rights disputes it is the tenant who gets the financial benefit, which flows from the pockets of the landlord in lieu of surrender of the tenancy rights by the tenant, and the landlord does not receive any amount. Therefore, according to the Tribunal, the settled law relating to taxation of a receipt on surrender of tenancy rights would not apply in the case before it.

The Tribunal also examined whether the assessee actually received all the rights over the property, including the tenancy rights. It noted the clause in the agreement which indicated that the existing tenant surrendered the tenancy rights along with the property to the assessee. It questioned the need for the existing tenant to be a signatory to the agreement giving the property on monthly rent to the new tenants and the need for a tripartite agreement. According to the Tribunal, letting of the property to the new tenant was a matter of agreement between the landlord and the new tenant.

Noting that the monthly rental and rental advance were nominal, the Tribunal was of the view that the sum of Rs. 7.26 lakhs paid to the landlord by the new tenant was consideration for the consent. As per the Tribunal, the receipt was for the consent for transfer by the old tenant to the new tenants, for a consideration of Rs. 14.48 lakhs and there was a need for the consent of the landlord. The Tribunal accordingly held that there was no transfer of any capital asset by the landlord to the new tenants and that the sum of Rs. 7.26 lakhs was neither a capital receipt nor a rental receipt.

The Tribunal also noted that there was no time gap between the vacation of the property by the old tenant and grant of rental rights to the new tenants. There was continuity of renting of the property and there was no evidence to infer that the house was in the vacant possession of the assessee even after the alleged end of the tenancy of the old tenant. Therefore, the assessee never got the property in vacant condition. Hence the Tribunal held that the amount received was consideration for consent, it did not involve any transfer of capital rights attached to the property, and it constituted a windfall gain to the assessee, which was taxable under the head ‘income from other sources’.

NEW PIECE GOODS BAZAR CO. LTD. CASE
The issue again came up before the Mumbai Bench of the Tribunal in the case of Jt. CIT vs. New Piece Goods Bazar Co. Ltd., ITA No. 6983/Mum/2012 dated 25th May, 2016.

In this case, the assessee was the owner of several shops in the cloth market which were given on rent to different tenants. Every year, some tenants transferred the possession of shops to new tenants, with the consent of the assessee, who was the owner of the shops. In consideration of giving its consent to the transfer of possession of the shops from old tenants to the new tenants, the assessee was receiving a certain premium from the old tenants.

Earlier, the receipt of premium by the assessee was shown as income under the head ‘capital gains’. During the relevant year also, certain old tenants transferred their possessory rights of the rental shops to the new tenants with the consent of the assessee. In consideration of giving consent for such transfer of possessory rights, the assessee received a premium of Rs. 1,15,50,000 from the old tenants. The assessee treated such amount as income from ‘capital gains’ and claimed exemption from taxation of a part thereof u/s 54EC.

The A.O. held that the assessee was the owner of the shops, the old tenants had transferred the tenancy rights in favour of the new tenants along with rights of possession and the assessee remained the owner of the shops as before. Consequently, there was no transfer of the capital assets, being shops, as even after the transfer of tenancy rights the assessee continued to remain the owner of the shops. According to the A.O., while the transfer of tenancy rights indisputably resulted in capital gains, such capital gains would be taxable in the hands of the outgoing tenants and could not be taxed as the capital gains of the assessee. The A.O. therefore held that the amount received by the assessee as premium was taxable in the hands of the assessee as ‘income from other sources’ and not as ‘capital gains’, and that the assessee was therefore not entitled to exemption u/s 54EC.

In an appeal before the Commissioner (Appeals), the assessee submitted that in earlier and subsequent years also, a similar amount was offered to tax as capital gains and was accepted by the Income-tax Department. It was further argued that tenancy rights was undoubtedly a capital asset under the law and therefore any gains arising from the transfer of such rights had to be assessed under the head ‘capital gains’.

The Commissioner (Appeals) noted that a right was a bundle of benefits embedded in some asset or independent thereof. Capital asset meant property of any kind held by an assessee. Therefore, a right, whether or not attached to any asset, was also a property. The old tenant could transfer the possessory rights of the shops only with the consent of the landlord. According to the Commissioner (Appeals), such right of consent was a property in the hands of the assessee. Since that right or property was connected to the capital asset, i.e., shops, therefore such a right of consent was also a capital asset in the hands of the assessee which was more or less similar to a tenancy right, which was also a capital asset.

The Commissioner (Appeals) therefore held that on giving consent to change in the possession of rented premises from an old tenant to a new tenant, there was a transfer of capital asset. He, therefore, held that such receipt was liable to tax as capital gains and the assessee was entitled to exemption u/s 54EC.

On appeal by the Revenue, the Tribunal expressed its agreement with the observations of the Commissioner (Appeals) that the assessee acquired a bundle of rights (ownership) with respect to the shops. These rights included, inter alia, the right of grant of tenancy. The term ‘capital asset’ was defined in the widest possible manner in section 2(14) and had been curtailed only to the extent of exclusions given in the said section, including stock-in-trade and personal effects. The asset under consideration clearly did not fall within the above exclusions. The bundle of rights acquired by the assessee was undoubtedly valuable in terms of money.

On the above reasoning, the Tribunal held that the tenancy rights formed part of a capital asset in the hands of the assessee and therefore any gains arising therefrom would be assessable under the head ‘capital gains’, eligible for deduction u/s 54EC.

In Sujaysingh P. Bobade (HUF) vs. ITO (2016) 158 ITD 125 (Mum) a similar view was taken that the amount received by the landlord was a capital receipt, subject to tax as capital gains. However, in that case the appeal was against an order of revision passed u/s 263 and the landlord had received the amount from the new tenants for allotment of tenancy rights under tenancy agreements.

A similar view has also been taken by the Tribunal in the case of ITO vs. Dr. Vasant J. Rath Trust, ITA No. 844/Mum/2014 dated 29th February, 2016 wherein the old tenants had surrendered their tenancy rights to the landlord without receiving any consideration and the landlord directly entered into tenancy agreements with the six new tenants on receipt of consideration for grant of tenancy rights.

OBSERVATIONS
Any property, especially immovable property, comprises of a bundle of rights where each such right is a capital asset capable of being transferred by the owner for an independent consideration to different persons. Ownership of the land and / or building is the classic case of owning such a bundle of rights. The right to grant tenancy flows from such a bundle. The Supreme Court in the case of A.R. Krishnamurthy, 176 ITR 417, in the context of the ownership of a mine, held that the mining rights were a part of the mine and were capable of being held as an independent asset and therefore of being transferred independent of the ownership of the mine. It held that the grant of the lease to mine the asset or the mining rights resulted in the transfer of a capital asset, negating the case of the assessee that there was no transfer of capital asset on grant of the mining rights where the ownership of the mine continued with the assessee. The court also rejected the contention that there was no cost of acquisition of such rights or the cost could not be attributed to such rights.

Receipt of a salami or premium by a landlord from a tenant for grant of tenancy rights in an immovable property owned by him is a capital receipt and not a revenue receipt [Durga Das Khanna vs. CIT 72 ITR 796 followed by the Bombay and the Calcutta High Courts in CIT vs. Ratilal Tarachand Mehta 110 ITR 71 and CIT vs. Anderson Wright & Co. 200 ITR 596, respectively]. The Courts held that unless such a receipt is proved to be in the nature of rent or advance rent, it could not be taxed under the Act as revenue income.

The Supreme Court, in the case of CIT vs. Panbari Tea Co. Ltd. 57 ITR 422 held that a premium received on parting with the lessor’s interest was a capital receipt and the rent receipt was revenue in nature:

‘When the interest of the lessor is parted with for a price, the price paid is premium or salami. But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital income and the latter a revenue receipt. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology. In some cases, the so-called premium is in fact advance rent and in others rent is deferred price. It is not the form but the substance of the transaction that matters. The nomenclature used may not be decisive or conclusive but it helps the court, having regard to the other circumstances, to ascertain the intention of the parties.’

The amount received for giving consent is certainly not an advance rent. Can the giving of a consent in relation to user of a capital asset amount to a revenue receipt, even where it is assumed, though not right, that there is no transfer of the capital asset itself (in this case, tenancy rights) by the landlord? The character of a receipt depends upon its relation with the capital asset. For a receipt to be considered as income, it should be a receipt that is of revenue in nature. Normally, the amount received for use of an asset, such as rent, is revenue in nature and is income. However, that logic may not apply to all receipts in relation to a capital asset. Again, for a receipt to be a capital receipt it is not necessary that there should be a transfer of a capital asset or a diminution in value of a capital asset. Transfer of a capital asset is only necessary in order to subject a capital receipt to tax as capital gains.

When a landlord gives his consent for transfer of a tenancy, in substance, he is consenting to grant of the possessory rights to a new tenant. Therefore, he is giving up his possessory rights over the premises in favour of a new tenant. This can be viewed as a right in respect of the premises being agreed to be foregone for the future as well.

Another way of examining the matter is whether the receipt is in relation to a capital asset. The right to consent to a new tenant is also a right associated with the ownership of the immovable property. It is therefore part of the bundle of rights which constitute the immovable property. The exercise of such right in favour of the incoming tenant amounts to exercise of a capital right, the compensation for which would necessarily be capital in nature.

Therefore, the better view of the matter is that the premium received by the landlord for according his consent to transfer of tenancy rights is a capital receipt, subject at best to capital gains tax, and is not a revenue income.

The connected important issue is whether there is any cost of acquiring / holding such a right in the hands of the landlord. Can a part of the cost of acquiring the immovable property be attributed to the cost of the tenancy rights and be claimed and allowed as deduction in computing the capital gains? In our considered opinion, yes, such cost though difficult to ascertain is not an impossible task and should be determined on commercial consideration and be allowed in computing the capital gains arising on grant of the consent to transfer the tenancy rights or for creation of such rights.

Once it is held that the receipt is in the nature of a capital receipt that is liable to tax in the hands of the landlord under the head capital gains, the question of applicability of section 56(2)(x) should not arise. In any case, the receipt, in our opinion, is for a lawful consideration and cannot be subjected to the provisions of this provision that should not have had any place in the Income-tax Act.

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Vivad se Vishwas sections 2(1)(o) and 9(a)(ii) – Prosecution – Pending prosecution for assessment year in question on an issue unrelated to tax arrears – Holding that an assessee would not be eligible to file a declaration would defeat very purport and object of Vivad se Vishwas Act – Question No. 73 vide Circular No. 21/2020 dated 4th December, 2020 is not in consonance with section 9(a)(ii) of Vivad se Vishwas Act

3 Macrotech Developers Ltd. vs. Pr. Commissioner of Income Tax [Writ Appeal No. 79 of 2021, date of order: 25th March, 2021 (Bombay High Court)]

Vivad se Vishwas sections 2(1)(o) and 9(a)(ii) – Prosecution – Pending prosecution for assessment year in question on an issue unrelated to tax arrears – Holding that an assessee would not be eligible to file a declaration would defeat very purport and object of Vivad se Vishwas Act – Question No. 73 vide Circular No. 21/2020 dated 4th December, 2020 is not in consonance with section 9(a)(ii) of Vivad se Vishwas Act

The assessee is a public limited company engaged in the business of land development and construction of real estate properties. Initially, Shreeniwas Cotton Mills Private Limited (‘Cotton Mills’ for short) was a subsidiary of the assessee company. Subsequently, it was merged with the assessee company on the strength of the amalgamation scheme sanctioned vide order dated 7th June, 2019 passed by the National Company Law Tribunal, Mumbai Bench. The merger had taken place with effect from 1st April, 2018. However, the pending tax demand against the cotton mills under the Act continued in the name of the cotton mills since migration of the permanent account number of the cotton mills to the permanent account number of the assessee company had not taken place. Therefore, it is pleaded that the tax demand of the cotton mills should be construed to be that of the assessee company and reference to the assessee company would mean and include the assessee company as well as the cotton mills.

For the A.Y. 2015-16, the assessee had filed return of income u/s 139(1) disclosing total income of Rs. 2,05,71,01,650. The self-assessment income tax payable on the returned income as per section 115JB was Rs. 69,92,08,851. At the time of filing of the return, an amount of Rs. 27,34,77,755 was shown to have been paid by way of tax deducted at source. The balance of the self-assessment tax of Rs. 42,57,31,096 (Rs.69,92,08,851 less Rs. 27,34,77,755) with interest thereon under sections 234A, 234B and 234C aggregating to Rs. 12,36,74,855 (totalling Rs. 54,94,05,951) was paid by the assessee after the due date for filing of the return.

The Pr. CIT issued notice to the assessee on 19th September, 2017 to show cause as to why prosecution should not be initiated against it u/s 276-C(2) for alleged wilful attempt to evade tax on account of delayed payment of the balance amount of the self-assessment tax. The assessee in its reply denying the allegations, made a request to the Pr. CIT to withdraw the show cause notice. The assessee did not apply for compounding u/s 279(2).

In the meanwhile, on 17th December, 2017, the A.O. passed the assessment order for the A.Y. 2015-16 u/s 143(3). In this order, he disallowed certain expenses claimed by the assessee towards workmen’s compensation and other related expenses. After disallowing such claim, the A.O. computed the tax liability of the assessee at Rs. 61.75 crores, inclusive of interest.

When the aforesaid assessment order was challenged by the assessee, the Commissioner (Appeals) dismissed it and upheld the assessment order vide order dated 27th December, 2018.

Aggrieved by this order, the assessee preferred further appeal before the ITAT which is pending before the Tribunal for final hearing.

While the appeal of the assessee was pending before the Tribunal, the Central Government enacted the Direct Tax Vivad se Vishwas Act, 2020 which came into force on and from 17th March, 2020. The primary objective of this Act is to reduce pending tax litigations pertaining to direct taxes and in the process grant considerable relief to the eligible declarants while at the same time generating substantial revenue for the Government.

Circular No. 9 of 2020 dated 22nd April, 2020 was issued whereby certain clarifications were given in the form of questions and answers. The Central Government vide a Notification dated 18th March, 2020 has made the Vivad se Vishwas Rules.

With a view to settling the pending tax demand, the assessee submitted a declaration in terms of the Vivad se Vishwas Act on 23rd September, 2020 in the name of the cotton mills in respect of the tax dues for the A.Y. 2015-16 which is the subject matter of the appeal pending before the Tribunal.

While the assessee’s declaration dated 23rd September, 2020 was pending, it came to know that the Pr. CIT had passed an order on 3rd May, 2019 authorising the Joint Commissioner of Tax (OSD) to initiate criminal prosecution against the cotton mills and its directors by filing a complaint before the competent magistrate in respect of the delayed payment of self-assessment tax for the A.Y. 2015-16. On the basis of such sanction, the Income-tax Department filed a criminal complaint under section 276-C(2) r/w/s 278B before the 38th Metropolitan Magistrate’s Court at Ballard Pier. However, no progress has taken place in the said criminal case.

The impugned Circular No. 21/2020 dated 4th December, 2020 was issued giving further clarifications in respect of the Vivad se Vishwas Act. Question No. 73 contained therein is: when in the case of a taxpayer prosecution has been initiated for the A.Y. 2012-13 with respect to an issue which is not in appeal, would he be eligible to file declaration for issues which are in appeal for the said assessment year and in respect of which prosecution has not been launched? The answer given to this is that ineligibility to file declaration relates to an assessment year in respect of which prosecution has been instituted on or before the date of declaration. Since for the A.Y. 2012-13 prosecution has already been instituted, the taxpayer would not be eligible to file a declaration for the said assessment year even on issues not relating to prosecution.

It is the grievance of the assessee company that on the basis of the answer given to Question No. 73 its declaration would be rejected since the declaration pertains to the A.Y. 2015-16 and prosecution has been launched against it for delayed payment of self-assessment tax for the A.Y. 2015-16. It is in this context that the assessee approached the High Court by a writ petition seeking the reliefs as indicated above.

The High Court held that the exclusion referred to in section 9(a)(ii) is in respect of tax arrears relating to an assessment year in respect of which prosecution has been instituted on or before the date of filing of declaration. Thus, what section 9(a)(ii) postulates is that the provisions of the Vivad se Vishwas Act would not apply in respect of tax arrears relating to an assessment year in respect of which prosecution has been instituted on or before the date of filing of declaration. Therefore, the prosecution must be in respect of tax arrears relating to an A.Y. The Court was of the view that there is no ambiguity insofar as the intent of the provision is concerned and a statute must be construed according to the intention of the Legislature and that the Courts should act upon the true intention of the Legislature while applying and interpreting the law. Therefore, what section 9(a)(ii) stipulates is that the provisions of the Vivad se Vishwas Act shall not apply in the case of a declarant in whose case a prosecution has been instituted in respect of tax arrears relating to an assessment year on or before the date of filing of declaration. The prosecution has to be in respect of tax arrears which naturally is relatable to an assessment year.

The Court observed that a look at clauses (b) to (e) of section (9) shows that there is a clear demarcation in section 9 of the Act inasmuch as the exclusions provided under clause (a) are in respect of tax arrears, whereas in clauses (b) to (e) the thrust is on the person who is either in detention or facing prosecution under the special enactments mentioned therein. Therefore, if we read clauses (b) to (e) of section 9, it would be apparent that such categories of persons would not be eligible to file a declaration under the Vivad se Vishwas Act in view of their exclusion in terms of section 9(b) to (e).

Apart from this, the Court observed that under the scheme of the Act and the purpose of the Rules as a whole, the basic thrust is on settlement in respect of tax arrears. Under section 9 certain categories of assessees are excluded from availing the benefit of the Vivad se Vishwas Act. While those persons who are facing prosecution under serious charges or those who are in detention as mentioned in clauses (b) to (e) are excluded, the exclusion under clause (a) is in respect of tax arrears which is further circumscribed by sub-clause (ii) to the extent that if prosecution has been instituted in respect of tax arrears of the declarant relating to an A.Y. on or before the date of filing of declaration, he would not be entitled to apply under the Vivad se Vishwas Act. Now, tax arrears has a definite connotation under the Vivad se Vishwas Act in terms of section 2(1)(o) which has to be read together with sections 2(f) to 2(j).

Further, the High Court held that to say that the ineligibility u/s 9(a)(ii) relates to an assessment year and if for that assessment year a prosecution has been instituted, then the taxpayer would not be eligible to file declaration for the said A.Y. even on issues not relating to prosecution, would not only be illogical and irrational but would be in complete deviation from section 9(a)(ii) of the Act. Such an interpretation would do violence to the plain language of the statute and, therefore, cannot be accepted. On a literal interpretation or by adopting a purposive interpretation of section 9(a)(ii), the only exclusion visualised under the said provision is pendency of a prosecution in respect of tax arrears relatable to an assessment year as on the date of filing of declaration and not pendency of a prosecution in respect of an A.Y. on any issue. The debarment must be in respect of the tax arrears as defined u/s 2(1)(o) of the Vivad se Vishwas Act. Therefore, to hold that an assessee would not be eligible to file a declaration because there is a pending prosecution for the A.Y. in question on an issue unrelated to tax arrears would defeat the very purport and object of the Act. Such an interpretation which abridges the scope of settlement as contemplated under the Act cannot, therefore, be accepted.

Insofar as the prosecution against the petitioner is concerned, the same has been initiated u/s 276C(2) because of the delayed payment of the balance amount of the self-assessment tax. Such delayed payment cannot be construed to be a tax arrear within the meaning of section 2(1)(o). Therefore, such a prosecution cannot be said to be in respect of tax arrears. Since such a prosecution is pending which is relatable to the A.Y, 2015-16, it would be in complete defiance of logic to debar the petitioner from filing a declaration for settlement of tax arrears for the said A.Y. which is pending in appeal before the Tribunal.

Considering the above, the clarification given by way of answer to Question No. 73 vide Circular No. 21/2020 dated 4th December, 2020 is not in consonance with section 9(a)(ii) of the Vivad se Vishwas Act and, therefore, the same would stand to be set aside and quashed. The declaration of the petitioner dated 23rd September, 2020 was directed to be decided by the Pr. CIT in conformity with the provisions of the Vivad se Vishwas Act dehors the answer given to Question No. 73 which was set aside and quashed. The writ petition was allowed.

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Business expenditure – Section 37(1) of ITA, 1961 – Where assessee company, engaged in business of construction and sale of residential and commercial building complexes, sold a building which was under construction at time of sale and incurred expenditure for completing its construction during financial year subsequent to sale of building, such expenditure was liable for deduction u/s 37(1)

17. CIT vs. Oberon Edifices & Estates (P) Ltd.; [2019] 110 taxmann.com 305 (Ker.) Date of order: 5th September, 2019 A.Y.: 2009-10

Business expenditure – Section 37(1) of ITA, 1961 – Where assessee company, engaged in business of construction and sale of residential and commercial building complexes, sold a building which was under construction at time of sale and incurred expenditure for completing its construction during financial year subsequent to sale of building, such expenditure was liable for deduction u/s 37(1)

The assessee was a company engaged in the business of construction and sale of residential and commercial building complexes. During the A.Y. 2009-10 the assessee sold a portion of the mall building being constructed by it. The construction of the building was not complete at that time. The assessee incurred expenditure during the financial years 2009-10 and 2010-11 for completing the construction and claimed it as deduction. The AO disallowed the same.

The Commissioner (Appeals) held that in a situation where at the time of assessment the building remains incomplete, estimated future expenditure to be incurred was also considered along with the expenditure already incurred and was taken as cost relatable to the total saleable area, i.e., saleable area already built and the saleable area to be built in future, for arriving at the estimated cost of construction per square foot (sq. ft.). Therefore, the contentions of the assessee were accepted and it was held that the AO was not justified in not taking the value of building work-in-progress during the financial years 2009-10 and 2010-11 for working out the cost per sq. ft.

It was directed that the cost per sq. ft. would be taken as total expenditure incurred in construction, divided by the total saleable area, for the purpose of working out the profit from the sale of commercial area. The Tribunal upheld the decision of the Commissioner (Appeals).

The Revenue filed an appeal before the High Court and contended that the claim for deduction of future expenses made by the assessee could not be allowed. It contended that there was a distinction between the amount spent to pay off an actual liability and a liability that would be incurred in future which was only contingent. It was contended that the former was deductible but not the latter.

The Kerala High Court upheld the decision of the Tribunal and held as under:

‘(i) The dispute raised by the Revenue is only with regard to the deduction claimed by the assessee in respect of the expenses incurred in future, that is, after the sale of the building, during the subsequent financial years, and not in respect of the expenses incurred by it during the relevant financial year. Section 37 is a residuary section for allowability of business expenditure.

(ii) The expression “profits and gains” has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted therefrom –whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date. The profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts. It is the meaning of the word “profits” in relation to any trade or business. Whether there be such a thing as profit or gain can only be ascertained by setting against the receipts the expenditure or obligations to which they have given rise.

(iii) “Expenditure” is not necessarily confined to the money which has been actually paid out and it covers a liability which has accrued or which has been incurred although it may have to be discharged at a future date. However, a contingent liability which may have to be discharged in future cannot be considered as expenditure. It also covers a liability which the assessee has incurred in praesenti although it is payable in futuro.

(iv) In order to claim deduction of business expenditure, it is not necessary that the amount has been actually paid or expended during the relevant accounting year itself and it is sufficient that the liability for payment had incurred or accrued during the relevant accounting year and the actual payment of amount or discharge of liability may occur in future and what is crucial is the accrual of liability for payment or expenditure during the relevant accounting year. But a contingent liability that may arise in future cannot be treated as expenditure. Thus, the substantial question of law is answered in favour of the assessee and against the Revenue.’

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Section 44AD – Eligible assessee engaged in an eligible business – Partner of firm – Not carrying on business independently – Not applicable

6. Anandkumar vs. Asst. CIT Tax, Circle-2, Salem [Tax Case Appeal No. 388 of 2019; 23rd December, 2020; Madras High Court] [‘A’ Bench, Chennai in I.T.A. No. 573/CHNY/2018; A.Y.: 2012-13; ITAT order dated 30th January, 2019]

Section 44AD – Eligible assessee engaged in an eligible business – Partner of firm – Not carrying on business independently – Not applicable

The assessee is an individual, a partner in M/s Kumbakonam Jewellers, M/s ANS Gupta & Sons and M/s ANS Gupta Jewellers. The assessee filed his return of income for the A.Y. under consideration admitting a total income of Rs. 43,53,066. The assessment was finalised u/s 143(3) by an order dated 3rd March, 2015 disallowing the claim made by the assessee u/s 44AD. While filing the return, the assessee had applied the presumptive rate of tax at 8% u/s 44AD and returned Rs. 4,68,240 as income from the remuneration and interest received from the partnership firm. The A.O. did not agree with the assessee and opined that section 44AD is available only for an eligible assessee engaged in an eligible business and that the assessee was not carrying on business independently but was only a partner in the firm. Further, the assessee did not have any turnover and receipts of account of remuneration and interest from the firms cannot be construed as gross receipts mentioned in section 44AD.

On appeal, the CIT (Appeals), Salem dismissed the same by order dated 22nd December, 2017. The Tribunal also dismissed the assessee’s appeal.

The Hon. High Court observed that section 44AD is a special provision for computing profits and gains of business on presumptive basis which was introduced in the Act with effect from 1993. At the outset, it needs to be noted that section 44AD is a special provision and it carves out an exception in respect of certain businesses, and from clause (b)(ii) of the Explanation u/s 44AD which prescribes the limit of Rs. 2 crores as total turnover or gross receipts, it is a clear indication that this provision is meant for small businesses. Further, section 44AD(1) commences with a non-obstante clause and states that notwithstanding anything to the contrary contained in sections 28 to 43C in the case of an eligible assessee engaged in an eligible business, a presumptive rate of tax at 8% can be adopted. One more important aspect is that 8% is computed on the basis of the total turnover or gross receipts of the assessee. Therefore, four important aspects to be noted in section 44AD are that the assessee who claims such a benefit of the presumptive rate of tax should an eligible assessee as defined in clause (a) of the Explanation to section 44AD, he should be engaged in an eligible business as defined in clause (b) of section 44AD and 8% of the presumptive rate of tax is computed on the total turnover or gross receipts. Therefore, to avail the benefit of such provision, the assessee has to necessarily satisfy the A.O. that he comes within the framework of section 44AD.

The assessee’s case is that he has received the remuneration and interest from the partnership firm and according to him this remuneration and interest received are gross receipts, and they being less than Rs. 1 crore arising from an eligible business, he is entitled to claim the benefit of the presumptive rate of tax. Further, the assessee’s contention is that he is an eligible assessee and the remuneration and interest received from the partnership firm being gross receipts from an eligible business, the A.O. ought to have allowed the benefit u/s 44AD.

The Revenue submitted that the assessee is not doing any business, but the firm is carrying on business in which the assessee is a partner and therefore the condition that it should arise from an eligible business is not satisfied. In the Statement issued by the ICAI, it has been stated that the word ‘turnover’ for the purpose of the clause may be interpreted to mean the aggregate amount for which sales are effected or services rendered by an enterprise, whereas in the case of the assessee neither has he performed any sales nor rendered any services but merely received remuneration and interest from the firm and the partnership firm has already debited the remuneration and interest in their profit and loss account, and therefore it cannot be taken as turnover or gross receipts.

The assessee should be able to satisfy the four main criteria mentioned in sub-section (1) of section 44AD r/w Explanations (a) and (b) in the said provision. Therefore, the assessee should establish that he is an eligible assessee engaged in an eligible business and such business should have a total turnover or a gross receipt. Admittedly, the assessee who is an individual in the instant case, is not carrying on any business. Therefore, the remuneration and interest received by the assessee from the partnership firm cannot be termed to be the turnover of the assessee (individual). Similarly, it will also not qualify for gross receipts.

Admittedly, the assessee has not done any sales nor rendered any services but has been receiving remuneration and interest from the partnership firms which amount has already been debited in the profit and loss account of the firms. Therefore, the Revenue was right in the contention that remuneration and interest cannot be treated as gross receipts.

The Court noted that the Tribunal observed that the intention of section 40(b) is that the partner should not be disentitled from claiming reasonable remuneration where he is a working partner and should not be denied reasonable interest on the capital invested by him in a firm and these changes if not made in the accounts of the firm, then the pro-rata profits of the firm would be higher resulting in higher tax for the firm. Therefore, the payments have to be construed indirectly as a type of distribution of profits of a firm or otherwise the firm would have been taxed. Therefore, the Tribunal observed that the Legislature in its wisdom chose such remuneration and interest to be a part of profits from business or profession and that can never translate into gross receipts or turnover of a business of being a partner in a firm. The Tribunal took note of the position prior to the substitution of section 44AD by the Finance (No. 2) Act, 2009 with effect from 1st April, 2011. Prior to the said substitution, this provision allowed the application of presumptive tax rate only for the business of civil construction or supply of labour for civil construction. By virtue of the substitution, the applicability of presumptive rate of tax was expanded to include any business which had turnover or gross receipts of less than Rs. 1 crore. The Tribunal noted the Explanatory notes to the provisions of the Finance (No. 2) Act, 2009 vide Circular No. 5/2010 dated 3rd June, 2010 wherein the CBDT had explained why the scope of the said provision was enlarged.

The Court observed that section 44ADA is a special provision for computing profits and gains of profession on presumptive basis and uses the expression ‘Total gross receipts’. As already seen in section 44AD, the words used are ‘total turnover’ or ‘gross receipts’ and it pre-supposes that it pertains to a sales turnover and no other meaning can be given to the said words and if so done, the purpose of introducing section 44AD would stand defeated. That apart, the position becomes much clearer if we take note of sub-section (2) of section 44AD which states that any deduction allowable under the provisions of sections 30 to 38 for the purpose of sub-section (1) be deemed to have been already given full effect to and no further deduction under those sections shall be allowed. Thus, conspicuously section 28(v) has not been included in sub-section (2) of section 44AD which deals with any interest, salary, bonus, commission or remuneration, by whatever name called, due to or received by a partner of a firm from such firm.

Thus, the Tribunal rightly rejected the plea raised by the assessee and confirmed the order passed by the CIT(A) and the A.O. The appeal filed by the assessee was accordingly dismissed.

It is my great hope someday, to see science and decision makers rediscover what the ancients have always known. Namely that our highest currency is respect

– Nassim Nicholas Taleb

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Income from undisclosed sources – Bogus purchases – A.O. disallowing entire purchases – Estimation by Commissioner (Appeals) of profit element embedded in purchases at 17.5% affirmed by Tribunal based on facts – Justified

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Housing project – Special deduction – Sections 80-IB(10) and 80-IB(10)(c) – Eligibility for deduction – Condition precedent – Single approval from local authority for development and construction of residential units more than and less than 1,500 sq. ft. in area – Development permission which includes residential units more than 1,500 sq. ft. irrelevant for deciding eligibility for deduction – Assessee entitled to deduction

39. Principal CIT vs. Pratham Developers [2020] 429 ITR 114 (Guj.) Date of order: 2nd March, 2020 A.Y.: 2010-11

Housing project – Special deduction – Sections 80-IB(10) and 80-IB(10)(c) – Eligibility for deduction – Condition precedent – Single approval from local authority for development and construction of residential units more than and less than 1,500 sq. ft. in area – Development permission which includes residential units more than 1,500 sq. ft. irrelevant for deciding eligibility for deduction – Assessee entitled to deduction

The assessee developed housing projects. It claimed deduction u/s 80-IB(10) in respect of five projects. The A.O. found that one of the projects was undertaken
on land introduced by the partners. He held that the assessee was not the sole owner of the land on which the housing project was constructed and disallowed the deduction. In respect of another project PV, the A.O. held that out of the layout plan for 158 residential units, 55 residential units were of built-up areas of 2,199 sq. ft. which exceeded the prescribed built-up area of 1,500 sq. ft. as envisaged u/s 80-IB(10)(c). Accordingly, the A.O. disallowed the deduction claimed by the assessee u/s 80-IB(10).

The Commissioner (Appeals) found that all the residential units developed by the assessee under the scheme PV were below the prescribed built-up area of 1,500 sq. ft., that as regards the 55 residential units the development agreement entered into between the land owners and its associate concern showed that the scheme was developed by its associate concern and that they did not form part of the housing project developed by the assessee. The Commissioner (Appeals) held, on the facts that the assessee was a separate concern which fulfilled the conditions prescribed u/s 80-IB(10), that the project which consisted of the 55 residential units was a separate project developed by another assessee, and that the assessee was entitled to deduction u/s 80-IB(10) in respect of the 103 residential units in the project which fulfilled the criteria prescribed as to the size of the plot, and the built-up area of each residential unit being of less than 1,500 sq. ft. The Tribunal affirmed the order passed by the Commissioner (Appeals).

On appeal by the Revenue, the Gujarat High Court upheld the decision of the Tribunal and held as under:

‘i) The condition laid down u/s 80-IB(10)(c) was fulfilled when the assessee claimed the deduction with respect to the residential units, which had built-up area less than 1,500 sq. ft. Under section 80-IB(10) there was no provision requiring the assessee to obtain a commencement certificate from the local authority for development and construction of the residential units having more than 1,500 sq. ft. area. Therefore, whether such development permission included the area for the residential units which were more than 1,500 sq. ft. would not be relevant for deciding the eligibility for deduction u/s 80-IB(10).

ii) In view of the concurrent findings of fact arrived at by the Commissioner (Appeals) and the Tribunal, there was no legal infirmity in their orders allowing the deduction u/s 80-IB(10).’

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Export – Exemption u/s 10A – Effect of section 10A and notification of CBDT issued u/s 10A – Assessee providing human resources services – Entitled to deduction u/s 10A

38. CIT vs. NTT Data Global Advisory Services Pvt. Ltd. [2020] 429 ITR 546 (Karn.) Date of order: 12th November, 2020 A.Y.: 2007-08

Export – Exemption u/s 10A – Effect of section 10A and notification of CBDT issued u/s 10A – Assessee providing human resources services – Entitled to deduction u/s 10A

The assessee is a private limited company and is in the business of software development and professional services. For the A.Y. 2007-08 the assessee claimed deduction u/s 10A. The A.O. recomputed the deduction u/s 10A by reducing the recruitment fee from the export turnover.

The Commissioner held that income from human resource services is not eligible for deduction u/s 10A and accepted the alternative plea to tax only net income from the business of manpower supply. The Tribunal held that transmitting the data of qualified information technology personnel is human resource services and information technology-enabled services. Accordingly, the appeal preferred by the assessee was allowed.

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:

‘i) The expression “computer software” has been defined in Explanation 2 to section 10A and means even any customised electronic data or any product or service of a similar nature as may be notified by the Board. Thus, the Legislature has empowered the Board to notify the products or services of similar nature which would be covered under clause (b) and treated as “customised electronic data” and also, “any product or service of similar nature”. The Board has issued a notification dated 26th September, 2000 which admittedly contains human resources as well as information technology-enabled products or services.

ii) The role of the assessee company was to create an electronic database of qualified personnel and transmit data through electronic means to the client. The Commissioner (Appeals) had found that the assessee was in the business of supply of manpower from India to its foreign clients after their recruitment in India. Thus, irrespective of whether or not the assessee provided training to its employees or to the employees who were recruited by its clients, since the assessee was engaged in providing human resource services, its case was squarely covered by notification dated 26th September, 2000. Therefore, the assessee was entitled to the benefit of deduction u/s 10A.’

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Export – Exemption u/s 10A – (i) Conditions precedent for claiming exemption u/s 10A – Separate accounts need not be maintained – Undertaking starting manufacture on or after 1st April, 1995 must have 75% of sales attributed to export; (ii) Sub-contractors giving software support to assessee on basis of foreign inward remittance – Claim by sub-contractors would not affect assessee’s claim u/s 10A

37. CIT (LTU) vs. V. IBM Global Services India Pvt. Ltd. [2020] 429 ITR 386 (Karn.) Date of order: 3rd November, 2020 A.Y.: 2000-01

Export – Exemption u/s 10A – (i) Conditions precedent for claiming exemption u/s 10A – Separate accounts need not be maintained – Undertaking starting manufacture on or after 1st April, 1995 must have 75% of sales attributed to export; (ii) Sub-contractors giving software support to assessee on basis of foreign inward remittance – Claim by sub-contractors would not affect assessee’s claim u/s 10A

The assessee was in the business of export of software solutions and maintenance services. For the A.Y. 2000-01, the assessee claimed exemption u/s 10A. The A.O., inter alia, held that the assessee had a software technology park unit as well as other units and all overhead expenses had been charged in relation to the other unit and no expenditure was claimed in respect of the software technology park unit for which exemption u/s 10A had been claimed. He also held that the assessee had not fulfilled the stipulations laid down in the Software Technology Parks of India Scheme or the conditions laid down by the Reserve Bank of India regarding maintenance of separate accounts and other conditions and, therefore, the assessee was not entitled to exemption u/s 10A. He further held that the audit report did not exclude payment made to sub-contractors or other expenses incurred abroad. He held that the turnover brought into the country was 56.056% which was below 75% as stipulated u/s 10A. Accordingly, he disallowed the exemption u/s 10A.

The Commissioner (Appeals) allowed the appeal partly. The Tribunal dismissed the appeal preferred by the Revenue and allowed the appeal preferred by the assessee in part.

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:

‘i) Section 10A is a special provision in respect of newly-established undertakings in free trade zones. The exemption is dependent on fulfilment of the conditions mentioned in sub-section (2). Sub-section (2) does not contain any requirement with regard to maintenance of separate accounts. Wherever the Legislature intended to incorporate the requirement of maintenance of either separate accounts or separate books of accounts, it has expressly said so. The requirement of maintenance of separate accounts has been provided in the STPI registration scheme and no consequences for non-compliance therewith have been prescribed. Therefore, the requirement is directory.

ii) From a perusal of section 10A(2)(ia) it is evident that it applies to an undertaking which begins to manufacture or produce any article or thing on or after 1st April, 1995 and whose exports of such articles or things are not less than 75% of the total sales thereof during the previous year. Thus, the total export has to be not less than 75% of the total sales.

iii) The A.O. in his remand report to the Commissioner (Appeals) had stated that the assessee had been able to bifurcate the software technology park receipts, section 80HHE receipts and domestic receipts. The direct expenses relating to domestic receipts and export receipts had also been segregated and direct expenses of export turnover were apportioned on the basis of the percentage of turnover of the software technology park unit and section 80HHE receipts.

iv) The Commissioner (Appeals) had concluded that since the assessee had identified the turnover relating to the software technology park units and there was a reasonable basis for quantifying direct and indirect expenses pertaining to the software technology park units, the income pertaining to the software technology park units and therefore, exemption u/s 10A could be worked out. The Tribunal had held that the assessee had units spread over various parts of the country and even abroad, and hence the only plausible method of reasonably allocating the overhead expenses was by relating them to the turnover. The Tribunal had upheld the order to the extent of Rs. 68,72,88,748 holding this to be a reasonable figure. These concurrent findings of fact were based on meticulous appreciation of evidence on record. The Tribunal had rightly held that the allocation of the overhead expenses had to be made on the basis of the turnover.

v) The Commissioner (Appeals) had held that the sub-contractors had given software support activity to the assessee and not to the customers of the assessee. The employees of the sub-contractors operated from the software technology park unit itself and the sub-contractors had claimed exemption u/s 10A on the basis of the foreign inward remittance certificate, which had no bearing with regard to the assessee’s claim to exemption u/s 10A. The question of double deduction did not arise.

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Disallowance of expenditure relating to exempt income – Section 14A r/w/r 8D of ITR, 1962 – Condition precedent for disallowance – Proximate relationship between expenditure and exempt income – Onus to establish such proximity on Department – A.O. must give a clear finding with reference to the assessee’s accounts how expenditure related to exempt income

36. CIT vs. Sociedade De Fomento Industrial Pvt. Ltd. (No. 2) [2020] 429 ITR 358 (Bom.) Date of order: 6th November, 2020

Disallowance of expenditure relating to exempt income – Section 14A r/w/r 8D of ITR, 1962 – Condition precedent for disallowance – Proximate relationship between expenditure and exempt income – Onus to establish such proximity on Department – A.O. must give a clear finding with reference to the assessee’s accounts how expenditure related to exempt income

The assessee was a miner and exporter of mineral ores. For the A.Y. 2009-10 the A.O. computed disallowance u/s 14A read with rule 8D at 0.5% on the average investment. He rejected the assessee’s claim that it did not incur any expenditure to earn the dividend income, that it invested the surplus funds through bankers and other financial institutions and all the forms were filled up by them, and that it only issued cheques. He was of the view that without devoting time and without analysing the nature of the investment, the assessee could not have invested in the mutual funds.

The Commissioner (Appeals) partly allowed the appeal. The Tribunal allowed the assessee’s appeal and deleted the disallowances.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

‘i) Section 14A inserted by the Finance Act, 2001 with retrospective effect from 1st April, 1962 aims to disallow expenditure incurred in relation to income which did not form part of the total income and has to be read with Rule 8D of the Income-tax Rules, 1962 which provides the method of calculation of the disallowance. Section 14A statutorily recognises the principle that tax is leviable only on the net income. The profits and gains of business or profession are taxed after deducting expenditure from income. In that regard, there is no need for the assessee to establish a one-to-one correlation between income and expenditure. Rule 8D provides the methods for determining the amount of expenditure in relation to income not includible in the total income and comes into play once an expenditure falls within the mischief of section 14A.

ii) The onus is on the Revenue to establish that there is a proximate relationship between the expenditure and the exempt income. The application of section 14A and rule 8D is not automatic in each and every case, where there is income not forming part of the total income. Though the expenditure u/s 14A includes both direct and indirect expenditure, that expenditure must have a proximate relationship with the exempted income. Before rejecting the disallowance computed by the assessee, the A.O. must give a clear finding with reference to the assessee’s accounts as to how the other expenditure claimed by the assessee out of the non-exempt income is related to the exempt income. There must be a proximate relationship between the expenditure and the exempt income and only then would a disallowance have to be effected.

iii) The Tribunal was right in deleting the additions made by the A.O. u/s 14A read with rule 8D. The Tribunal had found that the A.O. had only discussed the provisions of section 14A(1) but had not justified how the expenditure incurred by the assessee during the relevant year related to the income not forming part of its total income and had straightaway applied Rule 8D. There must be a proximate relationship between the expenditure and the exempt income and only then would a disallowance have to be effected. There was no valid reason to interfere with the Tribunal’s well-reasoned order.’

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Capital gains – Sections 2(14), (42A), (47) and 45 – (i) Capital asset – Stock option is a capital asset – Gains on exercising option – Capital gains; (ii) Salary – Stock option given to consultant – No relationship of employer and employee – Gains on exercising stock option – Assessable as capital gains

35. Chittharanjan A. Dasannacharya vs. CIT [2020] 429 ITR 570 (Karn.) Date of order: 23rd October, 2020 A.Y.: 2006-07

Capital gains – Sections 2(14), (42A), (47) and 45 – (i) Capital asset – Stock option is a capital asset – Gains on exercising option – Capital gains; (ii) Salary – Stock option given to consultant – No relationship of employer and employee – Gains on exercising stock option – Assessable as capital gains

The assessee was a software engineer who was employed with a company registered in India from 1995 to 1998. He was deputed to a U.S. company in 1995 as an independent consultant. The assessee served in the US from 1995 to 1998 as an independent consultant and later as an employee of the US company from 2001 to 2004. The assessee thereafter returned to India and was employed in the Indian subsidiary. While on deputation to the US, the assessee was granted stock option by the US company whereunder he was given the right to purchase 30,000 shares at an exercise price of US $0.08 per share. The assessee also had an option of cashless exercise of stock options which was an irrevocable direction to the broker to sell the underlying shares and deliver the proceeds of the sale of the shares after deducting the exercise / option price which was to be delivered to the US company. In the cashless exercise, the underlying shares were not allotted to the assessee and he was only entitled to receive the sale proceeds less the exercise price.

The assessee in the A.Y. 2006-07 exercised his right under the stock option plan by way of cashless exercise and received a net consideration of US $283,606 and offered this as long-term capital gains as the stock options were held for nearly ten years. The A.O. by an order u/s 143(3) split the transaction into two and brought to tax the difference between the market value of the shares on the date of exercise and the exercise price as ‘income from salary’ and the difference between the sale price of shares and market value of shares on the date of exercise of ‘income from short-term capital gains’.

The Tribunal held that the assessee was to be regarded as an employee for the purposes of the plan and the benefits arising therefrom were to be treated as income in the nature of salary in the hands of the assessee.

The Karnataka High Court allowed the appeal filed by the assessee and held as under:

‘i) The Supreme Court in Dhun Dadabhoy Kapadia and Hari Brothers (P) Ltd. held that the right to subscribe to shares of a company was treated to be a capital asset u/s 2(14). The stock option being a right to purchase the shares underlying the options is a capital asset in the hands of the assessee u/s 2(14) which is also evident from Explanation 1(e) to section 2(42A) which uses the expression “in case of a capital asset being a right to subscribe any financial asset”. The cashless exercise of option therefore is a transfer of capital asset by way of a relinquishment or extinguishment of the right in the capital asset in terms of section 2(47).

ii) From a perusal of the communication dated 3rd August, 2006 sent by the US company to the assessee, it was evident that the assessee was an independent consultant and not an employee of the US company at the relevant time. Thus, there was no relationship of employer and employee between it and the assessee. The assessee never received the shares in the stock options. At the time of grant of options to the assessee in the year 1996, section 17(2)(iia) was not there in the statute. The difference between the option / exercise price of the stock option and the fair market value of the shares on the date of exercise of the stock option was assessable as capital gains.

iii) The Revenue in case of several other assessees had accepted the fact that on cashless exercise of option there arises income in the nature of capital gains. However, in the case of the assessee the aforesaid stand was not taken. The Revenue could not be permitted to take a different view.’

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TDS – Payments to contractors – Section 194C – Assessee, Department of State Government – Government directing assessee to appoint agency for construction of college buildings providing percentage of project cost for each building as service charges – Payments to agencies for construction of college buildings – Appellate authorities on facts holding that assessee not liable to deduct tax – Concurrent findings based on facts not shown to be perverse – Order need not be interfered with

19 CIT vs. Director of Technical Education [2021] 432 ITR 110 (Karn) A.Y.: 2011-12 Date of order: 10th February, 2021

TDS – Payments to contractors – Section 194C – Assessee, Department of State Government – Government directing assessee to appoint agency for construction of college buildings providing percentage of project cost for each building as service charges – Payments to agencies for construction of college buildings – Appellate authorities on facts holding that assessee not liable to deduct tax – Concurrent findings based on facts not shown to be perverse – Order need not be interfered with

The assessee was a Department of the Government of Karnataka and was in charge of the academic and administrative functions of controlling technical education in the State of Karnataka. As part of its activities, the assessee entrusted the construction of engineering and polytechnic college buildings under construction agreements to KHB and RITES. The Deputy Commissioner treated the assessee as an assessee-in-default and passed an order u/s 201(1) on the ground that the assessee had failed to deduct the tax as required u/s 194C on the payments made under the contracts with KHB and RITES. Accordingly, a demand notice was also issued.

The Commissioner (Appeals), inter alia, held that the Government of Karnataka directed the assessee to appoint a particular agency like KHB or RITES for every new building on remuneration by providing a specific percentage of the project cost for each building in the form of service charges and that the provisions of section 194C were not applicable. The Tribunal upheld the order of the Commissioner (Appeals).

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:

‘The Tribunal was right in holding that the assessee was not liable to deduct tax u/s 194C on payments made to KHB and RITES for rendering of services in connection with the construction of engineering and polytechnic college buildings in the State of Karnataka. The Commissioner (Appeals) had gone into the details of the memorandum of understanding entered into with KHB and RITES and had held that the provisions of section 194C were not applicable to the assessee. The concurrent findings of fact by the appellate authorities need not be interfered with in the absence of any perversity being shown.’

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TAXABILITY OF MESNE PROFITS

ISSUE FOR CONSIDERATION

The term ‘mesne profits’ relates to the damages or compensation recoverable from a person who has been in wrongful possession of immovable property. It has been defined in section 2(12) of the Code of Civil Procedure, 1908 as under:

‘(12) “mesne profits” of property means those profits which the person in wrongful possession of such property actually received or might with ordinary diligence have received therefrom, together with interest on such profits, but shall not include profits due to improvements made by the person in wrongful possession.’

At times, the tenant or lessee continues to use and occupy the premises even after the termination of the lease agreement either due to efflux of time or for some other reasons. In such cases, the courts may direct the occupant of the premises to pay the mesne profits to the owner for the period for which the premises were wrongfully occupied. The taxability of the amounts received as mesne profits in the hands of the owner of the premises has become a subject matter of controversy. While the Calcutta High Court has taken the view that mesne profit is in the nature of damages for deprivation of use and occupation of the property and, therefore, it is a capital receipt not chargeable to tax, the High Courts of Madras and Delhi have taken the view that it is a recompense for deprivation of income which the owner would have enjoyed but for the interference of the persons in wrongful possession of the property and, consequently, it is a revenue receipt chargeable to tax.

LILA GHOSH’S CASE

The issue had earlier come up for consideration of the Calcutta High Court in the case of CIT vs. Smt. Lila Ghosh (1993) 205 ITR 9.

In that case, the assessee was the owner of the premises in question which were given on lease. The lease expired in 1970. However, the lessee did not give possession to the assessee. The assessee filed a suit for eviction and mesne profits. The decree was passed in favour of the assessee by the trial court and it was affirmed by the High Court as well as by the Supreme Court. The assessee then applied for the execution of the decree. The Court appointed a Commissioner to determine the claim of quantum of mesne profits. While the execution of the said decree and the determination of the quantum of the mesne profits were pending, the Government of West Bengal requisitioned the demised property on 24th December, 1979. The said requisition order was challenged by the assessee before the High Court through a writ application filed under Article 226 of the Constitution of India.

During its pendency, a settlement was arrived at between the assessee and the State of West Bengal which was recorded by the Court in its order dated 28th February, 1980. Under the terms of the settlement, the property in question was to be acquired by the State under the Land Acquisition Act, 1894 and compensation of Rs. 11 lakhs for the acquisition was to be paid to the assessee. There was no dispute relating to this compensation received. Apart from the compensation, the assessee also received a sum of Rs. 2 lakhs from the State of West Bengal against the assignment of the decree for mesne profits obtained and to be passed as a final decree against the tenant.

While making the assessment for the assessment year 1980-81, the A.O. assessed the said sum of Rs. 2 lakhs representing mesne profits as revenue receipt in the hands of the assessee under the head ‘Income from Other Sources’. It was taxed as income of the assessment year 1980-81 since it had arisen to the assessee in terms of an order of the Court dated 28th February, 1980. On appeal by the assessee before the CIT(A), it was submitted that the mesne profits were nothing but damages and, therefore, capital receipt not chargeable to tax. It was also contended that in case the assessee’s contention in this respect was to be rejected and the mesne profits of Rs. 2 lakhs be held to be revenue receipts, the same could not be taxed in one year since it related to the period from 19th May, 1970 to 24th December, 1979. However, the CIT(A) rejected all the contentions of the assessee and held that the mesne profits of Rs. 2 lakhs were revenue receipts and assessable under the head ‘Income from Other Sources’ in the A.Y. 1980-81.

On further appeal by the assessee, the Tribunal held that the mesne profits of Rs. 2 lakhs had arisen as a result of the transfer of the capital asset and the same was assessable under the head ‘capital gains’. According to the Tribunal, the assessee had received the sum of Rs. 2 lakhs for transferring her right to receive the mesne profits which was her capital asset. The contention of the assessee that no capital gain was chargeable inasmuch as no cost of acquisition was incurred for the so-called capital asset was rejected by the Tribunal. The Tribunal held that it was possible to determine the cost of acquisition of the asset in question which, according to the Tribunal, consisted of the amount spent by the assessee towards stamp duty and other legal expenses incurred for obtaining the decree. From the decision of the Tribunal, both the assessee as well as the Revenue had sought reference to the High Court.

After referring to the definition of ‘mesne profits’ as per the Code of Civil Procedure, 1908, the High Court referred to the observations of the Judicial Committee of the Privy Council in Girish Chunder Lahiri vs. Shashi Shikhareswar Roy [1900] 27 IA 110 in which it was stated that the mesne profits were in the nature of damages which the court may mould according to the justice of the case. Further, the Supreme Court’s observations in the case of Lucy Kochuvareed vs. P. Mariappa Gounder AIR [1979] SC 1214 were also referred to, which were as under:

‘Mesne profits being in the nature of damages, no invariable rule governing their award and assessment in every case can be laid down and “the Court may mould it according to the Justice of the case”.’

Accordingly, the High Court held that the mesne profits were nothing but damages for loss of property or goods. The Court further held that such damages were not in the nature of revenue receipts but in the nature of capital receipt. While holding so, the High Court relied upon the decisions in the case of CIT vs. Rani Prayag Kumari Debi [1940] 8 ITR 25 (Pat.); CIT vs. Periyar & Pareekanni Rubbers Ltd. [1973] 87 ITR 666 (Ker.); CIT vs. J.D. Italia [1983] 141 ITR 948 (AP); and CIT vs. Ashoka Marketing Ltd. [1987] 164 ITR 664 (Cal.).

The Court disagreed with the views expressed by the Madras High Court in CIT vs. P. Mariappa Gounder [1984] 147 ITR 676 wherein it was held that mesne profits awarded by the Court for wrongful possession were revenue receipts and, therefore, liable to be assessed as income. The Calcutta High Court observed that neither the decision of the Privy Council in Girish Chunder Lahiri (Supra) nor the decision of the Supreme Court in Lucy Kochuvareed (Supra) was either cited or noticed by the learned Judges of the Madras High Court. It was also observed that even the decisions of the Patna High Court in Rani Prayag Kumari Debi (Supra) and that of the Kerala High Court in Periyar & Pareekanni Rubbers Ltd. (Supra), wherein it was held that damages or compensation awarded for wrongful detention of the properties of the assessee was not a revenue receipt, were neither noticed nor considered by the Madras High Court.

As far as the Tribunal’s direction to tax the amount received as capital gains was concerned, the High Court held that there was no assignment of the decree for mesne profits. No final decree in respect of mesne profits was passed in favour of the assessee and the State Government had reserved the right to itself for getting an assignment from the assessee in respect of the final decree for mesne profits, if any, passed against the tenant for its use and occupation of the said property. Therefore, the High Court held that the assessee had not earned any capital gains on the transfer of a capital asset.

The High Court held that the mesne profits received was a capital receipt and, hence, not liable to tax.

THE SKYLAND BUILDERS (P) LTD. CASE
The issue thereafter came up for consideration before the Delhi High Court in the case of Skyland Builders (P) Ltd. vs. ITO (2020) 121 taxmann.com 251.

In this case, the assessee company had let out the property in the year 1980 for five years to Indian Overseas Bank. The parties had agreed to increase the rent by 20% after the expiry of the first three years. The lessee bank did not comply with the terms and increased the rent by 10% only. Therefore, the assessee terminated the lease agreement w.e.f. 31st January, 1990 by serving notice upon the lessee. Since the lessee failed to vacate the premises, the assessee filed a suit for damages / mesne profit and restoration of the premises to the owner. The suit of the assessee was decreed vide judgment / decree issued dated 27th July, 1998 for mesne profit and damages, including interest. In compliance with the Court’s order, the lessee Indian Overseas Bank paid Rs. 77,87,303 to the assessee company. In the original return for the A.Y. 1999-2000, mesne profits of Rs. 77,87,303 was declared as taxable income, whereas in the revised return the assessee claimed it as a capital receipt and excluded it from its taxable income.

The A.O. did not accept the contention of the assessee that it was a capital receipt and relied upon the decision of the Madras High Court in P. Mariappa Gounder (Supra) in which it was held that mesne profits were also a species of taxable income. The A.O. taxed it as ‘Income from other sources’ and allowed a deduction of legal expenses incurred in securing the mesne profits.

Before the CIT(A), apart from claiming that the mesne profits were not taxable, the assessee raised an alternative plea that even if it was treated as income in the nature of arrears of rent, even then it could not have been taxed in the year under consideration merely based on its realisation during the year and, rather, should have been taxed in the respective years to which it pertained. It was claimed that the enabling provision to tax the arrears of rent in the year of its receipt was inserted in section 25B with effect from the A.Y. 2001-02 and it was not applicable for the year under consideration. However, the CIT(A) did not accept the contentions of the assessee and held it to be a revenue receipt liable to be taxed as income. Insofar as section 25B was concerned, the CIT(A) observed that it did not bring about any change in law and it only set at rest doubts regarding taxability of income relating to earlier years in the previous year concerned in which the arrears of rent were received.

The Tribunal also rejected the assessee’s claim with regard to the non-taxability of mesne profits as income under the Act on the ground that it was a capital receipt. It followed the decisions of the Madras High Court in the cases of P. Mariappa Gounder (Supra) and S. Kempadevamma vs. CIT [2001] 251 ITR 87. It did not follow the decision of the Calcutta High Court in the case of Smt. Lila Ghosh (Supra) on the ground that the decision of the Madras High Court in the case of S. Kempadevamma (Supra) was rendered after that and it was binding in nature, being a later decision. The Tribunal also held that the sum which was granted by the Civil Court as mesne profit in respect of the tenanted property could be presumed to be a reasonably expected sum for which property could be let from year to year, and the same value could have been taken as annual letting value of the property in dispute as per section 23(1). With regard to the alternate plea of the assessee concerning the provisions of section 25B introduced subsequently, the Tribunal relied upon the decision in the case of P. Mariappa Gounder in which it was held that the mesne profit is to be taxed in the assessment year in which it was finally determined. The Tribunal’s decision has been reported at 91 ITD 392.

In further appeal before the High Court, the following arguments were made on behalf of the assessee:
•   The income falling under the specific heads enumerated in the Act as being taxable income alone was liable to tax and the income which did not fall within the specific heads was not liable to be taxed under the Act.
•   By its definition, ‘mesne profits’ were a kind of damages which the owner of the property, which was a capital asset, was entitled to receive on account of deprivation of the opportunity to use that capital asset on account of the wrongful possession thereof by another. Therefore, such damages which were awarded for deprivation of the right to use the capital asset constituted a capital receipt.
•   Section 25B introduced w.e.f. 1st April, 2001 could not be applied to bring the mesne profits and interest thereon to tax in the A.Y. 1999-2000 even though they pertained to the earlier financial years. Further, the amount received from the erstwhile tenant could not be regarded as rent under the rent agreement which ceased to exist. The assessee had received damages and not rent since there was no subsisting relationship of landlord and tenant between the assessee and the bank post the termination of their tenancy.
•   Reliance was placed on the decision of the Supreme Court in the case of CIT vs. Saurashtra Cement Ltd. 325 ITR 422 wherein it was held that the amount received towards compensation for sterilisation of the profit-earning source, not in the ordinary course of business, was a capital receipt in the hands of the assessee. In this case, the liquidated damages received from the supplier on account of the delay caused in delivery of the machinery was held to be a capital receipt not liable to tax.
•   The facts before the Madras High Court in the case of P. Mariappa Gounder were different from the facts of the present case. In that case, the assessee had entered into an agreement to purchase a property which was not conveyed by the vendor to the assessee as it was sold to another person who was put in possession. The Court decreed specific performance of the assessee’s agreement with the original owner and the assessee’s claim for mesne profits against the other purchaser who was in possession was also accepted. Thus, it was not a case of grant of mesne profits against the erstwhile tenant who continued to occupy the premises despite termination of the tenancy. But it was a case where another purchaser of the same property held on to the possession of the property and the mesne profits were awarded against him.
•   The decision of the Madras High Court in the case of P. Mariappa Gounder was not followed by the Calcutta High Court in a subsequent decision in the case of Smt. Lila Ghosh (Supra). It was the view of the Calcutta High Court which was the correct view and should be followed.
•   Reliance was also placed on the Special Bench decision of the Mumbai Bench of the Tribunal in the case of Narang Overseas (P) Ltd. vs. ACIT (2008) 111 ITD 1 wherein the view favourable to the assessee was adopted, in view of conflicting decisions of the High Courts, and mesne profits were held to be capital receipts.

The Revenue pleaded that the decision of the Madras High Court in P. Mariappa Gounder had been affirmed by the Supreme Court (232 ITR 2). It was submitted that the decision of the Calcutta High Court in Smt. Lila Ghosh was a decision rendered before the Supreme Court decided the appeal in the case of P. Mariappa Gounder. Further, the view taken by the Madras High Court in P. Mariappa Gounder was reiterated by it in the case of S. Kempadevamma (Supra). The Revenue also placed reliance on the decision of the Delhi High Court in the case of CIT vs. Uberoi Sons (Machines) Ltd. 211 Taxman 123, wherein it was held that the arrears of rent received as mesne profits are taxable in the year of receipt, and that section 25B of the Act which was introduced vide amendment in 2000 with effect from A.Y. 2001-02 was only clarificatory in nature.

In reply, the assessee submitted that the real issue in the case before the Delhi High Court in Uberoi Sons (Machines) Ltd. (Supra), was in which previous year the arrears of rent received by the assesse (as mesne profits) could be brought to tax and the issue was not whether mesne profits received by the landlord / assesse from the erstwhile tenant constituted revenue receipt or capital receipt.

The Delhi High Court held that if the test laid down by the Supreme Court in the case of Saurashtra Cement Ltd. (Supra) had been applied to the facts of the case, then the only conclusion that could be drawn was that the receipt of mesne profits and interest thereon was a revenue receipt. This was because the capital asset of the assessee had remained intact, and even the title of the assessee in respect of the capital asset had remained intact. The damages were not received for harm and injury to the capital asset, or on account of its diminution, but were received in lieu of the rent which the appellant would have otherwise derived from the tenant. Had it been a case where the capital asset would have been subjected to physical damage, or of diminution of the title to the capital asset, and damages would have been awarded for that, there would have been merit in the appellant’s claim that damages were capital receipt.

The High Court held that the issue was no longer res integra as it stood concluded not only by the decision of the Supreme Court in P. Mariappa Gounder but also by the co-ordinate Bench of the Delhi High Court itself in Uberoi Sons (Machines) Ltd. In that case, the Court not only held that section 25B was clarificatory and applied to the assessment year in question, but also held that the receipt of mesne profits constituted revenue receipt. The Court also held that the issue of invocation of section 25B was intimately linked to the issue of whether the said receipts were revenue receipts, or capital receipts, and had it not been so there would be no question of the Court upholding the applicability of section 25B. Therefore, the submission of the assessee that the ratio of the decision in Uberoi Sons (Machines) Ltd. was not that income by way of mesne profits constituted revenue receipts, was found to be misplaced by the Court.

The Delhi High Court in this case did not follow the decision of the Calcutta High Court in the case of Smt. Lila Ghosh for two reasons: due to the subsequent decision of the Supreme Court in P. Mariappa Gounder approving the Madras High Court’s view, and due to the decision of the co-ordinate Bench of the Delhi High Court in the case of Uberoi Sons (Machines) Ltd. following the Madras High Court’s view and taking note of its approval by the Supreme Court. The ratio of the decision of the Special Bench in the Narang Overseas case (Supra) of the Tribunal was also not approved by the High Court for the same reason that the jurisdictional High Court’s decision prevailed over it.

Accordingly, the High Court held that mesne profits and interest on mesne profits received under the direction of the Civil Court for unauthorised occupation of the immovable property of the assessee by Indian Overseas Bank, the erstwhile tenant of the appellant, constituted revenue receipts and were liable to tax u/s 23(1) of the Act.

OBSERVATIONS

In order to determine the tax treatment of mesne profits, it is necessary to first understand the meaning of the term ‘mesne profits’ and the reason for which the owner of the property becomes entitled to receive it. Though the term ‘mesne profits’ is not defined under the Income-tax Act, it is defined under section 2(12) of the Civil Procedure Code. (Please see the first paragraph.)

The definition makes it very clear that mesne profits represent the damages that emanate from the property, the true owner of which has been deprived of its possession by a trespasser. It is not rent for use of the property. The Supreme Court in the case of Lucy Kochuvareed vs. P. Mariappa Gounder AIR 1979 SC 1214 has considered mesne profits to be damages. The relevant observations of the Supreme Court are reproduced below:

‘Mesne profits being in the nature of damages, no invariable rule governing their award and assessment in every case can be laid down and “the Court may mould it according to the justice of the case”. Even so, one broad basic principle governing the liability for mesne profits is discernible from section 2(12) of the CPC which defines “mesne profits” to mean “those profits which the person in wrongful possession of property actually received or might with ordinary diligence have received therefrom together with interest on such profits, but shall not include profits due to improvements made by the person in wrongful possession”. From a plain reading of this definition, it is clear that wrongful possession of the defendant is the very essence of a claim for mesne profits and the very foundation of the defendant’s liability therefor. As a rule, therefore, liability to pay mesne profits goes with actual possession of the land. That is to say, generally, the person in wrongful possession and enjoyment of the immovable property is liable for mesne profits.’

The basis for quantification of mesne profits is the gain that the person in wrongful possession of the property made or might have made from his wrongful occupation and not what the owner of the property has lost on account of deprivation from the possession of the property. This aspect of the nature of the receipt has been explained by the Delhi High Court in the case of Phiraya Lal alias Piara Lal vs. Jia Rani AIR 1973 Del 18 as follows:

‘When damages are claimed in respect of wrongful occupation of immovable property on the basis of the loss caused by the wrongful possession of the trespasser to the person entitled to the possession of the immovable property, these damages are called “mesne profits”. The measure of mesne profits according to the definition in section 2(12) of the Code of Civil Procedure is “those profits which the person in wrongful possession of such property actually received or might with ordinary diligence have received there from, together with interest on such profits”. It is to be noted that though mesne profits are awarded because the rightful claimant is excluded from possession of immovable property by a trespasser, it is not what the original claimant loses by such exclusion but what the person in wrongful possession gets or ought to have got out of the property which is the measure of calculation of the mesne profits. (Rattan Lal vs. Girdhari Lal, AIR 1972 Delhi ll). This basis of damages for use and occupation of immovable property which are equivalent to mesne profits is different from that of damages for tort or breach of contract unconnected with possession of immovable property. Section 2(12) and order Xx rule 12 of the Code of Civil Procedure apply only to the claims in respect of mesne profits but not to claims for damages not connected with wrongful occupation of immovable property. The measure for the determination of the damages for use and occupation payable by the appellants to the respondent Jia Rani is, therefore, the profits which the appellants actually received or might with ordinary diligence have received from the property together with interest on such profits.’

The mesne profit cannot be viewed as compensation for the loss of income which the owner of the property would have earned but for deprivation of its possession, or as compensation for the loss of the source of income. It will be more appropriate to consider the mesne profit as compensation or damages for the loss of enjoyment of the property instead of the loss of income arising from the property. Mesne profits is for the injury or damages caused to the owner of the property due to deprivation of the possession of the property. Mesne profits become payable due to wrongful possession of the property with the trespasser, irrespective of whether or not that property before deprivation was earning any income for its owner. It might be possible that the property concerned might not be a let-out property and, therefore, yielding no income for its owner. Even in a case where the property was self-occupied by the owner which is not resulting in any income, the mesne profits become payable if that property has come in wrongful possession of the trespasser. Therefore, it is inappropriate to consider the mesne profits as compensation for loss of income which the owner would have earned otherwise. Any such compensation received due to the injury or damages caused to the assessee is required to be considered as a capital receipt not chargeable to tax, unless it is received in the ordinary course of business as held by the Supreme Court in the case of Saurashtra Cement Ltd. (Supra).

Mesne profits cannot be brought to tax as income under the head ‘Income from House Property’ as it cannot be said to be representing the annual value and that it will not come within the purview of taxation at all. Section 22 creates a charge of tax over the ‘annual value’ of the property. The ‘annual value’ is required to be determined in accordance with the provisions of section 23. As per section 23, the annual value is the sum which the property might reasonably be expected to get from year to year or the actual rent received or receivable in case of let-out property, if it is higher than that sum. The sum of mesne profits per se, which may pertain to a period of more than one year, cannot be considered as an ‘annual value’ of the property concerned for the year in which it accrued to the assessee by virtue of court order or received by the assessee. Therefore, the mesne profits cannot be held to be an annual value of the property u/s 23(1). For this reason and for the reasons stated in the next paragraph, it is respectfully submitted that part of the Delhi High Court’s decision in Skyland Builders (Supra) requires reconsideration where it held that the mesne profits were taxable u/s 23(1).

The erstwhile provisions of section 25B dealing with the taxability of arrears of rent or the corresponding provisions of section 25A, as substituted with effect from 1st April, 2017, can be pressed into play only if the receipt is in the nature of ‘rent’ in the first place. The Supreme Court in the case of UOI vs. M/s Banwari Lal & Sons (P) Ltd. AIR 2004 SC 198 has referred to the Law of Damages & Compensation by Kameshwara Rao (5th Ed., Vol. I, Page 528) and approved the learned author’s statement that right to mesne profits presupposes a wrong, whereas a right to rent proceeds on the basis that there is a contract. Therefore, the rent is the consideration for letting out of the property under a contract and there is no question of any wrongful possession of the property by the tenant. In a manner, the mesne profits and the rent are mutually exclusive.

Furthermore, the erstwhile sections 25AA and 25B and the present section 25A provide for taxation of an arrear of rent received from a tenant or unrealised rent realised subsequently, in the year of receipt under the head ‘Income from House Property’, irrespective of the ownership of the property in the year of taxation. The objective behind these provisions is to overcome the difficulties that used to arise in the past on account of the year of taxation and also in relation to the recipient not being the owner in the year of receipt. All of these provisions, for the purposes of activating the charge, require that the amount received represented (a) rent and (b) such rent was in arrears or unrealised and which rent was (c) subsequently realised. These three conditions are cumulative in nature for applying the deeming fiction of these provisions. Applying these cumulative conditions to the receipt of ‘mesne profits’, it is apparent that none of the conditions could be said to have been satisfied when a person receives damages for deprivation of the use of the property. The receipt in his case is neither for letting out the property nor does it represent the rent, whether in arrears or unrealised. It is possible that for measuring the quantum of damages and the amount of mesne profits the amount of prevailing rent is taken as a benchmark but such benchmarking cannot be a factor that has the effect of converting the damages into rent for the purposes of taxation of the receipt under the head ‘Income from House Property’. In fact, the right to receive mesne profits starts from the time where the relationship of the owner and tenant terminates and the right to receive rent ends.

The next question is whether the receipt of mesne profits could be considered as income under the head ‘Income from Other Sources’, importantly, u/s 56(2)(x). Apparently, the case of the receipt is to be tested vis-à-vis sub-clause (a) of clause (x) which brings to tax the receipt of any sum of money in excess of Rs. 50,000. Obviously, the receipt of mesne profits is on account of damages and cannot be considered to be without consideration and for this reason alone section 56(2)(x) cannot be invoked to tax such a receipt under the head ‘Income from Other Sources’. It is possible that the head is activated for charging the part of the receipt where such part represents the interest on the amount of damages for delay in payment thereof. But then that is an issue by itself.

It is, therefore, correct to hold that the Income-tax Act does not contain a specific provision to tax mesne profits under a specific head of income listed u/s 14. It is a settled position in law that for a receipt to be taxed as an income it should be fitted into a pigeon-hole of a particular head of income or the residual head and in the absence of a possibility thereof, a receipt cannot be taxed.

The next thing to assess is whether the receipt of mesne profits is an income at all or is in the nature of an income. Maybe not. For a receipt to qualify as income it perhaps is necessary that it represents the fruits of the efforts or labour made, or the risks and rewards assumed, or the funds employed. None of the above could be said to be present in the case of mesne profits where the receipt is for deprivation of the use of property. Such a receipt is not even for transfer of any property or right therein and cannot fit into the head capital gains. The receipt is for the unlawful action of the erstwhile tenant and is certainly not payment for the use of the property by him. No efforts are made by the recipient nor have any services been rendered by him. He has not employed any funds nor has he assumed any risks and the question of him being rewarded for the risks does not arise at all.

Lastly, as regards the decision of the Supreme Court in P. Mariappa Gounder confirming the ratio of the decision of the Madras High Court in the same case and the following of the said decision by the Delhi High Court in Skyland Builders (P) Ltd., it is respectfully stated that the Delhi High Court in the latter case did not concur with the view of the Calcutta High Court in the case of Smt. Lila Ghosh only for the reason that the Court noted that the Madras High Court’s view in the case of P. Mariappa Gounder that the mesne profits were revenue receipts was approved by the Supreme Court. With respect, in that case there was a complete failure on the part of the assessee to highlight the fact that the Supreme Court in deciding the case before it had considered only a limited issue concerning the year in which the mesne profits were taxable which arose from the Madras High Court’s decision. The Apex Court in that case had not considered whether the mesne profits was a capital receipt or revenue receipt and this fact of the non-consideration of the main issue by the Court was not pointed out to the Delhi High Court. Had that been highlighted, we are sure that the decision of the Delhi High Court would have been otherwise. This limited aspect of the Supreme Court’s decision becomes very clear on a perusal of the decisions of the High Court and the Supreme Court in P. Mariappa Gounder. The relevant part of both the decisions is reproduced as under:

Madras High Court – Two controversies arise in these references under the Income-tax Act, 1961 (‘the Act’). One is whether mesne profits decreed by a court of law can be held to be taxable income in the hands of the decree holder? The other question is about the relevant year in which mesne profits are to be charged to income-tax.

Supreme Court – The question which arises for consideration in this appeal is as to in which assessment year the appellant is liable to be assessed in respect of mesne profits which were awarded in his favour.

Further, the Mumbai Special Bench in the case of Narang Overseas (P) Ltd. (Supra) has extensively dealt with this aspect of the limited application of the Supreme Court’s decision at paragraphs 6 to 23 and concluded as follows:

‘The above discussion clearly reveals that the judgment of the Hon’ble Supreme Court in the case of P. Mariappa Gounder (Supra) only decides the issue regarding the year of taxability of the mesne profits. That judgment, therefore, cannot be said to be an authority for the proposition that the nature of mesne profits is revenue receipts chargeable to tax. Accordingly, the contention of Revenue that the issue regarding the nature of mesne profits is covered by the aforesaid decision of the Hon’ble Supreme Court cannot be accepted.’

This decision of the Special Bench has remained unchallenged by the Income-tax Department in an appeal before the High Court as is noted by the Bombay High Court in the case of Goodwill Theatres Pvt. Ltd. [2016] 241 Taxman 352. The appeal filed by the Income-tax Department against the decision of the Special Bench was dismissed for non-removal of the office objections.

Insofar as the reliance placed by the Delhi High Court on its earlier decision in the case of Uberoi Sons (Machines) Ltd. (Supra) is concerned, it is worth noting that the following questions of law were framed for consideration of the High Court in that case:
(i) Whether the ITAT was, in the facts and circumstances of the case, correct in law in quashing the re-assessment order passed by the Assessing Officer under section 147(1) of the Income Tax Act, 1961?
(ii) Whether the ITAT was correct in law in holding that the excess amount payable to the assessee towards mesne profits / compensation for unauthorised use and occupation of the premises accrued to the assessee only upon the passing of the decree by the Civil Court on 14th October, 1998?

It can be noticed that the question about the nature of mesne profits, whether revenue or capital, was not raised before the Delhi High Court even in the Uberoi case. Therefore, in our considered opinion the decision of the Supreme Court cannot be a precedent on the subject of the taxability or otherwise of mesne profits. The Court in that simply confirmed that the year of taxation would be the year of the order of the civil court as was decided by the Madras High Court. Any High Court decision not touching the issue of taxability of the receipt cannot be pressed into service for deciding the issue of taxability or otherwise of the receipt.

It may be noted that the question whether mesne profits were capital receipts or revenue receipts had also arisen before the Bombay High Court in the case of CIT vs. Goodwill Theatres Pvt. Ltd. [2016] 241 Taxman 352. The High Court had dismissed the appeal of the Revenue on the ground that the decision of the Special Bench in the case of Narang Overseas (P) Ltd. (Supra) had remained unchallenged, as the appeal filed against that decision before the High Court was dismissed for non-removal of office objections. The Supreme Court, however, on an appeal by the Income-tax Department challenging the order of the High Court has remanded the issue back to the High Court for its adjudication on merits which is reported at [2018] 400 ITR 566.

It is very difficult to persuade ourselves to believe that the decision of the Supreme Court in the case of Saurashtra Cement Ltd. (Supra) could be applied to the facts of the case to hold that the mesne profits was revenue receipts taxable under the Act. The Supreme Court in the said case was concerned with the facts unrelated to mesne profits. In that case, the capital asset was subjected to physical damage leading to the diminution of the title to the capital asset, and damages had been awarded for that, which damages were found to be capital receipt. It was the assessee who had relied upon the decision to contend that the mesne profits was not taxable. Instead, the Court applied the decision in holding against the assessee that applying the ratio therein the receipt could be exempted from taxation only where there was a damage or destruction to the property and diminution to title. Nothing can be stranger than this. The said decision nowhere stated that any receipt unrelated to damage to the capital asset would never be a capital receipt not liable to tax. The Supreme Court in that case of Saurashtra Cement Ltd. held that the amount received towards compensation for sterilization of the profit-earning source, not in the ordinary course of business, was a capital receipt in the hands of the assessee. In that case, the liquidated damages received from the supplier on account of delay caused in delivery of the machinery were held to be a capital receipt not liable to tax.

The facts in Skyland Builders were better than the facts in P. Mariappa Gounder where the receipt of mesne profits was from a person who was never a tenant of the assessee while in the first case the receipt was from an erstwhile tenant who deprived the owner of the possession, meaning there was a prior letting of the premises to the payer of the mesne profits and the receipt from such a person could have been better classified as mesne profits not taxable under the head ‘Income from House Property’.

The better view, in our considered opinion, therefore, is the view expressed by the Calcutta High Court that mesne profits are in the nature of capital receipts not chargeable to tax.

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TDS – Commission – Scope of section 194H – Transactions between banks for benefit of credit card holders – Transactions on principal-to-principal basis – Section 194H not applicable

18 CIT vs. Corporation Bank [2021] 431 ITR 554 (Karn) A.Y.: 2011-12 Date of order: 23rd November, 2020

TDS – Commission – Scope of section 194H – Transactions between banks for benefit of credit card holders – Transactions on principal-to-principal basis – Section 194H not applicable

The assessee is a nationalised bank. For the A.Y. 2011-12, the A.O. made disallowance u/s 40(a)(ia) of service charges paid to National Financial Switch (NFS) on the ground that tax was not deducted at source u/s 194H.

The Commissioner of Income-tax (Appeals) and the Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the following question was farmed:

‘Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that on the payment made towards the service charges rendered by M/s NFS is neither commission nor brokerage which does not attract tax deduction at source u/s 194H of the Income-tax Act?’

The Karnataka High Court upheld the decision of the Tribunal and held as under:

‘i) In case the credit card issued by the assessee was used on the swiping machine of another bank, the customer whose credit card was used to get access to the internet gateway of acquiring bank resulting in realisation of the payment. Subsequently, the acquiring banks realise and recover the payment from the bank which had issued the credit card. The relationship between the assessee and any other bank is not of an agency but that of two independents on principal-to-principal basis. Even assuming that the transaction was being routed to National Financial Switch and Cash Tree, even then it is pertinent to mention here that the same is a consortium of banks and no commission or brokerage is paid to it. It does not act as an agent for collecting charges. Therefore, we concur with the view taken by the High Court of Delhi in CIT vs. JDS Apparels (P) Ltd. [2015] 370 ITR 454 (Delhi) and hold that the provisions of section 194H of the Act are not attracted to the fact situation of the case.

ii) In the result, the substantial question of law is answered against the Revenue and in favour of the assessee.’

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Settlement of cases – Sections 245D, 245F and 245H – Powers of Settlement Commission – Application for settlement of case following search operations and notice u/s 153A – Order of penalty thereafter as consequence of search – Assessment and penalty part of same proceedings – Order of penalty not valid

17 Tahiliani Design Pvt. Ltd. vs. JCIT [2021] 432 ITR 134 (Del) A.Y.: 2018-19 Date of order: 19th January, 2021

Settlement of cases – Sections 245D, 245F and 245H – Powers of Settlement Commission – Application for settlement of case following search operations and notice u/s 153A – Order of penalty thereafter as consequence of search – Assessment and penalty part of same proceedings – Order of penalty not valid

A search and seizure operation u/s 132 as well as a survey u/s 133A were carried out on 29th May, 2018 in the case of the assessee. Thereafter, the Investigation Wing referred the case to the A.O. The Range Head of the A.O. of the assessee, after going through the seized material, presumed that the assessee had violated the provisions of section 269ST and issued a notice to it for the A.Ys. 2018-19 and 2019-20 to show cause why penalty u/s 271DA for violating the provisions of section 269ST should not be imposed on it. Meanwhile, in pursuance of the search and seizure operation, notices u/s 153A were issued to the assessee for the A.Ys. 2013-14 to 2018-19. The assessee applied for settlement of the case on 1st November, 2019 for the A.Ys. 2012-13 and 2013-14 to 2019-20 and in accordance with the provisions of the Act on 1st November, 2019 itself also informed the A.O. about the filing of the application before the Settlement Commission. The A.O., however, proceeded to pass a penalty order dated 4th November, 2019.

The Delhi High Court allowed the writ petition filed by the assessee and held as under:

‘i) Though section 245A(b) while defining “case” refers to a proceeding for assessment pending before an A.O. only and therefrom it can follow that penalties and prosecutions referred to in sections 245F and 245H are with respect to assessment of undisclosed income only, (i) section 245F vests exclusive jurisdiction in the Settlement Commission to exercise the powers and perform the functions “of an Income-tax authority under this Act in relation to the case”; and (ii) section 245H vests the Settlement Commission with the power to grant immunity from “imposition of any penalty under this Act with respect to the case covered by the settlement”. The words, “of an Income-tax authority under this Act in relation to the case” and “immunity from imposition of any penalty under this Act with respect to the case covered by the settlement”, are without any limitation of imposition of penalty and immunity with respect thereto only in the matter of undisclosed income. They would also cover penalties under other provisions of the Act, detection whereof has the same origin as the origin of undisclosed income. Not only this, the words “in relation to the case” and “with respect to the case” used in these provisions are words of wide amplitude and in the nature of a deeming provision and are intended to enlarge the meaning of a particular word or to include matters which otherwise may or may not fall within the main provisions.

ii) Both the notices u/s 153A as well as u/s 271DA for violation of section 269ST had their origin in the search, seizure and survey conducted qua the assessee as evident from a bare reading of the notice u/s 271DA. Both were part of the same case. The proceedings for violation of section 269ST according to the notice dated 30th September, 2019 were a result of what was found in the search and survey qua the assessee and were capable of being treated as part and parcel of the case taken by the assessee by way of application to the Settlement Commission.

iii) The Settlement Commission had exclusive jurisdiction to deal with the matter relating to violation of section 269ST also and the A.O., on 4th November, 2019, did not have the jurisdiction to impose penalty for violation of section 269ST on the assessee. His order was without jurisdiction and liable to be set aside and quashed.’

shailesh.kwebmaker

New industrial undertaking in free trade zone – Export-oriented undertaking – Exemption under sections 10A and 10B – Shifting of undertaking to another place with approval of authorities – Not a case of splitting up or reconstruction of business – Assessee entitled to exemption

16 CIT vs. S.R.A. Systems Ltd. [2021] 431 ITR 294 (Mad) A.Ys.: 2000-01 to 2002-03 Date of order: 19th January, 2021

New industrial undertaking in free trade zone – Export-oriented undertaking – Exemption under sections 10A and 10B – Shifting of undertaking to another place with approval of authorities – Not a case of splitting up or reconstruction of business – Assessee entitled to exemption

While completing the assessment u/s 143(3) read with section 147 for the A.Ys. 2000-01 and 2001-02, the A.O. disallowed the claim of deduction made by the assessee under sections 10A and 10B on the ground that an undertaking was formed by splitting up / reconstruction of the business already in existence. While completing the assessment u/s 143(3) read with section 263(3) for the A.Y. 2002-03, the A.O. disallowed the claim u/s 10A on the ground that an undertaking was formed by splitting up / reconstruction of the business already in existence among others.

The Commissioner of Income-tax (Appeals) allowed the appeals for the A.Ys. 2000-01 and 2001-02 by following the order of the Tribunal. The Department filed appeals before the Income-tax Appellate Tribunal and the Tribunal confirmed the order of the Commissioner of Income-tax (Appeals). The Tribunal held that this was not a case of setting up of a new business but only of transfer of existing business to a new place located in a software technology park area and, thereafter, getting the approval from the authorities.

On appeal by the Revenue, the Madras High Court upheld the decision of the Tribunal and held as under:

‘On the facts and in the circumstances of the case, the assessee was entitled to deduction u/s 10A/10B.’

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Deduction u/s 80-IA – Electricity undertaking – Expenditure on renovation and modernisation of existing lines – Condition precedent for deduction u/s 80-IA(4) – Work of renovation need not be completed – Expenditure need not be capitalised in accounts – Expenditure need not result in increase in value of assets – Assessee undertaking renovation and modernisation of existing lines more than 50% of book value of assets as on 1st April, 2004 – Assessee entitled to deduction u/s 80-IA(4)

15 Bangalore Electricity Supply Company Ltd. vs. Dy. CIT [2021] 431 ITR 606 (Karn) A.Y.: 2005-06 Date of order: 27th January, 2021

Deduction u/s 80-IA – Electricity undertaking – Expenditure on renovation and modernisation of existing lines – Condition precedent for deduction u/s 80-IA(4) – Work of renovation need not be completed – Expenditure need not be capitalised in accounts – Expenditure need not result in increase in value of assets – Assessee undertaking renovation and modernisation of existing lines more than 50% of book value of assets as on 1st April, 2004 – Assessee entitled to deduction u/s 80-IA(4)

The assessee was a public limited company which was wholly owned by the Government of Karnataka and was engaged in the activity of distribution of electricity. For the A.Y. 2005-06, it claimed deduction of Rs. 141,84,44,170 u/s 80-IA(4)(iv)(c), but the A.O. disallowed the claim. This was upheld both by the Commissioner (Appeals) and the Tribunal.

In its appeal to the High Court, the assessee submitted that its case fell within the third category of undertakings and, therefore, the amount undertaken towards renovation and modernisation had to be considered. Alternatively, it submitted that capital work-in-progress was to be included and should not be restricted only to those amounts which were capitalised in the books and substantial renovation and modernisation could be at any time during the period beginning on 1st April, 2004 and ending 31st March, 2006. It contended that it had undertaken substantial renovation and modernisation of existing lines which was more than 50% of the book value of assets as on 1st April, 2004 under the Explanation to section 80-IA(4)(iv)(c).

The Karnataka High Court allowed the appeal and held as under:

‘i) From a perusal of section 80-IA(4) it is evident that there are three types of undertakings which are considered by the Legislature eligible for deduction u/s 80-IA, viz., an undertaking which is (i) set up for generation or generation and distribution of power, (ii) starts transmission or distribution by laying network of new transmission or distribution lines, (iii) undertakes substantial renovation and modernisation of the existing network of transmission or distribution lines. Thus, for each type of undertaking the Legislature has used different expressions, viz., “set up”, “starts” and “undertakes”. These words have different meanings. The expression “undertake” has not been defined under the Act. Therefore, its common parlance meaning has to be taken into account. The meaning of the word “undertake” used in section 80-IA(4)(iv)(c) cannot be equated with the word “completion”.

ii) The Circular dated 15th July, 2005 [(2005) 276 ITR (St.) 151] issued by the CBDT clearly states that the tax benefit under the section has been extended to undertakings which undertake substantial renovation and modernisation of an existing network of transmission or distribution lines during the period beginning from 1st April, 2004 and ending on 31st March, 2006. The provisions of section 80-IA(4)(iv)(c) use the expression “any time” during the period beginning from 1st April, 2004 and ending on 31st March, 2006 and do not use the word “previous year”. Wherever the Legislature has intended to use the expression “previous year”, it has consciously done so, viz., in section 35AB, section 35ABB, section 35AC and section 35AD as well as in 77 other sections of the Act.

iii) There is no requirement of capitalisation of the amount in the books of accounts mentioned in section 80-IA(4)(iv)(c) which does not mandate that there has to be an increase in the value of plant and machinery in the books of accounts. Therefore, such a requirement which is not prescribed in the language of the provision cannot be read into it.

iv) The assessee had undertaken substantial renovation and modernisation of existing lines which was more than 50% of the book value of the assets as on 1st April, 2004 under the Explanation to section 80-IA(4)(iv)(c). Thus, it could safely be inferred that the assessee had undertaken the work towards renovation and modernisation of existing transmission or distribution lines. The assessee was entitled to deduction u/s 80-IA(4).’

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Appeal to High Court – Court quashing order and remanding matter to Tribunal – Effect – Search and seizure – Appeal arising out of block assessment – Assessee entitled to raise question of limitation in remand proceedings – Tribunal refusing to adjudicate issue of limitation holding it was not subject matter of remand – Not sustainable – Matter remanded to Tribunal

14 Karnataka Financial Services Ltd. vs. ACIT [2021] 432 ITR 187 (Karn) A.Ys.: 1986-87 to 1996-97 Date of order: 8th February, 2021

Appeal to High Court – Court quashing order and remanding matter to Tribunal – Effect – Search and seizure – Appeal arising out of block assessment – Assessee entitled to raise question of limitation in remand proceedings – Tribunal refusing to adjudicate issue of limitation holding it was not subject matter of remand – Not sustainable – Matter remanded to Tribunal

The assessee carried on the business of equipment leasing. Pursuant to a search, a notice was issued to it u/s 158BC for the block period 1986-87 to 1996-97 and the assessee filed its return of income. The A.O. held that the assessee had purchased the assets from one PLF at a higher value with a view to claim depreciation on the enhanced value as against the actual written down value in the books of accounts of PLF and restricted the depreciation to assets of value Rs. 1 crore. The Tribunal deleted the disallowance of depreciation and held in favour of the assessee.

The Department filed an appeal before the High Court against the order of the Tribunal. During the pendency of the appeal, the Court by an order directed the assessee to be wound up and appointed the official liquidator to take charge of its assets. The Court set aside the order of the Tribunal and remitted the matter to the Tribunal for fresh adjudication considering the amended provisions of section 158BB. The Tribunal thereupon passed an order with respect to the question of depreciation but did not adjudicate the ground raised by the assessee with regard to limitation on the ground that it was not the subject matter of the order of remand of the Court.

The Karnataka High Court allowed the appeal of the assessee and held as under:

‘i) The order passed by the Tribunal had been set aside in its entirety by this Court. Therefore, it was open to the assessee to raise the plea of limitation.

ii) Since the Tribunal had not adjudicated the issue with regard to limitation, the order passed by the Tribunal insofar as it pertained to the finding with regard to the issue of limitation was quashed and the Tribunal was directed to decide the issue of limitation with regard to the order of assessment passed by the A.O. for the block period 1986-87 to 1996-97. It would be open to the parties to raise all contentions before the Tribunal on this issue.’

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Appeal to High Court – Sections 92CA and 260A – Powers to disturb findings of fact recorded by Tribunal – Only upon specific question being raised as to their being perverse – Transfer pricing – Exclusion of comparables and depreciation on goodwill – High Court cannot go into facts

13 Principal CIT vs. Samsung R&D Institute Bangalore Pvt. Ltd. [2021] 431 ITR 615 (Karn) A.Y.: 2009-10 Date of order: 30th November, 2020

Appeal to High Court – Sections 92CA and 260A – Powers to disturb findings of fact recorded by Tribunal – Only upon specific question being raised as to their being perverse – Transfer pricing – Exclusion of comparables and depreciation on goodwill – High Court cannot go into facts

The assessee was a wholly-owned subsidiary of SECL and rendered software development services to its associate enterprises. In the A.Y. 2009-10 the assessee realised a net profit margin of 15.45% in respect of the international transactions with its associate enterprises. The Transfer Pricing Officer made a transfer pricing adjustment in respect of software development services and passed an order u/s 92CA which was incorporated by the A.O. in his order.

Before the Commissioner (Appeals) the assessee challenged the selection of the entity IL as comparable. The Commissioner (Appeals) excluded IL on account of its enormous size and bulk and partly allowed the appeal. The Tribunal directed the Transfer Pricing Officer to exclude certain companies from the list of comparables on the basis of functional dissimilarity. The Tribunal also held that the assessee was entitled to depreciation on goodwill.

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:

‘i) The Tribunal is the final fact-finding authority and a decision of the Tribunal on the facts can be gone into by the High Court only if a question has been referred to it which says that the finding of the Tribunal is perverse.

ii) The issue whether the entity IL was comparable to the assessee and was functionally dissimilar was a finding of fact. The Commissioner (Appeals) had dealt with the findings recorded by the Transfer Pricing Officer and had been approved by the Tribunal by assigning cogent reasons. The findings were findings of fact.

iii) Even in the substantial questions of law, no element of perversity had either been pleaded or demonstrated. The Tribunal was justified in removing certain companies from the list of comparables on the basis of functional dissimilarity and in holding that the assessee was entitled to depreciation on goodwill.’

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Appeal to Appellate Tribunal – Powers of Tribunal – Sections 253 and 254 and Rule 24 – No power to dismiss appeal on ground of non-prosecution – Duty to dispose of appeal on merits – Tribunal to restore appeal and afford opportunity of hearing to both parties

12 Rabindra Kumar Mohanty vs. Registrar ITAT [2021] 432 ITR 158 (Ori) A.Y.: 2009-10 Date of order: 18th March, 2020

Appeal to Appellate Tribunal – Powers of Tribunal – Sections 253 and 254 and Rule 24 – No power to dismiss appeal on ground of non-prosecution – Duty to dispose of appeal on merits – Tribunal to restore appeal and afford opportunity of hearing to both parties

The Income-tax Appellate Tribunal issued notice for hearing of the appeal filed by the assessee on 6th July, 2017. On that date, the authorised representative of the assessee filed an adjournment application and the case was placed for hearing on 30th August, 2017. However, on that date neither the assessee nor his authorised representative or his counsel was present. The Tribunal, therefore, dismissed the appeal for want of prosecution.

On a writ petition filed by the assessee the Orissa High Court held as under:

‘i) The Income-tax Act, 1961 enjoins upon the Appellate Tribunal to pass an order in an appeal as it thinks fit after giving both the parties an opportunity of being heard. It does not give any power to the Appellate Tribunal to dismiss the appeal for default or for want of prosecution in case the appellant is not present when the appeal is taken up for hearing.

ii) Article 265 of the Constitution of India mandates that no tax can be collected except by authority of law. Appellate proceedings are also laws in the strict sense of the term, which are required to be followed before tax can legally be collected. Similarly, the provisions of law are required to be followed even if the taxpayer does not participate in the proceedings. No assessing authority can refuse to assess the tax fairly and legally merely because the taxpayer is not participating in the proceedings. Hence, dismissal of appeals by the Income-tax Appellate Tribunal for non-prosecution is illegal and unjustified.

iii) Merely because a person is not availing of his right of natural justice it cannot be a ground for the Tribunal to refuse to perform its statutory duty of deciding the appeal. An appellate authority is required to afford an opportunity to be heard to the appellant.

iv) The Tribunal could not have dismissed the appeal filed by the assessee for want of prosecution and it ought to have decided the appeal on merits even if the assessee or its counsel was not present when the appeal was taken up for hearing. The Tribunal was to restore the appeal and decide it on the merits after giving both the parties an opportunity of being heard.’

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Appeal to Appellate Tribunal – Powers of Tribunal – Sections 253 and 254 and Rule 24 – No power to dismiss appeal on ground of non-prosecution – Duty to dispose of appeal on merits – Appeals restored before Tribunal

11 Daryapur Shetkari Sahakari Ginning and Pressing Factory vs. ACIT [2021] 432 ITR 130 (Bom) A.Ys.: 2002-03 to 2004-05 Date of order: 24th November, 2020

Appeal to Appellate Tribunal – Powers of Tribunal – Sections 253 and 254 and Rule 24 – No power to dismiss appeal on ground of non-prosecution – Duty to dispose of appeal on merits – Appeals restored before Tribunal

For the A.Ys. 2002-03, 2003-04 and 2004-05, against the orders of the Commissioner (Appeals), the assessee had filed appeals before the Tribunal. The Tribunal dismissed all three appeals by a common order on the ground that none appeared on behalf of the assessee which meant that the assessee was not interested in prosecuting those appeals.

The Bombay High Court allowed the appeals filed by the assessee and held as under:

‘i) Rule 24 of the Income-tax (Appellate Tribunal) Rules, 1963 mandates that when an appeal is called for hearing and the appellant does not appear, the Tribunal is required to dispose of the appeal on merits after hearing the respondent.

ii) The order passed by the Tribunal dismissing the appeals in limine for non-appearance of the appellant-assessee holding that the assessee was not interested in prosecuting the appeals was unsustainable. The Tribunal was duty-bound to decide the appeals on the merits after hearing the respondent and the Department according to the mandate under Rule 24 of the 1963 Rules and in terms of the ratio laid down by the Supreme Court.

iii) The order of the Tribunal being contrary to Rule 24 of the 1963 Rules was quashed and set aside. The respective appeals were restored for adjudication on the merits before the Tribunal.’

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Appeal to Appellate Tribunal – Section 254 of ITA, 1961 and Rule 24 of ITAT Rules, 1963 – (i) Application for recall of order – Tribunal dismissing appeal for non-prosecution – Duty of Tribunal to decide appeal on merits; (ii) Application for recall of order – Limitation – Amendment in law – First application for restoration of appeal dismissed for non-prosecution within period of limitation – Tribunal dismissing second application invoking amendment to section 254(2) – Erroneous

10 Pradeep Kumar Jindal vs. Principal CIT [2021] 432 ITR 48 (Del) A.Y.: 2008-09 Date of order: 19th February, 2021

Appeal to Appellate Tribunal – Section 254 of ITA, 1961 and Rule 24 of ITAT Rules, 1963 – (i) Application for recall of order – Tribunal dismissing appeal for non-prosecution – Duty of Tribunal to decide appeal on merits; (ii) Application for recall of order – Limitation – Amendment in law – First application for restoration of appeal dismissed for non-prosecution within period of limitation – Tribunal dismissing second application invoking amendment to section 254(2) – Erroneous

The assessee filed an application in March, 2017 before the Tribunal for recall of the order dated 10th December, 2015 dismissing its appeal for non-prosecution. The application was dismissed by the Tribunal in limine by an order dated 7th February, 2018. The Tribunal dismissed the assessee’s contention that between 8th and 10th December, 2015 he was ill and hence could not appear when the appeal was heard on 10th December, 2015, and held that u/s 254(2) as amended with effect from 1st June, 2016, any miscellaneous application had to be filed within six months from the date of the order and that, therefore, the application for restoration of the appeal dismissed on 10th December, 2015 was barred by limitation. Thereafter, the assessee filed another application on 26th February, 2018 for recall of the order dated 7th February, 2018 which was also dismissed by an order dated 23rd December, 2020 on the ground that a second application was not maintainable.

The Delhi High Court allowed the writ petition filed by the assessee and held as under:

‘i) There was no adjudication by the Tribunal of the appeal on merits. Its order dated 10th December, 2015 dismissing the assessee’s appeal was for non-prosecution and not on merits, as it was required to do notwithstanding the non-appearance of the assessee when the appeal was called for hearing, was violative of Rule 24 of the Income-tax (Appellate Tribunal) Rules, 1963 and thus was void. The action of the Tribunal, of dismissing the appeal for non-prosecution instead of on merits and of refusal to restore the appeal notwithstanding the applications of the assessee, was not merely an irregularity. The Tribunal had erred in dismissing the first application of the assessee filed in March, 2017 for restoration of the appeal invoking the amendment to section 254(2) requiring application thereunder to be filed within six months and in not going into the sufficiency of the reasons given by the assessee for non-appearance.

ii) The application filed by the assessee in March, 2017 invoking Rule 24 of the 1963 Rules was within time and could not have been dismissed applying the provisions of limitation applicable to section 254(2).

iii) In view of the aforesaid, the petition is allowed. I.T.A. No. 3844/Del/2013 preferred by the petitioner before the Income-tax Appellate Tribunal is ordered to be restored to its original position, as immediately before 10th December, 2015, and the Tribunal is requested to take up the same for hearing on 15th March, 2021 or on any other date which may be convenient to the Income-tax Appellate Tribunal.’

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Sections 22, 56 – Since the nature of services provided by the assessee to the tenants / lessees was linked to the premises and was in the nature of the auxiliary services which were directly linked to the leasing of the property, gross receipts on account of amenities / services provided by the assessee to its tenants are chargeable to tax under the head ‘Income from House Property’ and not ‘Income from Other Sources’

5 ACIT vs. XTP Design Furniture Ltd. Pramod Kumar (V.P.) and Saktijit Dey (J.M.) ITA No. 2424/Mum/2019 A.Y.: 2013-14 Date of order: 19th January, 2021 Counsel for Assessee / Revenue: None / T.S. Khalsa

Sections 22, 56 – Since the nature of services provided by the assessee to the tenants / lessees was linked to the premises and was in the nature of the auxiliary services which were directly linked to the leasing of the property, gross receipts on account of amenities / services provided by the assessee to its tenants are chargeable to tax under the head ‘Income from House Property’ and not ‘Income from Other Sources’

FACTS
The assessee had leased its office premises at Unit Nos. 201, 301 and 401 in Peninsula Chambers to Group Media Pvt. Ltd. and Hindustan Thompson Associates Ltd. The assessee had given the lessees additional common facilities like lift, security, fire-fighting system, common area facilities, car parking, terrace use, water supply, etc. The assessee charged license fees and also amenities fees. Both these amounts were offered by the assessee for taxation under the head ‘Income from House Property’. The A.O. taxed the license fees under the head ‘Income from House Property’, whereas the amenities fees were taxed by him as ‘Income from Other Sources’.

Aggrieved, the assessee preferred an appeal to the CIT(A) who, following the decision of the Tribunal in the assessee’s own case for A.Ys. 2009-10 and 2010-11, decided the appeal in favour of the assessee.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

HELD
The Revenue fairly accepted that the issue under consideration is clearly covered by the decision of the Tribunal, in the assessee’s own case, for A.Ys. 2009-10 and 2010-11 in favour of the assessee. The Tribunal noted that the CIT(A) has decided the issue by following these decisions of the Tribunal wherein for the A.Y. 2009-10 the Tribunal has held as under:

‘We find that the nature of services provided by the assessee to the tenants / lessees were linked to the premises and were in the nature of the auxiliary services which were directly linked to the leasing of the property. Since there is a direct nexus between the amenities and leased premises, the CIT(A) has rightly directed the A.O. to treat the income from amenities under the head, “Income from House Property”’.

The Tribunal while deciding the appeal for A.Y. 2010-11, has in its order dated 9th February, 2016, concurred with the above view by holding that ‘the income of Rs. 4,38,61,486 received by the assessee company from amenities shall be chargeable to tax under the head “Income from House Property”.’

The Tribunal held that it found no reason to take any other view of the matter than the view taken by the co-ordinate bench. It held that there is no infirmity in the order of the CIT(A) in deciding the issue in favour of the assessee in consonance with the decision of the co-ordinate bench.

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Section 220 – Collection and recovery of tax – Assessee contended that total demand was to be kept in abeyance till disposal of appeal by CIT(A) – It was noted that said addition was made primarily on basis of statement – No cross-examine granted – Thus making additions to income of assessee was highly questionable – Financial hardship to meet demand even to extent of 20% – The entire demand was to be kept in abeyance till disposal of appeal on merits by CIT(Appeals)

2. Mayur Kanjibhai Shah vs. ITO-25(3)(1) [Writ Petition No. 812 of 2020, dated 12th March, 2020 (Bombay High Court)]

Section 220 – Collection and recovery of tax – Assessee contended that total demand was to be kept in abeyance till disposal of appeal by CIT(A) – It was noted that said addition was made primarily on basis of statement – No cross-examine granted – Thus making additions to income of assessee was highly questionable – Financial hardship to meet demand even to extent of 20% – The entire demand was to be kept in abeyance till disposal of appeal on merits by CIT(Appeals)

The assessee had filed his return of income for A.Y. 2012-13 on 28th September, 2012 declaring a total income of Rs. 5,05,981.00, which was processed u/s 143(3).

Subsequently, it was decided to reopen the assessment u/s 147 for which notice u/s 148 was issued. Following assessment proceedings on re-opening culminating in the assessment order passed u/s 143(3) r/w/s 147, the A.O. held that an amount of Rs. 3.25 crores was extended by the petitioner to one Nilesh Bharani which was treated as unexplained money u/s 69A and was added to the total income of the assessee.

Pursuant to the order of assessment, the A.O. issued notice of demand dated 21st December, 2019 to the assessee u/s 156 calling upon him to pay an amount of Rs. 2,17,76,850 within the period prescribed.

An appeal was preferred before the CIT(A)-37. Simultaneously, the assessee filed an application before the A.O. for complete stay of demand. Under an order passed u/s 220(6) the A.O. rejected the stay application, giving liberty to the assessee to pay 20% of the demand in which event it was stated that the balance of the outstanding dues would be kept in abeyance.

Aggrieved by the above order, the assessee filed the writ petition.

Revenue filed a common affidavit. Reopening of the assessment in the case of the petitioner for A.Y. 2012-13 was justified and it was contended that the said re-assessment order suffers from no error or infirmity. In paragraph No. 17 it was stated that summons u/s 131 was issued to Nilesh Bharani, but he, instead, had sent a copy of a letter dated 14th October, 2014 addressed to the Director of Income Tax-2, Mumbai.

The Court observed that the assessment order on reopening had been made primarily on the basis of certain entries (in coded language) made in the diary recovered from the premises of Nilesh Bharani in the course of search and seizure u/s 132. The finding that the petitioner had lent / provided cash amount of Rs. 3.25 crores to M/s Evergreen Enterprises / Nilesh Bharani was also reached on the statement made by Nilesh Bharani. Nilesh Bharani was not subjected to any cross-examination by the petitioner; rather, in the affidavit of the Revenue it is stated that Nilesh Bharani has retracted his statement. Prima facie, on the basis of coded language diary entries and a retracted uncorroborated statement of an alleged beneficiary, perhaps the additions made by the A.O. are highly questionable. In such circumstances, instead of taking a mechanical approach by directing the petitioner to pay 20% of the tax demand or providing instalments, the Revenue ought to have considered the case prima facie, balance of convenience and financial hardship, if any, of the petitioner.

In such circumstances, in the interest of justice the demand raised was kept in abeyance till disposal of the appeal by the CIT(A). The appeal should be decided by the CIT(A) within a period of four months from the date of receipt of an authenticated copy of the order. Till disposal of the appeal within the said period, notice of demand shall be kept in abeyance. Accordingly, writ petition is allowed.

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Section 54F – Exemption cannot be denied merely because the sale consideration was not deposited in a bank account as per ‘capital gain accounts scheme’ when the investment in acquisition of a residential house was made within the time prescribed

1. Ashok Kumar Wadhwa vs. ACIT (New Delhi) Amit Shukla (J.M.) and O.P. Kant (A.M.) ITA No. 114/Del/2020 A.Y.: 2016-17 Date of order: 2nd March, 2021 Counsel for Assessee / Revenue: Raj Kumar Gupta and J.P. Sharma / Alka Gautam

Section 54F – Exemption cannot be denied merely because the sale consideration was not deposited in a bank account as per ‘capital gain accounts scheme’ when the investment in acquisition of a residential house was made within the time prescribed

FACTS

The assessee, along with a co-owner, sold a residential plot on 15th April, 2015 for Rs. 6.26 crores. He deposited the sale proceeds in a savings bank account maintained with Axis Bank. Subsequently, he purchased a residential house for a sum of Rs. 2.48 crores on 12th April, 2017 under his full ownership. The due date for filing of the return of income was 31st July, 2016, which was extended to 5th August, 2016, but the assessee filed his return of income belatedly on 5th June, 2017 u/s 139(4). In the said return, the assessee claimed exemption u/s 54F against capital gain on sale of property. But according to the A.O., the assessee was not entitled to the benefit of exemption because the sale consideration was not deposited in a bank account maintained as per the ‘capital gain accounts scheme’ before the due date of filing of return of income u/s 139(1), i.e. 5th August, 2016. On appeal, the CIT(A) confirmed the order of the A.O.

Before the Tribunal, the assessee submitted that he has made an investment in the residential house within the specified period of two years from the date of the sale of the property and thus he has substantially complied with the provision of section 54F(1). Therefore, exemption should be allowed. However, the Revenue relied on the orders of the lower authorities.

HELD

The Tribunal noted that the assessee had made an investment in a new house on 12th April, 2017, i.e., within the two years’ time allowed u/s 54F(1). The benefit was denied only because the assessee had failed to deposit the sale consideration in the specified capital gains bank deposit schemes by 5th August, 2016, i.e., the time allowed u/s 139(1), as required u/s 54F(4).

Analysing the provisions of section 54, the Tribunal observed that the provisions of sub-section (1) are mandatory and substantive in nature while the provisions of sub-section (4) of section 54F are procedural. According to it, if the mandatory and substantive provisions stood satisfied, the assessee should be eligible for benefit u/s 54F. For this purpose, the Tribunal relied on the decisions of the Karnataka High Court in the case of CIT vs. K. Ramachandra Rao (56 Taxmann.com 163) and of the Delhi Tribunal in the case of Smt. Vatsala Asthana vs. ITO (2019) (110 Taxmann.com 173). Therefore, the Tribunal set aside the findings of the lower authorities and directed the A.O. to allow the exemption u/s 54F.

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NAMING OF BENEFICIARIES IN TRUST DEED – EXPLANATION TO SECTION 164(1)

ISSUE FOR CONSIDERATION

Section 160(1) treats the trustee as a representative assessee in respect of the income which he receives or is entitled to receive on behalf of or for the benefit of any person due to his appointment under a trust declared by a duly executed instrument in writing. Section 161 provides that tax on the income in respect of which the trustee is a representative assessee shall be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him, i.e., the beneficiary.

Section 164(1) provides an exception to this general rule of taxation of the income of a trust. It provides that the tax shall be charged at the maximum marginal rate in certain cases and not the tax that would have been payable had it been taxed in the hands of the beneficiaries. The taxability at maximum marginal rate in the manner provided in section 164(1) will get triggered in a case where the income (or any part thereof) is not specifically receivable on behalf of or for the benefit of any one person or where the individual shares of the persons on whose behalf or for whose benefit such income is receivable are indeterminate or unknown. Such trusts are commonly referred to as discretionary trusts. Further, the Explanation 1 to section 164 provides as follows:

• Where the person on whose behalf or for whose benefit the income (or any part thereof) is receivable during the previous year is not expressly stated in the instrument of the trust and is not identifiable as such on the date of such instrument, it shall be deemed that the income is not specifically receivable on behalf of or for the benefit of any one person.
• Where the individual shares of the persons on whose behalf or for whose benefit the income (or part thereof) is receivable are not expressly stated in the instrument of the trust and are not ascertainable as such on the date of such instrument, it shall be deemed that the individual shares of the beneficiaries are indeterminate or unknown.

An issue has arisen about the applicability of the provisions of section 164(1) read with the aforesaid Explanation in the case of trusts (such as venture capital funds or alternative investment funds) where the persons who contribute the capital (contributors) under the scheme become beneficiaries of the income derived by the trust in proportion to the capital contributed by them. In such cases it is not possible to identify the beneficiaries and their share in the income of the trust at the time when the trust has been formed. Therefore, the trust deed does not list out the names of the beneficiaries and their respective shares in the income of the trust. Instead, it provides for the mechanism on the basis of which the beneficiaries and also their shares in the income of the trust can be identified from time to time.

The Bengaluru Bench of the Tribunal has held that it is sufficient if the basis to identify the beneficiaries and their share in the income of the trust is specified in the trust deed and it is not left to the discretion of the trustee or any other person. As against this, the Chennai Bench took the view that the income of the trust would be liable to tax at the maximum marginal rate in the absence of identification of the beneficiaries and their share in the income in the trust deed at the time of its formation.

THE INDIA ADVANTAGE FUND CASE

The issue had first come up for consideration of the Bengaluru Bench of the Tribunal in the case of DCIT vs. India Advantage Fund – VII [2015] 67 SOT 5.

In this case, the assessee was a trust constituted under an instrument of trust dated 25th September, 2006. The settlor (ICICI Venture Funds Management Company Limited) had, by the said instrument, transferred a sum of Rs. 10,000 to the trustee (The Western India Trustee and Executor Company Limited) as initial corpus to be applied and governed by the terms and conditions of the indenture of trust. The trustee was empowered to call for contributions from the contributors which were required to be invested by the trustee in accordance with the objects of the trust. The objective of the trust was to invest in certain securities called ‘mezzanine instruments’ and to achieve commensurate returns for the contributors. The trust was to facilitate investment by the contributors who should be resident in India and achieve returns for such contributors. The trust deed provided that the contributors to the fund would also be its beneficiaries.

For the assessment year 2008-09, the trust filed its return declaring income of Rs. 1,81,68,357 and, further, submitted a letter to the A.O. that it had declared the income out of extreme precaution and in good faith to provide complete information and details about the income earned by it but offered to tax by the beneficiaries. It was claimed that the income declared had been included in the return of income of the beneficiaries and offered to tax directly by them pursuant to the provisions of sections 61 to 63 of the Act, which mandated that the income arising from revocable transfers was to be taxed in the hands of the transferors (i.e., the contributors). Accordingly, the Fund had not offered the same to tax again in its hands.

The A.O. was of the view that the individual shares of the persons on whose behalf or for whose benefit the income was received or was receivable by the assessee, or part thereof, were indeterminate or unknown. He was also of the view that the mere fact that the deed mentioned that the share of the beneficiaries would be allocated according to their investments in the Fund, did not make their shares determinate or known. Accordingly, the A.O. invoked the provisions of section 164(1) and held that the assessee would be liable to be assessed at the maximum marginal rate on its whole income. Apart from that, the A.O. also held that the assessee and the beneficiaries joined in a common purpose or common action, the object of which was to produce income, profits and gains, and therefore constituted an AOP. On that count also, the income was brought to tax in the hands of the assessee in the status of an AOP and charged at the maximum marginal rate.

The assessee raised the following contentions before the CIT(A):
1. It should not have been treated as an AOP as there was no inter se arrangement between one contributory / beneficiary and the other contributory / beneficiary, as each of them had entered into separate contribution arrangements with the assessee. Therefore, it could not be said that two or more beneficiaries had joined in a common purpose or common action;

2. The beneficiaries could not be said to be uncertain so long as the trust deed gave the details of the beneficiaries and the description of the person who was to be benefited. Reliance was placed on the CBDT Circular No. 281 dated 22nd September, 1980 wherein it was clarified that it was not necessary that the beneficiary in the relevant previous year should be actually named in the instrument of trust and all that was necessary was that the beneficiary should be identifiable with reference to the instrument of trust on the date of the instrument. With regard to ascertainment of the share of the beneficiaries, it was contended that it was enough if the shares were capable of being determined based on the provisions of the trust deed and it was not the requirement of law that the trust deed should actually prescribe the percentage share of the beneficiary in order for the trust to be determinate. Attention was drawn to the relevant clauses of the trust deed where it was specified who would be the beneficiaries and the formula to determine the share of each beneficiary.

3. The assessee was set up as a revocable trust as the trustees were given power to terminate the trust at any time before the expiry of the term. Therefore, the income of the trust had to be assessed in the hands of the beneficiaries, being the transferors.

The CIT(A) treated the assessee trust as a revocable trust and held that it need not be subjected to tax as the tax obligations had been fully discharged by the beneficiaries of the assessee trust. Aggrieved by the order of the CIT(A), the Revenue preferred an appeal to the Tribunal.

Before the Tribunal, the Revenue, apart from reiterating its stand as contained in the assessment order, drew attention to Circular No. 13/2014 whereby the CBDT had clarified that Alternative Investment Funds which were subject to the SEBI (Alternative Investment Funds) Regulations, 2012 which were not venture capital funds and which were non-charitable trusts where the investors’ name and beneficial interest were not explicitly known on the date of its creation – such information becoming available only when the funds started accepting contribution from the investors – had to be treated as falling within section 164(1) and the fund should be taxed in respect of the income received on behalf of the beneficiaries at the maximum marginal rate. It was claimed that the case of the assessee would fall within the above CBDT Clarifications and therefore the action of the A.O. was correct and had to be restored.

On behalf of the assessee, however, attention was drawn to the clause of the trust deed which contained the following definition:
‘“Contributors” or “Beneficiaries” means the Persons, each of whom have made or agreed to make Contributions to the Trust, in accordance with the Contribution Agreement.’

It was claimed that it was possible to identify the beneficiaries and their share on the basis of the mechanism provided in the trust deed. Reliance was placed on CBDT Circular No. 281 dated 22nd September, 1980 and the decisions in the case of CIT vs. P. Sekar Trust [2010] 321 ITR 305 (Mad); CIT vs. Manilal Bapalal [2010] 321 ITR 322 (Mad); and Companies Incorporated in Mauritius, In re [1997] 224 ITR 473 (AAR). Insofar as the Circular No. 13/2014 relied upon by the Revenue was concerned, it was argued that it was not applicable for the assessment year under consideration and reliance was placed on the decision of the Bombay High Court in the case of BASF (India) Ltd. vs. W. Hasan, CIT [2006] 280 ITR 136 wherein it was held that Circulars not in force in the relevant assessment year cannot be applied.

The assessee also raised the issue of the nature of the trust being revocable and, hence, the income could be assessed only in the hands of the transferors in terms of the provisions of section 61. As far as the status of the trust as an AOP was concerned, the assessee relied upon several decisions including that of the Supreme Court in the case of CIT vs. Indira Balakrishnan [1960] 39 ITR 546 and claimed that the characteristics of an AOP were completely absent in its case.

After considering the contentions of both the parties, the Tribunal inter alia held as follows:
• The trust deed clearly laid down that beneficiaries means the persons, each of whom have made or agreed to make contributions to the trust in accordance with the Contribution Agreement. This clause was sufficient to identify the beneficiaries. It was clarified by Circular No. 281 dated 22nd September, 1980 that it was not necessary that the beneficiary in the relevant previous year should be actually named in the instrument of trust and all that was necessary was that the beneficiary should be identifiable with reference to the order of the instrument of trust on the date of such instrument.

• It was not the requirement of law that the trust deed should actually prescribe the percentage share of the beneficiary in order for the trust to be determinate. It was enough if the shares were capable of being determined based on the provisions of the trust deed. In the case of the assessee, the clause details the formula with respect to the share of each beneficiary and the trustee had no discretion to decide the share of each beneficiary. Reliance was placed on the decision of the AAR in the case of Companies Incorporated in Mauritius, In re (Supra) wherein it was held that the persons as well as the shares must be capable of being definitely pinpointed and ascertained on the date of the trust deed itself without leaving these to be decided upon at a future date by a person other than the author either at his discretion or in a manner not envisaged in the trust deed. Even if the trust deed authorised the addition of further contributors to the trust at different points of time, in addition to the initial contributors, then the same would not make the beneficiaries unknown or their share indeterminate. Even if the scheme of computation of income of beneficiaries was complicated, it was not possible to say that the share income of the beneficiaries could not be determined or known from the trust deed.

• CBDT’s Circular No. 13/2014 dated 28th July, 2014 was not in force in the relevant assessment year for which the assessment was made by the A.O. The Circulars not in force in the relevant A.Y. cannot be applied as held by the Bombay High Court in the case of BASF (India) Ltd. (Supra).

On the basis of the above, the Tribunal held that the income of the assessee trust was determinate; its income could not be taxed at the maximum marginal rate; the income was assessable only in the hands of the beneficiaries as it was a revocable transfer; and that there was no formation of an AOP.

TVS INVESTMENTS IFUND CASE

Thereafter, the issue came up for consideration before the Chennai Bench of the Tribunal in the case of TVS Investments iFund vs. ITO (2017) 164 ITD 524.

In this case, the assessee was a trust which was formed to receive unit contributions from High Net-Worth Individuals (HNIs) towards the capital amount committed by them as per the terms of Contribution Agreements and provided returns on such investments. For the A.Y. 2009-10, the assessee declared Nil income by treating itself as a representative assessee and claimed that the entire income was taxable in the hands of the beneficiaries. However, the A.O. subjected the entire receipts to tax. He concluded that the assessee was not a Determinate Trust and when not found eligible for deduction u/s 10(23FB) as an alternative investment fund, it could not be extended the benefit of section 164. The ‘pass-through’ status was denied since the assessee was neither a determinate trust nor a non-discretionary trust and therefore the income was taxed in the hands of the representative assessee and not in the hands of the beneficiaries.

In appeal, the CIT(A) held that the assessee trust could not be categorised as a Determinate Trust so as to gain pass-through status. Further, pass-through status was available only when the trust was an approved fund u/s 10(23FB). When the assessee was not a SEBI-approved Alternate Investment Fund, it could not claim pass-through status. The CIT(A) opined that if every trust were to become eligible for pass-through status automatically, then there was no need for an enactment under the Act in the form of 10(23FB) r.w.s. 115U. Accordingly, the CIT(A) dismissed the appeal of the assessee. On being aggrieved, the assessee went in further appeal before the Tribunal.

The Tribunal held that the income of the trust would be chargeable to Maximum Marginal Rate if the trust does not satisfy two tests, i.e., the names of the beneficiaries are specified in the trust deed and the individual shares of the beneficiaries are ascertainable on the date of the trust deed. If the trust has satisfied these tests, then the trust would be treated as a pass-through conduit subject to the provisions of section 160. For getting pass-through treatment the trust should be a determinate and non-discretionary trust. In order to form a determinate trust, the beneficiaries should be known and the individual share of those beneficiaries should be ascertainable as on the date of the trust deed. But in the case under consideration the beneficiaries were not incorporated in the trust deed. The identities of the contributors / beneficiaries were unknown. The investment manager gathered the funds from the contributors and the benefit was passed on to the contributors based on the proportion of their investments in the assessee trust. The exception to this rule, and providing pass-through status to a Trust, even though the contributing beneficiaries were not mentioned in the deed of trust, was only extended to AIF(VCF) which were registered with SEBI and eligible for exemption u/s 10(23FB) r.w.s. 115U.

The Tribunal distinguished the decision of the Madras High Court in the case of CIT vs. P. Sekar Trust [2010] 321 ITR 305 which was relied upon by the assessee on the ground that in that case the beneficiaries were incorporated on the day of institution of the trust deed and, moreover, they did not receive any income in that year. Further, the individual share of the beneficiaries was also ascertainable on the date of the trust. As against this, in the assessee’s case neither the names of the beneficiaries were specified in the trust deed nor were the individual shares of the beneficiaries ascertainable on the date of the institution of the trust. Therefore, the Tribunal upheld the order of the A.O. taxing the income of the assessee trust at the maximum marginal rate under the provisions of section 164(1).

OBSERVATIONS

The taxation of discretionary trusts at maximum marginal rate was introduced in section 164(1) by the Finance Act, 1970 with effect from 1st April, 1970. The objective behind its introduction was explained in Circular No. 45 dated 2nd September, 1970 which is reproduced below:

Private discretionary trusts. – Under the provisions of s. 164 of the IT Act before the amendment made by the Finance Act, 1970, income of a trust in which the shares of the beneficiaries are indeterminate or unknown, is chargeable to tax as a single unit treating it as the total income of an AOP. This provision affords scope for reduction of tax liability by transferring property to trustees and vesting discretion in them to accumulate the income or apply it for the benefit of any one or more of the beneficiaries, at their choice. By creating a multiplicity of such trusts, each one of which derives a comparatively low income, the incidence of tax on the income from property transferred to the several trusts is maintained at a low level. In such arrangements, it is often found that one or more of the beneficiaries of the trust are persons having high personal incomes, but no part of the trust income being specifically allocable to such beneficiaries under the terms of the trust, such income cannot be subject to tax at a high personal rate which would have been applicable if their shares had been determinate.

Thus, it can be seen that the objective was to curb the practice of forming multiple trusts, whereby each of them derived minimum income, so that it did not fall within the higher tax bracket.

Thereafter, the Explanation was added by the Finance (No. 2) Act, 1980 with effect from 1st April, 1980 deeming that, in certain situations, beneficiaries shall be deemed to be not identifiable or their shares shall be deemed to be unascertained or indeterminate or unknown. The legislative intent behind insertion of this Explanation has been explained in the Circular No. 281 dated 22nd September, 1980 which is reproduced below:

Under the provisions as they existed prior to the amendments made by the Finance Act, the flat rate of 65 per cent was not applicable where the beneficiaries and their shares are known in the previous year although such beneficiaries or their shares have not been specified in the relevant instrument of trust, order of the court or wakf deed. This provision was misused in some cases by giving discretion to the trustees to decide the allocation of income every year and in several other ways. In such a situation, the trustees and beneficiaries were able to manipulate the arrangements in such a manner that a discretionary trust was converted into a specific trust whenever it suited them tax-wise. In order to prevent such manipulation, the Finance Act has inserted Explanation 1 in section 164 to provide as under:

a. any income in respect of which the court of wards, the administrator-general, the official trustee, receiver, manager, trustee or mutawalli appointed under a wakf deed is liable as a representative assessee or any part thereof shall be regarded as not being specifically receivable on behalf or for the benefit of any one person unless the person on whose behalf or for whose benefit such income or such part thereof is receivable during the previous year is expressly stated in the order of the court or the instrument of trust or wakf deed, as the case may be, and is identifiable as such on the date of such order, instrument or deed. [For this purpose, it is not necessary that the beneficiary in the relevant previous year should be actually named in the order of the court or the instrument of trust or wakf deed, all that is necessary is that the beneficiary should be identifiable with reference to the order of the court or the instrument of trust or wakf deed on the date of such order, instrument or deed;]

b. the individual shares of the persons on whose behalf or for whose benefit such income or part thereof is receivable will be regarded as indeterminate or unknown unless the individual shares of such persons are expressly stated in the order of the court or the instrument of trust or wakf deed, as the case may be, and are ascertainable as such on the date of such order, instrument or deed.

As a result of the insertion of the above Explanation, trust under which a discretion is given to the trustee to decide the allocation of the income every year or a right is given to the beneficiary to exercise the option to receive the income or not each year will all be regarded as discretionary trusts and assessed accordingly.

The following points emerge from a combined reading of both the Circulars, clarifying the objective behind amending the provisions of section 164(1) to provide for taxability of discretionary trusts at the maximum marginal rate and inserting the Explanation providing for deemed cases of discretionary trust:

• There was a need to tax the income of the discretionary trusts at the maximum marginal rate to curb the practice of creating multiple trusts and thereby avoiding tax by ensuring that they earn low income, so that they do not get taxed at the maximum marginal rate.
• To overcome this issue, the provisions of section 164(1) were amended to provide that the income of the discretionary trust (where the beneficiaries or their share are not known or determinate) is liable to tax at the maximum marginal rate.
• Even after providing for taxability of such discretionary trusts at the maximum marginal rate in section 164(1), the practice of avoiding it continued in some cases, as there was no requirement under the law that the beneficiaries or their shares should have been specified in the relevant instrument of trust, order of the court or wakf deed.
• Although the discretion was given to the trustees to decide the allocation of income every year, the affairs of the trusts were so arranged whereby it was claimed that the beneficiaries and their shares were known in the concerned previous year and, therefore, the provisions of section 164(1) were not applicable to that previous year.
• To plug this loophole, the Explanation was inserted to provide that the beneficiaries and their shares should be expressly stated in the relevant instrument of trust, order of the court or wakf deed.
• It has been expressly clarified that it is not necessary that the beneficiary in the relevant previous year should be actually named in the order of the court or the instrument of trust or wakf deed and all that is necessary is that the beneficiary should be identifiable with reference to the order of the court or the instrument of trust or wakf deed on the date of such order, instrument or deed.
• Only cases where a discretion is given to the trustee to decide the allocation of the income every year or a right is given to the beneficiary to exercise the option to receive the income or not each year will be regarded as discretionary trusts and assessed accordingly.

In the background of these legislative developments, it can be inferred that the requirement is not to name the beneficiaries in the instrument of trust but to provide for the identification of the beneficiaries on an objective basis. This has been made expressly clear in the aforesaid Circular itself. These aspects had not been pointed out to the Chennai Bench of the Tribunal in the case of TVS Investments iFund (Supra). The Bengaluru Bench of the Tribunal considered the legislative intent and the aforesaid Circulars to hold that it would be sufficient if the trust deed provided that the contributors would be beneficiaries and further it provided for the formula to arrive at the individual share of each beneficiary.

It may be noted that both the above decisions of the Tribunal had been challenged before the respective High Courts. The Revenue had filed an appeal before the Karnataka High Court against the decision of the Bengaluru Bench in the case of India Advantage Fund (Supra). Before the High Court it was contended on behalf of the Revenue that the exact amount of share of the beneficiaries and its quantification should have been possible on the date when the trust deed was executed or the trust was formed. If such conditions were not satisfied, then the shares of the beneficiaries would turn into non-determinable shares. The High Court rejected this argument by holding as under:

10. In our view, the contention is wholly misconceived for three reasons. One is that by no interpretative process the Explanation to section 164 of the Act, which is pressed in service can be read for determinability of the shares of the beneficiary with the quantum on the date when the Trust deed is executed, and the second reason is that the real test is the determinability of the shares of the beneficiary and is not dependent upon the date on which the trust deed was executed if one is to connect the same with the quantum. The real test is whether shares are determinable even when or after the Trust is formed or may be in future when the Trust is in existence. In the facts of the present case, even the assessing authority found that the beneficiaries are to share the benefit as per their investment made or to say in other words, in proportion to the investment made. Once the benefits are to be shared by the beneficiaries in proportion to the investment made, any person with reasonable prudence would reach to the conclusion that the shares are determinable. Once the shares are determinable amongst the beneficiaries, it would meet with the requirement of the law, to come out from the applicability of section 164 of the Act.

11. Under the circumstances, we cannot accept the contention of the Revenue that the shares were non-determinable or the view taken by the Tribunal is perverse. On the contrary, we do find that the view taken by the Tribunal is correct and would not call for interference so far as determinability of the shares of the beneficiaries is concerned.

12. Once the shares of the beneficiaries are found to be determinable, the income is to be taxed of that respective sharer or the beneficiaries in the hands of the beneficiary and not in the hands of the trustees which has already been shown in the present case.

Thus, the view of the Bengaluru Bench of the Tribunal was affirmed by the Karnataka High Court.

The decision of the Chennai Bench of the Tribunal in the case of TVS Investments iFund (Supra) was challenged by the assessee before the Madras High Court. Before deciding the issue, the Madras High Court had already dealt with it in the case of CIT vs. TVS Shriram Growth Fund [2020] 121 taxmann.com 238 and decided it in favour of the assessee by relying on its own decision in the case of CIT vs. P. Sekar Trust [2010] 321 ITR 305 (Mad). It was noted by the Madras High Court that the Chennai Bench had wrongly disregarded the decision in the case of the P. Sekar Trust. The relevant observations are reproduced below:

In fact, the Tribunal ought to have followed the decision of the Division Bench of this Court in the case of P. Sekar Trust (Supra). However, the same has been distinguished by the Tribunal in the case of TVS Investments iFund (Supra) by observing that the said judgment is not applicable to the facts of the case because in it, the beneficiaries are incorporated on the day of the institution of the Trust Deed and, moreover, they did not receive any income in that year. Unfortunately, the Tribunal in the case of TVS Investments iFund (Supra), did not fully appreciate the finding rendered by the Hon’ble Division Bench of this Court and post a wrong question, which led to a wrong answer.

The Madras High Court in this case concurred with the view of the Karnataka High Court in the case of India Advantage Fund (Supra) and decided the issue against the Revenue. The same view was then followed by the Madras High Court in the case of TVS Investments iFund and overruled the decision of the Chennai Bench of the Tribunal.

A similar view had been taken by the Authority for Advance Rulings in the case of Companies Incorporated in Mauritius, In re (Supra).

The better view of the matter therefore is the view taken by the Bengaluru Bench of the Tribunal in the case of India Advantage Fund, as affirmed by the Karnataka and Madras High Courts, that it is not necessary to list out the beneficiaries and their exact share in terms of percentage in the trust deed. It is sufficient if the trust deed provides both for the manner of identification of the beneficiaries as well as a mechanism to compute their respective shares in the income of the trust for any year, without leaving it to the discretion of the trustee or any other person.

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Reserve credited in the books of amalgamated company on account of acquisition of assets and liabilities in a scheme of amalgamation is in the nature of capital reserve only and not revaluation reserve

7. (2020) 82 ITR (T) 557 (Del)(Trib) Hespera Realty Pvt. Ltd. vs. DCIT ITA No.: 764/Del/2020 A.Y.: 2015-16 Date of order: 27th July, 2020

Reserve credited in the books of amalgamated company on account of acquisition of assets and liabilities in a scheme of amalgamation is in the nature of capital reserve only and not revaluation reserve

FACTS

The assessee company took over (acquired) certain other companies under a scheme of amalgamation. The assets and liabilities were taken over at fair value which was higher than their cost in the books of the amalgamating companies. The difference was recorded in the assessee’s books as ‘capital reserve’. These also included shares of Indiabulls Housing Finance Limited. Some of the said shares acquired in the scheme of amalgamation were sold by the assessee company at a profit. While accounting for the said profit in the books, the assessee company considered the cost of acquisition as the actual cost at which they were acquired in the course of amalgamation, which value was necessarily the fair value of the shares (calculated at closing price on NSE on the day prior to the appointed date for the amalgamation).

It was the contention of the Revenue that the scheme of amalgamation was a colourable device to evade tax on book profits u/s 115JB. The A.O. held that the reserve credited in the books was not capital reserve and was essentially revaluation reserve which ought to be added back while computing book profits in view of clause (j) to Explanation 1 of section 115JB. Thus, the difference between the cost of shares in the books of the amalgamating company and their fair value was added back in the hands of the assessee while computing book profits (pertaining to sale of shares).

The CIT(A) concurred with the findings of the A.O. and upheld his order.

Aggrieved, the assessee preferred an appeal before the ITAT.

HELD

The ITAT observed that a ‘Revaluation Reserve’ is created when an enterprise revalues its own assets, already acquired and recorded in its books at certain values. In the instant case, the assessee has not revalued its existing assets but has only recorded the fair values of various assets and liabilities ‘acquired’ by the assessee from the transferor / ‘amalgamating companies’ pursuant to the scheme of amalgamation as its ‘cost of acquisition’ in accordance with the terms of the Court-approved scheme of amalgamation and the provisions of AS 14.

The ITAT examined the provisions of section 115JB vis-à-vis accounting treatment of capital reserve / revaluation reserve.

It was observed that section 115JB requires an assessee company to prepare its P&L account in accordance with the provisions of Parts I and II of Schedule III of the Companies Act, 2013. The section further says that for computing book profits under the said section, the same accounting policy and Accounting Standards as are adopted for preparing the accounts laid before the shareholders at the Annual General Meeting in accordance with the provisions of section 129 of the Companies Act, 2013 (corresponding to section 210 of the Companies Act, 1956) shall be adopted.

Section 129 of the Companies Act provides that the financial statements of the company shall be prepared to give a true and fair view of the state of affairs and the profit or loss of the company and shall comply with the Accounting Standards as prescribed by the Central Government.

As per the above provisions, for accounting for amalgamation, AS 14 is applicable. As per AS 14 pooling of interest method and purchase method are recognised. In the instant case, as per sections 391 to 394 of the Companies Act, amalgamation was regarded as amalgamation in the nature of purchases and hence purchase method of AS 14 is applicable to the assessee.

As per AS 14 ‘If the amalgamation is an “amalgamation in the nature of purchase”, the identity of the reserves, other than the statutory reserves dealt with in paragraph 18, is not preserved. The amount of the consideration is deducted from the value of the net assets of the transferor company acquired by the transferee company. If the result of the computation is negative, the difference is debited to goodwill arising on amalgamation and dealt with in the manner stated in paragraphs 19-20. If the result of the computation is positive, the difference is credited to Capital Reserve.’

Based on the above examination of the requirements of AS 14 and the provisions of section 115JB, the ITAT ruled in favour of the assessee by holding that the reserve credited in the books of the assessee is not in the nature of revaluation reserve but is a capital reserve. In doing so, the Tribunal relied on the order of the co-ordinate Bench in the case of Priapus Developers Pvt. Ltd. 176 ITD 223 dated 12th March, 2019 which had made similar observations on the issue of reserve arising out of the purchase method adopted in the scheme of amalgamation.

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Where receipt of consideration was dependent upon fulfilment of certain obligations, the income cannot be said to have accrued in the year in which relevant agreement is entered

6. (2020) 82 ITR (T) 419 (Mum)(Trib) ITO vs. Abdul Kayum Ahmed Mohd. Tambol (Prop. Tamboli Developers) ITA No.: 5851/Mum/2018 A.Y.: 2009-10 Date of order: 6th July, 2020

Where receipt of consideration was dependent upon fulfilment of certain obligations, the income cannot be said to have accrued in the year in which relevant agreement is entered

FACTS

The assessee, an individual, civil contractor, transferred certain development rights for a total consideration of Rs. 3.36 crores vide agreement dated 23rd July, 2008 out of which Rs. 1 crore was received during F.Y. 2008-09. The assessee calculated business receipts after deducting expenditure incurred in connection with the above and finally offered 8% of the net receipts as income u/s 44AD. The A.O. brought to tax the entire consideration of Rs. 3.36 crores on the basis that, as per the terms of the agreement, the assessee parted with development rights and the possession of the land was also given. Therefore, the transfer was completed during the year and the taxability of business receipts would not be dependent upon actual receipt thereof. On further appeal to the CIT(A), the latter concluded the issue in the assessee’s favour. Aggrieved, the Revenue filed an appeal before the ITAT.

HELD

The whole controversy in this matter pertained to year of accrual of the afore-mentioned income and consequent year of taxability of the income. The ITAT took note of an important fact that only part payment, as referred to above, accrued to the
assessee in the year under consideration since the balance receipts were conditional receipts which were payable only in the event of the assessee performing various works, obtaining requisite permissions, etc. The payments were, thus, subject to fulfilment of certain contractual performance by the assessee. The said facts were confirmed by the payer, too, in response to a notice u/s 133(6).

The ITAT also confirmed the view of the CIT(A) that the term ‘transfer’ as defined in section 2(47)(v) would not apply in the case since the same is applicable only in case of capital assets held by the assessee. The development rights in the instant case were held as business assets. The assessee had also offered to tax the balance receipts in the subsequent years. It concluded that since the balance consideration was a conditional receipt and was to accrue only in the event of the assessee performing certain obligations under the agreement, the same did not accrue to the assessee.

Thus, the ITAT dismissed the appeal of the Revenue.

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Section 54F of the Income-tax Act, 1961 – Exemption to be granted even if investment in new residential property is made in the name of legal heir – Section 54F does not require investment to be made in assessee’s name

5. 125 taxmann.com 110 Krishnappa Jayaramaiah IT Appeal No. 405 (Bang) of 2020 A.Y.: 2016-17 Date of order: 22nd February, 2021

Section 54F of the Income-tax Act, 1961 – Exemption to be granted even if investment in new residential property is made in the name of legal heir – Section 54F does not require investment to be made in assessee’s name

FACTS

The assessee filed his return of income showing, among other things, income under capital gains from sale of a property acquired on account of partition of the HUF. The assessee claimed a deduction u/s 54F by investing the sale consideration in a new residential property purchased in the name of his widowed daughter. The assessee’s daughter had no independent source of income and was entirely dependent on him. The A.O. denied the claim of deduction to the assessee and determined the total assessed income at Rs. 2,07,75,230. The CIT(A) upheld the A.O.’s order. Aggrieved, the assessee filed an appeal with the Tribunal.

HELD

It was held that there is nothing in section 54F to show that a new residential house should be purchased only in the name of the assessee. The section merely says that the assessee should have purchased / constructed a ‘residential house’. Noting that purposive consideration is to be preferred as against literal consideration, the Tribunal held that the word ‘assessee’ should be given a wide and liberal interpretation and include legal heirs, too. Thus, the A.O. was directed to grant exemption u/s 54F to the assessee for the amount invested in the purchase of a residential house in his daughter’s name.

The assessee’s appeal was allowed.

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Sections 250, 251 – The appellate authorities are obligated to dispose of all the grounds of appeal raised before them so that multiplicity of litigation may be avoided – There can be no escape on the part of the CIT(A) from discharging the statutory obligation cast upon him to deal with and dispose of all the grounds of appeal on the basis of which the impugned order has been contested by the assessee before him

4. TS-48-ITAT-2021 (Mum) DCIT vs. Tanna Builders Ltd. ITA No. 2816 (Mum) of 2016 A.Y.: 2011-12 Date of order: 19th January, 2021

Sections 250, 251 – The appellate authorities are obligated to dispose of all the grounds of appeal raised before them so that multiplicity of litigation may be avoided – There can be no escape on the part of the CIT(A) from discharging the statutory obligation cast upon him to deal with and dispose of all the grounds of appeal on the basis of which the impugned order has been contested by the assessee before him

FACTS

For A.Y. 2011-12, the assessee company, engaged in the business of builder, masonry and general construction contractor, filed its return of income declaring a total income of Rs. 26,41,130. The assessee had constructed two buildings, viz. Tanna Residency (Phase I) and Raheja Empress. The assessee had made buyers of units / houses shareholders of the company and allotted shares of Rs. 10 each to them. The assessee had issued debentures to those purchasers / shareholders equivalent to the value of the sale consideration of the units / houses sold. Debentures with a face value of Rs. 1,00,000 each were issued and an amount of Rs. 99,990 was collected on each debenture and shown as a liability in the Balance Sheet of the company. This was the case for all the 27 allottees / purchasers of the houses / units in the two buildings on the date of commencement of the respective projects.

During the year under consideration the assessee issued debentures of Rs. 4.20 crores towards the sale of certain units / spaces. The A.O. held that the assessee had been accounting the sale proceeds of its stock as a liability in its Balance Sheet instead of as sales in the P&L account. He called upon the assessee to explain why the amounts received on issuing the debentures during the year under consideration may not be taxed as sales and be subjected to tax. The assessee submitted that it continued to own the buildings and the construction cost had been raised through the shareholders by issuing unsecured redeemable debentures to them. It was also submitted that issuing of debentures by the company and raising money therefrom was neither held as sale of units nor sale of parking spaces by the Department while framing its assessments of preceding years. It was submitted that the assessee has issued 60 debentures to International Export and Estate Agency (IEEA) on the basis of holding 180 shares of the assessee company. On the basis of this holding, the assessee company had given IEEA the right to use, possess and occupy 60 basement parking spaces in its building. Debentures were issued pursuant to a resolution passed in the Board of Directors meeting held on 4th October, 2010 and the resolution passed by the shareholders in the Extraordinary General Meeting held on 29th October, 2010.

The A.O. held that the assessee has sold the units / houses in the aforesaid buildings to the shareholders / debenture holders who were the actual owners of the said properties and the claim of the assessee that it was the owner of the buildings and the debentures / shares were issued for raising funds was clearly a sham transaction that was carried out with an intent to evade taxes. The A.O. also held that the amount received by the assessee company by issuing shares / debentures to the purchasers of the houses / units / spaces was supposed to have been accounted by it as its income in its P&L account. He treated the amount of Rs. 4.20 crores received by the assessee on issuing debentures / shares during the year as the sales income of the assessee company.

Aggrieved, the assessee preferred an appeal to the CIT(A) who found favour with the contentions advanced by the assessee and vacated the addition.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

HELD

The Tribunal observed that the assessee had, in the course of appellate proceedings before the CIT(A), raised an alternative claim that the A.O. erred in not allowing cost of construction against the amount of Rs. 4.20 crores treated by him as business income. The assessee had filed additional evidence in respect of corresponding cost of parking space. In view of the fact that the CIT(A) had deleted the addition of Rs. 4.20 crores made by the A.O., he would have felt that adjudicating the alternative claim would not be necessary. The Tribunal held that in its opinion piecemeal disposal of the appeal by the first Appellate Authority cannot be accepted.

The Tribunal held that as per the settled position of law the appellate authorities are obligated to dispose of all the grounds of appeal raised by the appellant before them so that multiplicity of litigation may be avoided. For this view it placed reliance on the decision of the Madras High Court in the case of CIT vs. Ramdas Pharmacy [(1970) 77 ITR 276 (Mad)] that the Tribunal should adjudicate all the issues raised before it.

The Tribunal restored the matter to the file of the CIT(A) with a direction to dispose of the alternative ground of appeal that was raised by the assessee before him.

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Sections 2(24), 45, 56 – Compensation received by the assessee towards displacement in terms of Development Agreement is not a revenue receipt and constitutes capital receipt as the property has gone into redevelopment

3. 2021 (3) TMI 252-ITAT Mumbai Smt. Dellilah Raj Mansukhani vs. ITO ITA No.: 3526/Mum/2017 A.Y.: 2010-11 Date of order: 29th January, 2021

Sections 2(24), 45, 56 – Compensation received by the assessee towards displacement in terms of Development Agreement is not a revenue receipt and constitutes capital receipt as the property has gone into redevelopment

FACTS

During the course of appellate proceedings the CIT(A) found, on the basis of details forwarded by M/s Calvin Properties, that the assessee has been given compensation for alternative accommodation of Rs. 2,60,000 as per the terms of the Development Agreement. According to the CIT(A), the amount received was over and above the rent actually paid by the assessee and, therefore, the same has to be taxed accordingly. The CIT(A) having issued notice u/s 251(2) qua the proposed enhancement and considering the reply of the assessee that she received monthly rental compensation during the year aggregating to Rs. 2,60,000 for the alternative accommodation which is a compensation on account of her family displacement from the accommodation and tremendous hardship and inconvenience caused to her, the said compensation is towards meeting / overcoming the hardships and it is a capital receipt and therefore not liable to be taxed.

The assessee relied on the decision of the co-ordinate Bench in the case of Kushal K. Bangia vs. ITO in ITA No. 2349/Mum/2011 for A.Y. 2007-08 wherein the A.O. did not tax the displacement compensation as it was held to be a receipt not in the nature of income. The CIT(A) rejected the contentions of the assessee and enhanced the assessment to the extent of Rs. 2,60,000 by holding that the assessee has not paid any rent.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal held that compensation received by the assessee towards displacement in terms of the Development Agreement is not a revenue receipt and constitutes capital receipt as the property has gone into redevelopment. It observed that in a scenario where the property goes into redevelopment, the compensation is normally paid by the builder on account of hardship faced by owner of the flat due to displacement of the occupants of the flat. The said payment is in the nature of hardship allowance / rehabilitation allowance and is not liable to tax. It observed that the case of the assessee is squarely supported by the decision of the co-ordinate Bench in the case of Devshi Lakhamshi Dedhia vs. ACIT ITA No. 5350/Mum/2012 wherein a similar issue has been decided in favour of the assessee. The Tribunal in that case held that the amounts received by the assessee as hardship compensation, rehabilitation compensation and for shifting are not liable to tax. Accordingly, the Tribunal set aside the findings of the CIT(A) and directed the A.O. to delete the addition made of Rs. 2,60,000.

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Sections 120 and 250 – CIT(A) has no jurisdiction to pass orders after a direction from DGIT(Inv.) not to pass any further orders during the pendency of the explanation sought from him on the lapses in adjudicating the appeals – The order passed by him contrary to the directions of the superior officer cannot be said to be an order passed by a person having proper jurisdiction

2. TS-90-ITAT-2021 (Bang) DCIT vs. GMR Energy Ltd. ITA No. 3039 (Bang) of 2018 A.Y.: 2014-15 Date of order: 22nd February, 2021

Sections 120 and 250 – CIT(A) has no jurisdiction to pass orders after a direction from DGIT(Inv.) not to pass any further orders during the pendency of the explanation sought from him on the lapses in adjudicating the appeals – The order passed by him contrary to the directions of the superior officer cannot be said to be an order passed by a person having proper jurisdiction

FACTS

In the appeal under consideration filed by the Revenue and 82 other appeals and cross-objections filed before the Tribunal, the Revenue requested by way of an additional ground that the orders impugned in these appeals which had all been passed by the CIT(A)-11, Bengaluru should be held to be orders passed without proper jurisdiction and should be set aside and remanded to the CIT(A) for fresh decision by the CIT(A) with competent jurisdiction.

It was stated that the CIT(A)-11, Bangalore who passed all the impugned orders committed serious lapses and he was directed by the Director-General of Income-tax, Investigation, Karnataka & Goa, Bengaluru by direction dated 18th June, 2018 not to pass any further appellate orders during pendency of the explanation sought on the lapses in adjudicating the appeals. It was the plea of the Revenue that all the orders impugned in these appeals were passed after 18th June, 2018 and are therefore orders passed without jurisdiction and on that ground are liable to be set aside.

Without prejudice to the above contention, it was the further plea of the Revenue that by Notification dated 16th July, 2018, issued u/s 120 by the Principal Chief Commissioner of Income-tax, Karnataka & Goa, the appeals pending before the CIT(A)-11 were transferred to the CIT(A)-12, Bengaluru.

It was the case of the Revenue that

(i) the CIT(A)-11, disregarding the directions issued by the Principal CCIT, has passed orders that are impugned in all these appeals;

(ii) though the impugned orders are purported to have been passed on dates which are prior to 16th July, 2018, they were in fact passed after those dates but were pre-dated. In support of this claim, the Revenue relied on the circumstance that the date of despatch of the impugned orders has not been entered in the dispatch register maintained by the CIT(A)-11;

(iii) in view of the fact that the date of dispatch is not specifically entered during the period when CIT(A)-11 was directed not to pass any orders, the only inference that can be drawn is that the impugned orders were passed after the appeals were transferred u/s 120 to the CIT(A)-12. By implication, the Revenue contended that the orders impugned were back-dated so as to fall before or on the cut-off date of 16th July, 2018;

(iv) since the orders passed in all these appeals are dated after 18th June, 2018 when the DGIT (Investigation), Karnataka & Goa, Bengaluru directed the then CIT(A)-11, Bengaluru not to pass any further appellate orders during pendency of the explanation sought on the lapses in adjudicating the appeals, therefore the orders passed after 18th June, 2018 are illegal and are orders passed without jurisdiction and liable to be set aside.

HELD

It is undisputed that the impugned orders in all the appeals were passed after 18th June, 2018. The order by which the DGIT (Investigation), Karnataka & Goa, Bengaluru directed the then CIT(A)-11, Bengaluru not to pass any further appellate orders during pendency of the explanation sought on the lapses in adjudicating the appeals was dated 18th June, 2018. The CIT(A)-11 thus had no jurisdiction to pass any orders in appeal on or after the aforesaid date. The orders passed by him contrary to the directions of the superior officer cannot be said to be orders passed by a person having proper jurisdiction. The Tribunal noted that the CBDT has in paragraph 7 of its instruction dated 8th March, 2018 [F. No. DGIT (Vig.)/HQW/SI/Appeals/2017 – 18/9959] instructed all Chief Commissioners of Income-tax to conduct regular inspections of the CIT(A)s working under them and keep a watch on the quality and quantity of orders passed by them. The instructions further lay down that failure on the part of the Chief Commissioners of Income-tax to do so would be viewed adversely by the CBDT.

The Tribunal held that the very action of then CIT(A)-11 in ignoring the binding directions given by the DGIT and proceeding to pass orders resulted in a serious lapse on his part in administering justice. The Tribunal noticed that all the orders impugned in these appeals had been passed between the 5th and the 13th of July, 2018; they numbered around 50 orders, involving different assessees and different issues, which was a difficult task for any appellate authority. The Tribunal agreed with the submission of the standing counsel that the interests of Revenue were prejudiced by the said action of the then CIT(A)-11. The Tribunal held that all these factors vitiate the appellate orders passed by him after 18th June, 2018, even if the allegation of pre-dating of orders is not accepted / proved.

Following the decision of the Delhi Bench of the Tribunal in the case of ACIT vs. Globus Constructions Pvt. Ltd. (ITA No. 1185/Delhi/2020; AY 2015-16; order dated 8th January, 2021) on almost similar facts, the Tribunal set aside the orders of the CIT(A) to the respective jurisdictional CIT(A) to decide the appeals afresh in accordance with law after due opportunity of hearing to the parties.

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Section 37 – Input service tax credit is deductible u/s 37(1) when such Input Tax Credit is written off in the books of accounts

1. TS-113-ITAT-2021 (Chny) FIH India Private Limited vs. DCIT ITA No. 1184 (Chny) of 2018 A.Y.: 2010-11 Date of order: 8th February, 2021

Section 37 – Input service tax credit is deductible u/s 37(1) when such Input Tax Credit is written off in the books of accounts

FACTS

The assessee engaged in the business of manufacturing, assembling and trading of parts and accessories for mobile phones operated from two units, both located in SEZs. The assessee filed its return of income after setting off brought-forward losses and unabsorbed depreciation under normal provisions of the Act and book profit of Rs. 80,25,61,835 under the provisions of section 115JB.

The assessee followed the method of accounting wherein expenses were debited to the Profit & Loss account excluding service tax. The service tax paid on expenses was shown as ITC adjustable against output service tax payable on the services rendered by it. Since output services rendered by the assessee were exempt from service tax, the assessee made a claim for refund. Upon the rejection of the claim of refund by the Service Tax Department, the assessee reversed the ITC and debited the P&L account with a sum of Rs. 51,65,869 towards service tax written off and claimed it as an expenditure u/s 37(1). The A.O. called upon the assessee to explain why service tax written off should not be disallowed u/s 37(1).

The A.O. was of the opinion that
(i) rejection of the claim of refund of service tax credit cannot impact the P&L account;
(ii) even if it is to be treated as a P&L account item, it was never treated as income at any point of time for it to be written off;
(iii) if the same is treated as claim of deferred expenditure, the same pertains to earlier years and is therefore a prior period item which is not eligible to be claimed as an item of expenditure.

For the above-stated reasons, the A.O. rejected the claim of Rs. 51,65,869 made by the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O. The assessee then preferred an appeal to the Tribunal.

HELD

The Tribunal observed that the A.O. has not disputed the fact that the assessee has not debited the service tax component paid on input services into the P&L account. Therefore, there is no merit in his observation that it is not an item of P&L account. The assessee has paid service tax on input services and hence the question of treating the said service taxes as an item of income does not arise because any taxes paid on purchase of goods or services is part of the cost of goods or services which can be either debited to the P&L account when the assessee has not availed ITC, or if the assessee avails ITC then the service tax component is taken out from the P&L account and treated as current assets pending adjustment against output taxes payable on goods or services.

When the application filed by the assessee for refund was rejected by the Department, the assessee had written off the said ITC and debited it to the P&L account. Therefore, the second observation of the A.O. also fails. When the input service tax credit is carried forward from earlier financial year to the current financial year, it partakes the nature of taxes paid for the current financial year and hence deductible as and when the assessee has debited it into the P&L account.

Further, it is a well-settled principle of law by the decision of various Courts and Tribunals that ITC / CENVAT is deductible u/s 37(1) when such ITC is reversed or written off in the books of accounts. The Tribunal relied upon the decision of the Gujarat High Court in the case of CIT vs. Kaypee Mechanical India (P) Ltd., (2014) 223 taxmann 346 and the decision of the Ahmedabad Bench of the Tribunal in the case of Girdhar Fibres (P) Ltd. vs. ACIT in ITA No. 2027/Ahd/2009. The Tribunal held that input service tax credit is deductible u/s 37(1) when such ITC is written off in the books of accounts.

The Tribunal set aside the issue to the file of the A.O. for the limited purpose of verification of the claim of the assessee regarding rejection of refund claim.

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COVID IMPACT AND TAX RESIDENTIAL STATUS: THE CONUNDRUM CONTINUES

The last 12 months have resulted in people facing challenges and difficulties coming at them from all sides, and often all at once. At the very inception of the lockdown in late March, 2020, a panic had set in amongst a large number of NRIs and PIOs stuck in India, despite wishing to leave the country to avoid becoming tax resident in India.

The CBDT came out with a welcome Clarification on 8th May, 2020 vide Circular No. 11/2020 and provided relief to such persons becoming accidental and unintentional residents. The accompanying press release, dated 9th May, 2020, provided further assurance from the Government that relief for F.Y. 2020-21 would be given in due course of time.

‘Further, as the lockdown continues during the Financial Year 2020-21 and it is not yet clear as to when international flight operations would resume, a Circular excluding the period of stay of these individuals up to the date of normalisation of international flight operations, for determination of the residential status for the previous year 2020-21, shall be issued after the said normalisation.’

By the time of the actual normalisation of international flight operations, the 182-day mark had already been crossed, thereby resulting in a situation in which a non-resident who was stranded in India due to the lockdown became a tax resident for F.Y. 2020-21. There was indeed a pressing need for a proactive step from the Government to provide a breather to such people stranded in India, or to instruct the CBDT to issue the necessary guidelines for them. However, our Government, recognising tax as a major source for revenue, felt it appropriate to leave the matter untouched and was busy in other priority matters not concerning the hardship that people would face. Accordingly, people had to make several representations to the Government for clarity, since the so-called commitment to issue a relief-granting Circular was never met, nor any statement or indication given by the Government as to its plans.

Finally, after multiple representations to the Government, an SLP had to be filed before the Supreme Court. While hearing the SLP filed by an NRI who gained involuntary residency in India, the Court pronounced that the CBDT was the appropriate body to grant relief and directed it to issue a Circular within three weeks. But despite all these efforts, the CBDT came out with an ineffective Circular and reasoning. On the international platform, the Government is trying to co-operate with OECD countries to tackle tax nuances whereas, on the other hand, this action of the Government reflects its fickle mind-set in relation to tax levy. It is important for the Government to understand that ‘trust is earned when actions meet words’. They should learn from the ancient days when kings collecting bali from the people were considerate not to collect such bali during the periods of drought / floods.

Circular No. 2/2021 was issued on 3rd March, 2021 and instead of granting any relief or concession, as was expected, it was merely a summarisation of the existing provisions of section 6 of the Income-tax Act, 1961 (‘ITA’) and a short explanation of how Articles 4 and 16 of the India-US tax treaty work, amongst other things.

What was the CBDT trying to clarify through this Circular – the provisions of the ITA and the Tax treaty, or guidelines for stranded people in India? It is a perfect example of how CBDT easily discharged its obligation without considering the practical applicability of the Circular. No relief through this Circular means that non-residents have to again make representations and file SLPs before the due date to file returns in India, resulting in prolonged litigation for these NRIs. It is believed that this Circular will severely harm NRIs stranded in India.

On an examination of the reasons in the Circular for not granting any relief, the following points emerge:

ONE. There is no ‘short-stay’ in India
The first reason given by the Circular for not granting relief was that a ‘Short stay will not result in Indian residency’. This reason shows that the CBDT has not considered the situation that by the time international flights were normalised and stranded NRIs could leave the country and return to their country of usual residence, they had already exceeded the threshold of 183 days’ stay in India and become residents. Therefore, for most persons who were stranded in India as on 1st April, 2020 the terminology of a ‘short stay’ in India during F.Y. 2020-21 introduced by the CBDT is highly irrelevant, especially as it was evident that NRIs were forced to remain in India till at least July (when limited flights to the US and France were commenced) and in most other cases till October. Further, in case of several other countries such as Hong Kong and Singapore, flights have yet not resumed.

TWO. Possibility of dual non-residency is no reason for not granting relief
The Circular, while further explaining the rationale for not granting relief, raised an issue which has become a hot topic and a sore point for the Indian Government – the inequity and injustice of double non-taxation. The Indian Government has been focused on non-residents, especially NRIs, avoiding tax in India by ‘managing’ their residential status to remain outside India. Section 6 was significantly amended to tackle this scourge on the Indian exchequer. The Circular states that granting relief for the forced period of stay in India could result in a situation where ‘a person may not become a tax resident in any country in F.Y. 2020-21 even after staying for more than 182 days or more in India resulting in double non-taxation and end up not paying tax in any country.’ Therefore, the Government deems it fit to not grant any general relief.

Never mind that this aspect was not considered relevant while granting relief for F.Y. 2019-20, or that the Government had already committed to granting relief in May, 2020.

Coming back to the reasoning, even if a person ends up becoming a ‘stateless’ person (if relief were hypothetically provided), they would then be unable to seek recourse to any beneficial position under a tax treaty and have all their India-sourced income subject to tax in India anyway. The only tax revenue that the Indian Government would forgo would be in respect of foreign-sourced income, which anyway it has no right to tax. The reasoning defines the intention of the CBDT to tax global income of the NRI stranded in India due to the lockdown. Is the Indian Government morally right to levy tax on such foreign-sourced income under the ‘residence-based’ taxation rules?

Clearly, the answer to this must be an emphatic ‘No’. However, the knife is in the hands of the Indian Government and they would try to tax (i.e., cut) everything which comes their way in the name of legitimate tax collection. Just because NRIs have got stranded in India due to the lockdown by virtue of which they became residents in India satisfying the condition of section 6, the Government feels it has the right to tax their worldwide income. This shows that the Government interprets Indian laws as per its convenience. Further, if the source-country has ‘source-based’ taxation rules like India, then it will levy tax on such income, irrespective of the fact that the income-earner is a non-resident there. If the source-country has given up its right to tax such income arising and originating therein, then that should be of no concern to the Indian Government and remain a matter solely relevant to that Sovereign State.

It is also unfair for the involuntary period of stay in India to be considered while determining residential status. The Delhi High Court in its decision in CIT vs. Suresh Nanda [2015] 375 ITR 172 has articulated this point very well as follows:

‘It naturally follows that the option to be in India, or the period for which an Indian citizen desires to be here, is a matter of his discretion. Conversely put, presence in India against the will or without the consent of the citizen should not ordinarily be counted adverse to his chosen course or interest, particularly if it is brought about under compulsion or, to put it simply, involuntarily. There has to be, in the opinion of this Court, something to show that an individual intended or had the animus of residing in India for the minimum prescribed duration. If the record indicates that – such as for instance omission to take steps to go abroad, the stay can well be treated as disclosing an intention to be a resident Indian. Equally, if the record discloses materials that the stay (to qualify as resident Indian) lacked volition and was compelled by external circumstances beyond the individual’s control, she or he cannot be treated as a resident Indian.’

Besides, the newly-inserted section 6(1A) should have automatically addressed the concerns of the Indian Government of double-non-taxation of ‘stateless’ Indian citizens, if that is the thinking behind non-granting of relief.

The Indian Government seems to be taking a position that because some persons may get too much of a benefit, no relief should be granted to anyone, a position which is both disingenuous and inconsistent. By granting relief, the Indian Government would not have done any favour; instead, it would simply be forgoing a right it normally would, and should, never have had in the first place.

In addition to exposing the income of stranded foreign residents to tax in India, they shall be burdened with the additional responsibility of the disclosures and compliances in India as applicable to residents. In case the foreign assets’ disclosures are not made by such persons, then the Indian Assessing Officer has been given unfettered powers under the Black Money Act wherein he can levy penalties and prosecutions.

Further, they would also lose the benefit of concessional or beneficial tax provisions available to non-residents both under the ITA and a tax treaty. And, if they are engaged in a business or profession outside India or take part in the management of a company or entity outside India, they would risk the income arising to them through such business or profession becoming taxable in India, or the company being considered a resident in India by virtue of its place of effective management being in India. Compliances with tax audit provisions, transfer pricing provisions, etc., also become applicable to such persons and their business transactions when they become resident in India. Additionally, whatever payments such persons would make, whether personal in nature or for their business or profession, would also be subject to evaluation for taxability in India – for example, if a person who becomes resident in India due to being stuck here during the lockdown makes royalty payments in respect of his foreign business to a non-resident, then such royalty would be deemed to accrue and arise in India and be chargeable to tax in India.

These follow-on consequences of becoming a resident are completely ignored by the Government while evaluating the impact of not granting relief, since there is nothing which is going from its pocket instead of falsely piling up the case for taxing such income.

THREE. No tie to break
The Circular explains that the tie-breaker test under tax treaties will come to the rescue of dual-residents. This clarity completely misses its own stand as stated in the Circular in the earlier section, that if someone becomes a resident of India by virtue of their period of stay in India, they will not be able to access the tie-breaker test of the tax treaty because they may not qualify as residents of the country of their usual or normal tax residency. So, how would the tie-breaker test come to the rescue? The Government should take the trouble to explain in detail the difference in stand taken by it in the same Circular. Was the Circular drafted by two different persons applying their minds independently? Further, India does not have a tax treaty with each and every country and any person who is resident of such a country with which India does not have a tax treaty would have no such recourse available, even if he were to become a dual resident. In case of any non-compliance, the Government comes with retrospective clarifications to tax such people. Isn’t this a kind of tax terrorism?

The Circular further states that: ‘It is also relevant to note that even in cases where an individual became resident in India due to exceptional circumstances, he would most likely become not ordinarily resident in India and hence his foreign sourced income shall not be taxable in India unless it is derived from business controlled in or profession set up in India.’

If this is indeed the case, and eventually relief will anyway be granted by operation of the tie-breaker test or MAP (Mutual Agreement Procedure), or foreign source income will anyway not be subject to tax in India, then there should be no reason for the Indian Government to not grant relief pre-emptively and reduce the genuine hardship and burden on accidental residents. By the very reasoning adopted in the Circular, granting relief will not confer any additional benefit upon anyone and therefore the Government should not have had any reluctance and objection to granting such relief.

The issue of tie-breaker also raises the practical difficulty in claiming tax treaty based on non-residential status while filing the return of tax (‘ITR’) in India. There is no provision in the ITR for individuals to claim status as tax treaty non-residents if they are residents under the provisions of the ITA. It has become mandatory to provide details of period of stay in India in the ITR and, therefore, issues shall arise in cases where stay in India exceeds 182 days but the tie-breaker results in non-residence in India.

In such cases, the options are that the filer simply claims all foreign source income as exempt even though his status is disclosed as a resident, or the filer does not fill in the period of stay and files as a non-resident. Filing as a resident may expose him to the need to make unnecessary additional disclosures and compliances, such as in respect of foreign assets. However, if such disclosures are rightly not made, this may attract additional scrutiny and also the potential for proceedings under the Black Money law. Even if the proceedings may not eventually result in any consequence, the nuisance and additional effort and financial burden due to the scrutiny will nonetheless arise. Filing as a non-resident without providing details of period of stay may result in the ITR being considered defective, which has its own consequences. In the absence of any changes to the ITR or clarification on this subject from the CBDT, the fact that such difficulty has not been addressed will add to the anguish and confusion.

FOUR. Employment income
The Circular reiterates the current legal position that employment-related income of an accidental resident will only be subject to tax in India if his stay exceeds 183 days in India or if a PE of the foreign employer bears the salary.

Therefore, the Circular itself acknowledges the fact that many persons will be in India for 183 days or more when it talks about dual non-residency, (but) it ignores this very aspect while discussing taxation of salary and wages.

The salary structure of any employee is designed based on the applicable taxation and labour laws of the jurisdiction where the employee was expected to be exercising his employment. The tax deductions and taxability of perquisites, employment benefits such as pension, social security and retirement benefit contributions, stock options and similar reward schemes, etc., vary greatly from country to country and the calculation is extremely sensitive to the specific tax considerations under which the remuneration package was designed.

Therefore, all those persons stuck in India and exercising their employment in India will unnecessarily have their employment income subjected to tax in India. While there may not be an instance of double taxation, there surely will be instances of unforeseen and unexpected tax consequences on account of differing tax treatments and employment-related tax breaks not being available in India as against the jurisdiction of the employer.

Not merely this, the rates of tax applicable in India may be much higher than the rates of tax applicable in the person’s home country, and given the relatively weaker purchasing power of the Indian Rupee, it is likely that a major portion of the employment-related income would be subject to tax under the 30% tax slab, while the income would not have been subject to such high rates of tax in the home country. This will have a serious cash flow impact due to the additional tax liability to be borne in India.

FIVE. No credit-worthiness
This brings up the next matter which the Circular addressed, i.e., credit of foreign taxes. The Government’s argument is that even if there is a case of double taxation, credit of foreign taxes would be available in India as per Rule 128.

This ignores the concern of many of the accidental residents, that the real problem may not be double taxation but the overall rate of taxation. If the foreign tax liability and effective rate of tax is greater that the Indian rate of tax, there would be no concern. However, in most cases the Indian rate of tax is higher due to which even after eliminating double taxation there would be an additional tax cost borne in respect of Indian taxes. In this respect, the CBDT in its Circular could have clarified that such additional burden shall be refunded to the people taxed overly. On a serious note, if you want to tax people considering a certain scenario, then the Tax Department should also consider a scenario in which it has to refund money to them.

Apart from this, the elimination of double taxation through tax credit is irrelevant to the many Indian emigrants living and working abroad in lower tax or zero-tax rate countries such as the UAE, Bahrain, Oman, Qatar, Kuwait, Bahamas, Singapore, Cyprus, Mauritius, Hong Kong, etc. In such a scenario, the Indian Government is taxing something which it never had the right to tax. Clearly, the Government is taking undue advantage of the pandemic by deriving revenue from the stranded people.

SIX. International inexperience
The Circular then goes on to quote from the OECD Policy Responses to Coronavirus (Covid-19), which stated that the displacement that people would face would be for a few weeks and only temporary and opined that acquiring residency in the country where a person is stranded is unlikely.

This reference to the OECD’s analysis is of 3rd April, 2020, less than a week into India’s lockdown. The Circular relying on a projection in April, 2020 of people being stranded for a few weeks only is absurd given that this Circular is issued in March, 2021 and it is abundantly clear that people were stranded for several months (or even a year) and in almost all cases acquired residency in India.

A majority of OECD countries are in Europe where inter-country and cross-continental travel by road is fairly common and convenient due to the short distances involved. If a person working in France gets stranded in the Netherlands or Belgium, he could simply travel back to France by his own private car – this convenience is surely not available to a person working in the US and stranded in India.

If the Government really did want to rely on international experience to justify its actions, it should have fallen back on something more recent, which considers the situation as it is today, not on what it was in April, 2020 and definitely not an invalidated forecast from the past.

The Circular then mentions what other countries have done and states that the UK and the USA have provided an exclusion or relief of 60 days, subject to fulfilment of certain conditions, while some countries have not provided any relief or have undertaken to provide relief based on the circumstances of each case. The Indian tax authorities often argue that India is not bound by the actions, decisions and interpretations of other countries. This is done especially while denying benefits or adopting positions that are not aligned with the international experience and best practices. Conveniently in this case, the CBDT has taken its cue from international experience!

What is also relevant is the difference in circumstances between India and the other countries. A large number of Indians normally reside and work in other countries – estimated to be more than 13 million NRIs / PIOs globally. The US, the UK, Germany or Australia are more likely to host foreign citizens than have their own citizens working and living overseas. Therefore, these countries are less likely to be concerned about their emigrants accidentally re-acquiring residency under their domestic tax laws from being stranded due to the lockdown. The Indian Government, however, ought to have been more considerate to the plight of some of these 13 million people.

Another argument relied upon by the Circular is the position adopted by Germany which has held that ‘in the absence of a risk of double taxation, there is basically no factual inequity if the right to tax is transferred from one contracting state to another due to changed facts.’

However, this presumes that the taxation system and tax burden faced by the person in either jurisdiction will be similar or comparable. As has been argued above, there are real possibilities that accidental residents will suffer a much greater tax burden as compared to what they would have suffered had they continued to reside in the country of normal residence.

CONCLUSION
The position of the Government is correct to the extent that there are reduced chances of double taxation and that double taxation through dual residency can be mitigated and relieved through operation of tax treaties and credit for foreign taxes. The Circular also provides that persons suffering double taxation and not receiving relief can make an application to the CBDT for specific relief. It, however, ignores several other issues.

It neither acknowledges nor addresses the concerns of the large number of NRIs and PIOs who are normally residing in lower tax or zero-tax jurisdictions and will suffer a much higher tax burden only because an unforeseen global lockdown forced them to be physically present in India. It also ignores the implications arising out of residency in India that go beyond being subject to tax in India.

There would be a large number of persons who were resident in India previously but have recently emigrated to another country, but they become not just resident but also ordinarily resident in India because of their current year’s presence along with their past status and stay. This exposes their global income to tax in India, which is patently unfair.

Such forced residential status may also require them to disclose all their foreign assets in India and if they are unable to do so accurately and exhaustively, it exposes them to implications under Black Money law and severe non-disclosure related penalties. It will also restrict their access to beneficial tax provisions available to non-residents under the ITA simply because they were stranded in India.

Most importantly, however, none of the arguments made by the CBDT in the Circular are new or were not already known before. They were also known in May, 2020 when the Government provided relief for F.Y. 2019-20 and explicitly committed that it would issue a Circular to provide relief in respect of the period of stay in India till the normalisation of international flights.

The second petition filed against the Circular before the Supreme Court by the same NRI who had filed the original SLP makes the argument that the Government is obligated to provide relief based on its earlier promise. It relies on the Supreme Court’s ruling in the case of Ram Pravesh Singh vs. State of Bihar that there was a legitimate expectation of relief based on the fact that under similar facts relief had been provided for F.Y. 2019-20 and it had been promised for F.Y. 2020-21. The doctrine of ‘legitimate expectations’, although not a right, is an expectation of a benefit, relief or remedy that may ordinarily flow from a promise or established practice. The expectation should be legitimate, i.e., reasonable, logical and valid. Any expectation which is not based on established practice, or which is unreasonable, illogical or invalid cannot be a legitimate expectation. It is a concept fashioned by courts for judicial review of administrative action. It is procedural in character based on the requirement of a higher degree of fairness in administrative action, as a consequence of the promise made, or practice established. In short, a person can be said to have a ‘legitimate expectation’ of a particular treatment if any representation or promise is made by an authority, either expressly or impliedly, or if the regular and consistent past practice of the authority gives room for such expectation in the normal course.

In addition to this, the petition argues that the Circular is unconstitutional because it violates the principle of equality before law under Article 14 – there is inconsistency in not granting relief for F.Y. 2020-21, although under similar circumstances relief had been granted for F.Y. 2019-20. Another argument is that not granting relief from being a non-resident violates Article 19 because it interferes with the freedom to practice a trade or profession and places undue restrictions on the same. Lastly, it argues that the Constitution guarantees protection to life and personal liberty and the lockdown was a force majeure situation, where the appellant was forced to remain in India in order to protect his life and liberty – the Circular penalises him for merely exercising this Constitutional right because, if not for the pandemic, he would have travelled back to the UAE and not remained in India.

The fresh petition makes other arguments which have also been made here to seek justice from the Supreme Court in the matter. The CBDT was also possibly aware that it may have to provide additional relief since it has stated in the Circular that based on the applications that will be received it shall examine ‘whether general relaxation can be provided for a class of individuals or specific relaxation is required to be provided in individual cases’. We can only hope that given the almost universally negative response to the Circular, the CBDT relents and provides the much needed, and previously promised, general relief and exclusion. Else, the soon-to-be-heard petition seems to be the last resort for any equitable relief for the NRI and PIO community.

shailesh.kwebmaker

I HAD A DREAM

The intensity was brewing slowly in the court. Spectators were biting their nails, not knowing which shot will be fired next. Both players were not letting their guard down. The crowd was silent, the referee’s movement oscillated with the player’s delivery and the linesman kept a check on every movement. The match was telecast live on various channels. Young aspirants were seeing their heroes showcasing their skills – and just then the siren went berserk.

I woke up shaking, shut the alarm and realised that it was a dream. Although it might have seemed like that, but it was not a match at the Australian Open, rather, it was two learned tax experts arguing their case in the Income Tax Appellate Tribunal. It was telecast live on the ITAT’s channel and subscribers could watch any hearing going on across the country. ‘What a dream’, I whispered to myself, considering that it might have been the after-effect of the recent budget proposal of turning the ITAT faceless. However, instead of ruminating on the bizarre story, I thought about daydreaming and penned down my thoughts on my wish list for the future of the Income Tax Appellate Tribunal (ITAT).

The ITAT was established in 1941 and has been the torch-bearer of judicial fairness in the country. It can be compared to cricketer M.S. Dhoni in his heydays. It is the last fact-finding authority (the finisher), the first appellate authority outside the Income Tax Department (the ’keeper) and has led the way for being the Mother Tribunal of all the other tribunals in the country (the Captain). And the fact that the Department winning ratio in ITAT is just 27%1, it overturns many high-pitched assessments (the DRS winner) and it keeps on doing its work without making much of a fuss (the cool-headed).

I still remember the first day when I entered the Tribunal as a first-year article assistant. Though my only contribution to the paper book at that time was numbering the pages, I realised the holiness of the inner sanctum of the Tribunal when my manager insisted that I be meticulous on page numbering and he even reviewed the same after I finished it. The showdown was spectacular and I was awestruck by the intellect and inquisitiveness shown by the Honourable Tribunal members.

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1 Economic Survey, 2017-18

That was the story of the past; now let’s focus back on the dream. The ITAT has stood the test of time and it is only possible because it is agile and adaptive to changes. Keeping with that spirit, I present my 7-point wish list for the future of the ITAT.

1. Less-Face and not Face-Less: Changes which might not have been sought by a Chief Technical Officer of an entity in a decade have been brought by Covid-19. Companies adapted and learnt to work from home and now are seeing multiple ways of saving costs through technical upgradation. Similarly, all cases in the Tribunal should be categorised into three: (a) Basic – Does not require a hearing and can be judged just based on submission; (b) Complex – Requires video hearing; and (c) Complex and high value – Requires in-person hearing. This will be cost and time-efficient for the Tribunal, the tax practitioners and the clients. Since in-person attendance will not be required, it will open a lot of opportunities for tax practitioners from tier-2 and tier-3 cities to grow their litigation practice.

2. One Nation – One Law – One Bench: In spite of numerous benches, currently there is a huge backlog of cases (88,0002). With the technological upgradation (mentioned at point 1 above) in place, Tribunal members from across the country could preside over hearings related to any jurisdiction. This will not only reduce the workload from overloaded benches but will also reduce the hectic travelling of Tribunal members who go on a tour to set up benches in several locations. This may also result in a spurt in the setting up of additional benches and Tribunals which can work in two shifts, having separate members if required.

3. Jack of all trades and master of one: A decade back, the accounting profession was mostly driven by general practitioners who were masters in all subjects. With rising complexities and frequent changes in the law, very few can now deal with all the intricacies of even a single income tax law. Most of the big firms have separate teams for Transfer Pricing, International Taxation, Individual Taxation, Corporate Taxes and so on. Owing to these complexities, the Honourable Tribunal members must spend a lot of time studying minute details of every case. If a ‘dynamic jurisdiction’ is in place (see point 2), judges of a specialised area / section can preside over all similar cases. This will ensure detailed, in-depth discussion on each topic and the results will be similar and swifter.

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https://timesofindia.indiatimes.com/business/india-business/88000-appeals-pending-before-income-tax-appellate-tribunal-chairman/articleshow/74322517.cms

4. OTT platform: Online telecasts of Tribunals can be done for viewers which will not only help tax practitioners and students learn some technical aspects, but will also help them to learn court craft. This will give confidence to newcomers and more lawyers and chartered accountants would be inclined to join litigation practice.

5. ETA: Currently, a lot of the time of a professional is spent waiting for his hearing. Once full digitisation kicks in with video conferencing facility, an ETA (Expected Time of Appeal!) could be provided. This would help tax professionals to schedule their day better.

6. Error 404 – Page not found: Many times, digitisation leads to further problems rather than solutions. A robust internal technical system which allows uploading of documents without size limit, writing of replies without word limit and allowance of documents to and from in the hearing would help the cause of e-hearing. Additionally, the facility of explaining through a live digital whiteboard and PowerPoint presentation would be the cherry on the cake.

7. Circular reference: Often, a case is remanded back to the Assessing Officer for finding the facts. Then, the whole circular motion of the A.O., CIT(A) and ITAT starts once again, which delays the decision-making. With the help of technological advancement, if a special cell is created at the ITAT level to finalise the facts and present them to the bench, it would surely ensure speedy justice.

The list can go on and on with the emphasis on technological upgrading and efficient utilisation of resources. However, the one thing that I don’t want to be changed is the way in which ITAT has upheld the principle of natural justice. This is one thing by which I was mesmerised as a young kid and I want any other person joining the profession to feel the same. I would be extremely grateful if some portion of my dream does come true.

Jai Hind! Jai Taxpayers!

shailesh.kwebmaker

RATE OF TAX ON DEEMED SHORT-TERM CAPITAL GAINS U/S 50

ISSUE FOR CONSIDERATION

Section 50 of the Income-Tax Act, 1961 provides for the manner of computation of capital gains arising on sale of depreciable assets forming part of a block of assets and for deeming such gains as the one on transfer of the short-term capital assets. The section reads as under:

‘Special provision for computation of capital gains in case of depreciable assets

50. Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications: –

(1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely: –
(i) expenditure incurred wholly and exclusively in connection with such transfer or transfers;
(ii) the written down value of the block of assets at the beginning of the previous year; and
(iii) the actual cost of any asset falling within the block of assets acquired during the previous year,

such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets;

(2) where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets.’

In a situation where an asset which is otherwise held for more than three years but is deemed short-term capital asset, on application of section 50, for the reason such an asset forming part of the block of assets and depreciated is transferred, the issue has arisen as to the rate of tax applicable to the gains on transfer of such assets – whether such gains would be taxable in the manner prescribed u/s 112 at a concessional rate of 20%, or at the regular rates prescribed for the total income. While a few benches of the Tribunal have held that the rate applicable would be the regular rate applicable to total income including the short-term capital gains, in a number of decisions various benches of the Tribunal have taken the view that the rate applicable on such deemed short-term capital gains would be the rate applicable to long-term capital gains, i.e., the rate of 20% prescribed u/s 112. This controversy has been discussed in the BCAJ Vol. 48-B, November, 2016, Page 51, but the latest decision in Voltas Ltd. has added a new dimension to the conflict and some fresh thoughts on the subject are shared herein.

THE RATHI BROTHERS’ CASE

The issue had come up before the Pune bench of the Tribunal in the case of Rathi Brothers (Madras) Ltd. vs. ACIT, ITA No. 707/PN/2013 dated 30th October, 2014.

During the previous year relevant to A.Y. 2008-09, the assessee sold its office premises for Rs. 98,37,000. Since depreciation had been claimed on such asset in the past, the assessee computed its capital gains u/s 50 at Rs. 93,40,796, disclosed such capital gains as short-term capital gains but computed tax thereon at the rate of 20%.

It was contended before the A.O. that the tax rate u/s 112 was being applied on the gains treating the gains as long-term capital gains, though the resultant capital gains were in the nature of short-term capital gains as per the provisions of section 50 based on the decision of the Bombay High Court in CIT vs. Ace Builders (P) Ltd. 281 ITR 210. The assessee also placed reliance on the decision of the Mumbai Tribunal in the case of P.D. Kunte & Co. vs. ACIT (ITA No. 4437/Mum/05 dated 10th April, 2008).

However, the A.O. observed that the said ITAT decision was in the context of eligibility of exemption u/s 54EC in respect of capital gains computed u/s 50 on transfer of an asset held for more than three years. It was pointed out to the A.O. that in response to a miscellaneous application filed in that case the order was modified to hold that on the reasoning of the Bombay High Court in the case of Ace Builders (Supra), it naturally followed that even the tax rate applicable while bringing capital gain to tax would be as per the provisions of section 112.

However, attempting to distinguish this interpretation, the A.O. stated that section 50 was a special provision inserted to compute capital gains in respect of depreciable assets with an intention to prevent dual concession to the assessee in the form of depreciation as well as concessional rate of tax. It was also emphasised by the A.O. that even in the case decided by the Bombay High Court, the larger issue involved was the eligibility to claim deduction u/s 54E against capital gains arising on transfer of an asset on which depreciation was being claimed, even if such gains were to be computed in accordance with the provisions of section 50.

The A.O. accordingly taxed the capital gain as short-term capital gain and declined to apply the tax rate prescribed u/s 112.

The Commissioner (Appeals) dismissed the assessee’s appeal, holding that section 50 was enacted with the objective of denying multiple benefits to the owners of assets. According to him, the rationale behind enacting such a deeming provision u/s 50 was that the assessee had already availed benefits in the form of depreciation in case of depreciable assets, and it was not equitable to extend dual benefit of depreciation as well as concessional tax rate of 20% to capital gains arising on transfer of depreciable assets.

On behalf of the assessee it was argued before the Tribunal that since the asset was held for more than three years, it was a long-term capital asset as defined in section 2(14), and capital gain computed even u/s 50 is to be treated as long-term capital gain. The Bombay High Court in Ace Builders (Supra) had held that section 50 is a deeming provision, hence the same is to be interpreted to the extent to achieve the object of the said provision. Reliance was also placed by the assessee on the Mumbai Tribunal decision in the case of P.D. Kunte & Co. (Supra).

The Tribunal refused to accept the argument that in case of Ace Builders the Bombay High Court had held that even capital gain computed u/s 50 is to be treated as long-term capital gain. According to the Tribunal, the High Court had explained that if the capital gain was computed as provided u/s 50, then the capital gains tax would be charged as if such capital gain had arisen out of a short-term capital asset. The Tribunal also did not follow the Mumbai Tribunal decision in the case of P.D. Kunte & Co. on the ground that this ground had remained to be adjudicated in that case.

The Tribunal therefore held that such capital gains was not eligible for the 20% rate of tax applicable to long-term capital gains u/s 112.

A similar view has been taken by the Mumbai bench of the Tribunal in the cases of ACIT vs. SKF Bearings India Ltd. (ITA No. 616/Mum/2006 dated 29th December, 2011), SKF India Ltd. vs. Addl. CIT (ITA No. 6461/Mum/2009 dated 24th February, 2012) and Reckitt Benckiser (India) Ltd. vs. ACIT, 181 TTJ 384 (Kol.).

THE VOLTAS CASE

The issue came up again recently before the Mumbai bench of the Tribunal in the case of DCIT vs. Voltas Ltd. TS-566-ITAT-2020(Mum).

In this case, the assessee had sold buildings which were held for more than three years. The assessee claimed that the capital gains on the sale of the buildings should be taxed at 20% u/s 112 instead of at 30%, the rate applicable to short-term capital gains.

It was argued on behalf of the assessee before the Tribunal that the issue was covered in favour of the assessee by the Mumbai Tribunal decision in the case of Smita Conductors Ltd. vs. DCIT 152 ITD 417. Reliance was also placed on the decision of the Bombay High Court (actually of the Supreme Court, affirming the decision of the Bombay High Court) in the case of CIT vs. V.S. Dempo Company Ltd. 387 ITR 354 and the decision of the Supreme Court (actually of the Bombay High Court) in the case of CIT vs. Manali Investment [219 Taxman 113 (Bombay)(Mag.)] and it was argued that both Courts had held that the deeming provision of the section could not be extended beyond the method of computation of the cost of acquisition involved.

It was argued on behalf of the Revenue that section 50, being a special provision for computation of capital gains in case of depreciable assets, specifically provides in the concluding paragraph that the income accrued or arising as a result of such transfer shall be deemed to be income from transfer of a short-term capital asset. It was submitted that the language of the Act was very clear and unambiguous. It was argued that there would have been scope for ambiguity only if the term ‘short term’ was not used. It was submitted that when the Act provides that such gain would be gain arising from short term capital asset, there was no reason why the term ‘short term’ appearing in that provision should be regarded as superfluous. It was argued that when the Act was so clear there could not be any dispute about the rate of tax applicable for short-term capital gain.

The Tribunal analysed the provisions of section 50 and the decisions in the cases of V.S. Dempo (Supra) and Manali Investment (Supra). It noted the observations of the Bombay High Court (actually the Supreme Court) that section 50 is only restricted for the purpose of sections 48 and 49 as specifically stated therein, and the fictions created in sub-sections (1) and (2) have limited application only in the context of the mode of computation of capital gains contained in sections 48 and 49. The fictions have nothing to do with exemption that is provided in a totally different provision, viz., section 54EC. The Tribunal cited with approval the observations of the Bombay High Court in the case of Ace Builders (Supra) and noted that the Gujarat and Gauhati High Courts had taken a similar view in the cases of CIT vs. Polestar Industries 221 Taxman 423 and CIT vs. Assam Petroleum Industries (P) Ltd. 262 ITR 587, respectively. It also noted the Supreme Court (Bombay High Court) decision in the case of Manali Investment where the Supreme Court (Bombay High Court) permitted set-off of brought forward long-term capital loss against gains computed u/s 50 on sale of an asset which had been held for more than three years.

The Tribunal observed that the higher Courts had held that the deeming fiction of section 50 was limited and could not be extended beyond the method of computation of capital gain and that the distinction between long-term and short-term capital gains was not obliterated by this section. The Tribunal, therefore, allowed the appeal of the assessee on this ground.

A similar view has been taken by the Tribunal in the cases of Smita Conductors vs. DCIT 152 ITD 417 (Mum.), Poddar Brothers Investments Pvt. Ltd. vs. DCIT [ITA 1114/Mum/2013 dated 25th March, 2015), Castrol India Ltd. vs. DCIT [ITA 195/Mum/2012 dated 18th October, 2016], Yeshwant Engineering Pvt. Ltd. vs. ITO [ITA 782/Pun/2015 dated 9th October, 2017], DCIT vs. Eveready Industries Ltd. [ITA 159/Kol/2016 dated 18th October, 2017], BMC Software India Pvt. Ltd. vs. DCIT (ITA 1722/Pun/2017 dated 12th March, 2020), Mahindra Freight Carriers vs. DCIT, 139 TTJ 422 and Prabodh Investment & Trading Company vs. ITO (ITA No. 6557/Mum/2008). In most of these cases, the view taken by the Tribunal in the case of Smita Conductors (Supra) has been followed.

OBSERVATIONS

Section 50 provides for modification to provisions of sections 48 and 49, while giving the mode of computation as well as stating that such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets. Both sections 48 and 49 are computation provisions and therefore section 50 really only modifies the manner of computation of capital gains.

This aspect has been clarified by various Courts as under:

In Ace Builders (Supra), the Bombay High Court has observed:
‘21. On perusal of the aforesaid provisions, it is seen that section 45 is a charging section, and sections 48 and 49 are the machinery sections for computation of capital gains. However, section 50 carves out an exception in respect of depreciable assets and provides that where depreciation has been claimed and allowed on the asset, then, the computation of capital gain on transfer of such asset under sections 48 and 49 shall be as modified under section 50. In other words, section 50 provides a different method for computation of capital gain in the case of capital assets on which depreciation has been allowed.

22. Under the machinery sections the capital gains are computed by deducting from the consideration received on transfer of a capital asset, the cost of acquisition, the cost of improvement and the expenditure incurred in connection with the transfer. The meanings of the expressions “cost of improvement” and “cost of acquisition” used in sections 48 and 49 are given in section 55. As the depreciable capital assets have also availed depreciation allowance under section 32, section 50 provides for a special procedure for computation of capital gains in the case of depreciable assets. Section 50(1) deals with the cases where any block of depreciable assets do not cease to exist on account of transfer and section 50(2) deals with cases where the block of depreciable assets cease to exist in that block on account of transfer during the previous year. In the present case, on transfer of depreciable capital asset the entire block of assets has ceased to exist and, therefore, section 50(2) is attracted. The effect of section 50(2) is that where the consideration received on transfer of all the depreciable assets in the block exceeds the written down value of the block, then the excess is taxable as a deemed short-term capital gain. In other words, even though the entire block of assets transferred are long-term capital assets and the consideration received on such transfer exceeds the written down value, the said excess is liable to be treated as capital gain arising out of a short-term capital asset and taxed accordingly.
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25. In our opinion, the assessee cannot be denied exemption under section 54E because, firstly, there is nothing in section 50 to suggest that the fiction created in section 50 is not only restricted to sections 48 and 49 but also applies to other provisions. On the contrary, section 50 makes it explicitly clear that the deemed fiction created in sub-section (1) and (2) of section 50 is restricted only to the mode of computation of capital gains contained in sections 48 and 49. Secondly, it is well established in law that a fiction created by the Legislature has to be confined to the purpose for which it is created. In this connection, we may refer to the decision of the Apex Court in the case of State Bank of India vs. D. Hanumantha Rao 1998 (6) SCC 183. In that case, the Service Rules framed by the bank provided for granting extension of service to those appointed prior to 19th July, 1969. The respondent therein who had joined the bank on 1st July, 1972 claimed extension of service because he was deemed to be appointed in the bank with effect from 26th October, 1965 for the purpose of seniority, pay and pension on account of his past service in the army as Short Service Commissioned Officer. In that context, the Apex Court has held that the legal fiction created for the limited purpose of seniority, pay and pension cannot be extended for other purposes. Applying the ratio of the said judgment, we are of the opinion that the fiction created under section 50 is confined to the computation of capital gains only and cannot be extended beyond that.’

These observations of the Bombay High Court in paragraph 25 of the Ace Builder’s decision have been reproduced and approved of by the Supreme Court in the V.S. Dempo case, thereby confirming that the fiction of section 50 is confined to the computation of capital gains only and cannot be extended beyond that.

However, in paragraph 26, the Bombay High Court has observed:
‘26. It is true that section 50 is enacted with the object of denying multiple benefits to the owners of depreciable assets. However, that restriction is limited to the computation of capital gains and not to the exemption provisions. In other words, where the long-term capital asset has availed depreciation, then the capital gain has to be computed in the manner prescribed under section 50 and the capital gains tax will be charged as if such capital gain has arisen out of a short-term capital asset, but if such capital gain is invested in the manner prescribed in section 54E, then the capital gain shall not be charged under section 45 of the Income-tax Act.’

The Mumbai bench of the Tribunal in the SKF cases as well as the Pune bench of the Tribunal in the Rathi Brothers case has relied on these observations for holding against the assessee. However, since the issue before the Bombay High Court was regarding the availability of the exemption u/s 54E, the observations regarding charge of capital gains tax should be regarded as the obiter dicta. Further, the Tribunal in these cases did not have the benefit of the Supreme Court’s decision in the V.S. Dempo case, where it had approved of the fact that the applicability of section 50 is confined to the computation of capital gains only.

The observations of the Gauhati High Court, which had also been approved by the Supreme Court in the V.S. Dempo case, can also be referred to:

‘7. Section 2(42A) defines “short-term capital asset” which means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer. Thus the assets, which have been already held for more than 36 months before it is transferred, would not be short-term capital assets. Section 2(29A) defines “long-term capital asset” means a capital asset which is not short-term capital asset. Therefore, the asset, which has been held for more than 36 months before the transfer, would be long-term capital asset. Section 2(29B) provides for “long- term capital gain”, which means capital gain arising from the transfer of a long-term capital asset.

8. All capital gains on the transfer of the capital asset whether short-term capital asset or long-term capital asset except otherwise provided in mentioned sections in section 45 of the Income-tax Act are chargeable to income-tax. How the capital gains shall be computed is laid under sections 48 and 49 of the Income-tax Act, 1961. The capital gain arising from the transfer of short-term assets under section 48 (as it stands at the relevant time) are wholly assessable to be as ordinary income after deduction as provided under section 48(1)(e) whereas the capital gain arising from the transfer of long-term capital assets are partially assessable as provided under section 48(b), which reads:

“(b) where the capital gain arises from the transfer of a long-term capital asset (hereinafter in this section referred to, respectively, as long-term capital gain and long-term capital asset) by making the further deductions specified in sub-section (2).”

9. Thus by virtue of this section, long-term capital assets would be entitled for further deduction as provided in sub-section (2) of section 48. Section 49 is a provision whereunder the general principle is laid down for computing capital gains and certain exceptions are engrafted in the section. Thus, sections 48 and 49 provide for the principles on which the capital gains shall be computed and the benefit which can be given for transfer of long-term capital assets while calculating the capital gain by virtue of sub-section (2) of section 48 wherein the assessee transferring long-term capital assets can claim further deduction as specified under sub-section (2). Section 50…….

10. By virtue of this section, notwithstanding anything contained in clause (42A) of section 2, where the short-term capital asset has been defined, if the depreciation is allowed, the procedure for computing the capital gain as provided under sections 48 and 49 would be modified and shall be substituted as mentioned in section 50. Section 50 only provides that if the depreciation has been allowed under the Act on the capital asset then the assessee’s computation of capital gain would not be under sections 48 and 49 of the Income-tax Act and it would be with modification as provided under section 50. Section 54E is the section which has nothing to do with sections 48 and 49 or with section 50 of the Income-tax Act, 1961 wherein the mode of computation of capital gain is provided.
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12. Section 50 is a special provision where the mode of computation of capital gains is substituted if the assessee has claimed the depreciation on capital assets. Section 50 nowhere says that depreciated asset shall be treated as short-term assets, whereas section 54E has an application where long-term capital asset is transferred and the amount received is invested or deposited in the specified assets as required under section 54E.’

The observations of the Madras High Court in the case of M. Raghavan vs. Asst. CIT 266 ITR 145, in the context of the purpose of section 50, are also relevant:

‘22. It would appear that the object of introducing section 50 in order to provide different method of computation of capital gain for depreciable assets was to disentitle the owners of such depreciable assets from claiming the benefit of indexing, as if indexing were to be applied, there would be no capital gain available in most cases for being brought to taxation. The value of depreciable asset in most cases comes down over a period of time, although there are cases where the sale value of a depreciated asset exceeds the cost of acquisition. The result of allowing indexing, if it were to be allowed, is to regard the cost of acquisition as being very much higher than what it actually is, to the assessee. If such boosted cost of acquisition is required to be deducted from the amount realised on sale, in most cases it would result in a negative figure, resulting in the assessee being enabled to claim a capital loss. Clearly, it could not have been the legislative intent to confer such multiple benefits to the assessees selling depreciable assets.’

Therefore, from the above it is clear that the deeming fiction of section 50 is for the limited purpose of computation in case of sale of depreciable assets where the computation has to be in the same manner as that applicable to short-term capital assets, i.e., without indexation of cost and with substituted cost of acquisition, being the written down value of the block of assets. The deeming of short-term capital gains can therefore be viewed in the context of the manner of computation of the capital gains, i.e., without the indexation of cost available u/s 48.

It may also be noted that one of the factors that weighed with the Pune bench of the Tribunal in Rathi Brothers for not following the Mumbai Tribunal decision in the P.D. Kunte & Co. case (which was the first case on the issue) was that this issue had not been decided in the P.D. Kunte & Co. case. However, the Tribunal failed to take note of the order in the Miscellaneous Application in the P.D. Kunte & Co. case (MA 394/Mum/2008 dated 6th August, 2008), where the Tribunal had allowed this ground by observing as under:

‘On the reasoning of the Hon’ble Bombay High Court in the case of Ace Builders (P) Ltd. (Supra), it naturally follows that even the tax rate applicable while bringing capital gain to tax will be as per the provisions of section 112 of the Act. The Assessing Officer is directed to apply the same’.

The decision of the Pune bench of the Tribunal in the said case would have been different had the amended decision delivered in the Miscellaneous Application been brought to its notice.

The better view of the matter therefore is the view taken by the Tribunal in the cases of P.D. Kunte & Co., Smita Conductors, etc., that the provisions of section 50 do not take away the benefit of the concessional rate of tax, where available, for the capital gains based on its period of holding.

shailesh.kwebmaker

[DCIT vs. S.R.A. Systems Ltd.; ITA Nos. 1497 to 1499/Mds/2009, A.Y. 2000-01 to 2001-02 (Mds.) ITAT] Section 234D – Levy of interest u/s 234D came into force from 1st June, 2003 – Prospective nature – After the commencement of the assessment year – Interest could be levied only from 1st April, 2004, i.e., from the A.Y. 2004-05 – The law to be applied is the law as on the date of commencement of the assessment year and not the change in law amended subsequent to that date Deduction u/s 10B – Undertaking – Not be formed by splitting up or reconstruction of a business already in existence – Merely by shifting business from one place to another and keeping some of the plant and machinery as those were bearing charge of financial institution – Clauses (ii) and (iii) of sub-clause (2) to section 10A were not violated

8. Commissioner of Income Tax, Chennai vs. S.R.A. Systems Ltd. [T.C. Appeal Nos. 1470 to 1472 of 2010, dated 19th January, 2021 (Bom.)]

[DCIT vs. S.R.A. Systems Ltd.; ITA Nos. 1497 to 1499/Mds/2009, A.Y. 2000-01 to 2001-02 (Mds.) ITAT]

Section 234D – Levy of interest u/s 234D came into force from 1st June, 2003 – Prospective nature – After the commencement of the assessment year – Interest could be levied only from 1st April, 2004, i.e., from the A.Y. 2004-05 – The law to be applied is the law as on the date of commencement of the assessment year and not the change in law amended subsequent to that date

Deduction u/s 10B – Undertaking – Not be formed by splitting up or reconstruction of a business already in existence – Merely by shifting business from one place to another and keeping some of the plant and machinery as those were bearing charge of financial institution – Clauses (ii) and (iii) of sub-clause (2) to section 10A were not violated

For the A.Y. 2000-01, the assessee had filed its return of income on 29th November, 2000. The assessee claimed that it was eligible for deduction u/s 10B. The return was processed on 28th March, 2002. Subsequently, the A.O. had reason to believe that income chargeable to tax had escaped assessment on account of the assessee company being ineligible for deduction u/s 10A. A notice dated 22nd March, 2007 was issued u/s 148 disallowing the entire claim of deduction u/s 10B. Further, the expenditure incurred for the renovation and repairs of the rented premises of the assessee company was disallowed by the A.O. on the ground that such expenses were in the nature of capital expenditure. The A.O. in his reassessment order noted that in terms of section 10B(ii) an undertaking in order to be eligible for deduction u/s 10B must not be formed by splitting up or reconstruction of a business already in existence. Further, he held that deduction u/s 10B was not available to the assessee in view of the provisions of section 10B(iii) which stipulate that eligible business is not formed by transfer to a new business of plant and machinery previously used for any purpose. The A.O. found that the assessee had not complied with both these conditions, hence it was not entitled to any deduction u/s 10B.

While completing the assessment u/s 143(3) r/w/s 147 for the A.Ys. 2000-01 and 2001-02, the A.O. disallowed the claim of deduction made by the assessee under sections 10A and 10B on the ground that an undertaking was formed by splitting up / reconstruction of the business already in existence. Similar disallowance was made in A.Y 2002-03 while passing an order u/s 143(3) r/w/s 263. The A.O. levied interest u/s 234D.

For the A.Y. 2002-03, on challenge the Tribunal set aside the order of the CIT after taking into consideration the decision of the Apex Court reported in 107 ITR 195 [Textile Machinery Corporation Limited vs. CIT] that held as follows:

‘… This is not a case of setting up of a new business, but only transfer of business place of existing business to a new place located in STPI area and thereafter, getting the approval from the authorities, the assessee becomes entitled to deduction u/s 10A. Merely because by shifting the business from one place to another and keeping some of the plant and machinery as those are bearing charge of financial institution, does not violate clauses (ii) and (iii) of sub clause (2) to section 10A.’

The order passed by the Income-tax Appellate Tribunal was challenged by the Department in T.C.A. No. 1916 of 2008 and the Division Bench of this Court by its judgment dated 26th October, 2018 confirmed the order of the ITAT dated 16th May, 2008 made in I.T.A. No. 2255/Mds/06 for the A.Y. 2002-03 and dismissed the appeal.

Aggrieved by the assessment order for the A.Ys. 2000-01 and 2001-02, the assessee filed appeals before the CIT(A). The Appellate Authority allowed the appeals by following the order of the Tribunal for A.Y. 2002-03. The Appellate Authority, while dealing with the levy of interest u/s 234D, held that the said section comes into effect only after the commencement of the assessment year and interest could be levied only for the A.Y. 2004-05, and therefore deleted the interest for the A.Ys. 2000-01, 2001-02 and 2002-03.

Aggrieved over the order of the CIT(A), the Department filed appeals before the Appellate Tribunal which confirmed the CIT(A) order and dismissed the appeals. While dismissing the appeals, the Tribunal held that interest u/s 234D cannot be levied for the A.Ys. 2000-01, 2001-02 and 2002-03. Further, while dismissing the appeals, the Tribunal followed the order in I.T.A. No. 2255/Mds/06 dated 16th May, 2008.

Still aggrieved, the Department filed the appeals before the High Court. The Court held that, in view of the judgment of the Division Bench of this Court, it is clear that the applicability of clauses (ii) and (iii) of sub-clause (2) to section 10B, the impugned order passed by the ITAT is proper. In view of the order passed by the ITAT of 16th May, 2008 in I.T.A. No. 2255/Mds/06 and the judgment passed by the Division Bench of this Court on 26th October, 2018 in Tax Case Appeal No. 1916 of 2008, the assessee company would be entitled to deduction u/s 10A and the disallowance made by the A.O. was not correct. For A.Y. 2002-03, since the order passed u/s 263 itself had been set aside, the cause of action for reassessment does not survive.

So far as the levy of interest u/s 234D is concerned, the Court held that the section came to be inserted by the Finance Act, 2003 with effect from 1st June, 2003. Prior to that, no interest was payable on refund in the event of an order for refund being set aside and the assessee is made to pay the same from the date of rectification order or the orders passed by the Appellate Authorities. A reading of the provisions of section 234D makes it clear that there is no indication in the language employed in the entire section that the Parliament intended to make this levy of tax on excess refund retrospective. On the contrary, after inserting this provision in the Act it is specifically stated that it comes into effect from 1st June, 2003. Though the amendment is by insertion, the Parliament has expressly stated that the amendment comes into effect from 1st June, 2003. Parliament has made its intention clear and unambiguous. In other words, it is not retrospective. Merely because the order of assessment was passed subsequent to the insertion of the said provision in the Act, would not make the said provision retrospective. The provision providing imposition of interest is a substantive provision. It is settled law that in the absence of any express words used in the provision making levy of interest retrospective, it can only be prospective (i.e.) from the date on which it came into force, viz., 1st June, 2003.

The Constitution Bench of the Apex Court in the case of Karimthuravi Tea Estate Ltd. vs. State of Kerala reported in 1966 60 ITR 262 SC held as follows:

‘…It is well settled that the Income-tax Act as it stands amended on the first day of April of any financial year must apply to the assessments of that year. Any amendments in the Act which come into force after the first day of April of a financial year would not apply to the assessment for that year even if the assessment is actually made after the amendments come into force.’

The amended provision shall come into force only after the commencement of the assessment year and cannot be applied retrospectively unless it is specifically mentioned. Therefore, the law to be applied is the law as on the date of commencement of the assessment year and not the change in law amended subsequent to that date. Section 234D having come into force only on 1st June, 2003, i.e., after the commencement of the assessment year, interest could be levied only from 1st April, 2004, that is, from the A.Y. 2004-05, and no interest u/s 234D could be chargeable prior to the A.Y. 2004-05. Since all the three assessment years are prior to the A.Y. 2004-05, the provisions of section 234D cannot be applied. Accordingly, the Revenue appeals were dismissed.

shailesh.kwebmaker

FACELESS REGIME UNDER INCOME-TAX LAW: SOME ISSUES AND THE WAY FORWARD

INTRODUCTION

With a view to making the tax system ‘seamless, faceless and painless’, the Government of India had introduced the Faceless Assessment Scheme, 2019 (Faceless Assessments) in September, 2019. The purpose behind it was to ensure fair and objective tax adjudication and to make sure that some of the flaws in the operation of physical assessment proceedings (such as the element of subjectivity in assessment proceedings, non-consideration of written submissions, granting of inadequate opportunities to the taxpayers for filing responses, etc.) do not recur. What is equally commendable is the phased manner in which Faceless Assessments have been introduced (first, by introducing e-proceedings on a pilot basis, then on a country-wide basis, and lastly introducing Faceless Assessments).

All these steps were aimed in the right direction to impart greater efficiency, transparency and accountability by (a) eliminating the human interface between taxpayers and tax officers; (b) optimising the utilisation of resources through economies of scale and functional specialisation; and (c) introducing a team-based assessment with dynamic jurisdiction.

Currently, all income tax assessments [subject to certain exceptions viz., (a) assessment orders in cases assigned to central charges; and (b) assessment orders in cases assigned to international tax charges] are being carried out in a faceless manner. For the purpose of carrying out Faceless Assessments, the Government had set up different units [i.e., National Faceless Assessment Centre (NaFAC), Regional Faceless Assessment Centres, Assessment Units, Verification Units, Technical Units and Review Units].

However, as it is still in its nascent stage, the taxpayers have had to grapple with several challenges / issues (as discussed below) during the course of Faceless Assessments. The Government needs to resolve these teething issues so that the objective of having a fair, efficient and transparent taxation regime is met. Nevertheless, there are some good features in the Faceless Assessment proceedings but these are not being fully utilised. There are some tabs in the e-proceedings section of the e-filing portal which provide details as to the date on which the notice was served to the taxpayer, the date on which the taxpayer’s response was viewed by the field authorities, etc., but such functionalities are not yet operational.

The following are some practical problems / issues faced by the taxpayers and the suggested changes:

Requests for personal hearings and written submissions are not being considered before passing of assessment orders: A salient feature of Faceless Assessments is that personal hearing (through video conferencing) would be given only if the taxpayer’s request for such hearing is approved by the prescribed authority. Unfortunately, in some of the cases, written submissions were not considered at all. Moreover, it has come to light that some taxpayers’ request for personal hearings were also not granted before passing of the assessment order despite the fact that the frequently asked questions (FAQs) uploaded by the Income-tax Department on its website require the field authorities to provide reasons in case a request for personal hearing is rejected. In many such cases, taxpayers were forced to file writ petitions in courts to seek justice on the ground of violation of the ‘principles of natural justice’.

Fortunately, the courts came to their rescue and stayed the operation of such faceless assessment orders1 / directed the Department to grant personal hearing2 and do fresh assessments. One of the basic tenets of tax adjudication / tax proceedings is that the taxpayer should get a fair and reasonable hearing / chance to explain its case and make its submissions to present / defend its case. Written submissions are, perhaps, the most critical tool of taxpayers through which they can actualise this right. Needless to say, in Faceless Assessments the importance and vitality of written submissions grow manifold.

While the underlying objective of Faceless Assessments – to eliminate human interface – is certainly a commendable reason, it cannot be denied that on many occasions (especially for complex matters such as eligibility of tax treaty benefits, etc.), face-to-face hearings are needed for the taxpayer to properly and effectively represent its case and put forth its submissions / arguments as well as for the tax Department to understand and appreciate such arguments / merits. During a personal hearing, the taxpayer / its authorised representatives would generally gauge whether the Assessing Officer (AO) / tax authorities are receptive to their arguments and averments. This is helpful because it gives them an opportunity to make further submissions, oral or written, or to adopt a different line of reasoning / arguments in support of their case. This distinct advantage is lost under the faceless regime. From the perspective of the tax Department also, personal hearings are helpful as it not only saves their time, energy and effort in understanding the facts and merits of the case, but also gives them an opportunity to ask more effective / relevant questions of the taxpayers for doing an objective assessment.

Thus, the Government may consider amending Faceless Assessments and provide a threshold (say income beyond a particular amount, turnover beyond a particular amount, etc.) wherein the taxpayers’ right for personal hearing will not be denied / will not be at the discretion of the prescribed authority. Given that the Government’s focus is on digital push, it may consider allowing an oral-cum-video submission also in addition to filing of written submissions. This will improve the efficiency and efficacy of tax adjudication proceedings.

Taxpayers’ requests for adjournment are not being considered before passing of assessment orders: One of the grievances of many taxpayers who faced Faceless Assessments has been that their adjournment requests (filed in time / before the expiry of due date fixed for compliance) were not considered before passing of the assessment order. This is certainly not fair and is against the core principles of tax adjudication. In this regard, certain taxpayers also knocked the doors of courts on the ground of violation of the ‘principles of natural justice’ and sought quashing of such assessment orders and consequent tax demands raised on them. Fortunately, the courts3 ruled in favour of the taxpayers and directed the tax Department to consider their written submissions and to do fresh assessments.

Further, instances have also come to light where very short deadlines were provided to taxpayers to comply with notices (sometimes only three to four days’ time was given). Since currently the service of notices is done electronically, the possibility of the taxpayers missing out on such notices or realising very late that such a notice has been issued, cannot be ruled out. This is even more critical in the current Covid pandemic situation wherein the functioning of offices is already disturbed. It is thus advisable that the tax Department should give a reasonable time period (at least ten to 15 days) to taxpayers for filing their explanations – written submissions / comply with the notices.

Draft assessment orders are not sent to taxpayers before passing the final assessment order: Under Faceless Assessments, the tax Department is required to serve a show cause notice (SCN) along with a draft assessment order in case variations proposed in the same are prejudicial to the interests of the taxpayers. It has been reported that final assessment orders were passed in some cases without providing such draft assessment orders to the taxpayers. Such orders have been quashed / stayed by the courts4 in writ proceedings.

Passing of assessment orders prior to the expiry of time allowed in SCN: One of the intentions of Faceless Assessments was to hasten the assessment proceedings and to ensure time-bound completion. This objective gets reflected in the annual budgetary amendments wherein the time limits for passing assessment orders are gradually being reduced. But on a practical basis, it has come to light that in some taxpayers’ cases Faceless Assessment orders were passed even before the expiry of the time allowed in the SCN. What has added to this grievance is that in some cases, taxpayers were not able to upload their written submissions also because the assessments orders were passed and the tab on the e-filing portal was closed. Again, this is neither fair nor pragmatic. In such cases also, the courts5 have granted relief to taxpayers by quashing such orders by observing that with the issuance of an SCN, the taxpayers’ statutory right to file a reply and seek a personal hearing kicks in and which cannot be curtailed.

Notices are not getting uploaded / reflected on e-filing portal on real-time basis: As part of Faceless Assessments, notices issued by NaFAC in connection with the Faceless Assessment proceedings are to be uploaded on the taxpayers’ account on the e-filing portal. But cases have come to light where notices issued by NaFAC were getting reflected on the e-filing portal after one or two days – perhaps due to technical glitches. Due to such delays, taxpayers are left with less time to comply with such notices and as a consequence, they are left with no option but to file adjournment requests. One hopes that these technical glitches get resolved soon so that the notices are reflected on the e-filing portal on a real-time basis. This step will increase the efficiency of Faceless Assessments significantly. Even as per Faceless Assessments, every notice / order / any electronic communication should be delivered to the taxpayer by way of:

•   Placing authenticated copy thereof in taxpayer’s registered account; or
•   Sending an authenticated copy thereof to the registered email address of the taxpayer or its authorised representative; or
•   Uploading an authenticated copy on the taxpayer’s mobile app.
and followed by a real-time alert6.

It has been further specified that the time and place of dispatch and receipt of electronic record (notice, order, etc.) shall be determined in accordance with the provisions of section 13 of the Information Technology Act, 2000 (21 of 2000) which inter alia provides that receipt of an electronic record occurs at the time when the electronic record ‘enters’ the designated computer resource (that is, the taxpayer’s registered account on the e-filing portal) of the taxpayer. Thus, the crucial test for determining service / receipt of any notice / order, etc., is the time when it ‘enters’ the taxpayer’s registered account on the e-filing portal. Since there is a time lag between uploading of notice by the tax Department and its viewability by the taxpayer, an issue can arise as to what will be the date of service of notice.

The first step in a communication process is intimating the taxpayer about the issuance of any notice / order, etc. Thus, unless a taxpayer is informed, it will not be possible for the taxpayer to comply with the same. Further, in the case of reopening of assessments, there has been litigation on the aspect of issuance and service of reopening notice. The Supreme Court in the case of R.K. Upadhyaya vs. Shanabhai P. Patel [1987] 166 ITR 163 (SC) ruled that service of reopening notice u/s 148 is a condition precedent to making the order of assessment. Thus, service of a notice is an important element and
to avoid any unnecessary litigation it is advisable that the technical glitch gets resolved and notices are reflected on the e-filing portal on a real-time basis. Given that short messaging service (SMS) is one of the most effective ways of putting the other person on notice about some communication, it is advisable that sending of real-time alert to taxpayers by SMS be made mandatory.

Certain restrictions / glitches on the e-filing portal: There are certain other technical restrictions or glitches on the e-filing portal which cause practical difficulties in the effective and efficient implementation of the Faceless Assessments. The same are discussed below:

• Attachment size restriction: Currently, the e-filing portal has a restriction wherein attachment size cannot exceed 10 MB. This means that if the size of the response (written submissions / annexures) exceeds this limit, the same is required to be split into different parts such that each attachment size does not exceed 10 MB. While the tax Department is expected to read the entire response (written submissions and annexures) and assess the taxpayers’ income accordingly, practically it becomes difficult for the Department to open multiple files and read them in continuation when written submissions including annexures run into a number of pages (especially in case of large taxpayers). This difficulty for the tax Department becomes a cause of suffering for the taxpayers. Thus, the Government should consider investing in improvement of digital infrastructure and increase the attachment size limit (say to 40 to 50 MB per attachment).

• Issuance of reopening notices: It is seen that reopening notices are issued by the tax Department asking the taxpayers to file their return of income. There is no window / tab available to the taxpayers to object to such reopening notice which was otherwise allowed under the physical assessment proceedings as per the settled position of law. Further, there is no window / option available on the e-filing portal to ask for reasons for reopening of an assessment even after filing the return of income in response to reopening notices.

• All file formats are not allowed: Currently, the taxpayers can upload the documents / responses only in certain file formats – .pdf, .xls, .xlsx and .csv format. Other commonly used file formats, viz., .doc, .docx, .ppt, .pptx, etc., cannot be uploaded. The Government should consider investing in improvement of digital infrastructure on this count so that all types of file formats get supported by the e-filing portal.

• Special characters are not allowed: The e-filing portal does not allow use of certain special characters. However, the problem occurs at the time when taxpayers are submitting their response in the respective fields, and just then they are given a message that special characters are not allowed. It is advisable that the disallowed special characters are highlighted, and the taxpayers get a pop-up as and when such special characters are used by them.

• Other glitches: It has also been observed that taxpayers faced other technical glitches such as e-filing portal was not working at certain times, video conferencing link was not working, documents were not getting uploaded, etc.

CONCLUSION

One of the apprehensions of the entire taxpayer community is that with Faceless Assessments coming into force, proper hearing may not be given and this could lead to erroneous / unfair assessments. In this regard, attention is invited to the decision of the Supreme Court in the case of Dhakeswari Cotton Mills Ltd. vs. CIT [1954] 26 ITR 775 (SC) wherein it was held that the ‘principle of natural justice’ needs to be followed by the tax Department while passing assessment orders. The Court also ruled that the taxpayer should be given a fair hearing and aspects like failure to disclose the material proposed to be used against the taxpayer, non-granting of adequate opportunity to the taxpayer to rebut the material furnished and refusing to take the material furnished by the taxpayer to support its case violates the fundamental rules of justice. Thus, it is crucial that in doing Faceless Assessments, (a) proper hearing is afforded to the taxpayer; (b)‘written submissions’ filed are duly taken into account before passing the assessment order; and (c) adjournment is allowed in genuine cases.

The Government should resolve these teething issues (as discussed above) so that this fear / apprehension does not turn into reality. With revenue of Rs. 9.32 lakh crores7 already stuck in direct tax litigation in various forums, and considering the vision of the Government in making India a US $5 trillion economy, it will not be prudent if such teething issues are not resolved at the earliest. If not done, Faceless Assessments may need to pass through various litmus tests in courts8. Further, one hopes that the Central Board of Direct Taxes comes up with some internal instructions (such as writing proper reasons in the assessment order in case field authorities do not accept / reject judicial precedents cited by the taxpayer in its support) to the field authorities for fair, smooth and effective functioning of Faceless Assessments.

The Government is also on a spree to digitise the tax administration system in India which is evident from the fact that Faceless Assessments; Faceless Appeal Scheme, 2020; and Faceless Penalty Scheme, 2021 are already in force. Besides, enabling provisions have been introduced under the Income-tax Act, 1961 to digitise other aspects of tax adjudication, viz., faceless inquiry, faceless transfer pricing proceedings, faceless dispute resolution panel proceedings, faceless collection and recovery of tax, faceless effect of appellate orders, faceless Income Tax Appellate Tribunal, etc. Thus, it becomes all the more important to resolve the aforesaid teething issues at this stage itself so that other faceless schemes (existing as well as upcoming) are free of such shortcomings / gaps.

One hopes that the new, revamped e-filing portal of the Government will bring a new ray of hope to the taxpayers wherein such issues are taken care of.

(The views expressed in this article are the personal views of the author/s)

shailesh.kwebmaker

SLUMP SALE – AMENDMENTS BY FINANCE ACT, 2021

BACKGROUND

The sale of a business undertaking on a going concern basis for a lump sum consideration is referred to as ‘slump sale’ and section 50B of the Income-tax Act, 1961 (the Act) provides for a mechanism to compute capital gains arising from such a slump sale. Section 50B has for long remained a complete code to provide the computation mechanism for capital gains with respect to only a specific transaction, being the ‘slump sale’.

The essence of this amendment seems to be to align this method of transfer of capital assets with other methods (such as transfer of shares, gifts, assets), wherein a minimum value has been prescribed and such prescribed minimum value did not apply to transfer of capital assets forming part of an undertaking transferred on a slump sale basis. For example, an immovable property could be transferred as an indivisible part of an undertaking under slump sale at any value, without having any reference to the value adopted or assessed by the stamp valuation authority, which if otherwise transferred on a stand-alone basis would need to be transferred at any value higher than the value adopted or assessed by the stamp valuation authority. In addition, the Finance Act, 2021 also expands the scope of section 50B from merely ‘sale’ of an undertaking to any form of transfer of an undertaking, whether or not a ‘sale’ per se, essentially to include ‘slump exchanges’ within its ambit.

Section 50B was inserted by the Finance Act, 1999 with effect from 1st April, 2000 and since then this amendment by the Finance Act, 2021 is the first major amendment to this code of taxing profits and gains arising from slump sales. This article evaluates the following amendments in the ensuing paragraphs:

i. Amendment in section 2(42C) of the Act;
ii. Substitution of sub-section 2 of section 50B of the Act;
iii. Insertion of clause (aa) in Explanation 2 to section 50B of the Act; and
iv. The date of enforcement of these amendments and whether these amendments will have retrospective effect.

LIKELY IMPACT OF THE AMENDMENT ON M&As / DEALS

Sale of business undertakings has been one of the prominent methods of deal consummation in India, since the buyers usually find it cleaner to acquire an Indian business without acquiring the legal entity / company and therefore keep the acquisition free of any legacy legal, tax or commercial disputes. In such transactions, it is hard to believe any transaction being consummated at a value less than its fair value, unless the transaction is consummated with the mala fide intention of transferring the assets for a value less than their fair value. Therefore, such transactions with independent parties are likely to remain un-impacted except the compliances attached with slump sale under the new provisions like obtaining a valuation report in compliance with the prescribed rules as on the date of the slump sale.

The amended section 50B is, however, likely to impact internal group restructurings wherein intra-group transfers were resorted to at book values which would often be less than the prescribed fair values. Such internal transfers of ‘undertakings’ or divisions from one company to another are often resorted to to get to the deal-ready structure (e.g., one company has two divisions and a deal is sought with respect to only one division – the other division will need to be moved out) and such transactions could have remained tax neutral if made within the group, similar to the way amalgamations / de-mergers remain tax neutral. Such restructurings could at times also be driven by regulatory changes or external factors and imposing tax consequences on such internal restructurings will discourage such transfers and the companies will need to resort to time-consuming structures like amalgamations / de-mergers which require a long-drawn process under sections 230 to 232 of the Companies Act, 2013, including approval by the National Company Law Tribunal.

Moreover, in case of transactions where the sale consideration against transfer of the undertaking is discharged in the form of shares / securities (‘slump exchange’), the seller would no more be able to walk away without paying its dues to the taxman.

ANALYSIS OF THE AMENDMENTS BY THE FINANCE ACT, 2021
(a) Amendment in section 2(42C) of the Act
Section 2(42C) defines the term ‘slump sale’ and read as follows before amendment by the Finance Act, 2021: ‘slump sale’ means the transfer of one or more undertaking as a result of the sale, for a lump sum consideration without values being assigned to the individual assets and liabilities in such sale.

The text underlined above is being substituted by the Finance Act, 2021 with ‘undertaking by any means’. Therefore, the amended definition of slump sale reads as follows: ‘slump sale’ means the transfer of one or more undertaking by any means, for a lump sum consideration without values being assigned to the individual assets and liabilities in such sale.

Thus, the amendment replaces the words ‘as a result of sale’ with ‘by any means’, thereby expanding the scope of the term ‘slump sale’ from merely ‘sale’ to ‘any transfer’. This amendment seeks to neutralise the judicial precedents like CIT vs. Bharat Bijlee Ltd. (365 ITR 258) (Bom) wherein the assessee transferred its division to another company in terms of the scheme of arrangement u/s 391 of the Companies Act, 1956 and that consideration was not determined in terms of money but discharged through allotment or issue of bonds / preference shares; it was to be regarded as ‘exchange’ and not ‘sale’ as envisaged under the then section 2(42C), and therefore could not be taxed as a ‘slump sale’. In other words, judicial precedents established the principle that a ‘sale’ must necessarily involve a monetary consideration in the absence of which a transaction, though satisfying all other conditions, will not qualify as a ‘slump sale’ and would merely be an ‘exchange’. Therefore, with the expanded scope of the term ‘slump sale’ to mean transfer ‘by any means’, transactions of varied nature will get covered including but not limited to slump exchanges.

Effective date of the amendment
The Finance Act, 2021 provides that the amendment shall be effective from 1st April, 2021 and shall accordingly apply to the assessment year 2021-22 and subsequent years.

With its applicability for A.Y. 2021-22 one could argue that the amended provisions are applicable to transactions executed on or after 1st April, 2020 and to this effect the amendment is retrospective in nature.

Could this amendment be considered merely clarificatory and therefore retrospective?
The Explanatory Memorandum to the Finance Act, 2021 while explaining the rationale of this amendment, begins the last paragraph with ‘In order to make the intention clear, it is proposed to amend the scope of the definition of the term slump sale by amending the provision of clause (42C) of section 2 of the Act so that all types of transfer as defined in clause (47) of section 2 of the Act are included within its scope.’ The language is suggestive that the amendment is merely clarificatory in nature which is also abundantly clear from the language used in the Explanatory Memorandum with respect to this amendment, claiming that the pre-amended definition also included transactions like slump exchanges. A paragraph from the Explanatory Memorandum to the Finance Act, 2021 is reproduced hereunder:

‘For example, a transaction of – sale may be disguised as – exchange by the parties to the transaction, but such transactions may already be covered under the definition of slump sale as it exists today on the basis that it is transfer by way of sale and not by way of exchange. This principle was enunciated by the Supreme Court in CIT vs. R.R. Ramakrishna Pillai [(1967) 66 ITR 725 SC]. Thus, if a transfer of an asset is in lieu of another asset (non-monetary), it can be said to be monetised in a situation where the consideration for the asset transferred is ascertained first and is then discharged by way of non-monetary assets.’

In the absence of a retrospective operation having been expressly given, the courts may be called upon to construe the provisions and answer the question whether the Legislature had sufficiently expressed that intention of giving the statute retrospective effect. On the basis of Zile Singh vs. State of Haryana [2004] (8 SCC 1), four factors are suggested as relevant:
(i) general scope and purview of the statute; (ii) the remedy sought to be applied; (iii) the former state of the law; and (iv) what it was that the Legislature contemplated. The possibility cannot be ruled out that Indian Revenue Authorities (IRA) could contest this amendment to be clarificatory in nature to have always included ‘slump exchanges’. However, since the change doesn’t specifically call itself clarificatory nor does it give itself a retrospective operation, a reasonable view can be that the said change is prospective.

Essential characteristics of slump sale
With the modified definition, the Table below compares the essential characteristics of a transfer to qualify as a slump sale under the pre-amendment definition vis-à-vis the post-amendment definition u/s 2(42C) of the Act:

*Characteristic*	*Pre-amendment*	*Post-amendment*
Transfer	Yes	Yes
Of one or more undertaking(s)	Yes	Yes
As a result of sale	Yes	No
For a lump sum	Yes	Yes
Consideration	Yes	Yes
Without values being assigned	Yes	Yes

Characteristic

Pre-amendment

Post-amendment

Transfer

Yes

Of one or more undertaking(s)

Yes

As a result of sale

Yes

For a lump sum

Yes

Consideration

Yes

Without values being assigned

Yes

As one can see, all the essential characteristics of a transfer of an undertaking to qualify as a ‘slump sale’ continue, the only change being a transfer through sale vs. by any means.

By any means could have a very wide connotation when read with the newly-inserted Explanation 3 which provides that for the purposes of this clause [being section 2(42C)], ‘transfer’ shall have the meaning assigned to it in section 2(47).Therefore, this will include transactions or transfers wherein an undertaking is transferred for a lump sum consideration like an amalgamation which does not satisfy the conditions prescribed u/s 2(1B) of the Act or a de-merger which does not satisfy the conditions prescribed u/s 2(19AA) of the Act. A ‘gift’ of an undertaking will also be included within the meaning of ‘transfer’, but in the absence of the ‘lump sum consideration’, may not qualify to be a ‘slump sale’ even under the amended definition.

(b) Substitution of sub-section 2 of section 50B of the Act
The Finance Act, 2021 also substituted sub-section 2 of section 50B and the substituted text reads as follows:

[(2) In relation to capital assets being an undertaking or division transferred by way of such slump sale –

(i) The ‘net worth’ of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of sections 48 and 49 and no regards shall be given to the provisions contained in the second proviso to section 48;

(ii) The fair market value of the capital assets as on the date of transfer, calculated in the prescribed manner, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset.]

Essentially, the clause (ii) above has been newly inserted through substitution of the sub-section 2 as the clause (i) above existed in the form of previous sub-section 2 itself.

Section 50B provides for a complete code in itself for computation of profits and gains arising from transfer of ‘capital asset’ being an undertaking in case of slump sale. The erstwhile sub-section 2 provided that the ‘net worth’ of the undertaking would be considered as the cost of acquisition and there was no provision deeming the value of sale consideration or overriding the consideration agreed between the transferor and transferee. The newly-inserted sub-section 2 continues to provide that the ‘net worth’ of the undertaking shall be considered as the cost of acquisition and includes a deeming provision to impute the consideration, being the prescribed fair market value.

Rule 11UAE has been inserted in the Income-tax Rules, 1962 vide a notification dated 24th May, 2021 providing a detailed methodology for arriving at the deemed consideration of the ‘undertaking’ as well as a methodology for arriving at the value of non-monetary consideration received, if any (slump exchange transaction or amalgamation / de-mergers which may qualify as slump sale if they do not meet their respective prescribed conditions). The prescribed valuation rules provide for valuation of specific assets in line with already existing valuation methodologies under Rule 11UA and in this specific context, the Rule provides for value to be the value determined in accordance with the Rule or agreement value, whichever is higher.

Sub-rule (2) of the newly-inserted Rule 11UAE provides for determining the fair market value of the ‘capital assets’ transferred by way of slump sale and that could imply that the prescribed rules will not apply to value any asset other than ‘capital assets’ and such other assets will need to be taken at book values, for example, a parcel of land held as stock-in-trade and not as capital asset. Notably, even the newly-inserted sub-section (2) in clause (ii) refers to ‘fair market value of capital assets as on the date of transfer’ which supports the interpretation that Rule 11UAE would apply only to value ‘capital assets’ forming part of the undertaking being transferred through slump sale. However, one would need to be careful while applying this interpretation, as the specific clauses of Rule 11UAE do not distinguish between the assets as ‘capital assets’ or otherwise.

(c) Insertion of clause (aa) in Explanation 2 to section 50B of the Act
Explanation 2 to section 50B of the Act provides the mechanism to arrive at the value of total assets for computing the net worth. The said Explanation provides guidance on determination of values of respective assets forming part of the undertaking, in order to arrive at the ‘net worth’ being cost of acquisition for the purposes of section 50B of the Act. The Finance Act, 2021 inserted clause (aa) in Explanation 2 to section 50B which reads as follows:

(aa) in the case of capital asset being goodwill of a business or profession which has not been acquired by the assessee by purchase from a previous owner, nil.

Consequent to the insertion of the above-mentioned clause (aa), if ‘goodwill’ is one of the assets on the books of the undertaking, its value shall be considered to be ‘Nil’ for computation of net worth if it is not acquired by way of purchase which will result in its book value not being considered for computing the cost of acquisition. The amendment seems to be one of the consequential amendments made by the Finance Act, 2021 with respect to ‘goodwill’.

In a situation where the goodwill is appearing on the books by virtue of a past amalgamation or a de-merger, its value shall be taken as nil for computing the net worth of the undertaking. Whereas, if the goodwill was purchased prior to 1st April, 2020 and depreciation has been allowed thereof, it would be considered as a depreciable asset and its written down value shall be considered while computing the ‘net worth’. Similarly, if the goodwill is acquired on or after 1st April, 2020, it will not be considered as a depreciable asset pursuant to other amendments made by the Finance Act, 2021 and its book value shall be considered while computing the net worth of the undertaking.

CONCLUSION

Going forward, the expansion of scope of slump sale from merely ‘sale’ to any mode of transfer will bring transactions like ‘slump exchanges’ under the scanner. One needs to carefully consider the impact of this amendment on past slump exchange transactions and whether the amendment will be read as clarificatory and hence retrospective. The expanded scope of the definition will also cover amalgamations / de-mergers where the respective prescribed conditions are not met. In a situation where during the assessment proceedings the Indian Revenue Authorities challenge a specific condition not being satisfied, it could consequentially lead to the transaction being taxed as slump sale.

From a commercial perspective, the amendments do not impact genuine transactions. Even in genuine transactions where there are valuation gaps, the current law does not put the buyer in any adverse position and the tax risks seem to be restricted to the seller, primarily because section 56(2)(x) does not tax ‘undertaking’ as a property in the hands of the buyer.

One will still need to deal with challenges in application of the prescribed valuation methodology, especially valuation required to be as on the date of the slump sale, and the availability of the financials and data points to apply the rule.

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Revision u/s 264 – Offering income inadvertently – Not liable to be taxed – Revision provisions are meant for the benefit of the assessee and not to put him to inconvenience – Commissioner should have examined the existing material in the light of Circular No. 14 (XL – 35) of April, 1955 and Article 265 of the Constitution of India

5 Aafreen Fatima Fazal Abbas Sayed vs. Assistant Commissioner of Income Tax & Ors. [W.P. (L) No. 6096 of 2021, date of order: 08/04/2021 (Bombay High Court)]

Revision u/s 264 – Offering income inadvertently – Not liable to be taxed – Revision provisions are meant for the benefit of the assessee and not to put him to inconvenience – Commissioner should have examined the existing material in the light of Circular No. 14 (XL – 35) of April, 1955 and Article 265 of the Constitution of India

The petitioner challenged the order dated 12th February, 2021 passed by the Principal Commissioner of Income Tax, rejecting the revision petition filed by it u/s 264.

For the A.Y. 2018-19, the assessment year under consideration, the petitioner, who is an individual, declared a total income of Rs. 27,05,646 and after claiming deductions and set-off on account of TDS and advance tax, the refund was determined at Rs. 34,320. However, while filing the return of income on 20th July, 2018 for A.Y. 2018-19, the figure of long-term capital gain of Rs. 3,07,60,800 was purported to have been wrongly copied by the petitioner’s accountant from the return of income filed for the earlier A.Y., i.e., 2017-18, which had arisen on surrender of tenancy rights by the petitioner for that year. It is submitted that the assessment for A.Y. 2017-18 was completed u/s 143(3) vide assessment order dated 24th December, 2019. The petitioner has not transferred any capital asset and there can be no capital gains in the assessment year under consideration and therefore no tax can be imposed on such non-existent capital gains for A.Y. 2018-19.

The returns filed by the petitioner for A.Y. 2018-19 were processed u/s 143(1) vide order dated 2nd May, 2019 and a total income of Rs. 3,34,66,446, including long-term capital gains of Rs. 3,07,60,800 was purported to have been inadvertently shown in the return of income, thereby leading to a tax demand of Rs. 87,40,612. It is the case of the petitioner that the Central Processing Centre (‘CPC’) of the Department at Bengaluru accepted the aggregate income for the year under consideration at Rs. 25,45,650 as presented in column 14; however, the taxes were computed at Rs. 87,40,612 on the total income of Rs. 3,33,06,450 as described above. It is submitted that upon perusal of the order u/s 143(1) dated 2nd May, 2019, the petitioner realised that the amount of Rs. 3,07,60,800 towards long-term capital gains had been erroneously shown in the return of income for the year under consideration.

Realising the mistake, the petitioner filed an application u/s 154 on 25th July, 2019 seeking to rectify the mistake of the misrecording of long-term capital gains in the order u/s 143(1) as being an inadvertent error as the same had already been considered in the return for the A.Y. 2017-18, assessment in respect of which had already been completed u/s 143(3). It was submitted that the application for rectification was still pending and Respondent No. 1 had not taken any action with respect to the same, although it appears that the same has been rejected as per the statement in the Respondent’s affidavit in reply.

In the meanwhile, the petitioner also made a grievance on the E-filing portal of the CPC on 4th October, 2019 seeking rectification of the mistake where the taxpayer was requested to transfer its rectification rights to AST, after which the petitioner filed various letters with Respondent No. 1, requesting him to rectify the mistake u/s 154.

In order to alleviate the misery and bring to the notice of higher authorities the delay being caused in the disposal of the rectification application, the petitioner approached Respondent No. 2 u/s 264 on 27th January, 2021 seeking revision of the order dated 2nd May, 2019 passed u/s 143(1) narrating the aforementioned facts and requesting the Respondent No. 2 to direct Respondent No. 1 to recalculate tax liability for A.Y. 2018-19 after reducing the amount of long-term capital gains from the total income for the said year.

However, instead of considering the application on merits, vide order dated 12th February, 2021 the Respondent No. 2, Principal Commissioner of Income Tax-19, dismissed the application filed by the petitioner on the ground that the same was not maintainable on account of the alternate effective remedy of appeal and that the assessee had also not waived the right of appeal before the Commissioner of Income Tax (Appeals) as per the provisions of section 264(4).

Being aggrieved by the order of rejection of the application u/s 264, the petitioner moved the High Court.

The Court observed that in the petitioner’s return for A.Y. 2018-19, the figure of long-term capital gains of Rs. 3,07,60,800 on surrender of tenancy rights in respect of earlier A.Y. 2017-18 had inadvertently been copied by the petitioner’s accountant from the return for A.Y. 2017-18. The assessment for A.Y. 2017-18 was completed u/s 143(3) vide assessment order dated 24th December, 2019. In the financial year corresponding to A.Y. 2018-19, the petitioner declared a total income of Rs. 27,05,646 and after claiming deductions and set-off on account of TDS and advance tax, a refund of Rs. 34,320 was determined. No capital asset transfer had taken place during A.Y. 2018-19, therefore no tax on capital gains can be imposed. The error had crept in through inadvertence. There is neither any fraud nor malpractice alleged by the Revenue. The rectification application u/s 154 filed earlier was stated in the Respondent’s affidavit to have been rejected. The application u/s 264 has been dismissed / rejected on the ground that the application was not maintainable as an alternate effective remedy of appeal was available and there was no waiver of such appeal by the assessee.

The Court referred to the Delhi High Court decision in the case of Vijay Gupta vs. Commissioner of Income Tax [2016] 386 ITR 643 (Delhi), wherein the assessee in his return of income had erroneously offered to tax gains arising on sale of shares as short-term capital gains, instead of the same being offered as long-term capital gains exempt from tax, where the section 154 application of the assessee was refused / not accepted and when the assessee filed a revision application u/s 264, the same was rejected on the ground that section 143(1) intimation was not an order and was not amenable to the revisionary jurisdiction u/s 264. The Delhi High Court negated these contentions of the Revenue and further held in Paragraph 39 as under:

‘39:- When the Commissioner was called upon to examine the revision application u/s 264 of the Act, all the relevant material was already available on the record of the Assessing Officer, the Commissioner instead of merely examining whether the intimation was correct based on the material then available should have examined the material in the light of the Circular No. 14(XL-35) of 1955, dated April, 1955 and article 265 of the Constitution of India. The Commissioner has erred in not doing so and in failing to exercise the jurisdiction vested in him on mere technical grounds.’

The Court observed that in the facts of the present case, the Commissioner has failed to exercise the jurisdiction vested in him on fallacious grounds which cannot be sustained. In the facts of the present case also, the Commissioner has not considered the petitioner’s case on merits and simply on the ground of availability of an alternate remedy of filing appeal had rejected the application u/s 264. Therefore, on the basis of the above decision, the Commissioner’s order was liable to be set aside.

Under section 264, the Principal Commissioner is mandated not to revise any order in two situations: first, where an appeal that lies to the Commissioner (Appeals) but has not been made and the time within which such appeal may be made has not expired, and second, where the assessee has not waived his right of appeal. What emerges from this is that in a situation where there is an appeal that lies to the Commissioner (Appeals) and which has not been made and the time to make such an appeal has not expired, in that case the Principal Commissioner or Commissioner cannot revise any order in respect of which such appeal lies. The language is quite clear, that the two conditions are cumulative, viz., there should be an appeal which lies but has not been made and the time for filing such appeal has not expired; in such a case, the Principal Commissioner cannot revise. However, if the time for making such an appeal has expired, then it would be imperative that the Principal Commissioner would exercise his powers of revision u/s 264.

The other or second situation is when the petitioner assessee has not waived off his right of appeal; even in such a situation, the Commissioner cannot exercise his powers of revision u/s 264(4)(a). In clause (a) of section 264(4), in the language between filing of an appeal and the expiry of such period and the waiver of the assessee to his right of appeal, there is an ‘or’, meaning thereby that there is an option, i.e., either the assessee should not have filed an appeal and the period of filing the same should have expired, or he should have waived such right. Therefore, there are two situations which are contemplated in the said sub-section(4)(a) of section 264. The section cannot be interpreted to mean that for the Principal Commissioner to exercise his powers of revision u/s 264 not only that the time for filing the appeal should have expired but also that the assessee should have waived his right of appeal. In the facts of the case, the petitioner has not filed an appeal against the order u/s 143(1) u/s 246-A and the time of 30 days to file the same has also admittedly expired.

The Court held that a plain reading of the section suggests that it would not then be necessary for the petitioner to waive such right. That waiver would have been necessary if the time to file the appeal would not have expired. The Court also observed that in matters like these, where the errors can be rectified by the authorities, the whole idea of relegating or subjecting the assessee to the appeal machinery or even discretionary jurisdiction of the High Court was uncalled for and would be wholly avoidable. The provisions in the Income-tax Act for rectification, revision u/s 264 are meant for the benefit of the assessee and not to put him to inconvenience. That cannot and could not have been the object of these provisions.

The order dated 12th February, 2021 passed by Respondent No. 2 was set aside. The Writ Petition was allowed, directing the Pr.CIT to decide the application on merits.

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Vivad se Vishwas Scheme – Objective of scheme – Beneficial nature – Search case – Circulars are to remove difficulties and to tone down the rigour of law and cannot be adverse to the assessee

4 Bhupendra Harilal Mehta vs. Pr. Commissioner of Income Tax & Ors.
[W.P. No. 586 of 2021, date of order: 05/04/2021 (Bombay High Court)]

Vivad se Vishwas Scheme – Objective of scheme – Beneficial nature – Search case – Circulars are to remove difficulties and to tone down the rigour of law and cannot be adverse to the assessee

The petitioner was an individual; his assessment for A.Y. 2015-16 was completed vide an order dated 27th December, 2017 u/s 143(3), wherein one addition of Rs. 84,25,075 was made u/s 68 and another addition of Rs. 11,75,901 u/s 69C. The additions were made by the A.O. on the basis that the petitioner had booked artificial long-term capital gains of Rs. 5,73,23,123 and claimed exemption u/s 10(38) thereon by selling shares of M/s Lifeline Drugs and Pharma Limited for a total consideration of Rs. 5,87,95,055. The case of the A.O. was that the price of this share was artificially rigged by certain operators; the details of this were divulged in the course of a search u/s 132 carried out by the Kolkata Investigation Wing of the Income-tax Department during which some statements were recorded u/s 132(4), and in the course of a survey action u/s 133A on the premises of M/s Gateway Financial Service Limited and Korp Securities Limited where also statements of directors were recorded. By an order dated 18th February, 2019 u/s 154, the addition u/s 68 was revised to Rs. 5,87,95,055. Aggrieved by both the aforesaid orders, the petitioner filed appeals to the Commissioner (Appeals).

While the aforesaid appeals were pending, the Direct Tax Vivad se Vishwas Act, 2020 (‘DTVSV Act’) was passed, giving an option to taxpayers to settle their income tax disputes by making a declaration to the designated authority and paying varying percentages of the disputed tax as specified u/s 3 of the new Act.

On 22nd April, 2020, the Central Board of Direct Taxes issued Circular No. 9 of 2020 and on 4th December, 2020 another Circular, No. 21, making further clarifications in the form of Questions and Answers. While the petition was pending, the CBDT issued yet another Circular, No. 4/2021 dated 23rd March, 2021, further clarifying the answer to Q. No. 70.

The petitioner filed a declaration in Form No. 1 u/s 4(1) of the DTVSV Act read with Rule 3(1) of the DTVSV Rules on 16th December, 2020. The disputed income was declared to be Rs. 5,98,90,960 and the disputed tax thereon Rs. 2,02,69,581. The petitioner submitted that the gross amount payable by it was 100% of the disputed tax, i.e., Rs. 2,02,69,581, out of which a sum of Rs. 69,31,892 was declared to have been paid and the balance of Rs. 1,33,37,689 was declared to be payable by the petitioner.

By an order dated 26th January, 2021, the Designated Authority passed an order in Form No. 3 u/s 5(1) of the DTVSV Act read with Rule 4 of the DTVSV Rules, determining the tax payable by the petitioner to be Rs. 2,57,67,714, being 125% of the disputed tax as against Rs. 2,02,69,581 being 100% of the disputed tax declared by the petitioner.

Being aggrieved by the aforesaid order, the petitioner challenged it before the High Court by way of a Writ Petition including the Circular No. 21.

The petitioner submitted that for A.Y. 2015-16 the assessment was not made on the basis of any search but the addition was made only on the basis of certain information obtained in the course of a search conducted on the premises of other entities. The petitioner contended that he has not been subjected to any search action. As per section 3 of the DTVSV Act, sub-clause (a) is applicable to its case as the tax arrear is the aggregate amount of disputed tax, interest chargeable or charged on such disputed tax, and penalty leviable or levied on such disputed tax and, therefore, the amount payable by the petitioner would be the amount of the disputed tax. Only in a case as contained in sub-clause (b) of section 3, where the tax arrears include tax, interest or penalty determined in any assessment on the basis of a search u/s 132 or section 132A of the Income-tax Act, only then would the amount payable under the DTVSV Act be 125% of the disputed tax and in no other case.

It was submitted that the Circular has been issued under sections 10 and 11. Sub-section (1) of section 11 states that an order can be passed by the Central Government to remove difficulties; however, the same cannot be inconsistent with the provisions of the Act. Although section 3 of the DTVSV Act states in unequivocal terms that 125% of the disputed tax is payable only in those cases where an assessment is made on the basis of a search, the impugned order based on the Circular would make it contrary to the provisions of the Income-tax Act and also to several judgments of the Supreme Court; to that extent, the Circular is liable to be quashed. In any event, in interpreting the scope of a provision of a statute, the Courts are not bound by the Circulars issued by the CBDT.

The petitioner further relied on Circular No. 4/2021 dated 23rd March, 2021 with respect to the clarifications issued by the CBDT with reference to FAQ No. 70 of Circular No. 21/2020. It was submitted that to remove any uncertainty it is clarified that a search case means an assessment or reassessment made u/s 143(3)/144/147/153A/153C/158BC in the case of a person referred to in sections 153A, 153C, 158BC or 158BD on the basis of a search initiated u/s 132, or a requisition made u/s 132A, modifying FAQ No. 70 of Circular 21/2020 to that extent. It was submitted that the petitioner is not a person referred to in section 153A or 153C.

For their part, the respondents submitted that since the assessment order was framed based on search / survey inquiries conducted by the Directorate of Income Tax (Investigation), Kolkata on 2nd July, 2013, the designated authority has rightly computed the petitioner’s liability under the Vivad se Vishwas Act by adopting the rate of 125% of disputed tax applicable to a search case in accordance with section 3 of the DTVSV Act. The assessment order passed u/s 143(3) is on the basis of the search and seizure action and the statement recorded u/s 132(4), coupled with post-search inquiries, and as the petitioner had failed to demonstrate the genuineness of the transactions, the addition was made.

In other words, the Department submitted that as per the DTVSV Act, 2020 it is not material that a ‘search case’ essentially should be a case wherein a warrant is executed u/s 132. To emphasise this, it relied on FAQ No. 70 and stated that it was identical to section 153C wherein cases are considered as ‘search case’ even though a warrant is not executed but transaction or information is found from the person subjected to search action u/s 132.

The Court referred to the statement of objects and reasons of the DTVSV Act and observed that this Act is meant to provide a resolution for pending tax disputes which have been locked up in litigation. Taxpayers can put an end to tax litigation by opting for the scheme and also obtain immunity from penalty and prosecution by paying percentages of tax as specified therein. This would bring peace of mind, certainty, saving of time and resources for the taxpayers and also generate timely revenue for the Government.

Referring to the answer to Q. No. 70, it was observed that the said question and its answer in Circular No. 21 was clarified vide Circular No. 4/2021 dated 23rd March, 2021 that a ‘search case’ means an assessment or reassessment made u/s 143(3)/144/147/153A/153C/158BC in the case of a person referred to in section 153A, section 153C, section 158BC or section 158BD on the basis of a search initiated u/s 132, or a requisition made u/s 132A. Thus, the answer to FAQ No. 70 of Circular No. 21/2020 has been replaced by the above meaning.

The Court observed that to be considered a search case, the assessment / reassessment should be:
(i) under sections 143(3)/144/147/153A/153C/153BC; and
(ii) be in respect of a person referred to in section 153A, section 153C, section 158BC or section 158BD; and
(iii) should be on the basis of a search initiated u/s 132, or a requisition made u/s 132A.

If all the three elements / criteria as above are satisfied, the case is a search case.

The Court held that it is not the case of the Revenue that action pursuant to sections 153A or 153C had been initiated in the case of the petitioner. These facts are not disputed. Therefore, criterion No. (ii) necessary for a case to be a search case is not satisfied. Admittedly, no search has been initiated in the case of the petitioner. The assessment order dated 22nd December, 2017 also suggests that the case of the petitioner was selected for scrutiny under ‘CASS’ selection and notices under the Act were issued to the petitioner not pursuant to any search u/s 132 or requisition u/s 132A. Assessment refers only to section 143(3) and is not read with any provision of search and seizure contained in Chapter XIV-B of the Income-tax Act where the special procedure for assessment of a search case is prescribed. The name of the petitioner figures nowhere in any of the statements u/s 132(4) of the searches referred to in the assessment order, nor in the statements pursuant to the survey action of persons under search or survey.

In view of Circular No. 4/2021 modifying / replacing the answer to FAQ No. 70 in Circular No. 21, the case of the petitioner would not be a search case. The Court further observed that these Circulars are to remove difficulties and to tone down the rigour of the law and cannot be adverse to the assessee, especially keeping in mind the beneficial nature of the legislation carrying a lot of weight. Since the petitioner’s case cannot be regarded as a search case, consequently the order dated 26th January, 2021 in Form No. 3, passed by the Designated Authority, would be unsustainable. The Writ Petition filed by the assessee was accordingly allowed.

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Penalty – Mistake in notice not to affect validity – Scope of section 292B – Mistake in specifying assessment year for which penalty was levied – Mistake could not be corrected u/s 292B

28 SSS Projects Ltd. vs. Dy. CIT [2021] 432 ITR 201 (Karn) A.Y.: 2008-09; Date of order: 01/02/2021 Ss. 221 and 292B of ITA, 1961

Penalty – Mistake in notice not to affect validity – Scope of section 292B – Mistake in specifying assessment year for which penalty was levied – Mistake could not be corrected u/s 292B

The assessee is a company and for the A.Y. 2008-09 it had paid the tax on the assessed income. However, the A.O. passed an order dated 9th February, 2009 and levied a penalty of Rs. 50,00,000 u/s 221 for the A.Y. 2008-09. The assessee pleaded that it appeared that the A.O. had considered the facts of the case for the A.Y. 2007-08 for levying the penalty for the A.Y. 2008-09 and had passed an order u/s 221 to raise the demand of Rs. 50,00,000.

Both the Commissioner (Appeals) and the Tribunal dismissed the appeals filed by the assessee.

The Karnataka High Court allowed the appeal filed by the assessee and held as under:

‘i) From a close scrutiny of section 292B it is evident that no return of income, assessment, notice, summons or other proceeding, furnished or made or issued or taken or purported to have been furnished or made or issued or taken in pursuance of any of the provisions of this Act shall be invalid or shall be deemed to be invalid merely by reason of any mistake, defect or omission in such return of income, assessment, notice, summons or other proceeding if such return of income, assessment, notice, summons or other proceeding is in substance and effect in conformity with or according to the intent and purpose of this Act. In other words, any clerical or typographical error or omission in the return of income, assessment, notice, summons or other proceeding shall not invalidate the proceedings. When there is no confusion or prejudice caused due to non-observance of technical formalities, the proceedings cannot be invalidated and therefore, a defective notice to an assessee u/s 292B of the Act is not invalid.

ii) The order of penalty referred to the A.Y. 2008-09. The order by which the penalty was levied by the A.O. had been affirmed by the Commissioner (Appeals) and similarly, the Tribunal had held that the penalty had been levied in respect of the A.Y. 2008-09. From a perusal of the memorandum of appeal it was evident that the assessee had paid tax in respect of the A.Y. 2008-09. The assessee had committed a default in respect of the A.Y. 2007-08 and did not pay the tax on account of financial hardship. However, the authorities under the Act had taken into account the facts in respect of the A.Y. 2007-08 and had held the assessee to be in default in respect of the A.Y. 2008-09 and had levied the penalty u/s 221 in respect of the A.Y. 2008-09.

iii) The mistake could not be condoned u/s 292B under which only clerical error or accidental omissions can be protected. The order of penalty was not valid.’

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Limitation – Assessment u/s 144C – Section 144C does not exclude operation of section 153 – Notice by DRP four years after direction by Tribunal – Barred by limitation

26 ROCA Bathroom Products Pvt. Ltd. vs. DRP [2021] 432 ITR 192 (Mad) A.Ys.: 2009-10 and 2010-11; Date of order: 23/12/2020 Ss. 144C and 153 of ITA, 1961

Limitation – Assessment u/s 144C – Section 144C does not exclude operation of section 153 – Notice by DRP four years after direction by Tribunal – Barred by limitation

For the A.Y. 2009-10, by an order dated 18th December, 2015, the Tribunal had set aside the order passed u/s 144C and remanded the matter to the Dispute Resolution Panel (DRP) for fresh examination. For the A.Y. 2010-11, by an order dated 23rd September, 2016, the Tribunal had set aside the order passed u/s 144C and remanded the matter to the A.O. for passing a fresh order. No further proceedings were initiated by the DRP and the A.O. pursuant to the order of the Tribunal. Therefore, on 21st August, 2019, the assessee wrote to the A.O. seeking refund of the tax paid for both the years. The aforesaid letter triggered notices dated 6th January, 2020 from DRP calling upon the assessee to appear for a hearing. The assessee filed writ petitions and challenged the notices on the ground of limitation.

The Madras High Court allowed the writ petitions and held as under:

‘i) Section 144C is a self-contained code of assessment and time limits are in-built at each stage of the procedure contemplated. Section 144C envisions a special assessment, one which includes the determination of arm’s length price of international transactions engaged in by the assessee. The Dispute Resolution Panel (DRP) was constituted bearing in mind the necessity for an expert body to look into intricate matters concerning valuation and transfer pricing and it is for this reason that specific timelines have been drawn within the framework of section 144C to ensure prompt and expeditious finalisation of this special assessment. The purpose is to fast-track a specific type of assessment.

ii) This does not, however, lead to the conclusion that overall time limits have been eschewed in the process. In fact, the argument that proceedings before the DRP are unfettered by limitation would run counter to the avowed object of setting up of the DRP, a high-powered and specialised body set up for dealing with matters of transfer pricing. Having set time limits at every step of the way, it does not stand to reason that proceedings on remand to the DRP may be done at leisure sans the imposition of any time limit at all. Sub-section (13) to section 144C imposes a restriction on the A.O. and denies him the benefit of the more expansive time limit available u/s 153 to pass a final order of assessment as he has to do so within one month from the end of the month in which the directions of the DRP are received by him, even without hearing the assessee concerned. The specific exclusion of section 153 from section 144C(13) can be read only in the context of that specific sub-section and, once again, reiterates the urgency that sets the tone for the interpretation of section 144C itself.

iii) The notices issued by the Dispute Resolution Panel after a period of four years from the date of order of the Tribunal would be barred by limitation by application of the provisions of section 153(2A). The writ petitions are allowed.’

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Income – Income or capital – Receipt from sale of carbon credits – Capital receipt – Amount not assessable merely because of erroneous claim for deduction u/s 80-IA

25 S.P. Spinning Mills Pvt. Ltd. vs. ACIT [2021] 433 ITR 61 (Mad) A.Y.: 2011-12; Date of order: 19/01/2021 S. 4 of ITA, 1961

Income – Income or capital – Receipt from sale of carbon credits – Capital receipt – Amount not assessable merely because of erroneous claim for deduction u/s 80-IA

The assessee, a private limited company, had claimed deduction of Rs. 3,17,77,767 u/s 80-IA for the A.Y. 2011-12 in respect of the revenue generated for adhering to the clean development mechanism. This included receipts on sale of carbon credits. The A.O. found that the assessee is engaged in the generation of electrical power which is used for its own textile business and the remaining is wheeled to the Tamil Nadu Electricity Board. He held that the income from generation of electricity and the carbon credit earned by the assessee are totally separate and the source of the income is also separate. Therefore, the income derived from the generation of electrical power alone can be construed as income from the eligible business for the purpose of deduction u/s 80-IA. Therefore, the assessee is not entitled to deduction u/s 80-IA in respect of the carbon credit.

Before the Commissioner (Appeals), the assessee contended that without prejudice to its claim for deduction u/s 80-IA, the carbon credit revenue is to be held as a capital receipt and ought to have been excluded from the taxable income. The Commissioner (Appeals) noted the decision of the Chennai Tribunal relied on by the assessee in the case of Ambika Cotton Mills Ltd. vs. Dy. CIT [2013] 27 ITR (Trib) 44 (Chennai) ITA No. 1836/Mds/2012, dated 16th April, 2013, wherein it was held that carbon credit receipts cannot be considered as business income and these are a capital receipt. Hence, the assessee’s claim u/s 80-IA is untenable as deduction u/s 80-IA is allowable only on profits and gains derived by an undertaking. The Tribunal took note of the submission made by the assessee and the decisions relied on and confirmed the finding of the Commissioner (Appeals) largely on the ground that the assessee itself regarded it as a business income and claimed deduction u/s 80-IA.

The Madras High Court allowed the appeal filed by the assessee and held as under:

‘i) The task of an appellate authority under the taxing statute, especially a non-departmental authority like the Tribunal, is to address its mind to the factual and legal basis of an assessment for the purpose of properly adjusting the taxpayer’s liability to make it accord with the legal provisions governing his assessment. Since the aim of the statutory provisions, especially those relating to the administration and management of Income-tax is to ascertain the taxpayer’s liability correctly to the last pie, if it were possible, the various provisions relating to appeal, second appeal, reference and the like can hardly be equated to a lis or dispute as arises between two parties in a civil litigation.

ii) The assessee while preferring the appeal before the Commissioner (Appeals), had specifically raised a contention that the receipts from sale of carbon credits was a capital receipt and could not be included in the taxable income. Though this ground had been recorded in the order, the Commissioner (Appeals) did not take a decision thereon. A similar ground was raised by the assessee before the Tribunal, which was not considered by the Tribunal, though the Tribunal referred to all the decisions relied on by the assessee, and rejected the assessee’s claim made u/s 80-IA.

iii) This finding of the Tribunal was wholly erroneous and perverse. The Tribunal was expected to apply the law and take a decision in the matter and if the Commissioner (Appeals) or the A.O. had failed to apply the law, then the Tribunal was bound to apply the law. The receipt by way of sale of carbon credits had been held to be a capital receipt. Therefore, it was of little consequence to the claim made by the assessee u/s 80-IA or in other words, the question of taking a decision as to whether the deduction was admissible u/s 80-IA was a non-issue. Receipt from sale of carbon credits is a capital receipt.’

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Deemed income u/s 56(2)(viib) – Company – Receipt of consideration for issue of shares in excess of their fair market value – Determination of fair market value – General principles – Assessee valuing shares following prescribed method – No evidence that method was erroneous – Addition based on estimate by A.O. – Not justified

24 Principal CIT vs. Cinestaan Entertainment Pvt. Ltd. [2021] 433 ITR 82 (Del) A.Y.: 2015-16; Date of order: 01/03/2021 S. 56(2)(viib) of ITA, 1961

Deemed income u/s 56(2)(viib) – Company – Receipt of consideration for issue of shares in excess of their fair market value – Determination of fair market value – General principles – Assessee valuing shares following prescribed method – No evidence that method was erroneous – Addition based on estimate by A.O. – Not justified

For the A.Y. 2015/16, the assessee had filed its return of income declaring Nil income. The case of the assessee was selected for ‘limited scrutiny’ inter alia for the reason ‘large share premium received during the year [verify applicability of section 56(2)(viib)(b)]’. By an order dated 31st December, 2017, the assessment was framed u/s 143(3) determining the total income of the assessee at Rs. 90,95,46,200, making an addition u/s 56(2)(viib).

The Tribunal deleted the addition and held that neither the identity nor the creditworthiness and genuineness of the investors and the pertinent transaction could be doubted. This fact stood fully established before the A.O. and had not been disputed or doubted. Therefore, the nature and source of the credit stood accepted. It held that if the statute provides that the valuation has to be done as per the prescribed method and if one of the prescribed methods had been adopted by the assessee, then the A.O. had to accept it.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

‘i) Section 56(2)(viib) lays down that amounts received by a company on issue of shares in excess of their fair market value will be deemed to be income from other sources. Valuation is not an exact science and therefore cannot be done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and wisdom of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares.

ii) The shares had not been subscribed to by any sister concern or closely related person, but by outsider investors. The methodology adopted was a recognised method of valuation and the Department was unable to show that the assessee adopted a demonstrably wrong approach, or that the method of valuation was made on a wholly erroneous basis, or that it committed a mistake which went to the root of the valuation process. The deletion of addition was justified.’

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Deemed business income u/s 41(1)(a) – Remission or cessation of liability – Scope of section 41(1)(a) – Amount obtained mentioned in provision refers to actual amount obtained – Royalty payment claimed as expenditure in A.Y. 1990-91 – Tax deducted at source on such payment and interest paid to treasury – Royalty amount written back in accounts in A.Y. 1995-96 – Tax deducted at source and interest not refunded – Such amounts not includible u/s 41(1)(a)

23 Carbon and Chemicals (India) Ltd. vs. CIT [2021] 433 ITR 14 (Ker) A.Y.: 1995-96; Date of order: 01/03/2021 S. 41(1)(a) of ITA, 1961

Deemed business income u/s 41(1)(a) – Remission or cessation of liability – Scope of section 41(1)(a) – Amount obtained mentioned in provision refers to actual amount obtained – Royalty payment claimed as expenditure in A.Y. 1990-91 – Tax deducted at source on such payment and interest paid to treasury – Royalty amount written back in accounts in A.Y. 1995-96 – Tax deducted at source and interest not refunded – Such amounts not includible u/s 41(1)(a)

The assessee claimed a deduction of Rs. 53,71,650 for the A.Y. 1990-91 as expenditure, being royalty payable to a foreign collaborator. Though the deduction was allowed, the amount was not actually remitted outside India. In the meantime, an amount of Rs. 13,65,060 was paid towards tax deducted at source on the royalty amount and a further amount of Rs. 9,38,438 towards interest, under orders passed u/s 201(1A). Thus, a total amount of Rs. 23,03,498 was paid by the assessee towards tax and interest due to the Department against the deduction claimed towards royalty payable to the foreign collaborator. In the A.Y. 1995-96, the amount claimed as deduction for the A.Y. 1990-91, excluding the tax deducted at source and interest paid, was written back by the assessee into its accounts on account of the cessation of liability. Thus, in the return filed for the A.Y. 1995-96, the assessee had written back only Rs. 30,68,152 u/s 41(1). The A.O. held that the entire amount of Rs. 53,71,650 ought to be treated as a deemed profit u/s 41(1)(a) due to cessation of liability with the foreign collaborator.

The Tribunal upheld the addition.

On a reference by the assessee, the Kerala High Court allowed its claim and held as under:

‘i) A reading of section 41(1)(a) indicates that a legal fiction is created to treat the amount which was once deducted as an expenditure, if received back in another assessment year, as income from profits and gains of business. For the purpose of attracting section 41(1) it is necessary that the following conditions are satisfied: (i) the assessee had made an allowance or any deduction in respect of any loss, expenditure, or trading liability incurred by him; (ii) any amount is obtained in respect of such loss or expenditure or any benefit is obtained in respect of such trading facility by way of remission or cessation thereof; and (iii) such amount or benefit is obtained by the assessee in a subsequent year. Once these conditions are satisfied, the deeming provision enacted in the closing part of section 41(1)(a) gets attracted and the amount obtained becomes chargeable to Income-tax as profits and gains of business or profession.

ii) The purpose behind creating a fiction u/s 41(1)(a) is to tax the amount, earlier deducted but subsequently received back, to the extent recouped. It is a measure of taxing the amount recouped. Though a legal fiction must be given full effect, it should not be extended beyond the purpose for which it is created. It is true that Income-tax is a portion of the profits payable to the State and the tax payable is not a permissible deduction. Section 198 provides that all sums deducted for the purpose of computing income of an assessee, including the tax deducted at source, shall be treated as income received. However, this principle cannot be applied while determining the amount to be deemed as profits and gains u/s 41(1)(a). Such an interpretation, if adopted, will in fact be expanding the fiction created and even transform the chargeability.

iii) The words employed in section 41(1)(a) are “amount obtained by such person or the value of benefits accruing to him”. The “amount obtained” can only mean the actual amount obtained. The fiction created under the provision cannot be expanded to include amounts that may be obtained in the future. The legal fiction is intended to deem the actual amount obtained as profits and gains from business and to tax the actual amount. Section 41(1) employs, on the one hand, words such as “allowance” or “deduction”, and on the other hand “loss”, “expenditure”, or “trading liability”. These words are of general import and are understandably employed to take care of several fluid dynamics. These expressions are relatable to words used in section 41(1)(a), i. e., “the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits, gains, etc.” Therefore, an entry made in one previous year as an allowance or deduction towards “loss”, “expenditure” or “trading liability” when written back in a subsequent previous year, on account of the cessation of such liability, becomes taxable as profit or gains of business. But the tax liability should be commensurate with the actual amount received or the value of benefit accrued to the assessee in that financial year and not on the unrecovered amount or unacknowledged benefit by the assessee. The unrecovered amount becomes taxable only in the previous year when it is recovered or actually obtained.

iv) The amount of tax deducted at source and interest could be deemed to be profits and gains and chargeable to tax only on refund. The amounts paid as tax had not been obtained in 1995-96 as they had not been refunded. Until the amount of tax deducted at source was refunded, that amount could not be treated as an amount obtained by the assessee. The addition made by the A.O. was not justified.’

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Charitable purpose – Registration of trust – Loss of all records in respect of registration due to floods in 1978 – Exemption granted in assessments up to A.Y. 2012-13 – Absence of documents cannot be ground to presume registration never granted and to deny exemption – Other contemporaneous records to be scrutinised to ascertain issuance of registration certificate

22 Morbi Plot Jain Tapgachh Sangh vs. CIT [2021] 433 ITR 1 (Guj) A.Ys. 2013-14 to 2016-17; Date of order: 25/03/2021 Ss. 11, 12A, 12AA of ITA, 1961

Charitable purpose – Registration of trust – Loss of all records in respect of registration due to floods in 1978 – Exemption granted in assessments up to A.Y. 2012-13 – Absence of documents cannot be ground to presume registration never granted and to deny exemption – Other contemporaneous records to be scrutinised to ascertain issuance of registration certificate

The assessee was a charitable trust established in 1967 and registered with the Charity Commissioner. Thereafter, it was registered u/s 12A. In orders passed u/s 143(3) for the A.Ys. 1977-78 to 1982-83, the Department had accepted the assessee’s claim for exemption u/s 11 and for the A.Ys. 1986-87 to 2012-13, the exemption u/s 11 was allowed accepting the return of income u/s 143(1) under the provisions applicable to a registered trust drawing the benefits of registration u/s 12A.

The entire records of the assessee, including the books of accounts, registration certificate as trust and other documents related thereto were destroyed in the devastating flood in the year 1978. From A.Y. 2013-14, the assessee was required to E-file its return of income in which the details as regards the registration of trust u/s 12A/12AA were to be furnished. If the registration number was not mentioned an error would be indicated and the assessee would not be able to upload the return of income. In the absence of the registration certificate and the registration number, the Department did not grant the exemption u/s 11 for the period between 2013-14 and 2016-17. The assessee was granted a fresh certificate from A.Y. 2017-18 onwards.

The assessee filed a writ petition seeking a direction to grant the benefit of exemption for the A.Ys. 2013-14 to 2016-17. The Gujarat High Court allowed the writ petition and held as under:

‘i) Though in the absence of the registration number to be mentioned in the course of E-filing of the return, the benefit of exemption u/s 11 could not be granted, the assessee trust should not be denied the benefit of exemption u/s 11 only on account of its inability to produce the necessary records which got destroyed during the floods of 1978. There was nothing doubtful as regards the assessee. The stance of the Department that as the record was not available with the assessee or with the Department, it should be presumed that at no point of time the certificate of registration u/s 12A was granted, could not be accepted.

ii) There was contemporaneous record available with the assessee which could be produced by it and should be considered minutely by the Department so as to satisfy itself that the assessee had been issued a registration certificate u/s 12A and had been availing of the benefit of exemption over a period of time u/s 11.

iii) The Department is expected to undertake some homework in this regard seriously. The trust should not be denied the benefit of exemption u/s 11 only on account of its inability to produce the necessary records which got destroyed during the floods of 1978. We do not find anything doubtful or fishy as regards the trust.

iv) In such circumstances, we are of the view that whatever record is available with the trust, as on date, should be produced before the Department and the Department should look into the records minutely and also give an opportunity of hearing to the trust or its legal representative and take an appropriate decision in accordance with law.

v) We dispose of this writ application with a direction that the writ applicant-trust shall produce the entire record available with it as on date before the Department and the Department shall look into the entire record closely and threadbare and ascertain whether the trust being a registered charitable trust had been issued the registration certificate u/s 12A. A practical way needs to be found out in such types of litigation. Let this entire exercise be undertaken at the earliest and be completed within a period of four weeks from the date of receipt of the order by the Department.

vi) We hope and trust that the controversy is resolved by the parties amicably and the trust may not have to come back to this Court.’

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Capital gains – Computation – Deeming provision in section 50C – Applicable only when there is actual transfer of land – Assessee acquiring right in land under agreement to purchase land – Sale of land to third party with consent of assessee – Section 50C not applicable

21 V.S. Chandrashekar vs. ACIT [2021] 432 ITR 330 (Karn) A.Y.: 2010-11; Date of order: 02/02/2021 Ss. 45 and 50C of ITA, 1961

Capital gains – Computation – Deeming provision in section 50C – Applicable only when there is actual transfer of land – Assessee acquiring right in land under agreement to purchase land – Sale of land to third party with consent of assessee – Section 50C not applicable

The assessee was a dealer in land. On 23rd December, 2005, it had entered into an unregistered agreement with ‘N’ for purchase of land measuring 3,639.60 square metres for a consideration of Rs. 4.25 crores. Under the agreement, the assessee was neither handed over possession of the land nor was the power of attorney executed in his favour. ‘N’ sold the land in question by three sale deeds. In the first two transactions the assessee was not a party to the deed, whereas in the third transaction the assessee was a consenting witness. The assessee claimed the loss arising from the transaction as a business loss. The A.O. applied section 50C and made an addition to his income. This was upheld by the Tribunal.

The Karnataka High Court allowed the appeal filed by the assessee and held as under:

‘i) It is a well settled rule of statutory interpretation with regard to taxing statutes that an assessee cannot be taxed without clear words for that purpose and every Act of Parliament has to be read as per its natural construction of words.

ii) From a perusal of sections 2(47) and 50C it is axiomatic that Explanation 1 to section 2(47) uses the term “immovable property”, whereas section 50C uses the expression “land” instead of immovable property. Wherever the Legislature intended to expand the meaning of land to include rights or interests in land, it has said so specifically, viz., in section 35(1)(a), section 54G(1), section 54GA(1) and section 269UA(d) and Explanation to section 155(5A). Thus, section 50C applies only in case of transfer of land.

iii) Section 50C was applicable only in case of a transferor of land which in the instant case was ‘N’ and not a transferor or co-owner of the property. The provisions of section 50C were not applicable to the case of the assessee.

iv) The question whether the loss sustained by the assessee fell under the head “Business” or “Capital gains” required adjudication of facts.’

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DEDUCTION FOR PENALTIES AND FINES UNDER THE MOTOR VEHICLES ACT, 1988

ISSUE FOR CONSIDERATION

Section 37 allows a deduction for any revenue expenditure, laid out or expended wholly and exclusively for the purposes of business or profession, in computing the income under the head Profit and Gains from Business and Profession, provided the expenditure is not of a nature covered by sections 30 to 36.

Explanation 1 to section 37(1) provides that no deduction or allowance shall be made in respect of an expenditure incurred for any purpose which is an offence or which is prohibited by law; such an expenditure shall not be deemed to have been incurred for the purposes of business and profession.

Explanation 1, inserted for removal of doubts with retrospective effect from 1st April, 1962, has been the subject matter of fierce litigation even before it was inserted by the Finance No. 2 Act, 1998. Disputes regularly arise about the true meaning of the terms ‘for any purpose which is an offence’ or ‘which is prohibited by law’ in deciding the allowance of an expenditure incurred. The courts have been disallowing expenditure incurred against the public policy or payments that were made for serious violation of law even before the insertion of Explanation 1. Issues also arise about the legislative intent of Explanation 1 and about the scope of Explanation 1; whether the Explanation has limited the law as it always was or whether it has expanded its scope, or has reiterated what was always there.

In the last few years, the legislatures, Central and State, have increased the fines and penalties many-fold for violation of traffic laws and with this enormous increase the issue of allowance or deduction of such payments has also attracted the attention of the taxpayers who hitherto never viewed these seriously. The issue has been considered on several occasions by the courts and is otherwise not new, but it requires consideration in view of the sizeable increase in the quantum of expenditure and the dexterous implementation of the new fines by the traffic authorities with vigour hitherto unknown in this vast country. The recent decision of the Kolkata Bench of the Tribunal holding that such an expenditure is not allowable as a deduction in contrast to many decisions regularly delivered for allowance of such payments, requires us to examine this conflict once more, mainly with the intention to recap the law on the subject and share some of our views on the same.

THE APARNA AGENCY LTD. CASE

The issue recently came up for consideration in Aparna Agency Ltd. 79 taxmann.com 240 (Kolkata-Trib). In that case the assessee was engaged in the business of clearing and distribution of FMCG products and of forwarding agents and had claimed deduction for expenses in respect of payments made to State Governments for violating the provisions of the Motor Vehicles Act, 1988 (M.V. Act) for offences committed by its employees. The A.O. disallowed the payments by holding that such payments were made for infraction of law and could not be allowed as a deduction. The Commissioner (Appeals) confirmed the action of the A.O. but reduced the quantum of disallowance.

In an appeal to the Tribunal, the assesse challenged the orders of the A.O. and the Commissioner (Appeals). It submitted that the payments were made to the traffic department for minor traffic violations committed by its delivery vans, and the payments were not against any proved violation or infraction of law but were made in settlement of contemplated governmental actions that could have led to charging the assessee with an offence. It submitted that the payment did not prove any guilt and was made with a view to avoid prolonged litigation, save time and litigation cost.

The assessee relied on the decision of the Madras High Court in CIT vs. Parthasarathy, 212 ITR 105 to contend that the payment that was compensatory in nature should be allowed as a deduction so long as the said payment was not found to be penal in nature.

The Tribunal examined the provision of the M.V. Act, 1988, and in particular the relevant sections concerning the offence and the levy of the fine, namely, sections 119, 122, 129 and 177. It noted that the term ‘offence’ though not defined under the Income-tax Act, 1961, was, however, defined exhaustively by section 3(38) of the General Clauses Act, 1887 to mean ‘any act or omission made punishable by any law for the time being in force’. It was also noted that even the expression ‘prohibited by law’ has not been defined in the I.T. Act. Under the circumstances, the Tribunal held that the expression should be viewed either as an act arising from a contract which was prohibited by statute or which was entered into with the object of committing an illegal act. The Tribunal quoted with approval the following paragraph of the decision of the Supreme Court in the case of Haji Aziz and Abdul Shakoor Bros. vs. CIT 41 ITR 350:

‘In our opinion, no expense which is paid by way of penalty for a breach of the law can be said to be an amount wholly and exclusively laid for the purpose of the business. The distinction sought to be drawn between a personal liability and a liability of the kind now before us is not sustainable because anything done which is an infraction of the law and is visited with a penalty cannot on grounds of public policy be said to be a commercial expense for the purpose of a business or a disbursement made for the purposes of earning the profits of such business’.

The Tribunal, on perusal of various statutory provisions of the M.V. Act under which the payments in question were made, for offences committed by the employees for which the assessee was vicariously liable, held that such payments were not compensatory in nature and could not be allowed as a deduction by upholding the order of the Commissioner (Appeals) to that extent.

BHARAT C. GANDHI’S CASE

A similar issue had arisen in the case of DCIT vs. Bharat C. Gandhi, 10 taxmann.com 256 (Mum). The assessee in the case was an individual and the proprietor of Darshan Roadlines which specialised in transporting cargo consignments of huge or massive dimensions where the weight and the size of the same exceeded the limits laid down under the M.V. Act and the rules thereunder. The assessee paid compounding fees aggregating to Rs. 73,45,953 to the RTO on various trips during the year for transportation of the massive consignments on its trailers by way of fines at the check-post at Bhachau, Gujarat on various trips during the year for Suzlon Energy Ltd. The A.O. disallowed the assessee’s claim in respect of the said payments, holding that it was in the nature of penalty and, thus, not allowable u/s 37(1). The Commissioner (Appeals), however, held that the expenditure was not in violation of the M.V. Act and the payments could not be termed as penalty. He further relied on the clarifications given by the Central Government vide letter dated 3rd August, 2008 and allowed the expenditure.

On Revenue’s appeal, the Departmental Representative submitted that the issue was not of nomenclature but the intention of the Legislature in not allowing the amounts paid for violation of law. It was further submitted that it was nowhere stated that the assessee satisfied the conditions of the Circular referred to by it before the Commissioner (Appeals). It was submitted that the payment was a penalty for violating the law and could not be allowed.

In reply, the assessee contended that the massive (or over-dimensioned) consignment was indivisible and could not be divided into parts and pieces and hence there was no other way to transport it except by exceeding the permitted limits. It was submitted that transportation in such a manner was a business necessity and commercial exigency and did not involve any deliberate intention of violating any law or rules. It was further submitted that even though it was a compounding fees paid u/s 86(5) of the M.V. Act to the RTO, it was an option given to the assessee and hence payment could not be referred to as a penalty. It was further submitted that such over-dimension charges were also paid to Western Railways for crossing the railway tracks and an amount of Rs. 2,71,380 was allowed by the A.O. It was highlighted that the Central Government vide letter dated 3rd August, 2008 had clarified that transport could take place on payment of the fines.

The assessee further referred to section 86(5) of the M.V. Act and relied on the precedents on the issue in the following cases:
(i) Chadha & Chadha Co. in IT Appeal No. 3524/Mum/2007
(ii) CIT vs. Ahmedabad Cotton Mfg. Co. Ltd. 205 ITR 163(SC)
(iii) CIT vs. N.M. Parthasarathy 212 ITR 105 (Mad)
(iv) ACIT vs. Vikas Chemicals 122 Taxman 59 (Delhi)
(v) CIT vs. Hero Cycles Ltd. 17 Taxman 484 (Punj. & Har.)
(vi) Kaira Can Co. Ltd. vs. Dy. CIT 32 DTR 485 (Mum-Trib)
(vii) Western Coalfields Ltd. vs. ACIT, 27 DTR 226 (Nag-Trib)

The Tribunal noted that the issue was elaborately discussed by the ITAT in the case of Chadha & Chadha Co., IT Appeal No. 6140/Mum/2009, dated 17th September, 2010 relied upon by the assessee wherein the ITAT in its order has considered as under:

‘9. The liability for additional freight charges was considered in the case of ITO vs. Ramesh Stone Wares by the ITAT Amritsar Bench in 62 TTJ (Asr.) 93 wherein the additional freight charges paid to Railway Department for overloading was considered and held that the expense was not penal in nature because it is not the infringement of law but same is violation of contract that too not by the assessee but by his agent, i.e., Coal Authority of India. In terms of an agreement, if coal is finally found by the authorities to be overloaded then the assessee has to pay additional freight charges which according to the terminology of the contract is called penalty freight. This liability was not considered as penal nature and allowed. In the assessee’s case also the overloading charges are to be incurred regularly in view of the nature of goods transported for the said steel company and since the nature of the goods is indivisible and generally more than the minimum limit prescribed under the Motor Vehicles Act, the assessee has to necessarily pay compounding charges for transporting goods as part of the business expenses. These are not in contravention of law and the RTO authorities neither seized the vehicle nor booked any offence but are generally collecting as a routine amount at the check-post itself while allowing the goods to be transported. In view of the nature of collection and payment which are necessary for transporting the goods in the business of the assessee, we are of the opinion that it does not contravene the M.V. Act as stated by the A.O. and the CIT(A).

10. Similar issue also arose with reference to fine and penalty paid on account of violation of National Stock Exchange Regulations in the case of Master Capital Services Ltd. vs. DCIT and the Hon’ble ITAT Chandigarh “A” Bench in ITA No. 346/Chd/2006, dated 26th February, 2007 108 TTJ (Chd) 389 has considered that fines and penalties paid by the assessee to NSE for trading beyond exposure limit, late submission of margin certificate due to software problem and delay in making deliveries of shares due to deficiencies are payments made in regular course of business and not infraction of law, hence allowable. In the assessee’s case also these fines are paid regularly in the course of the assessee’s business for transportation of goods beyond the permissible limit and these payments are being made in the regular course of business to the same RTO authorities at the check-post every year, in earlier years and in later years also. Accordingly, it has to be held that these payments are not for any infraction of law but paid in the course of assessee’s business of transportation and these are allowable expenses under section 37(1).’

In view of the legal principles established by the decisions referred to and noticing that the assessee had made about 230 trips by paying compounding fees, as per the rules in the M.V. Act, the Tribunal held that it could not be stated that the assessee’s payments of compounding fees was in violation of law. Since the assessee was engaged in transporting of over-dimensioned goods, in excess of specified capacities in its transport business, it was a necessary business expenditure, wholly and exclusively incurred for the purpose of business, and the same was allowable u/s 37(1). The order of the Commissioner (Appeals) on the issue was confirmed and in the result, the appeal of the Revenue was dismissed.

OBSERVATIONS
Section 37 is a residual provision that allows a business deduction for an expenditure not specified in sections 30 to 36, provided that the expenditure in question is incurred wholly and exclusively for the purposes of business, an essential precondition for any allowance under this section. Any expenditure that cannot be classified as such a business expenditure gets automatically disallowed under this provision unless it is specifically allowed under other provisions of the Act. Likewise, under the scheme of the Act, an expenditure of capital nature or a personal nature is also not allowable in computing the total income. The sum and substance of this is that a payment which cannot be construed as made for the purposes of business gets disallowed.

In the context of the discussion here, it is a settled position in law that the purpose of any ordinary business can never be to offend any law or to commit an act that violates the law and therefore any payments made for such an offence or as a consequence of violating any law is not allowable; such an allowance is the antithesis of the business deduction. Allowance for such payments has no place for the deduction in the general scheme of taxation. Such payments would be disallowed irrespective of any express provision, like Explanation 1, for its disallowance. It is for this reason that the payments of the nature discussed have been disallowed even before the insertion of Explanation 1 by the Finance (No. 2) Act, 1998 w.r.e.f. 1st April, 1962. It is for this reason that the insertion of this Explanation has been rightly labelled as ‘for removal of doubts’ to reiterate a provision of law which was always there.

Under the circumstances, the better view of the law is that the insertion of the Explanation is not to limit the scope of disallowance; any expenditure otherwise disallowable would remain disallowable even where it is not necessarily provided for by the express words of the Explanation. It is with this understanding of the law that the courts have been regularly disallowing the expenditure against public policy, for committing illegal acts, for making payments which are crimes by themselves and even, in some cases, expenditure incurred for defending the criminal proceedings. The disallowance here of an expenditure is without an exception and the principle would apply even in respect of an illegal business unless when it comes to the allowance of a loss of such business, in which case a different law laid down by the courts may apply.

The decisions chosen and discussed here are taken with the limited objective of highlighting the principles of the law of disallowance, even though they may not be necessarily conflicting with each other and maybe both may be correct in their own facts. The settled understanding of the law provided by the decisions of the Supreme Court in a case like Haji Aziz and Abdul Shakoor Bros. 41 ITR 350 has been given a new dimension by the subsequent decisions of the said court in the cases of Prakash Cotton Mills, 201 ITR 684 and Ahmedabad Cotton Manufacturing Co. Ltd., 205 ITR 163 for making a distinction in cases of payment of redemption fine or compounding fees. The court in these case held that it was required to examine the scheme of the provisions of the relevant statute providing for payment of an impost, ignoring its nomenclature as a penalty or fine, to find whether the payment in question was penal or compensatory in nature and allow an expenditure where an impost was found to be purely compensatory in nature. It was further held that when an impost was found to be of a composite nature, the payment was to be bifurcated and the part attributable to penalty was to be disallowed.

Following this distinction, many courts and tribunals have sought to allow those payments that could be classified as compensatory in nature. Needless to say, the whole exercise of distinguishing and separating the two is discretionary and at times results in decisions that do not reconcile with each other. For example, some courts hold that the penalty under the Sales Tax Act is not disallowable while a few others hold that it is disallowable. At times the courts are led to decide even the payment admittedly made for an offence or violation of law was allowable if it was incurred under a bona fide belief out of commercial expediency.

The other extreme is disallowance of payments that are otherwise bordering on immorality as perceived by society. The Supreme Court in the case of Piara Singh 124 ITR 40 and later in the case of Dr. T.A. Qureshi 287 ITR 647 held that there was a clear distinction between morality and law and the decision of disallowance should be purely based on the considerations rooted in law and not judged by morality thereof. These decisions also explain the clear distinction in principle relating to a loss and an expenditure to hold that in cases of an illegal business, the loss pertaining to such a business may qualify for set-off against income of such business.

As noted earlier, the Income-tax Act has not defined the terms like ‘offence’ or ‘prohibited by law’ and it is for this reason, in deciding the issue, that the taxpayer and the authorities have to necessarily examine the relevant statute under which the payment is made, to determine whether such a payment can be classified to be made for any purpose which is an offence or which is prohibited by law under the respective statutes.

Needless to reiterate, the scope of disallowance is not restricted by the Explanation and the expenditure otherwise held to be disallowed by the courts should continue to be disallowed and those covered by the Explanation would surely be disallowed. In applying the law, one needs to appreciate the thin line of distinction between an infraction of law, an offence, a violation and a prohibition, each of which may carry a different connotation while deciding the allowance or otherwise of a payment. In deciding the issue of allowance or otherwise, it perhaps would be appropriate to examine the ratio of the latest and all-important decision of the Supreme Court in the case of Maddi Venkataraman & Co. (P) Ltd., 229 ITR 534 where the Court held that a penalty for an infraction of law is not deductible on grounds of public policy, even if it is paid for an act under an inadvertence. The Full Bench of the Punjab and Haryana High Court in the case of Jamna Auto Industries, 299 ITR 92 held that a penalty imposed for violation of any law even in the course of business cannot be held to be a commercial loss allowable in law. One may also see the latest decision in the case of Confederation of Indian Pharmaceutical Industry vs. CBDT, 353 ITR 388 (HP) wherein the Court examined the issue of payment by the pharmaceutical company to the medical practitioners in violation of the rules of the Indian Medical Council.

It appears that the plea that the payment was made during the course of business and the businessman was compelled to offend or violate the law out of commercial expediency is no more tenable and, in our considered opinion, not an attractive contention to support a claim for a business deduction. A payment to discharge a statutory obligation, for correcting the default when permitted under the relevant statute, can be viewed differently and favourably in deciding the allowance of such payment, but such a payment may not be allowed when it is otherwise for an offence or for violating the law inasmuch as it cannot be considered as an expenditure laid out for the purpose of the business. An infraction of law cannot be treated as a normal occurrence in business.

Having noted the law and the developments in law, it is advisable to carefully examine the relevant law under which the payment is made for ascertaining whether the payment can at all be classified as a compensatory payment, for example interest, including those which are labelled as fines and penalties but are otherwise compensatory in nature and have the effect of regularising a default. Surely a payment made for compounding an offence to avoid imprisonment is not one that can be allowed as a deduction, even where such a compounding is otherwise permitted under the relevant statute?

The tribunal and courts in the following decisions, too, have taken a stand that payments made for traffic violations were not allowable as deductions:

Vicky Roadways ITA No. 38/Agra/2013,

Sutlej Cotton Mills ITA 1775/1991 (Del) HC, dated 31st October, 1997,

Kranti Road Transport (P) Ltd. 50 SOT 15 (Visakhapatnam).

However, the tribunal and courts in the following cases have allowed the deduction for expenditure made for violation of the M.V. Act, 1988 in cases where the payment was made for overloading the cargo beyond the permissible limit, on the ground that the cargo in question was indivisible and there was a permission from the Central Government to allow the overloading on payment of fines:

Ramesh Stone Wares, 101 Taxman 176 (Mag) (Asr),

Vishwanath V. Kale ITA/20181/Mum/2010,

Chetak Carriers ITA 2934/Delhi/1996,

Amar Goods Carrier ITA 50 and 51/Delhi/199.

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Limitation – Order of TPO – Mode of computing limitation

27 Pfizer Healthcare India Pvt. Ltd. vs. JCIT [2021] 433 ITR 28 (Mad) Date of order: 07/09/2020 Ss. 92CA, 144C and 153 of ITA, 1961

Limitation – Order of TPO – Mode of computing limitation

The petitioners filed returns of income, including income from transactions with associated entities abroad, thus necessitating a reference of issues arising under Chapter X to the Transfer Pricing Officer. The TPO has, after issuance of notices, passed orders dated 1st November, 2019. The petitioners filed writ petitions and challenged the validity of the orders of the TPO on the ground of limitation that there was a delay of one day.

The Madras High Court allowed the writ petitions and held as under:

‘i) The provisions of section 144C prescribe mandatory time limits both pre- and post- the stage of passing of a transfer pricing order. In this scheme of things, the submission that the period of 60 days stipulated for passing of an order of transfer pricing is only directory or a rough and ready guideline cannot be accepted. Section 153 states that no order of assessment shall be made at any time after the expiry of 21 months from the end of the assessment year in which the income was first assessable.

ii) In computing the limitation for passing the order in the instant case, the period of 21 months expired on 31st December, 2019. That must stand excluded since section 92CA(3A) stated “before 60 days prior to the date on which the period of limitation referred to in section 153 expires”. Excluding 31st December, 2019, the period of 60 days would expire on 1st November, 2019 and the transfer pricing orders thus ought to have been passed on 31st October, 2019 or any date prior thereto. The Board in the Central Action Plan also indicated the date by which the Transfer Pricing orders were to be passed as 31st October, 2019.

iii) The orders of the Transfer Pricing Officer passed on 1st November, 2019 were barred by limitation.’

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Business expenditure – Disallowance u/s 40(a)(ia) – Payments liable to deduction of tax at source – Royalty: (i) Amendment to definition in 2012 with retrospective effect from 1976 – Assessee could not be expected to foresee future amendment at time of payment – Disallowance not called for; (ii) Disallowance attracted only for royalty as defined in Explanation 2 to section 9 – Channel placement fee of Rs. 7.18 crores to cable operators – Not royalty – Explanation 6 cannot be invoked to disallow payment

20 CIT vs. NGC Networks (India) Pvt. Ltd. [2021] 432 ITR 326 (Bom) A.Y.: 2009-10; Date of order: 29/01/2018 Ss. 9(1)(vi), 40(a)(ia), 194C, 194J of ITA, 1961

Business expenditure – Disallowance u/s 40(a)(ia) – Payments liable to deduction of tax at source – Royalty: (i) Amendment to definition in 2012 with retrospective effect from 1976 – Assessee could not be expected to foresee future amendment at time of payment – Disallowance not called for; (ii) Disallowance attracted only for royalty as defined in Explanation 2 to section 9 – Channel placement fee of Rs. 7.18 crores to cable operators – Not royalty – Explanation 6 cannot be invoked to disallow payment

During the previous year relevant to the A.Y. 2009-10, the assessee paid channel placement fees of Rs. 7.18 crores to cable operators deducting tax at source u/s 194C at the rate of 2%. The A.O. was of the view that the tax had to be deducted at source on payment at the rate of 10% u/s 194J as the payment was in the nature of royalty, as defined in Explanation 6 to section 9(1)(vi) and disallowed the entire expenditure of Rs. 7.18 crores u/s 40(a)(ia) for failure to deduct tax u/s 194J. The Dispute Resolution Panel upheld the assessee’s objections holding that deduction of tax at source was properly made u/s 194C. The A.O. passed a final assessment order accordingly.

On appeal by the Department, the Tribunal held that the assessee was not liable to deduct the tax at source at higher rates only on account of the subsequent amendment made in the Act, with retrospective effect from 1976.

On further appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

‘i) The view taken by the Tribunal that a party could not be called upon to perform an impossible act, i. e., comply with a provision not in force at the relevant time but introduced later by retrospective amendment, was in accordance with the legal maxim lex non cogit ad impossibilia (law does not compel a man to do what he cannot possibly perform). The amendment by introduction of Explanation 6 to section 9(1)(vi) took place in the year 2012 with retrospective effect from 1976. It could not have been contemplated by the assessee when it made the payment during the assessment year that the payment would require deduction u/s 194J due to some future amendment with retrospective effect.

ii) Under section 40(a)(ia), royalty is defined as in Explanation 2 to section 9(1)(vi) and not in Explanation 6 to section 9(1)(vi). Undisputedly, the payment made for channel placement as a fee was not royalty in terms of Explanation 2 to section 9(1)(vi). Therefore, no disallowance of expenditure u/s 40(a)(i) could be made.’

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In the absence of any incriminating and corroborative evidence, extrapolation of on-money received in one transaction cannot be done to the entire sales Addition u/s 68 in respect of unsecured loans cannot be made merely on the basis of statement of entry operators Only real income can be subject to tax – Addition cannot be made on the basis of notings in loose sheets which are not corroborated by any credible evidence

21 Mani Square Ltd. vs. Asst. CIT [2020] 83 ITR (T) 241 (Kol-Trib) A.Ys.: 2013-14 to 2017-18; Date of order: 6th August, 2020 Sections 132, 68, 5 and 145

In the absence of any incriminating and corroborative evidence, extrapolation of on-money received in one transaction cannot be done to the entire sales
Addition u/s 68 in respect of unsecured loans cannot be made merely on the basis of statement of entry operators
Only real income can be subject to tax – Addition cannot be made on the basis of notings in loose sheets which are not corroborated by any credible evidence

FACTS
1. The assessee was engaged in real estate development. A search action u/s 132 was undertaken on the assessee. Prior to this, a search action was undertaken on one of the buyers (an HUF) wherefrom certain documents were seized which suggested that the assessee had received on-monies for sale of the flat to that buyer. Based on those documents, the A.O. concluded that a certain percentage of the actual sale consideration for the flat and car parking was received in cash and was unaccounted. Thereafter, the A.O. extrapolated the on-money on the entire sales. The CIT(A) confirmed the addition in respect of the single flat sold to the HUF but deleted the balance addition in case of all other buyers on the ground that a singular instance cannot be extrapolated without evidence.

2. Addition was also made u/s 68 in respect of loans taken from parties allegedly linked to entry operators.

3. A further addition was made by the A.O. in respect of interest income receivable from a party. To put it briefly, in the course of the search at the assessee’s premises a document was recovered, containing notings which suggested a unilateral claim raised by the assessee against a third party. However, there was nothing in these documents which proved that the third party had ever accepted such claim of the appellant and nothing was brought on record by the A.O., too, to prove acceptance of the appellant’s claim by the third party. However, the A.O. made an addition on the basis of notings contained in the recovered document.

HELD
1. Addition u/s 68 on account of alleged on-money on sale of flats
The ITAT observed that the documents found in the course of third party search were loose sheets of paper which could not be construed as incriminating material qua the assessee. These documents neither contained the name of the assessee nor any mention of the assessee’s project, nor did it suggest that the seized document was prepared at the instance of the assessee and hence there was no mention of any cash payment to the assessee. No additions were made in the case of assessments of the parties, alleged to have given cash to the assessee, and hence addition was not warranted in the hands of the assessee, too.

In a subsequent search on the assessee’s premises, no corroborative material was found and in the absence of any incriminating material no addition was warranted. The extrapolation of unaccounted sales across all units sold by the assessee had no legs to stand on.

The A.O. had made an independent inquiry from each flat purchaser; however, he did not find any statement or material which could even suggest receipt of cash consideration not disclosed by the assessee. Therefore, based on legal as well as factual grounds, the ITAT upheld the CIT(A)’s decision to hold that the theory of extrapolation could not be applied on theoretical or hypothetical basis in the absence of any incriminating and corroborative evidence or material brought on record by the A.O.

2. Addition u/s 68 in respect of unsecured loans (from parties linked to entry operators)
The ITAT observed that, other than recording the statement of entry operators on oath, the A.O. had not shown any credible link between the person whose statement was relied upon and the company from whom loans were received by the assessee; the A.O. had neither personally nor independently examined even a single entry operator to verify the correctness of facts contained in the statement and to establish the link with the assessee if any, neither had he allowed the assessee to cross-examine the witnesses whose statements were extracted in the assessment order. The A.O. had also failed to objectively take into consideration the financial net worth of the creditors having regard to the facts and figures available in the audited accounts. Based on these grounds, the ITAT deleted the impugned additions.

3. Addition in respect of interest income
The ITAT held that the subject matter of tax under the Act can only be the ‘real income’ and not hypothetical or illusory income. The two methods recognised in section 145 only prescribe the rules as to when entries can be made in the assessee’s books but not the principles of time of ‘revenue recognition’. The same has to be judged with reference to the totality of the facts and surrounding circumstances of each case. Hence, the overall conduct of the third party and the fact that it has till date not made any payment whatsoever to the assessee indicates that notings on loose papers did not represent ‘real’ income accrued to the assessee and was rightly not offered to tax. The ITAT, accordingly, held that the alleged interest income was not taxable.

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Evidence of data transmission and export of software by an assessee outside India is not a requirement to claim deduction u/s 10AA RBI approval for bank account maintained outside India not a requirement to be fulfilled to claim deduction u/s 10AA No requirement of maintaining separate books of accounts for various STPI / SEZ units if the primary books of accounts maintained by assessee are sufficient to compute profits of various STPI / SEZ units

20 IBM (India) Pvt. Ltd. vs. Asst. CIT [2020] 83 ITR(T) 24 (Bang-Trib) A.Y.: 2013-14; Date of order: 31st July, 2020 Section 10AA

Evidence of data transmission and export of software by an assessee outside India is not a requirement to claim deduction u/s 10AA

RBI approval for bank account maintained outside India not a requirement to be fulfilled to claim deduction u/s 10AA
No requirement of maintaining separate books of accounts for various STPI / SEZ units if the primary books of accounts maintained by assessee are sufficient to compute profits of various STPI / SEZ units

FACTS

The assessee company was engaged in the business of trading, leasing and financing of computer hardware, maintenance of computer equipment and export of software services to associated enterprises. It filed its return of income after claiming exemption u/s 10AA. However, the A.O. and the Dispute Resolution Panel denied the said exemption on various grounds which inter alia included the following:
a) There was no evidence of data transmission and export of software by the assessee outside India.
b) The assessee had not obtained RBI approval for the bank account maintained by it outside India with regard to export earnings.
c) Unit-wise P&L account of assessee did not reflect true and correct profits of its SEZ units.

Aggrieved by the above action, the assessee filed an appeal before the ITAT.

HELD

With regard to the objection that there was no evidence of data transmission and export of software by the assessee outside India, the ITAT held that declaration forms submitted before the Software Technology Park of India (STPI) or Special Economic Zone authority were sufficient evidence of data transmission / export of software. Further, it was held that for the purpose of claiming exemption u/s 10AA, such an objection did not have any relevance. Accordingly, this objection was rejected.

Another objection of the Revenue was that since the assessee was crediting export proceeds in a foreign bank account which was not approved by the RBI, therefore exemption could not be granted. The ITAT held that approval of the RBI was required only in order to claim benefit of Explanation 2 to section 10A(3) according to which export proceeds would be deemed to have been received in India if the same were credited to such RBI-approved foreign bank account within the stipulated time. It was held that even though the assessee cannot not avail exemption based on Explanation 2 to section 10A(3), but it could not be denied exemption under the main provision of section 10A(3) which only requires the export proceeds to be brought to India in convertible foreign exchange within the time stipulated in the said section. Accordingly, if the export proceeds were brought to India (even though from the non-approved foreign bank account) within the stipulated time period in convertible foreign exchange, then the exemption as per the main provision of section 10A(3) could not be denied.

As for the objection that the unit-wise profit & loss account of the assessee did not reflect the true and correct profits of its SEZ units and hence exemption u/s 10AA could not be granted, the ITAT held that there was no requirement of maintaining separate books of accounts for various STPI / SEZ units if the primary books of accounts maintained by the assessee are sufficient to compute the profits of various STPI / SEZ units. It was held that since Revenue had not disputed the sale proceeds claimed by the assessee against each STPI / SEZ unit, it could be said that bifurcations of profits of various STPI / SEZ units as given by the assesse were correct. Reliance was also placed on CBDT Circular No. 01/2013 dated 17th January, 2013 which clarifies that there is no requirement in law to maintain separate books of accounts and the same cannot be insisted upon by Revenue.

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Capital gain – Investment in residential house – The date relevant for determining the purchase of property is the date on which full consideration is paid and possession is taken

19 ACIT vs. Mohan Prabhakar Bhide ITA No. 1043/Mum/2019 A.Y.: 2015-16; Date of order: 3rd March, 2021 Section 54F

Capital gain – Investment in residential house – The date relevant for determining the purchase of property is the date on which full consideration is paid and possession is taken

FACTS

The assessee filed his return of income claiming a deduction of Rs. 2,38,30,244 u/s 54F. The A.O., in the course of assessment proceedings, noted that the assessee had advanced a sum of Rs. 1,00,00,000 for purchase of new house property on 20th April, 2012, whereas the sale agreement for five commercial properties sold by the assessee was made in 2014 and 2015.

The A.O. held that the investment in question should have been made within one year before the sale of property or two years after the sale of property. Since this condition was not satisfied, he disallowed the claim for deduction of Rs. 2,38,30,244 made u/s 54F.

Aggrieved, the assessee preferred an appeal to the CIT(A) who noted that the date of agreement for purchase of the new residential house was 22nd July, 2015 and the assessee had taken possession of the new residential house on 22nd July, 2015; both these dates were within two years from the date of transfer. Relying on the decision in CIT vs. Smt. Beena K. Jain [(1996) 217 ITR 363 (Bom)], he allowed the appeal filed by the assessee.

Aggrieved, Revenue preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the issue in appeal is squarely covered by the decision of the Bombay High Court in CIT vs. Smt. Beena K. Jain (Supra). The Tribunal held that the date relevant for determining the purchase of property is the date on which full consideration is paid and possession is taken. It observed that there is no dispute that this date is 22nd July, 2015 which falls within a period of two years from the date on which the related property was sold. However, the A.O. had proceeded to adopt the date on which the initial payment of Rs. 1,00,00,000 was made. The Tribunal held that the approach so adopted by the A.O. was ex facie incorrect and contrary to the law laid down by the jurisdictional High Court in the case of Beena K. Jain (Supra).

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Penalty – Search case – Specified previous year – Addition made by taking the average gross profit rate cannot be considered to be assessee’s undisclosed income for the purpose of imposition of penalty u/s 271AAA

18 Ace Steel Fab (P) Ltd. vs. DCIT TS-311-ITAT-2021 (Del) A.Y.: 2010-11; Date of order: 12th April, 2021 Section 271AAA

Penalty – Search case – Specified previous year – Addition made by taking the average gross profit rate cannot be considered to be assessee’s undisclosed income for the purpose of imposition of penalty u/s 271AAA

FACTS

In the course of a search operation u/s 132(1), the value of stock inventory on that particular day was found to be lower than the value of stock as per the books of accounts. The A.O. concluded that the assessee made sales out of the books. He called upon the assessee to show cause why an addition of Rs. 15,53,119 be not made by taking a gross profit rate of 4.6% on the difference of stock of Rs. 3,13,12,889. In response, the assessee submitted that the discrepancy in stock was only due to failure of the accounting software. The A.O. did not accept this contention and made an addition of Rs. 11,52,314. The quantum appeal, filed by the assessee to the CIT(A), was dismissed.

The A.O. imposed a penalty u/s 271AAA which was confirmed by the CIT(A).

Aggrieved by the order of the CIT(A) confirming the imposition of penalty u/s 271AAA, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the question for its consideration is whether an addition made by taking the average gross profit rate can be considered to be the assessee’s undisclosed income for the purpose of imposition of penalty u/s 271AAA.

Although the A.O. had not accepted the contention of the assessee that the discrepancy in stock was due to malfunctioning of the ERP software, the assessee had demonstrated with evidence that due to malfunction of the software the accounts could not be completed in time and the assessee had had to approach the Company Law Board with a petition to extend the date for adoption of audited accounts. The petition of the assessee was accepted and the offence was compounded. The Tribunal held that the assessee had a reasonable explanation for the discrepancy found in stock and due credence should have been given to this explanation. It cannot be said that the assessee had no explanation to offer regarding the difference in stock. It also noted that penalty has been imposed only on an ad hoc addition made based on average gross profit rate and does not relate directly to any undisclosed income unearthed during the course of the search. In such a situation, penalty u/s 271AAA was not sustainable, hence the Tribunal set aside the order passed by the CIT(A) and deleted the impugned penalty.

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Limited Scrutiny – Revision – Order passed in a limited scrutiny cannot be revised on an issue which was not to be taken up in limited scrutiny – Action of A.O. in not examining an issue which was not to be taken up in limited scrutiny cannot be termed as erroneous

17 Spotlight Vanijya Ltd. vs. PCITTS-310-ITAT-2021 (Kol) A.Y.: 2015-16; Date of order: 9th April, 2021 Sections 143(3), 263

Limited Scrutiny – Revision – Order passed in a limited scrutiny cannot be revised on an issue which was not to be taken up in limited scrutiny – Action of A.O. in not examining an issue which was not to be taken up in limited scrutiny cannot be termed as erroneous

FACTS
In the present case, for the assessment year under consideration the assessee’s case was taken up for limited scrutiny under CASS and a notice u/s 143(2) was issued. Limited scrutiny was taken up for the following three reasons, viz.,
i) income from heads other than business / profession mismatch;
ii) sales turnover mismatch;
iii) investments in unlisted equities.

The A.O., after going through the submissions of the assessee, completed the assessment u/s 143(3), assessing the total income of the assessee to be Rs. 91,95,770 under normal provisions and Rs. 94,94,533 u/s 115JB.

Upon completion of the assessment, the PCIT issued a show cause notice (SCN) u/s 263 wherein he expressed his desire to interfere and revise the assessment order passed by the A.O. on the ground that a deduction of Rs. 10,02,198 has been claimed in respect of flats in Mumbai for which rental income of only Rs. 4,20,000 is offered under the head ‘Income from House Property’ and a standard deduction of Rs. 1,80,000 has been claimed.

The assessee, in response to the SCN, objected to the invocation of revisional jurisdiction on the ground that insurance premium was not one of the three items on which the case was selected for limited scrutiny. It was further stated that the insurance premium for flats is only Rs. 2,198 which has been added back while computing income under the head ‘Profits & Gains of Business or Profession’. The balance amount of Rs. 10,00,000 was premium for Keyman Insurance policy which is allowable as a deduction u/s 37. Consequently, the assessment order was not erroneous or prejudicial to the interest of the Revenue.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The A.O.’s action of not looking into the issue of insurance premium (Keyman policy) cannot be termed as erroneous as such omission is in consonance with the dictum of CBDT on the subject, viz., CBDT Instruction No. 2/2014 dated 26th September, 2014, which directs the field officers to confine their inquiries strictly to CASS reasons and they were not permitted to make inquiries in respect of issues for which a case was not selected for limited scrutiny. Therefore, the order passed by the A.O. cannot be termed as erroneous and prejudicial to the interest of the Revenue and consequently the PCIT could not have invoked revisional jurisdiction.

The Tribunal held that the impugned action of the PCIT is akin to doing indirectly what the A.O. could not have done directly. It said the very initiation of jurisdiction by issuing an SCN itself is bad in law and, therefore, quashed the SCN issued by the PCIT. For this, the Tribunal relied upon the decisions in
i) Sanjib Kumar Khemka [ITA No. 1361/Kol/2016, A.Y. 2011-12, order dated 2nd June, 2017]; and
ii) Chengmari Tea Co. Ltd. [ITA No. 812/Kol/2019, A.Y. 2014-15, order dated 31st January, 2020].

Consequently, all further actions / proceedings, including the impugned order of the PCIT, were held to be non est in the eyes of the law.

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Income from Other Sources – Interest on enhanced compensation for acquisition of agricultural land is a capital receipt not chargeable to tax u/s 56(2)(viii) r.w.s. 57(iv)

16 Nariender Kumar vs. ITO TS-298-ITAT-2021 (Del) A.Y.: 2014-15; Date of order: 12th April, 2021 Section 56(2)(viii) r.w.s. 57(iv)

Income from Other Sources – Interest on enhanced compensation for acquisition of agricultural land is a capital receipt not chargeable to tax u/s 56(2)(viii) r.w.s. 57(iv)

FACTS

The assessee filed his return of income for A.Y. 2014-15 declaring a total income of Rs. 12,250 and agricultural income of Rs. 3,50,000. During the previous year relevant to the assessment year under consideration, he had received Rs. 1.42 crores as enhanced compensation on land acquisition which included compensation of Rs. 56.90 lakhs and interest of Rs. 85.32 lakhs. The A.O. made an addition of Rs. 42.66 lakhs being 50% of interest of Rs. 85.32 lakhs u/s 56(2)(viii) r.w.s. 57(iv).

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O. The assessee then preferred an appeal to the Tribunal.

HELD

The capital receipt, unless specifically taxable u/s 45 under the head Capital Gains, in principle is outside the scope of income chargeable to tax and cannot be taxed as income unless it is in the nature of revenue receipt or is specifically brought within the ambit of income by way of a specific provision of the Act. Interest received on compensation to the assessee is nothing but a capital receipt.

The Tribunal observed that:
(i) The CIT(A) has not given a finding as to why the A.O. is justified in making the addition;
(ii) The Apex Court in Union of India vs. Hari Singh (Civil Appeal No. 15041/2017, order dated 15th September, 2017) has held that on agricultural land no tax is payable when the compensation / enhanced compensation is received by the assessee;
(iii) The assessee received compensation in respect of his agricultural land which was acquired by the State Government;
(iv) The ratio of the decision of the Apex Court in the case of Hari Singh (Supra) is applicable to the present case.

The Tribunal held the addition to be against the law.

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UNFAIRNESS AND THE INDIAN TAX SYSTEM

In a conflict between law and equity, it is the law which prevails as per the Latin maxim dura lex sed lex, meaning ‘the law is hard, but it is the law’. Equity can only supplement law, it cannot supplant or override it. However, in CIT vs. J.H. Gotla (1985) 156 ITR 323 SC, it is held that an attempt should be made to see whether these two can meet. In the realm of taxes, the tax collector always has an upper hand. When this upper hand is used to convey ‘heads I win, tails you lose’, the taxpayer has to suffer this one-upmanship till all taxpayers collectively voice their grievance loud and clear and the same is heard and acted upon. In this article, the authors would be throwing light on certain unfair provisions of the Income-tax Act.

Case 1: Differential valuation in Rule 11UA for unquoted equity shares, section 56(2)(x)(c) vs. section 56(2)(viib); section 56(2)(x)(c) read with Rule 11UA(1)(c)(b)

Section 56(2)(x)(c) provides for taxation under ‘income from other sources’ (IFOS), where a person receives, in any previous year, any property, other than immovable property, without consideration or for inadequate consideration. ‘Property’, as per Explanation to section 56(2)(x) read with Explanation (d) to section 56(2)(vii), includes ‘shares and securities’.

Section 56(2)(x)(c)(A) provides that where a person receives any property, other than immovable property without consideration, the aggregate Fair Market Value (FMV) of which exceeds Rs. 50,000, the aggregate FMV of such property shall be chargeable to tax as IFOS. Section 56(2)(x)(c)(B) provides that where a person receives any property, other than immovable property, for consideration which is less than the aggregate FMV of the property by an amount exceeding Rs. 50,000, the aggregate FMV of such property as exceeds such consideration shall be chargeable to tax.

The FMV of a property, as per the Explanation to section 56(2)(x) read with Explanation (b) to section 56(2)(vii) means the value determined in accordance with a prescribed method.

Rule 11UA(1)(c)(b) provides for determination of FMV of unquoted equity shares. Under this Rule, the book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) in the balance sheet is taken into consideration. In case of the assets mentioned within brackets, the following values are considered:
a) Jewellery and artistic work – Price which it would fetch if sold in the open market (OMV) on the basis of a valuation report obtained from a registered valuer;
b) Shares and securities – FMV as determined under Rule 11UA;
c) Immovable property – Stamp Duty Value (SDV) adopted or assessed or assessable by any authority of the Government.

SECTION 56(2)(viib) READ WITH RULE 11UA(2)(a)

Section 56(2)(viib) provides for taxation of excess of aggregate consideration received by certain companies from residents over the FMV of shares issued by it, when such consideration exceeds the face value of such shares [angel tax].

Explanation (a) to the said section provides that the FMV of shares shall be a value that is the higher of the value
a) As determined in accordance with the prescribed method; or
b) As substantiated by the company to the satisfaction of the Assessing Officer based on the value of its assets, including intangible assets.

Rule 11UA(2)(a) provides for the manner of computation of the FMV on the basis of the book value of assets less the book value of liabilities.

DISPARITY BETWEEN RULES 11UA(1)(c)(b) AND 11UA(2)(a)

Section 56(2)(x)(c) deals with taxability in case of receipt of movable property for no consideration or inadequate consideration. Thus, the higher the FMV of the property, the higher would be the income taxable u/s 56(2)(x). Hence, Rule 11UA(1)(c)(b) takes into consideration the book value, or the OMV or FMV or SDV, depending on the nature of the asset.

Section 56(2)(viib) brings to tax the delta between the actual consideration received for issue of shares and the FMV. Therefore, the lower the FMV, the higher would be the delta and hence the higher would be the income taxable under the said section. Rule 11UA(2) provides for the determination of the FMV on the basis of the book value of assets and liabilities irrespective of the nature of the same.

One may note the disparity between the two Rules in the valuation of unquoted shares. Valuation for section 56(2)(x)(c) adopts FMV or OMV, so that higher income is charged to tax thereunder. Valuation for section 56(2)(viib) adopts only book value so that a higher delta would emerge to recover higher angel tax.

The levy of angel tax is itself arbitrary, because such tax is levied even if the share issue has passed the trinity of tests, i.e., genuineness, identity and creditworthiness of section 68. No Government can invite investment as it wields this nasty weapon of angel tax. Adding salt to the wound, the NAV of unlisted equity shares is determined by insisting on adopting the book value of the assets irrespective of their real worth.

It is time the Government takes a bold move and drops section 56(2)(viib). Any mischief which the Government seeks to remedy may be addressed by more efficiently exercising the powers under sections 68 to 69C. In the meanwhile, the aforesaid disparity in the valuation should be immediately removed by executive action.

Case 2: Indirect transfer – Rule 11UB(8)
Explanation 5 to section 9(1)(i) provides that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be, and shall always be deemed to have been, situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India (underlying asset).

Explanation 6(a) to section 9(1)(i) provides that the share or interest, referred to in Explanation 5, shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India if, on the specified date, the value of such assets
a) Exceeds Rs. 10 crores; and
b) Represents at least 50% of the value of all the assets owned by the company or entity, as the case may be.

Explanation 6(b) to section 9(1)(i) provides that the value of an asset shall be its FMV on the specified date without reduction of liabilities, if any, determined in the manner as prescribed.

Rule 11UB provides the manner of determination of the FMV of an asset for the purposes of section 9(1)(i). Sub-rules (1) to (4) of Rule 11UB provide for the valuation of an asset located in India, being a share of an Indian company or interest in a partnership firm or association of persons.

Rule 11UB(8) provides that for determining the FMV of any asset located in India, being a share of an Indian company or interest in a partnership firm or association of persons, all the assets and business operations of the said company or partnership firm or association of persons are taken into account irrespective of whether the assets or business operations are located in India or outside India. Thus, even though some assets or business operations are not located in India, their value would be taken into account, thereby resulting in a higher FMV of the underlying asset in India and hence a higher chance of attracting Explanation 5 to section 9(1)(i).

This is contrary to the scheme of section 9(1)(i) read with Explanation 5 which seeks to tax income from indirect transfer of underlying assets in India. Explanation 5 codifies the economic concept of location of the asset. Such being the case, Rule 11UB(8) which mandates valuation of the Indian asset ignoring the downstream overseas investments by the Indian entity, is ultra vires of Explanation 5. It offends the very economic concept embedded in Explanation 5.

Take the case of a foreign company [FC], holding shares in an investment company in India [IC] which has step-down operating subsidiaries located outside India [SOS]. It is necessary to determine the situs of the shares of the FC in terms of Explanation 5.

Applying Explanation 6, the value of the shares of IC needs to be determined to see whether the same would exceed Rs. 10 crores and whether its proportion in the total assets of FC exceeds 50%.

Shares in FC derive their value not only from assets in India [shares of IC] but also from assets outside India [shares of the SOS]. However, Rule 11UB(8) mandates that while valuing the shares of the IC, the value of the shares of the SOS cannot be excluded. It seeks to ignore the fact that the shares of IC directly derive their value from the shares of the SOS, and thus the shares of FC indirectly derive their value from the shares of the SOS. This is unfair inasmuch as it goes beyond the scope of Explanation 5 and seeks to tax gains which have no economic nexus with India.

This is a classic case of executive overreach. By tweaking the rule, it is sought to bring to tax the gains which may have no nexus with India, whether territorial or economic. It is beyond the jurisdiction of the taxman to levy tax on gains on the transfer of the shares of a foreign company which derive their value indirectly from the assets located outside India.

Taxation of indirect transfer invariably results in double taxation. Mitigation of such double taxation is subject to the niceties associated with complex FTC rules. Such being the case, it is unfortunate that the scope of taxation of indirect transfer is extended by executive overreach. Before this unfair and illegal action is challenged, it would be good for the Government to suo motu recall the same.

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Reassessment – Notice u/s 148 – Validity – Effect of insertion of s. 148A by F.A. 2021 – Taxation and other laws (relaxation of certain provisions) Act, 2020 enabling certain actions of Department in view of pandemic – Notification of Finance Ministry under enabling Act – Notification could not save reassessment proceedings under unamended s. 148 instituted after 1st April, 2021 – Notices issued in pursuance of such reassessment proceedings – Not valid

28 Ashok Kumar Agarwal vs. UOI [2021] 439 ITR 1 (All) A.Ys.: 2013-14 to 2017-18; Date of order: 8th October, 2021 Ss. 147, 148 and 148A of ITA, 1961

Reassessment – Notice u/s 148 – Validity – Effect of insertion of s. 148A by F.A. 2021 – Taxation and other laws (relaxation of certain provisions) Act, 2020 enabling certain actions of Department in view of pandemic – Notification of Finance Ministry under enabling Act – Notification could not save reassessment proceedings under unamended s. 148 instituted after 1st April, 2021 – Notices issued in pursuance of such reassessment proceedings – Not valid

Writ petitions were filed by individual petitioners to challenge the initiation of reassessment proceedings after 1st April, 2021 by issuing notice u/s 148 for different assessment years.

The Allahabad High Court held as under:

‘i) An Act of legislative substitution is a composite Act. Thereby, the Legislature chooses to put in place another or replace an existing provision of law. It involves simultaneous omission and re-enactment. By its very nature, once a new provision has been put in place of a pre-existing provision, the earlier provision cannot survive, except for things done or already undertaken to be done, or things expressly saved to be done. By virtue of section 1(2)(a) of the Finance Act, 2021, the provisions of sections147, 148, 149, 151 (as those provisions existed up to 31st March, 2021) stood substituted and a new provision was enacted by way of section 148A which mandated that the A.O. before issuing any notice u/s 148 shall conduct an inquiry, if required with the prior approval of the specified authority and provide to an opportunity to the assessee of being heard.

ii) The Taxation and Other Laws (Relaxation of certain Provisions) Act, 2020 had been passed to deal with situations arising due to the pandemic. This enabling Act that was pre-existing had been enforced prior to enforcement of the Finance Act, 2021 on 1st April, 2021. In the 2020 Act and the Finance Act, 2021, there is absence both of any express provision in itself or to delegate the function to save applicability of the provisions of sections 147, 148, 149 or 151 of the Act as they existed up to 31st March, 2021. Plainly, the 2020 Act is an enactment to extend timelines only. Consequently, it flows from the above that from 1st April, 2021 onwards, all references to issuance of notice contained in the 2020 Act must be read as a reference to the substituted provisions only. Equally, there is no difficulty in applying the pre-existing provisions to pending proceedings. Looked at in that manner, the laws are harmonised. A reassessment proceeding is not just another proceeding emanating from a simple show cause notice. Both under the pre-existing law as also under the law enforced from 1st April, 2021, that proceeding must arise only upon jurisdiction being validly assumed by the assessing authority. Till such time jurisdiction is validly assumed by the assessing authority evidenced by issuance of the jurisdictional notice u/s 148, no reassessment proceedings may ever be said to be pending.

iii) The submission that the provision of section 3(1) of the 2020 Act gave an overriding effect to that Act and therefore saved the provisions as they existed under the unamended law, cannot be accepted. That saving could arise only if jurisdiction had been validly assumed before the date 1st April, 2021. In the first place section 3(1) of the 2020 Act does not speak of saving any provision of law. It only speaks of saving or protecting certain proceedings from being hit by the rule of limitation. That provision also does not speak of saving any proceeding from any law that may be enacted by Parliament in future. Even otherwise the word “notwithstanding” creating the non obstante clause does not govern the entire scope of section 3(1) of the 2020 Act. It is confined to and may be employed only with reference to the second part of section 3(1) of the 2020 Act, i.e., to protect proceedings already underway. There is nothing in the language of that provision to admit a wider or sweeping application to be given to that clause – to serve a purpose not contemplated under that provision and the enactment wherein it appears. Hence, the 2020 Act only protected certain proceedings that may have become time-barred on 20th March, 2020 up to the date 30th June, 2021. Correspondingly, by delegated legislation incorporated by the Central Government, it may extend that time limit. That time limit alone stood extended up to 30th June, 2021.

By Notification No. 3814 dated 17th September, 2021 ([2021] 437 ITR (St.) 16)], issued u/s 3(1) of the 2020 Act, further extension of time has been granted till 31st March, 2022. In the absence of any specific delegation, to allow the delegate of Parliament to indefinitely extend such limitation would be to allow the validity of an enacted law, i.e., the Finance Act, 2021 to be defeated by a purely colourable exercise of power, by the delegate of Parliament. Section 3(1) of the 2020 Act does not itself speak of reassessment proceeding or of section 147 or section 148 of the Act as it existed prior to 1st April, 2021. It only provides a general relaxation of the limitation granted on account of general hardship existing upon the spread of the Covid-19 pandemic. After enforcement of the Finance Act, 2021 it applies to the substituted provisions and not the pre-existing provisions.

iv) The mischief rule has limited application in the present case. Only in case of any doubt existing as to which of the two interpretations may apply or as to the true interpretation of a provision, the court may look at the mischief rule to find the correct law. However, where plain legislative action exists, as in the present case (whereunder Parliament has substituted the old provisions regarding reassessment with new provisions with effect from 1st April, 2021), the mischief rule has no application. There is no conflict in the application and enforcement of the 2020 Act and the Finance Act, 2021. Juxtaposed, if the Finance Act, 2021 had not made the substitution to the reassessment procedure, the Revenue authorities would have been within their rights to claim extension of time under the 2020 Act. However, upon that sweeping amendment made in Parliament, by necessary implication or implied force, it limited the applicability of the 2020 Act and the power to grant time extensions thereunder, to only such reassessment proceedings as had been initiated till 31st March, 2021. Consequently, the notifications had no applicability to reassessment proceedings initiated from 1st April, 2021 onwards. Upon the Finance Act, 2021 being enforced with effect from 1st April, 2021 without any saving of the provisions substituted, there is no room to reach a conclusion as to conflict of laws. It is for the assessing authority to act according to the law as it existed on and after 1st April, 2021. If the rule of limitation is permitted, it could initiate reassessment proceedings in accordance with the new law, after making adequate compliance therewith.

v) A delegated legislation can never overreach any Act of the principal Legislature. Secondly, it would be over-simplistic to ignore the provisions of either the 2020 Act or the Finance Act, 2021 and to read and interpret the provisions of the Finance Act, 2021 as inoperative in view of the fact and circumstances arising from the spread of the Covid-19 pandemic. Practicality of life de hors statutory provisions may never be a good guiding principle to interpret any taxation law. In the absence of any specific clause in the Finance Act, 2021 either to save the provisions of the 2020 Act or the notifications issued thereunder, by no interpretative process can those notifications be given an extended run of life beyond 31st March, 2020. They may also not infuse any life into a provision that stood obliterated from the statute with effect from 31st March, 2021. Inasmuch as the Finance Act, 2021 does not enable the Central Government to issue any notification to reactivate the pre-existing law (which that principal Legislature had substituted), the exercise by the delegate / Central Government would be de hors any statutory basis. In the absence of any express saving of the pre-existing laws, the presumption drawn in favour of that saving is plainly impermissible. Also, no presumption exists that by the notification issued under the 2020 Act the operation of the pre-existing provision of the Act had been extended and thereby the provisions of section 148A (introduced by the Finance Act, 2021) and other provisions had been deferred. Such notifications did not insulate or save the pre-existing provisions pertaining to reassessment under the Act.

vi) Accordingly, the Revenue authorities had admitted that all the reassessment notices involved in this batch of writ petitions had been issued after the enforcement date of 1st April, 2021. As a matter of fact, no jurisdiction had been assumed by the assessing authority against any of the assessees under the unamended law. Hence, no time extension could be made u/s 3(1) of the 2020 Act, read with the notifications issued thereunder. All the notices were invalid.’

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Educational institution – Exemption u/s 10(23C) – Scope of s. 10(23C) – Benefit granted with reference to educational activity – Society deriving income from running educational institution having other income – Separate accounting for such other income – Income of society could not be aggregated for purposes of s. 10(23C)

27 Manas Sewa Samiti vs. Addl. CIT [2021] 439 ITR 79 (All) A.Y.: 2007-08; Date of order: 5th October, 2021 S. 10(23C) of ITA, 1961

Educational institution – Exemption u/s 10(23C) – Scope of s. 10(23C) – Benefit granted with reference to educational activity – Society deriving income from running educational institution having other income – Separate accounting for such other income – Income of society could not be aggregated for purposes of s. 10(23C)

The appellant-assessee is a society registered under the Societies Registration Act, 1860. Under its registered objects, it established an educational institution in the name of Institute of Information Management and Technology at Aligarh. For the previous year relevant to the A.Y. 2007-08, the Institution received fees of Rs. 85,95,790 and interest on fixed deposit receipt of Rs. 86,121. Thus, the total receipts of the institution were Rs. 86,81,911. After deducting expenditure of the institution, the excess of income over expenditure, Rs. 38,54,310 was carried to the income and expenditure account of the society. Also, the society received donations or subscriptions amounting to Rs. 47,62,000 and interest on fixed deposit receipt of Rs. 18,155. The A.O. denied exemption claimed u/s 10(23C)(iiiad).

The Tribunal upheld the denial of exemption.

In the appeal before the High Court the following question of law was raised by the assessee:

‘Whether, in view of the law laid down in CIT vs. Children’s Education Society [2013] 358 ITR 373 (Karn) and the order passed by this Court in CIT (Exemption) vs. Chironji Lal Virendra Pal Saraswati Shiksha Parishad [2016] 380 ITR 265 (All), the order of the Tribunal denying the exemption u/s 10(23C)(iiiad) and clubbing the voluntary contributions received by the appellant with the receipts of the educational institution is justified in law?’

The Allahabad High Court held as under:

‘i) Under the provisions of section 10(23C), any income received by any person on behalf of any university or other educational institution existing solely for educational purposes and not for purposes of profit, if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed… in the A.Y. 2007-08 the upper limit prescribed for such receipts was Rs. 1 crore under Rule 2BC of the Income-tax Rules, 1962.

ii) The benefit of section 10(23C)(iiiad) being activity-centric, the limit of Rs. 1 crore prescribed thereunder has to be seen only with reference to the fee and other receipts of the eligible activity / institution. Admittedly, those were below Rs. 1 crore. The eligibility condition prescribed by law was wholly met by the assessee. The fact that the institution did not exist on its own and was run by the society could never be a valid consideration to disallow that benefit. Merely because the assessee-society was the person running the institution, it did not cause any legal effect of depriving the benefit of section 10(23C)(iiiad) which was activity specific and had nothing to do with the other income of the same assessee; the Tribunal had also erred in looking at the provisions of section 12AA and the fact that the donations received by the society may not have been received with any specific instructions.

iii) It was not relevant in the facts of the present case because here the assessee had only claimed the benefit of section 10(23C)(iiiad) with respect to the receipts of the institution, and it had not claimed any benefit with respect to the donations received by the society. There could be no clubbing of the receipts of the institution with the other income of the society for the purpose of considering the benefit of section 10(23C)(iiiad).

iv) The question of law is answered in the negative, i.e., in favour of the assessee and against the Revenue.’

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Business income – Meaning of business – Lease rent whether business income – Tests for determination of question – Assessee-company incurring losses – Scheme sanctioned by BIFR to help assessee – Scheme providing for lease of entire production unit of assessee – Lease rent constituted business income

26 CIT vs. Premier Tyres Ltd. [2021] 439 ITR 346 (Ker) A.Ys.: 1996-97 to 2003-04; Date of order: 19th July, 2021 Ss. 14 and 28 of ITA, 1961

Business income – Meaning of business – Lease rent whether business income – Tests for determination of question – Assessee-company incurring losses – Scheme sanctioned by BIFR to help assessee – Scheme providing for lease of entire production unit of assessee – Lease rent constituted business income

The assessee was a company engaged in the manufacture and sale of tyres. Since the assessee had a business loss in excess of the paid-up capital, it moved an application u/s 15 of the Sick Industries (Special Provisions) Act, 1985 before the Board for Industrial and Financial Reconstruction (BIFR) for framing a scheme under the 1985 Act. The BIFR, through its order dated 17th April, 1995, approved a scheme for the rehabilitation and revival of the assessee. While sanctioning the rehabilitation scheme for the assessee, the BIFR approved the arrangement between the assessee and ATL, viz., that ATL under an irrevocable lease of eight years would operate the plant and pay a total lease rental of Rs. 45.5 crores over the period of rehabilitation to the sick industrial company, i.e., the assessee, and that ATL would take over the production made at the assessee plant. The assessee made over the plant operation to ATL for manufacturing tyres. Thus, the plant and machinery were given on lease by the assessee to ATL for eight years stipulated in the scheme. For the A.Y. 1996-97, the assessment was completed treating the lease rent received from ATL amounting to Rs. 6,61,75,914 as income from business of the assessee. Thereafter, the A.O. issued notice and reopened the assessment u/s 148 and through the reassessment order treated the receipt from ATL as income from other sources.

The Tribunal held that the lease rental received by the assessee from ATL under the rehabilitation scheme came within the meaning of business income especially in the circumstances of the case.

On appeal by the Revenue, the Kerala High Court upheld the decision of the Tribunal and held as under:

‘i) The word “business” in section 14 is not a word of art but a word of commercial implication. Therefore, in any given year or situation, the activity claimed by the assessee is neither accepted through interpretative nor expressive narrative of the activity claimed by the assessee, nor is the claim for business income refused through the prism of the Revenue. The bottom line is the availability of assets, activities carried out for exploiting the assets, that the assessee is not a mere onlooker at the activities in the company or a passive recipient of rent for utilisation of facilities other than business assets. The net income of business presupposes computation of income after allowing permissible expenses and deductions in accordance with the Act. Therefore, denying eligible deductions or expenses treating business activity as any other activity, and on the other hand allowing deductions or expenses without just eligibility is equally illegal. The circumstances therefore are weighed in an even scale by the authority or court while deciding whether the activity stated by the assessee merits inclusion as income from business or other sources. These controversies are determined not only on case-to-case basis but also on year-to-year basis as well.

ii) The assessee was obligated to work under a statutorily approved scheme; the lease of eight years was to ATL, which was in the same business, and the lease was for utilising the plant, machinery, etc., for manufacturing tyres; the actuals were reimbursed to the assessee by ATL; the work force of the assessee had been deployed for manufacturing tyres; the total production from the assessee unit was taken over by ATL; the overall affairs of the assessee company were made viable by entering into the settlement; coupled with all other primary circumstances, the assessee employed commercial assets to earn income. The scheme was for providing a solution to the business problem of the assessee. The claim of lease rental receipt as income of business was justifiable for the assessment years.’

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Benami transactions – Prohibition – Act not applicable to companies – Action under Act should be taken within reasonable period

25 Kalyan Buildmart Pvt. Ltd. vs. Initiating Officer, Dy. CIT (Benami Prohibition) [2021] 439 ITR 62 (Raj) Date of order: 6th October, 2021 Prohibition of Benami Property Transactions Act, 1988

Benami transactions – Prohibition – Act not applicable to companies – Action under Act should be taken within reasonable period

In this writ petition, the petitioners assail the provisional attachment orders dated 12th January, 2018 passed by the Initiating Officer u/s 24(4) of the Prohibition of Benami Property Transactions Act, 1988 and the confirmation orders dated 30th January, 2019 passed by the adjudicating authority u/s 26(3) of the Prohibition of Benami Property Transactions Act, 1988 (hereinafter referred to as ‘the Benami Act, 1988’).

The Rajasthan High Court held as under:

‘i) The Prohibition of Benami Property Transactions Act, 1988 would not extend to properties purchased by a company.

ii) The very purpose of coming into force of the Prohibition of Benami Property Transactions Act, 1988 was to implement the recommendations of the 57th Report of the Law Commission on benami transactions and was to curtail benami purchases, i.e., purchase in the name of another person who does not pay the consideration but merely lends his name while the real title vests in another person who actually purchased the property. Upon reading the provisions of the Act and the definitions, it is apparent that a benami transaction would require one transaction made by one person in the name of another person where the funds are owned and paid by the first person to the seller while the seller gets the registered sale deed executed in favour of the second person, i.e., from the account of A, the amount is paid to C who sells the property to B and a registered sale deed is executed in favour of B. While in the case of an individual this position may continue, a transaction for purchase of property by a company in favour of any person or in its own name would not come within the purview of a benami transaction because the funds of the company are its own assets.

If the promoters of the company, namely, the shareholders, their relatives or individuals invest in the company by way of giving land or by way of gift or in any other manner, then such amounts or monies received would be part of the net worth of the company and the company would be entitled to invest in any sector for which it has been formed. The persons who have put monies in the company may be considered as shareholders but such shareholders do not have the right to own properties of the company nor can it be said that the shareholders have by virtue of their share in the company invested their amount as benamidars. The transactions of the company are independent transactions which are only for the purpose of benefit of the company. It is a different aspect altogether that on account of benefit accruing to the company the shareholders would also receive benefit and they may be beneficiaries to a certain extent. This would, however, not make the shareholders beneficial owners in terms of the definition as provided u/s 2(12) of the 1988 Act. A “company” as defined under the Companies Act, 1956 and incorporated thereunder, therefore, cannot be treated as a benamidar as defined under the 1988 Act. The company cannot be said to be a benamidar and its shareholders cannot be said to be beneficial owners within the meaning of the 1988 Act.

iii) Transactions done legally under the Companies Act of transferring shares of one shareholder to another, the benefit, if any, of which may accrue on account of legally allowed transactions, cannot be a ground to draw a presumption of benami transaction under the 1988 Act. Strict proof is required to be produced and there is no room for surmises or conjectures nor presumption to be made as the 1988 Act has penal consequences.

iv) The prayer of the respondents for lifting the veil to examine the original sale deed dated 24th August, 2006 in relation to the 1988 Act was correct. However, the original transaction of 2006 was between the company and the sellers and the sale deed was executed in favour of the company. Therefore, a subsequent registered sale deed executed by the Development Authority did not warrant interference and it was not a case of proceeds from the property acquired through benami transaction. Once land had been surrendered and order had been passed by the Development Authority u/s 90B of the Rajasthan Land Revenue Act, 1956 and the land had been converted from agricultural to commercial use and registered lease deed had been executed by the Development Authority in favour of the company, the transaction was not a benami transaction.

v) Ordinarily, any proceeding relating to benami transactions ought to be taken up immediately or at least within a reasonable period of limitation of three years as generally provided under the Limitation Act, 1963. Moreover the proceedings initiated after ten years of the purchase were highly belated.

vi) The action of the respondents in attaching the commercial complex which had been leased out to the company by the Development Authority was illegal and unjustified and without jurisdiction.’

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Merely because a property is called a farmhouse it does not become a non-residential house property unless otherwise proved

21 ACIT vs. Rajat Bhandari [TS-892-ITAT-2021 (Del)] A.Y.: 2011-12; Date of order: 16th September, 2021 Section: 54F

Merely because a property is called a farmhouse it does not become a non-residential house property unless otherwise proved

FACTS
The assessee sold a property at Patparganj, Delhi for Rs. 3.10 crores on 20th October, 2010 and claimed exemption u/s 54F stating that he had purchased a new farmhouse at Sainik Farms, New Delhi in September, 2011. The A.O. denied exemption u/s 54F without disputing the fact of the transactions, but merely noting that the assessee has more than one house and is also owner of many residential houses. For this proposition, the A.O. noted the address of the assessee on the return of income, on the bank account, on the insurance receipts as well as on the other legal documents placed before him.
He noted that the assessee has many residential houses and therefore deduction u/s 54F cannot be claimed. Therefore, the A.O. was of the view that the assessee is not entitled to deduction u/s 54F. He held that it is not possible to collect the direct evidence to prove that the assessee owned more than one residential house on the date of transfer of the original asset. He further noted that after taking consideration of the totality of the facts and circumstances of the case, one could draw the inference that the assessee did not fulfil the conditions for exemption u/s 54F. Even otherwise, he held that the assessee has purchased a farmhouse and no deduction u/s 54F should be allowed on that as income from a farm is not taxable.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the appeal. But the Revenue felt aggrieved and preferred an appeal to the Tribunal.

HELD
The Tribunal observed that the DR could not show that the assessee has more than one property. It noted that the A.O. himself says that he could not prove whether the assessee has more than one property. The objection of the A.O., that the assessee has purchased a farmhouse and therefore it is not a residential house property, was devoid of any merit. It held that ‘Farmhouse can be residential house also’. It is not the case of the Revenue that the assessee has purchased excessive land and has constructed a small house thereon, thereby claiming deduction on the total value of the land and the small property constructed thereon. If that had been the case, perhaps the assessee would have been eligible for proportionate deduction to the extent of residential house property as well as land appurtenant thereto.

The Tribunal observed that there is no finding by the A.O. that the assessee has purchased excessive land which would be used as a farmland and has for name’s sake constructed a residential house property. It held that ‘Merely because a property is called a farmhouse, it does not become a non-residential house property unless otherwise proved.’This ground of appeal filed by the Revenue was dismissed.

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The scope of the fifth proviso to section 32(1) cannot be extended to transactions of purchases between two unrelated parties

20 TUV Rheinland NIFE Academy Private Limited vs. ACIT [TS-1097-ITAT-2021(Bang)] A.Y.: 2016-17; Date of order: 1st November, 2021 Section: 32

The scope of the fifth proviso to section 32(1) cannot be extended to transactions of purchases between two unrelated parties

FACTS
The assessee, a private limited company, engaged in the business of providing vocational training to students in the fields of fire safety, lift technology, fibre optics, etc., is a subsidiary of TUV Rheinland (India) Pvt. Ltd. The A.O. noticed that the assessee had acquired a vocational training institute giving training to students from a person named Mr. M.V. Thomas who was running the said institution under the name and style of ‘Nife Academy’. It was observed that the holding company of the assessee had entered into a business transfer agreement (BTA) on 4th December, 2013 with Mr. M.V. Thomas for acquiring his academy for a lump sum amount of Rs. 28.50 crores plus some adjustment on slump sale basis. In pursuance of the said agreement, the assessee had paid an aggregate amount of Rs. 30.56 crores (Rs. 25.38 crores plus Rs. 5.18 crores). The purchase consideration paid over and above the value of tangible assets was treated as ‘goodwill’ and depreciation was claimed thereon. The A.O. held that the spirit of the fifth proviso to section 32(1) would suggest that the successor to an asset cannot get more depreciation than the depreciation which the predecessor would have got. He also noticed that the said Academy did not possess the asset of ‘goodwill’ and accordingly held that when an asset does not exist in the depreciation chart of the seller, then it cannot have a place in the depreciation chart of the buyer. Therefore, he disallowed the depreciation claimed on ‘goodwill’.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the view of the A.O. The assessee then preferred an appeal to the Tribunal.

HELD
The Tribunal observed that in view of the decision of the Delhi High Court in the case of Truine Energy Services Pvt. Ltd. vs. Deputy Commissioner of Income-tax (2016) 65 Taxmann.com 288, the payment made over and above the net asset value, while acquiring a business concern, shall constitute goodwill. Upon considering the language of the fifth proviso to section 32(1), the Tribunal held that a careful perusal of the above proviso would show that the same is applicable to the cases of ‘succession’, ‘amalgamation’ and ‘demerger’, i.e., transactions between related parties. In the instant case, Nife Academy has been acquired through a business transfer agreement by the holding company of the assessee from Mr. M.V. Thomas. It is not the case of the Revenue that this transaction is between two related parties. Hence this purchase would not fall under the categories of succession, amalgamation and demerger. The Tribunal held that it does not agree with the view of the lower authorities that the spirit of the proviso should be applied to the present case.The Tribunal set aside the order passed by the CIT(A) on this issue and restored the matter to the file of the A.O. to examine certain factual aspects.

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The ALV of the property, which could not be let out during the year, would be nil in accordance with the provisions of section 23(1)(c)

19 Purshotamdas Goenka vs. ACIT [TS-984-ITAT-2021 (Mum)] A.Y.: 2016-17; Date of order: 13th October, 2021 Section: 23

The ALV of the property, which could not be let out during the year, would be nil in accordance with the provisions of section 23(1)(c)

FACTS
The assessee owned four properties of which one was let out and three were vacant throughout the previous year relevant to the assessment year under consideration. The assessee offered for taxation the rental income in respect of the let-out property. As for the properties that were vacant, he claimed vacancy allowance u/s 23(1)(c). The A.O., while assessing his total income, made an addition of Rs. 1,09,624 on account of deemed rent for vacant properties after granting deduction for municipal taxes and statutory deductions u/s 24(a).Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O. The Assessee then
preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the three properties which were vacant during the year under consideration have been let out by the assessee in the subsequent assessment year and their rental income has been offered for taxation. It observed that the issue before it is whether the deemed rent of the assessee has to be taken as annual value (ALV) u/s 23(1)(a) for the purpose of assessment of income u/s 22, or whether the assessee is entitled to vacancy allowance as provided u/s 23(1)(c).It held that the ALV of the property which could not be let out during the year would be nil in accordance with the provisions of section 23(1)(c). The assessee was entitled to vacancy allowance in respect of the said properties. Since the properties have not been let out at all during the year, the ALV has to be taken as nil. It observed that the case is covered by the decision of the coordinate Bench in the case of M/s Metaoxide Pvt. Ltd. vs. ITO in ITA No. 5773/M/2016 A.Y. 2010-11.

The Tribunal set aside the order of the CIT(A) and deleted the addition of Rs. 1,09,624 in respect of the three vacant properties.

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Reopening of assessment – Precondition to be satisfied – Reasons recorded cannot be substituted

Peninsula Land Limited vs. Assistant Commissioner of Income Tax Central Circle-1(3), Mumbai & Ors. [Writ Petition No. 2827 of 2021; Date of order: 25th October, 2021 (Bombay High Court)]

Reopening of assessment – Precondition to be satisfied – Reasons recorded cannot be substituted

The petitioner challenged the notice u/s 148 dated 30th March, 2019 and the order dated 5th September, 2019 on the ground that the reasons recorded in support of the impugned notice do not indicate the manner in which the A.O. has come to the conclusion that income chargeable to tax has escaped assessment in the hands of the petitioner. It has also alleged that in the reasons for reopening, there is not even a whisper as to what was the tangible material in the hands of the A.O. which made him believe that income chargeable to tax has escaped assessment and in the notice issued four years after the assessment order, what was the material fact that was not fully and truly disclosed.

The Court observed that the law on this is well settled. To confer jurisdiction u/s 147(a), two conditions were required to be satisfied, firstly, the A.O. must have reasons to believe that income, profits or gains chargeable to income tax had escaped assessment, and secondly, he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions had to be satisfied before the A.O. could assume jurisdiction for issue of notice u/s 148 read with section 147(a). But under the substituted section 147 the existence of only the first condition suffices. In other words, if the A.O. has reason to believe that income has escaped assessment, it is enough to confer jurisdiction upon him to reopen the assessment.

Also, the reasons for reopening of assessment tested / examined have to be stated only on the basis of the reasons recorded at the time of issuing a notice u/s 148 seeking to reopen the assessment. These reasons cannot be improved upon and / or supplemented, much less substituted by affidavit and / or oral submissions. Moreover, the reasons for reopening an assessment should be that of the A.O. alone who is issuing the notice and he cannot act merely on the dictates of any another person in issuing the notice. Moreover, the tangible material upon the basis of which the A.O. comes to believe that income chargeable to tax has escaped assessment can come to him from any source; however, the reasons for the reopening have to be only of the A.O. issuing the notice.

It is also settled law that the A.O. has no power to review an assessment which has been concluded. If a period of four years has lapsed from the end of the relevant year, the A.O. has to mention what was the tangible material to come to the conclusion that there is an escapement of income from assessment and that there has been a failure to fully and truly disclose material facts. After a period of four years even if the A.O. has some tangible material to come to the conclusion that there is an escapement of income from assessment, he cannot exercise the power to reopen unless he discloses what was the material fact which was not truly and fully disclosed by the assessee.

In the reasons for issuance of notice in this case it is recorded that the return of income for the assessment year under consideration was filed on 28th September 2012, further revised return of income was filed on 28th March, 2014 and on 9th May 2015 the return of income was processed u/s 143(1) and the assessment order u/s 143(3) read with section 153A was passed by the A.O. on 30th December, 2016. The entire basis for issuance of the notice is that information was received from the Deputy Director of Income Tax, Mumbai that a search and survey action u/s 132 was carried out in the case M/s Evergreen Enterprises and based on the statement recorded of the partner of M/s Evergreen Enterprises and documentary evidences found in the search of its premises, it unearthed an undisclosed activity of money-lending and borrowing in unaccounted cash being operated at the premises of M/s Evergreen Enterprises. It is also recorded in the reasons that based on the statements recorded of the partners of M/s Evergreen Enterprises and its employees, it came to light that one of the individuals / business concerns has lent cash of Rs. 30,00,000. It is alleged that the petitioner has lent cash loan of Rs. 30,00,000 in F.Y. 2011-12 and therefore the petitioner has been indulging in lending of cash loan and hence the amount of Rs. 30,00,000 has escaped assessment within the meaning of section 147.

The Court observed that there is absolutely no mention as to how either the partners of M/s Evergreen Enterprises or its employees or one Mr. Bharat Sanghavi are connected to the petitioner. The affidavit in reply of the respondent stated that Bharat Sanghavi was an employee of the petitioner and, therefore, the reasons have been correctly recorded and the A.O. has reason to believe that income had escaped assessment.

As noted earlier, the reasons for reopening of assessment have to be tested / examined only on the basis of the reasons recorded and those reasons cannot be improved upon and / or much less substituted by an affidavit and / or oral submission. In the reasons for the reopening, the A.O. does not state anywhere that Bharat Sanghavi was an employee of the petitioner. Further, in the reasons for reopening, the A.O. does not even disclose when the search and survey action u/s 132 was carried out in the case of M/s Evergreen Enterprises, whether it was before the assessment order dated 30th December, 2016 in the case of the petitioner was passed or afterwards. The reasons for reopening are absolutely silent as to how the search and survey action on M/s Evergreen Enterprises or the statement referred to or relied upon in the reasons have any connection with the petitioner.

In the circumstances, the Court held that the impugned notice dated 30th March, 2019 and the impugned order dated 5th September, 2019 had been issued without jurisdiction and hence were quashed and set aside.

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Reopening notice u/s 148 – Notice issued to non-existing entity – Notice could not be corrected u/s 292B

5 Implenia Services and Solutions Pvt. Ltd. vs. Deputy / Asst. Commissioner of Income Tax [Writ Petition (L) No. 14088 of 2021; Date of order: 25th October, 2021 (Bombay High Court)]

Reopening notice u/s 148 – Notice issued to non-existing entity – Notice could not be corrected u/s 292B

The impugned notice dated 27th March, 2021 has been issued to a non-existing entity. In the affidavit in reply, it is admitted that the notice has been issued to a non-existing entity but the respondents state that it ought to be treated as a mistake and the name in the notice could be corrected u/s 292B.

The respondents relied upon a judgment of the Delhi High Court in the case of Skylight Hospitality LLP vs. Assistant Commissioner of Income Tax, Circle-28(1), New Delhi (2018) 405 ITR 296 (Delhi) which has been subsequently affirmed on 6th April, 2018 by a two-Judge Bench of the Supreme Court.

The Court observed that this cannot be a general proposition as the Apex Court has expressly stated in Skylight Hospitality LLP (Supra) that ‘in the peculiar facts of this case, we are convinced that the wrong name given in the notice was merely a clerical error which could be corrected under section 292B of the IT Act (emphasis supplied)’.

The Apex Court in its recent judgment on this subject in Principal Commissioner of Income Tax vs. Maruti Suzuki India Ltd. (2019) 416 ITR 613 (SC) has considered the judgment of Skylight Hospitality and said that it has expressly mentioned that in the peculiar facts of that case the wrong name given in the notice was merely a clerical error. In Maruti Suzuki India Ltd. (Supra) the Court has also observed that what weighed in the dismissal of the Special Leave Petition was the peculiar facts of that case. It has reiterated the settled position that the basis on which jurisdiction is invoked is u/s 148 and when such jurisdiction was invoked on the basis of something which was fundamentally at odds with the legal principle that the amalgamating entity ceases to exist upon the approved scheme of amalgamation, the notice is bad in law.

The High Court noted that the Apex Court in Maruti Suzuki India Ltd. (Supra) had observed that the basis on which jurisdiction was invoked was fundamentally at odds with the legal principle that the amalgamating entity ceases to exist upon the approved Scheme of amalgamation. Participation in the proceedings by the appellant in the circumstances cannot operate as an estoppel against law. The stand now taken in the affidavit in reply is nothing but an afterthought by the respondent after having committed a fundamental error. Therefore, the stand of the respondent that it was an error which could be corrected u/s 292B was not acceptable to this Court.

The Court followed the decision in the case of Alok Knit Exports Ltd. vs. Deputy Commissioner of Income Tax in its order dated 10th August, 2021 in WP No. 2742 of 2019.

In the circumstances, notice dated 27th March, 2021 issued u/s 148 was quashed and set aside.

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Search and seizure – Assessment of third person – Income-tax survey – Assessment based on documents seized during survey at assessee’s premises – No incriminating material found against assessee during search of third parties – Absence of satisfactory note by A.O. that any seized document belonged to assessee – Search warrant not issued against assessee – Assessment and consequent demand notice were unsustainable

24 Sri Sai Cashews vs. CCIT [2021] 438 ITR 407 (Ori) A.Y.: 2016-17; Date of order: 23rd August, 2021 Ss. 132, 133A, 153C and 156 of ITA, 1961

Search and seizure – Assessment of third person – Income-tax survey – Assessment based on documents seized during survey at assessee’s premises – No incriminating material found against assessee during search of third parties – Absence of satisfactory note by A.O. that any seized document belonged to assessee – Search warrant not issued against assessee – Assessment and consequent demand notice were unsustainable

The assessee processed cashewnuts into cashew kernel. A survey operation was conducted u/s 133A against it. The A.O. invoked the jurisdiction u/s 153C for making a block assessment for the A.Ys. 2010-11 to 2016-17 as a result of searches which were conducted in the premises of two persons JR and JS u/s 132. He passed an order u/s 143(3) read with section 153C for the A.Y. 2016-17 and issued a notice of demand u/s 156.

The assessee filed a writ petition and challenged the order. The Orissa High Court allowed the writ petition and held as under:

‘i) In the absence of incriminating materials against the assessee having been found in the course of the search of the searched persons JR and JS, the order passed u/s 143(3) read with section 153C and the consequential demand notice issued u/s 156 were unsustainable and, therefore, set aside.

ii) The documents relied upon by the A.O. were found in the course of survey of the assessee u/s 133A and not during the search of the parties against whom the search authorisation was issued u/s 132 and search was conducted. The Department had not been able to dispute any of the factual averments. No incriminating materials concerning the assessee were found in the premises of the two persons against whom search was conducted and the absence of satisfaction note of the A.O. of the persons against whom search was conducted about any such incriminating material against the assessee, were not denied. The order only related to disallowance of expenditure u/s 140A(3) that was payable to the cultivators, expenses towards hamali, i.e., labour charges, unexplained money u/s 69A, negative cash and unaccounted stock which was not on account of the discovery of any incriminating materials found in the course of the search concerning the assessee and there was no search warrant u/s 132 against the assessee.’

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Search and seizure – Assessment in search cases – Validity – Assessment completed on date of search – No incriminating material found during search – Invocation of section 153A not valid – Assessment order and consequent demand notice set aside

23 Smt. Jami Nirmala vs. Principal CIT [2021] 437 ITR 573 (Ori) A.Y.: 2015-16; Date of order:10th August, 2021 Ss. 132, 153A and 156 of ITA, 1961

Search and seizure – Assessment in search cases – Validity – Assessment completed on date of search – No incriminating material found during search – Invocation of section 153A not valid – Assessment order and consequent demand notice set aside

A search and seizure operation was conducted u/s 132 at the assessee’s residential premises and on a locker jointly held with another person. According to the panchanama prepared for the search and seizure, nothing was found or seized. A notice was issued to the assessee u/s 153A. The assessee requested the A.O. to treat the original return of income as the return filed in response to such notice. Thereafter, notices u/s 143(2) and 142(1) were issued. Although nothing was found during the course of the search, the order passed u/s 143(3) read with section 153A referred to the cash book found during the survey conducted two weeks prior to the date of search, and stated that during the course of the search operation it was found that the assessee company had made expenditure during the year which was paid in the mode of cash of beyond the prescribed limit of Rs. 20,000 or above in a single day to a single party. The A.O. also disallowed the payments made to the cultivators and hamalis and accordingly raised a demand u/s 156 along with interest.

The Orissa High Court allowed the writ petition filed by the assessee challenging the order and held as under:

‘i) The assessment u/s 153A pursuant to a search u/s 132 has to be on the basis of incriminating material gathered or unearthed during the course of the search.

ii) The order passed u/s 143(3) read with section 153A was without jurisdiction. The order did not refer to any document unearthed during the course of the search conducted u/s 132. Therefore, the assumption of jurisdiction u/s 153A for assessment of the A.Y. 2015-16 was without legal basis. The panchanama of the search proceedings unambiguously showed that nothing incriminating was recovered in the course of the search. The assessment order and the consequential demand notice u/s 156 are set aside.’

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Interest on excess refund – Law applicable – Effect of amendment of section 234D by F.A. 2012 – Section 234D applies to regular assessment – Meaning of regular assessment – Regular assessment refers to first order of assessment u/s 143, u/s 147 or u/s 153A – Order of assessment u/s 143(3) on 31st March, 2006 and order of reassessment passed on 26th December, 2008 – Section 234D not applicable – Interest could not be levied u/s 234D

22 CIT vs. United India Insurance Co. Ltd. [2021] 438 ITR 301 (Mad) A.Y.: 2001-02; Date of order: 24th August, 2021 S. 234D of ITA, 1961

Interest on excess refund – Law applicable – Effect of amendment of section 234D by F.A. 2012 – Section 234D applies to regular assessment – Meaning of regular assessment – Regular assessment refers to first order of assessment u/s 143, u/s 147 or u/s 153A – Order of assessment u/s 143(3) on 31st March, 2006 and order of reassessment passed on 26th December, 2008 – Section 234D not applicable – Interest could not be levied u/s 234D

The appellant Revenue had raised the following three substantial questions of law for consideration:

‘1. Whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal was right in deleting the interest levied u/s 234D?

2. Whether on the facts and in the circumstances of the case, no interest can be charged even for the period subsequent to the introduction of section 234D merely on the ground that the said section was introduced by the Finance Act, 2003 with effect from 1st June, 2003?

3. Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that interest levied u/s 234D cannot be charged for the A.Y. 2001-02, especially when the assessment order was made after introduction of the said section?’

The Madras High Court held as under:

‘i) Section 234D deals with “interest on excess refund”. Explanation 1 to section 234D states that where, in relation to an assessment year, an assessment is made for the first time u/s 147 or section 153A, the assessment so made shall be regarded as a regular assessment for the purposes of section 234D of the Act. Explanation (2) was inserted for the removal of doubts and declared that the provisions of section 234D shall also apply to an assessment year commencing before 1st June, 2003 if the proceedings in respect of such assessment year are completed after that date. Explanations (1) and (2) were inserted by the Finance Act, 2012 with retrospective effect from 1st June, 2003.

ii) “Regular assessment” has been defined u/s 2(40) to mean the assessment made under sub-section (3) of section 143 or section 144. Explanation (1) would stand attracted if an assessment is made for the first time u/s 147 or section 153A and the assessment, if it is done for the first time, shall be regarded as a “regular assessment” u/s 2(40).

iii) Admittedly, the assessment order dated 26th December, 2008 u/s 143(3) read with section 147 was not the first assessment, as an assessment was made u/s 143(3) dated 31st March, 2004 which fact was not disputed. Since the assessment framed u/s 143(3) read with section 147 dated 26th December, 2008, was not the assessment made for the first time, it could not be regarded as a “regular assessment” for the purposes of section 234D and, therefore, no interest could be levied on the assessee.’

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Income Declaration Scheme – Failure to pay full amount of tax according to declaration – Declaration would be rendered void and non est – Part of tax already paid under scheme cannot be forfeited by Revenue authorities – Such amount must be returned to assessee

21 Pinnacle Vastunirman Pvt. Ltd. vs. UOI [2021] 438 ITR 27 (Bom) A.Y.: 2016-17; Date of order: 11th August, 2021 Income Declaration Scheme, 2016 – Effect of S. 181 of Finance Act, 2016

Income Declaration Scheme – Failure to pay full amount of tax according to declaration – Declaration would be rendered void and non est – Part of tax already paid under scheme cannot be forfeited by Revenue authorities – Such amount must be returned to assessee

The assessee had made a declaration under the Income Declaration Scheme, 2016 concerning the A.Y. 2016-17. However, it could not make full payment of tax according to the declaration. Therefore, the declaration had become void and non est. The petitioner therefore applied for refund of the taxes so paid under the declaration or to give adjustment or credit of the amount so paid. The application was rejected.

The petitioner filed a writ petition and challenged the order of rejection. The Bombay High Court allowed the writ petition and held as under:

‘i) Article 265 of the Constitution of India provides that no tax shall be levied or collected except by authority of law. This would mean there must be a law, the law must authorise the tax and the tax must be levied and collected according to the law. Sub-section (3) of section 187 of the Finance Act, 2016 which deals with the Income Declaration Scheme, 2016 categorically provides that if the declarant fails to pay the tax, surcharge and penalty in respect of the declaration made u/s 183 on or before the dates specified in sub-section (1), the declaration filed by him shall be deemed never to have been made under the Scheme. This would mean that the declaration will be non est. When the scheme itself contemplates that a declaration without payment of tax is void and non est and the declaration filed by the assessee would not be acted upon [because section 187(3) says the declaration filed shall be deemed never to have been made under the Scheme], the question of retention of the tax paid under such declaration will not arise. The provisions of section 191 cannot have any application to a situation where the tax is paid but the entire amount of tax is not paid. The Scheme does not provide for the Revenue to retain the tax paid in respect of a declaration which is void and non est.

ii) The assessee was entitled to an adjustment by giving credit for the amount of Rs. 82,33,874 paid under the Income Declaration Scheme.’

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Capital gains – Long-term or short-term capital asset – Period of holding – No distinction between unlisted and listed shares for classifying as short-term capital asset

20 CIT vs. Exim Rajathi India Pvt. Ltd. [2021] 438 ITR 19 (Mad) A.Y.: 2007-08; Date of order: 7th September, 2021 S. 2(42A) proviso of ITA, 1961

Capital gains – Long-term or short-term capital asset – Period of holding – No distinction between unlisted and listed shares for classifying as short-term capital asset

For the A.Y. 2007-08, the Commissioner invoking his power u/s 263 held that the order passed by the A.O. u/s 143(3) was erroneous and prejudicial to the interests of the Revenue on the ground that the shares held by the assessee in a company, which was not a listed company when sold, should be treated as ‘short-term capital asset’ as defined u/s 2(42A) and not as ‘long-term capital asset’. Accordingly, the A.O. computed the short-term capital gains.

The Commissioner (Appeals) directed the A.O. to treat the shares as long-term capital asset, allow indexation and tax the resultant capital gains at the special rate of 20%. The Tribunal concluded that there was no distinction between unlisted and listed shares for classifying them as short-term capital asset under the Act and affirmed the decision of the Commissioner (Appeals).

On appeal by the Revenue, the Madras High Court upheld the decision of the Tribunal and held as under:

‘i) In terms of the definition u/s 2(42A), short-term capital asset would mean a capital asset held by an assessee for not more than 36 months immediately preceding the transfer. The provision does not make a distinction between shares in a public company, a private company, a listed company or an unlisted company. The use of the word “or” in between each of the categories is very important and such distinction needs to be borne in mind. Although “securities” as defined u/s 2(h) of the Securities Contracts (Regulation) Act, 1956 includes shares, scrips, stocks, bonds, etc., that by itself cannot have an impact to give a different interpretation to the distinction of “short-term capital asset” as defined in section 2(42A).

ii) According to the Explanatory Notes to the provisions of the Finance (No. 2) Act, 2014, in Circular No. 1 of 2015 dated 21st January, 2015 [(2015) 371 ITR (St.) 22] issued by the Central Board of Direct Taxes, all shares whether listed or unlisted enjoy the benefit of shorter period of holding, and investment in shares of private limited companies enjoy long-term capital gains on transfer after 12 months.

iii) The Tribunal was right in holding that the shares and debentures not listed could be treated as a long-term capital asset u/s 2(42A) of the Act read with its proviso.’

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Assessment – Duty of A.O. to consider normal and special provisions relating to assessee – Company – Computation of book profits – A.O. must take into account provisions of section 115JB

19 CIT vs. Kerala Chemicals and Proteins Ltd. [2021] 438 ITR 333 (Ker) A.Y.: 2002-03; Date of order: 19th July, 2021 S. 115JB of ITA, 1961

Assessment – Duty of A.O. to consider normal and special provisions relating to assessee – Company – Computation of book profits – A.O. must take into account provisions of section 115JB

The assessee is engaged in the business of manufacturing and trading of ossein, compound glue, gelatine, etc. On 31st October, 2002, it filed the Income-tax return for the A.Y. 2002-03 declaring a total loss of Rs. 3,59,10,946. The A.O., through an assessment order dated 3rd March, 2005 made u/s 143(3), computed the total income of the assessee at Rs. 2,99,81,060.

The Commissioner (Appeals) partly allowed the appeal. The Tribunal allowed the assessee’s appeal.

In the appeal by the Revenue, the following questions were raised:

‘1. Whether on the facts and in the circumstances of the case and also in the light of section 80AB, the Tribunal is right in holding that while computing the book profit u/s 115JB the deduction u/s 80HHC is to be computed as per minimum alternate tax provisions and not as per the normal provisions of the Income-tax Act, 1961?

2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law and fact,
(i) in presuming that the A.O. has considered clause (c) of Explanation to section 115JA in the A.Ys. 1997-98 and 1998-99;
(ii) in holding that merely because proper working is not available on record, it cannot be said that the A.O., has not considered the same; and are not the approach and the conclusion based on presumptions and suppositions perverse, arbitrary and illegal?

3. (a) Whether on the facts and in the circumstances of the case, the Tribunal is justified in directing the A.O. to reduce the net profit by the sum of Rs. 3,29,27,056 in place of Rs. 1,42,02,335 as has been done by the A.O.?
(b) Whether on the facts and in the circumstances of the case, the Tribunal is right in law in directing the A.O. to allow an amount of Rs. 1,87,24,721 being the provision for excise duty written back on the “presumption” that even though the provisions of minimum alternate tax were not considered as the assessments were completed applying the normal provisions of the Act; and the A.O. has considered clause (c) of Explanation to section 115JA in the A.Ys. 1997-98 and 1998-99?’

The Kerala High Court upheld the decision of the Tribunal and held as under:

“i) Once the return is filed by the assessee, it is the responsibility of the A.O. to compute the income of the assessee under normal provisions and special provisions. The income tax is collected on the income whichever is higher in these two methods, i. e., either normal provision or special provision.

ii) In the A.Ys. 1997-98, 1998-99 and 1999-2000, provision for disputed excise duty was made by the assessee. The assessment orders for the first two years were made referring to the normal provisions of the Act and the necessity to refer to the special provisions was not noticed by the A.O. The Tribunal, taking note of the fact that the assessee was subject to the slab rate of 30% for the A.Ys. 1997-98 and 1998-99, computed the tax under normal provisions.

iii) The Tribunal had rightly found that the fact that the proper working was not reflected in the respective assessment orders or the record could not lead to the conclusion that the A.O. had not considered the applicability of the special provision as well and that the omission on the part of the A.O. in referring to the special provisions ought not to deny the writing-back provision available under the second proviso to sub-section (2) of section 115JB. The denial of the benefit of writing back the provision to the assessee in these assessment years was illegal and the finding recorded by the Tribunal was valid and correct in the circumstances of this case.’

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