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Category: Direct Taxes

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.’

 

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.’

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.

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.’

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.’

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.’

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).’

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.’

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.’

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.’

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.’

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.’

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.

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.

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.

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.

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.

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.

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.

 

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.

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.

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.

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.

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.

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!

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.

[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.

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)

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

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.

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.

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.

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.’

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.’

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.’

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.’

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.’

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.’

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.’

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.

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.’

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.’

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.

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.

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).

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.

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.

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.

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.

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.’

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.’

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.’

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.’

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.

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.

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.

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.

 

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.

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.’

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.’

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.’

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.’

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.’

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.’

Assessment – International transactions – Section 144C mandatory – Assessment order passed without following procedure laid down in section 144C – Not a procedural irregularity – Section 292B not applicable – Order not valid

18 SHL (India) Pvt. Ltd. vs. Dy. CIT [2021] 438 ITR 317 (Bom) A.Y.: 2017-18; Date of order: 28th July, 2021 Ss. 144C and 292B of ITA, 1961

Assessment – International transactions – Section 144C mandatory – Assessment order passed without following procedure laid down in section 144C – Not a procedural irregularity – Section 292B not applicable – Order not valid

The petitioner is an Indian company incorporated under the Companies Act, 1956. It is a part of the SHL Group, United Kingdom, and primarily a trading entity that provides SHL products (psychometric test), assessment, consultancy and training services (‘SHL Solutions’) to clients in India in various industries. The petitioner had filed the return of income on 30th March, 2018 declaring a total income of Rs. 1,01,31,750. Its case is that during the A.Y. 2017-18 it had entered into an international transaction with its associated enterprise (the ‘AE’) whereby it was granted a licence to market, distribute and deliver the SHL Solutions to clients in India from its associated enterprise, for which the petitioner made payments towards support services charges incurred by the associated enterprise. It submitted that along with the return of income filed for the said year, in view of the various international transactions with the associated enterprise, Form 3CEB was filed along with the return of income.

The petitioner’s case was selected under the computer-aided scrutiny selection (CASS) pursuant to which, on 5th September, 2018 a notice was issued u/s 143(2). Thereafter, on 6th August, 2019, a reference was made to the Transfer Pricing Officer (TPO) by the first respondent. A notice was issued on 16th August, 2019 by the TPO and an order dated 29th January, 2021 was passed by the TPO proposing transfer pricing adjustments of Rs. 10,74,54,337 considered as Nil by the petitioner. On 10th March, 2021, the second respondent, viz., National e-Assessment Centre, Delhi requested the petitioner to provide rebuttal to the proposed adjustments to the arm’s length price made by the TPO. On 15th March, 2021, the petitioner filed a reply and on 6th April, 2021, a final assessment order was passed u/s 143(3) read with sections 143(3A) and 143(3B), determining the total income at Rs. 11,75,86,087. A notice of demand for Rs. 1,17,60,810 was also issued. A notice initiating penalty proceedings also came to be issued u/s 274 read with section 270A.

The assessee filed a writ petition and challenged the order and the notices. The Bombay High Court allowed the writ petition and held as under:

‘i) Section 144C(1) is a non obstante provision, which requires its compliance irrespective of the other provisions that may be contained in the Act. The requirement u/s 144C(1) to first pass a draft assessment order and to provide a copy thereof to the assessee is a mandatory requirement which gives a substantive right to the assessee to object to any variation that is prejudicial to it. The procedure prescribed u/s 144C is a mandatory procedure and not directory. Failure to follow the procedure would be a jurisdictional error and not merely a procedural error or irregularity but a breach of a mandatory provision. Therefore, section 292B cannot save an order passed in breach of the provisions of section 144C(1), the same being an incurable illegality.

ii) The assessee was an eligible assessee and there was no dispute as to the applicability of section 144C. It was also not in dispute that the final assessment order had been passed without the draft assessment order as contemplated u/s 144C(1). The order was not valid.’

Assessment – Draft assessment order – Objections – Powers of DRP – DRP must consider merits of objections – Objections cannot be rejected for mere non-appearance of party at time of hearing

17 Sesa Sterlite Ltd. vs. DRP [2021] 438 ITR 42 (Mad) A.Y.: 2011-12; Date of order: 29th July, 2021 S. 144C of ITA, 1961

Assessment – Draft assessment order – Objections – Powers of DRP – DRP must consider merits of objections – Objections cannot be rejected for mere non-appearance of party at time of hearing

The issue raised in this writ petition is whether the Dispute Resolution Panel (DRP) is competent to reject the objections on account of non-appearance of the assessee on the hearing date. The Madras High Court allowed the writ petition and held as under:

‘i) Under section 144C, on receipt of the draft order the assessee gets a right to file his objections, if any, to such variations with the DRP and the A.O. The DRP consists of three Commissioners of the Income-tax Department. They undoubtedly have certain expertise in the tax regime. Thus, adjudication before the DRP is a valuable opportunity provided both to the assessee as well as to the A.O. Either of the parties may get guidance for the purpose of completion of the assessment proceedings. Thus, the importance attached to the DRP under the Act can in no circumstances be undermined.

ii) When the Act contemplates a right to the assessee, such right must be allowed to be exercised in the manner prescribed under it. The manner in which objections are to be considered by the DRP are well defined both under the Act as well as under the Income-tax (Dispute Resolution Panel) Rules, 2009. Sub-section (6) of section 144C unambiguously states that the DRP is bound to consider the materials denoted as the case may be and issue suitable directions as it thinks fit. Therefore, the DRP has no option but to deal with objections, if any, filed by an eligible assessee on merits and, in the event of non-consideration, it is to be construed that the right conferred to an assessee has not been complied with.

iii) The language employed is “shall” both under sub-sections (5) and (6) of section 144C. Therefore, the DRP has no option but to strictly follow sub-sections (5) and (6) of section 144C which are mandatory provisions as far as the DRP is concerned; sub-sections (7) and (8) of section 144C are discretionary powers. Sub-section (11) is to be linked with sub-section (2)(b)(i) and (ii) of section 144C because an opportunity is bound to be given to the assessee as well as to the A.O. Sub-section (11) is also significant with reference to the opportunities to be granted to the parties before the DRP. The DRP is a quasi-judicial authority. This being the case, the DRP is bound to pass orders as it thinks fit only on the merits and such quasi-judicial authorities are not empowered to reject the objections merely by stating that the assessee had not appeared before the DRP. The DRP is legally bound to adjudicate the objections and pass orders on the merits, even in case of the assessee or the A.O. failing to appear for personal hearing.

iv) An order passed rejecting the objections submitted by the assessee, merely on the ground that the assessee has not appeared on the hearing date, is infirm and liable to be quashed.’

An assessee who has voluntarily surrendered the registration granted to it u/s 12A cannot be compelled, by action of or by inaction of Revenue authorities, to continue with the said registration

18 Navajbai Ratan Tata Trust vs. Pr.CIT [(2021) 88 ITR(T) 170 (Mum-Trib)] ITA No.: 7238 (Mum) of 2019 A.Y.: Nil; Date of order: 24th March, 2021

An assessee who has voluntarily surrendered the registration granted to it u/s 12A cannot be compelled, by action of or by inaction of Revenue authorities, to continue with the said registration

FACTS
The assessee, a charitable trust, was granted registration u/s 12A. The trust vide letter dated 11th March, 2015 addressed to the CIT indicated that it did not desire to continue to avail the benefits of the registration made by the trustees in 1975. The trust was called for a hearing on 20th March, 2015 on which date the trust confirmed its agreement to the cancellation / withdrawal of the registration. Returns of income filed subsequent thereto were filed without claiming exemption under sections 11 and 12.

The CIT cancelled the registration of the assessee trust, as granted u/s 12A, with effect from the date of his order, i.e., 31st October, 2019.

The assessee filed an appeal with the ITAT.

HELD
The ITAT tried to ascertain the objective behind the Income-tax Department’s keenness to extend registration u/s 12A for the extended period from March, 2015 to October, 2019, when the assessee did not want it.

It then considered the relevant legislative amendments to ascertain the objective. First, it considered the amendment in section 11. By insertion of sub-section (7) in section 11 with effect from 1st April, 2015, tax exemption u/s 10(34) for ‘dividends from Indian companies’, on which dividend distribution tax was already paid by the company distributing dividends which was available to every other taxpayer, was denied to charitable trusts registered u/s 12A.

It also observed that the continuance of registration u/s 12A, even when the assessee does not want exemption u/s 11, may result in higher tax liability for a trust which has earned dividends from domestic companies otherwise eligible for exemption u/s 10(34), as in the given case. However, the ITAT also took into consideration the rationale behind the said amendment which was to ensure that the assessee does not have the benefit of choice between special provisions and general provisions. The ITAT also noted the Circular No. 1/2015 dated 21st January, 2015 explaining the above amendment. As against this, the ITAT observed the way this provision was interpreted by the tax authorities. The Revenue authorities opined that once an assessee is a registered charitable institution, irrespective of admissibility or even claim for exemption u/s 11, the exemption u/s 10(34) was inadmissible. This put the assessee at a disadvantage since the scheme of sections 11 to 13 which were intended to be an optional benefit to the charitable institutions, in the present case, became a source of an additional tax burden for the trusts in question because of the interpretation given by the Revenue.

The ITAT also noted that introduction of section 115TD would also have a bearing on the tax liability of the trust which would depend on the date of cancellation of registration.

From the above-mentioned Circular the ITAT inferred that the assessee has an inherent right to withdraw from the special dispensation of the scheme of sections 11, 12 and 13, unless such a withdrawal is found to be mala fide. It also observed that the disadvantageous tax implications on the assessee [non-application of section 10(34) and section 115TD] are only as a result of a much later legislative amendment which was not in effect even when the assessee informed the CIT of his disinclination to continue with the registration; an assessee unwilling to avail the ‘benefit’ of registration ‘obtained’ u/s 12A could not be compelled, by action of or by inaction of the Revenue authorities, to continue with the said registration.

The ITAT observed that registration u/s 12A was obtained by the assessee in 1976 and registration u/s 12A simply being a foundational requirement for exemption u/s 11 and not putting the assessee under any obligations, is in the nature of a benefit to the assessee. Referring to the decision of the Supreme Court in the case of CIT vs. Mahendra Mills (2000) 109 taxmann 225 / 243 ITR 56, it held that ‘a privilege cannot be a disadvantage and an option cannot become an obligation’. Thus, in the instant case, registration u/s 12A cannot be thrust upon the unwilling assessee.

It also held that wherever a public authority has a power, that public authority also has a corresponding duty to exercise that power when circumstances so warrant or justify it. Accordingly, in the instant case when the assessee communicated to the CIT of inapplicability of exemptions under sections 11 to 13, the CIT was duty-bound to pass an order in writing withdrawing the registration. In the instant case, not only was the procedure of cancellation of registration kept pending but also the proceedings conducted earlier were ignored and fresh proceedings were started after a long gap, on a standalone basis de hors the pending proceedings. This is more so considering the fact that delay in cancellation of registration has tax implications to the disadvantage of the assessee.

The ITAT thus concluded by holding that the CIT was under a duty to hold that the cancellation of registration is to take effect from the date on which the violation of the statutory requirements for grant of exemption occurred, the date on which such a violation or breach was noticed, or at least the date on which hearing in this regard was concluded. That is, the cancellation of registration was required to be effective, at the most, from 20th March, 2015, i.e., the date fixed for hearing. The inordinate delay in cancellation of registration, which is wholly attributed to the Revenue authorities, cannot be placed to the disadvantage of the assessee. Finally, it was held that the cancellation was effective from 20th March, 2015 and the appeal of the assessee was allowed.

Re-opening of assessee’s case merely on basis of information from Director (Investigation) pertaining to receipt of huge amount of share premium by assessee and the opinion that the amount of share premium was not justifiable considering its lesser income during the year was unjustified

17 Future Tech IT Systems (P) Ltd. vs. ITO [(2021) 89 ITR(T) 676 (Chd-Trib)] ITA Nos. 543, 548 and 549 (Chd) of 2019 A.Y.: 2010-11; Date of order: 22nd April, 2021

Re-opening of assessee’s case merely on basis of information from Director (Investigation) pertaining to receipt of huge amount of share premium by assessee and the opinion that the amount of share premium was not justifiable considering its lesser income during the year was unjustified

FACTS
The assessee-company filed its return of income on 20th September, 2010 declaring an income of Rs. 2,55,860 which was accepted and an assessment order was passed.

Subsequently, the A.O. received information from the Director (Intelligence & Criminal Investigation) that the assessee had received share premium of a huge amount during the year. Notice u/s 148 was issued. The assessee’s objections to the same were disposed of by the A.O. and assessment order was passed after making additions of Rs. 1,17,00,000 in respect of share premium by invoking provisions of section 68. On appeal before the CIT(A), the assessee argued that the A.O. did not mount a valid base for the reasons to come to a rational belief that the income of the appellant has escaped assessment and that there was lack of material to prove that the transaction of receipt of share application money was not genuine. The A.O. acted only on the borrowed satisfaction.

The CIT(A) observed that the A.O. noticed that the book value of the share of the company was Rs. 10 and the company had nothing in its balance sheet to attract such huge share premium. He also observed that the A.O. initiated the proceedings on the basis of specific information, so it could not be said that his action was on the basis of certain surmises and conjectures only and it could also not be said that the material in his possession could just give him reason to suspect and not reason to believe that the income had escaped assessment. Another observation made by him was that the A.O. applied his mind to the information by verifying from the assessment record that the assessee had very low income as against which it received huge share premium and hence his action is valid.

Aggrieved, the assessee preferred an appeal before the ITAT.

HELD
The assessee argued before the ITAT that the A.O. while issuing the notice u/s 148 doubted the share premium only and accepted the share capital received by the assessee, therefore, the initiation of the proceedings u/s 147 were based on suspicion. It was also submitted that the investor company explained the source and the assessee furnished relevant documents to the A.O. The documents furnished by the assessee proved the source of credit for share application money. Thus, according to the assessee, it had proved the identity, genuineness and the credit-worthiness of the shareholders.

The ITAT observed that an identical issue was decided by the ITAT in ITA No. 1616/Chd/2018 for the A.Y. 2010-11 vide order dated 15th June, 2020 in the case of Indo Global Techno Trade Ltd. vs. ITO. Relevant findings of the said case that were considered by the ITAT in the instant case were that mere information (without recording of any details) of the assesse receiving a high premium could not be said to be a reason to form the belief that the income of the assessee had escaped assessment. There is no dispute to the well-settled proposition that reason to believe must have a material bearing on the question of escapement of income. It does not mean a purely subjective satisfaction of the assessing authority, such reason should be held in good faith and cannot merely be a pretence. There could be no doubt that the words ‘reason to believe’ suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income-tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour.

The other decision relied on by the assessee and considered by the ITAT was of the Chandigarh Bench of the Tribunal in the case of D.D. Agro Industries Ltd. vs. ACIT ITA Nos. 349 & 350/Chd/2017 order dated 7th September, 2017, wherein, on identical facts and circumstances, the A.O. recorded identical reasons to form belief for re-opening of the assessment. The Tribunal held that the A.O. assumed jurisdiction relying upon the non-specific routine information blindly without caring to first independently consider the specific facts and circumstances of the case and that the assumption of jurisdiction by the A.O. under the circumstances was wrong.

Thus, the ITAT followed the decision in Indo Global Techno Trade Ltd. vs. ITO (Supra).

The ITAT also considered the following other rulings on the issue:

• Rajshikha Enterprises (P) Ltd. vs. ITO for A.Y. 2005-06 vide order dated 23rd February, 2018 (Del ITAT);
• Pr.CIT vs. G&G Pharma India Ltd. (2016) 384 ITR 147 (Del HC);
• Pr.CIT vs. Meenakshi Overseas (P) Ltd. (2017) 395 ITR 677 (Del HC);
• Pr.CIT vs. Laxman Industrial Resources Ltd. (2017) 397 ITR 106 (Del HC); and
• Signature Hotels (P) Ltd. vs. ITO (2011) 338 ITR 51 (Del HC).

The ITAT applied the rationale of the above decisions to the facts of the instant case to conclude that the re-opening initiated by the A.O. was invalid. Thus, the ITAT allowed the appeal of the assessee.

When the A.O. is not empowered to do certain acts directly, the revisionary authority certainly cannot direct him to do so indirectly by exercising power u/s 263. Accordingly, limited scrutiny assessment cannot be revised u/s 263 beyond the scope of scrutiny

16 Antariksh Realtors Private Limited vs. ITO [TS-1029-ITAT-2021 (Mum)] A.Y.: 2015-16; Date of order: 22nd October, 2021 Section: 263

When the A.O. is not empowered to do certain acts directly, the revisionary authority certainly cannot direct him to do so indirectly by exercising power u/s 263. Accordingly, limited scrutiny assessment cannot be revised u/s 263 beyond the scope of scrutiny

FACTS
The assessee, a company engaged in business as a builder and developer, filed its return of income declaring a loss of Rs. 14,34,236. The case was selected under ‘limited scrutiny’ for examination of two issues, viz., (i) Low income in comparison to high loan / advances / investments in shares appearing in balance sheet; and (ii) Minimum Alternate Tax (MAT) liability mismatch. The A.O. upon examining these two issues completed the assessment.

Subsequently, after reviewing the assessment order, the Additional Commissioner of Income-tax in charge of the range found that the increase in loan taken by the assessee from Rs. 8.57 crores in the preceding year to Rs. 10.42 crores in the current year was not verified by the A.O. He observed that the A.O. also did not verify the assessee’s claim that all loans and advances given are for the purpose of business, by calling for details of transactions in subsequent years along with supporting documents. He also observed that the A.O. did not verify the capitalisation of interest paid. In view of these facts, the Additional Commissioner submitted a proposal to the PCIT for exercising the powers u/s 263 to revise the assessment order.

The PCIT issued a show cause notice u/s 263. The assessee submitted that the A.O. had thoroughly inquired into the issues for which the case was selected for scrutiny. However, the PCIT was not convinced. He held that the assessment order was erroneous and prejudicial to the interest of the Revenue due to non-inquiry by the A.O. He set aside the assessment order with a direction to examine the relevant details as observed in the revision order and complete the assessment after conducting proper and necessary inquiry.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the two issues which require examination are whether the limited scrutiny for which the assessee’s case was selected encompassed examination of loans taken by the assessee and capitalisation of interest expenditure, and if it was not so, whether the assessment order can be held to be erroneous and prejudicial to the interest of the Revenue for not examining the issues relating to loan taken and interest expenditure capitalised.

The Tribunal noted that the PCIT while exercising power u/s 263 has attempted to expand the scope of the limited scrutiny. It observed that the A.O. did examine both the issues for which the assessee’s case was selected for scrutiny and the A.O. had also conducted necessary inquiry on the issues for which the case was selected for scrutiny and he completed the assessment after applying his mind to the materials on record.

The A.O. being bound by CBDT Instruction No. 20/2015 dated 29th December, 2015 and CBDT Instruction No. 5 of 2016 dated 14th July, 2016, could not have gone beyond the scope and ambit of limited scrutiny for which the case was selected. He had rightly restricted himself to the scope and ambit of limited scrutiny. Unless the scope of scrutiny is expanded by converting it into a complete scrutiny with the approval of the higher authority, the A.O. could not have travelled beyond his mandate. The Tribunal held that the assessment order cannot be considered to be erroneous and prejudicial to the interest of Revenue for not examining the loans taken by the assessee and their utilisation as well as capitalisation of interest.

When the A.O. is not empowered to do certain acts directly, the revisionary authority certainly cannot direct the A.O. to do so indirectly by exercising power u/s 263. For this proposition the Tribunal relied upon the decision of the Coordinate Bench in the case of Su-Raj Diamond Dealers Pvt. Ltd. vs. PCIT, ITA No. 3098/Mum/2019; order dated 27th November, 2019.

The appeal filed by the assessee was allowed.

The A.O. recommending a revision to the CIT has no statutory sanction and is a course of action unknown to the law

15 Alfa Laval Lund AB vs. CIT (IT/TP) [TS-1024-ITAT-2021 (Pune)] A.Y.: 2012-13; Date of order: 2nd November, 2021 Section: 263

The A.O. recommending a revision to the CIT has no statutory sanction and is a course of action unknown to the law

FACTS
The assessee, a foreign company, filed its return of income declaring Nil total income. The assessment of its total income was completed on 27th March, 2015, again assessing Nil total income. Subsequently, the CIT received a proposal from the A.O. for revision based on which the CIT carried out a revision by observing that the assessee had entered into an agreement on 1st October, 2011 with its related concern in India for supply of software licenses and IT support services. The amount of service fee received from the Indian entity, collected on the basis of number of users, was claimed as not chargeable to tax in India within the meaning of Article 12 of the India-Sweden Double Taxation Avoidance Agreement. The CIT opined that the receipt from the Indian entity was in the nature of ‘Royalty’ and not ‘Fees for Technical Services’. After issuing a show cause notice and considering the reply of the assessee, the CIT set aside the order passed by the A.O. and remitted the matter to the A.O. for treating the amount received from the Indian entity as ‘Royalty’ chargeable to tax u/s 9(1)(vi).

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the order of the CIT mentioned that ‘A proposal for revision under section 263 of the IT Act, 1961 was received from DCIT(IT)-1, Pune through the Jt. CIT(IT), Pune vide letter No. Pn/Jt.CIT(IT)/263/2016-17/61 dated 23rd May,. 2016’. It observed that the edifice of the revision in the present case has been laid on the bedrock of receipt of the proposal from the A.O.

The Tribunal having noted the provisions of section 263(1) held that the process of revision u/s 263 is initiated only when the CIT calls for and examines the record of any proceeding under the Act and considers that any order passed by the A.O. is erroneous and prejudicial to the interest of the Revenue. The twin conditions are sine qua non for the exercise of power under this section. The use of the word ‘and’ between the expression ‘call for and examine the record…’ and the expression ‘if he considers that any order… is erroneous…’ abundantly demonstrates that both these conditions must be cumulatively fulfilled by the CIT and in the same order, that is, the first followed by the second. The kicking point is the CIT calling for and examining the record of the proceedings leading him to consider that the assessment order is erroneous, etc. The consideration that the assessment order is erroneous and prejudicial to the interests of the Revenue should flow from and be the consequence of his examination of the record of the proceedings. If such a consideration is not preceded by the examination of the record of the proceedings under the Act, the condition for revision does not get magnetised.

The Tribunal held that it is trite that a power which vests exclusively in one authority can’t be invoked or caused to be invoked by another, either directly or indirectly. The A.O. recommending a revision to the CIT has no statutory sanction and is a course of action unknown to the law. If the A.O., after passing an assessment order finds something amiss in it to the detriment of the Revenue, he has ample power to either reassess the earlier assessment in terms of section 147 or carry out rectification u/s 154. He can’t usurp the power of the CIT and recommend a revision. No overlapping of powers of the authorities under the Act can be permitted.

As revision proceedings in this case triggered with the A.O. sending a proposal to the CIT and then the latter passing an order u/s 263 on the basis of such a proposal, the Tribunal held that it became a case of jurisdiction defect resulting in vitiating the impugned order.

The Tribunal quashed the impugned order on this legal issue itself.

TAXABILITY OF CORPUS DONATIONS RECEIVED BY AN UNREGISTERED TRUST

ISSUE FOR CONSIDERATION
Section 2(24)(iia) of the Income-tax Act, 1961 defines income to include voluntary contributions received by a trust created wholly or partly for charitable or religious purposes. Till Assessment Year 1988-89, this included the phrase ‘not being contributions made with a specific direction that they shall form part of the corpus of the trust’, which was omitted with effect from the A.Y. 1989-90. Section 11(1)(d) of the Act, which was inserted with effect from A.Y. 1989-90, provides for exemption in respect of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution. However, this exemption applies only when the recipient trust or institution is registered with the income-tax authorities under section 12A or 12AA, as applicable up to 31st March, 2021, or section 12AB as applicable thereafter.

The issue has arisen as to whether such voluntary contributions (referred to as ‘corpus donations’) received by an unregistered trust, not registered u/s 12A or 12AA or 12AB, can be regarded as income taxable in its hands on the ground that it does not qualify for the exemption u/s 11, or in the alternative whether such donations can be regarded as the capital receipt not falling within the scope of income at all.

Several Benches of the Tribunal have taken a view, post-amendment, that a voluntary contribution received by an unregistered trust with a specific direction that it shall form part of its corpus, is a capital receipt and therefore not chargeable to tax at all. As against this, recently, the Chennai Bench of the Tribunal took a view that such a corpus donation would fall within the ambit of income of the trust and hence is includible in its total income.

SHRI SHANKAR BHAGWAN ESTATE’S CASE
The issue had first come up for consideration before the Kolkata Bench of the Tribunal in the case of Shri Shankar Bhagwan Estate vs. ITO (1997) 61 ITD 196.

In this case, two religious endowments were effectuated vide two deeds of endowment dated 30th October, 1989 and 19th June, 1990, respectively, in favour of Shree Ganeshji Maharaj and Shri Shankar Bhagwan by Smt. Krishna Kejriwal. The debutter properties, i.e., estates were christened as ‘Shree Ganeshji Maharaj Estate’ and ‘Shree Shankar Bhagwan Estate’. She constituted herself as the Shebait in respect of the deity. The estates were not registered u/s 12AA as charitable / religious institutions. The returns of income of the two estates for the A.Y. 1991-92 were filed declaring paltry income excluding the donations / gifts received towards the corpus of the estates.

During the course of the assessment proceedings, it was observed from the balance sheet that gifts were received by the estates from various persons. The assessees claimed that the said amounts were received towards the corpus of the endowments and, therefore, could not be taxed. Though the A.O. accepted the fact that the declarations filed by the donors indicated that they have sent moneys through cheques as their contributions to the corpus of the endowments, he held that the receipts were taxable u/s 2(24)(iia). Accordingly, the assessment was made taking the status of the assessees as a private religious trust, as against the status of an individual as claimed by the assessees, and taxing the income of the estates u/s 164, including the amounts received as corpus donations. He also held that the deities should have been consecrated before the endowments for them to be valid in law.

Before the CIT(A), the assessee contended that the provisions of section 2(24)(iia) did not authorise the assessment of the corpus gifts. However, the CIT(A) endorsed the view taken by the A.O. and upheld the assessment of the corpus gifts as income.

Upon further appeal, the Tribunal decided the issue in favour of the assessee by holding as under –

‘So far as section 2(24)(iia) is concerned, this section has to be read in the context of the introduction of the present section 12. It is significant that section 2(24)(iia) was inserted with effect from 1st April, 1973 simultaneously with the present section 12, both of which were introduced from the said date by the Finance Act, 1972. Section 12 makes it clear by the words appearing in parenthesis that contributions made with a specific direction that they shall form part of the corpus of the trust or institution shall not be considered as income of the trust. The Board’s Circular No. 108 dated 20th March, 1973 is extracted at page 1277 of Vol. I of Sampat Iyengar’s Law of Income-tax, 9th Edn. in which the interrelation between section 12 and section 2(24)(iia) has been brought out. Gifts made with clear directions that they shall form part of the corpus of the religious endowment can never be considered as income. In the case of R.B. Shreeram Religious & Charitable Trust vs. CIT [1988] 172 ITR 373 it was held by the Bombay High Court that even ignoring the amendment to section 12, which means that even before the words appearing in parenthesis in the present section 12, it cannot be held that voluntary contributions specifically received towards the corpus of the trust may be brought to tax. The aforesaid decision was followed by the Bombay High Court in the case CIT vs. Trustees of Kasturbai Scindia Commission Trust [1991] 189 ITR 5. The position after the amendment is a fortiori. In the present cases, the A.O. on evidence has accepted the fact that all the donations have been received towards the corpus of the endowments. In view of this clear finding, it is not possible to hold that they are to be assessed as income of the assessees. We, therefore, hold that the assessment of the corpus donations cannot be supported.’

The Tribunal upheld the claim of the assessee that the voluntary contributions received towards the corpus could not be brought to tax. In deciding the appeal, the Bench also held that the status of the endowments should be ‘individual’ and it was not necessary that the deities should have been consecrated before the endowments, or that the temple should have been constructed prior to the endowments.

Apart from this case, in the following cases a similar view has been taken by the Tribunal that the corpus donation received by an unregistered trust is a capital receipt and not chargeable to tax –

• ITO vs. Smt. Basanti Devi & Shri Chakhan Lal Garg Education Trust

  •  For A.Y. 2003-04 – ITA No. 3866/Del/2007, dated 30th January, 2009
  •  For A.Y. 2004-05 – ITA No. 5082/Del/2010, dated 19th January, 2011

• ITO vs. Chime Gatsal Ling Monastery [ITA No. 216 to 219 (Chd) of 2012, dated 28th October, 2014]
• ITO vs. Gaudiya Granth Anuved Trust [2014] 48 taxmann.com 348 (Agra-Trib)
• Pentafour Software Employees Welfare Foundation vs. Asstt. CIT [IT Appeal Nos. 751 & 752 (Mds) of 2007]
• ITO vs. Hosanna Ministries [2020] 119 taxmann.com 379 (Visakh-Trib)
• Indian Society of Anaesthesiologists vs. ITO (2014) 47 taxmann.com 183 (Chen-Trib)
• J.B. Education Society vs. ACIT [2015] 55 taxmann.com 322 (Hyd-Trib)
• ITO vs. Vokkaligara Sangha (2015) 44 CCH 509 (Bang–Trib)
• Bank of India Retired Employees Medical Assistance Trust vs. ITO [2018] 96 taxmann.com 277 (Mum-Trib)
• Chandraprabhu Jain Swetamber Mandir vs. ACIT [2017] 82 taxmann.com 245 (Mum-Trib)
• ITO vs. Serum Institute of India Research Foundation [2018] 90 taxmann.com 229 (Pune-Trib)

VEERAVEL TRUST’S CASE
Recently, the issue again came up for consideration before the Chennai Bench of the Tribunal in the case of Veeravel Trust vs. ITO [2021] 129 taxmann.com 358.

In this case, the assessee was a public charitable and religious trust registered under the Indian Trusts Act, 1882. It was not registered under the Income-tax Act. It had filed its return of income for A.Y. 2014-15, declaring Nil total income. The return of income filed by the assessee had been processed by the CPC, Bengaluru u/s 143(1) and the total income was determined at Rs. 55,82,600 by making additions of donations received amounting to Rs. 55,82,600.

The assessee trust filed an appeal against the intimation issued u/s 143(1) before the CIT(A) and contended that while processing the return u/s 143(1), only prima facie adjustments could be made and no addition could be made for corpus donations. The assessee further contended that corpus donations received by any trust or institution were excluded from the income derived from property held under the trust u/s 11(1)(d) and hence, even though the trust was not registered u/s 12AA, corpus donations could not be included in the income of the trust.

The CIT(A) rejected the contentions of the assessee and held that the condition precedent for claiming exemption u/s 11 was registration of the trust u/s 12AA and hence, in the absence of such registration, exemption claimed towards corpus donations could not be allowed. The CIT(A) relied upon the decision of the Supreme Court in the case of U.P. Forest Corpn. vs. Dy. CIT [2008] 297 ITR 1.

Being aggrieved by the order of the CIT(A), the assessee trust filed a further appeal before the Tribunal and contended that the donations under consideration were received for the specific purpose of construction of building and the said donations have been used for construction of building. Therefore, when donations have been received for specific purpose and such donations have been utilised for the purpose for which they were received, they were capital receipts by nature and did not fall within the scope of income.

The assessee relied upon the following decisions in support of its contentions –

(i) Shree Jain Swetamber Deharshar Upshraya Trust vs. ACIT [IT Appeal No. 264 (Mum) of 2016, dated 15th March, 2017]
(ii) ITO vs. Serum Institute of India Research Foundation [2018] 90 taxmann.com 229 (Pune)
(iii) Bank of India Retired Employees Medical Assistance Trust vs. ITO (Exemption) [2018] 96 taxmann.com 277 (Mum)
(iv) Chandraprabhu Jain Swetamber Mandir vs. Asstt. CIT [2017] 82 taxmann.com 245 (Mum)

The Revenue reiterated its stand that in the absence of registration of the trust u/s 12AA, no exemption could be given to it for the corpus donations.

The Tribunal referred to the relevant provisions of the Act and observed that the definition of income u/s 2(24) included voluntary contributions received by any trust created wholly or partly for charitable or religious purpose; that the provisions of sections 11, 12A and 12AA dealt with taxation of trust or institution and the income of any trust or institution was exempt from tax on compliance with certain conditions; the provisions of section 11(1)(d) excluded voluntary contributions received by a trust, with a specific direction that they shall form part of the corpus of the trust or institution which was subject to the provisions of section 12A, which stated that the provisions of sections 11 and 12 shall not apply in relation to income of any trust or institution, unless such trust or institution fulfilled certain conditions.

The Tribunal held that as per the said section 12A, one of the conditions for claiming benefit of exemption under sections 11 and 12 was registration of the trust as per sub-section (aa) of section 12A; that on a conjoint reading of the provisions, it was very clear that the income of any trust, including voluntary contributions received with a specific direction, was not includible in the total income of the trust, only if such trust was registered u/s 12A / 12AA and the registration was a condition precedent for claiming exemption u/s 11, including for voluntary contributions.

The Tribunal also took support from the decision of the Supreme Court in the case of U.P. Forest Corporation (Supra) wherein it was held that registration u/s 12A was a condition precedent for availing benefit under sections 11 and 12. Insofar as various case laws relied upon by the assessee were concerned, the Tribunal found that none of the Benches of the Tribunal had considered the ratio laid down by the Supreme Court in the case of U.P. Forest Corporation (Supra) while deciding the issue before them. In this view of the matter, it was held that corpus donations with a specific direction that they form part of the corpus received by the trust which was not registered under sections 12A / 12AA was its income and includible in its total income.

OBSERVATIONS
The issue under consideration is whether the voluntary contribution received by a trust with a specific direction that it shall form part of its corpus can be considered as the ‘income’ of the trust, is a capital receipt, not chargeable to tax, and whether the answer to this question would differ depending upon whether or not the trust was registered with the income-tax authorities under the relevant provisions of the Act.

Sub-clause (iia) was inserted in section 2(24) defining the term ‘income’ by the Finance Act, 1972 with effect from 1st April, 1973. It included the voluntary contribution received by a trust created wholly or partly for charitable or religious purposes within the scope of the term ‘income’ with effect from 1st April, 1973. Therefore, firstly, what was the position about taxability of such voluntary contribution prior to that needs to be examined.

The Supreme Court had dealt with this issue of taxability of an ordinary voluntary contribution for the period prior to 1st April, 1973 in the case of R.B. Shreeram Religious & Charitable Trust [1998] 233 ITR 53 (SC) and it was held that –

Undoubtedly by a subsequent amendment in 1972 to the definition of income under section 2(24), voluntary contributions, not being contributions towards the corpus of such a trust, are included in the definition of ‘income’ of such a religious or charitable trust. Section 12 as amended in 1972 also expressly provides that any voluntary contribution received by a trust for religious or charitable purposes, not being contribution towards the corpus of the trust, shall, for the purpose of section 11, be deemed to be income derived from property held by the trust wholly for charitable or religious purposes. This, however, does not necessarily imply that prior to the amendment of 1972, a voluntary contribution which was not towards the corpus of the receiving trust, was not income of the receiving trust. Even prior to the amendment of 1972, any income received by a religious or charitable trust in the form of a voluntary contribution would be income of the trust, unless such contribution was expressly made towards the corpus of the trust’s fund.

Thus, even prior to the insertion of sub-clause (iia) in the definition of income in section 2(24), the ordinary voluntary contribution received by a religious or charitable trust was regarded as income chargeable to tax and, therefore, no substantial change had occurred due to its specific inclusion in the definition of the term income. At the same time, the position was different as far as a voluntary contribution received towards the corpus was concerned. The settled view was that it was a capital receipt not chargeable to tax. The following are some of the cases in which such a view was taken by different High Courts as referred to by the Supreme Court in the case of R.B. Shreeram Religious & Charitable Trust (Supra) –
• Sri Dwarkadheesh Charitable Trust vs. ITO [1975] 98 ITR 557 (All)
• CIT vs. Vanchi Trust [1981] 127 ITR 227 (Ker)
• CIT vs. Eternal Science of Man’s Society [1981] 128 ITR 456 (Del)
• Sukhdeo Charity Estate vs. CIT [1984] 149 ITR 470 (Raj)
• CIT vs. Shri Billeswara Charitable Trust [1984] 145 ITR 29 (Mad)

The objective of inserting sub-clause (iia) treating voluntary contributions received by a religious or charitable trust specifically as its income in section 2(24) was not to unsettle this position of law as held by the Courts as explained above. Only ordinary voluntary contributions other than those which were received with a specific direction that they shall form part of the corpus of the trust were brought within the definition of ‘income’, perhaps by way of clarification and removal of doubts. The sub-clause (iia) as it was inserted with effect from 1st April, 1973 is reproduced below –

‘(iia) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution’

Thus, the voluntary contributions made with a specific direction that they shall form part of the corpus of the trust were expressly kept outside the ambit of the term ‘income’ and they continued to be treated as capital receipts not chargeable to tax. This position in law has been expressly confirmed by the Supreme Court in the above quoted paragraph, duly underlined for emphasis, when the Court clearly stated that the said section 2(24)(iia) covered donations not being the contributions towards corpus.

In such a scenario, a question may arise as to what was the purpose of making such an amendment in the Act to include the voluntary contributions (other than corpus donations) within the definition of ‘income’? The answer to this question is available in Circular No. 108 dated 20th March, 1973 explaining the provisions of the Finance Act, 1973 (as referred in the case of Shri Shankar Bhagwan Estate Supra). The relevant extract from this Circular is reproduced below –

The effect of the modifications at (1) and (2) above would be as follows:
(i) Income by way of voluntary contributions received by private religious trusts will no longer be exempt from income-tax.
(ii) Income by way of voluntary contributions received by a trust for charitable purposes or a charitable institution created or established after 31st March, 1962 (i.e., after the commencement of the Income-tax Act, 1961) will not qualify for exemption from tax if the trust or institution is created or established for the benefit of any particular religious community or caste.
(iii) Income by way of voluntary contributions received by a trust created partly for charitable or religious purposes or by an institution established partly for such purposes will no longer be exempt from income-tax.
(iv) Where the voluntary contributions are received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes, such contributions will qualify for exemption from income-tax only if the conditions specified in section 11 regarding application of income or accumulation thereof are satisfied and no part of the income enures and no part of the income or property of the trust or institution is applied for the benefit of persons specified in section 13(3), e.g., author of the trust, founder of the institution, a person who has made substantial contribution to the trust or institution, the relatives of such author, founder, person, etc. In other words, income by way of voluntary contributions will ordinarily qualify for exemption from income-tax only to the extent it is applied to the purposes of the trust during the relevant accounting year or within next three months following. Such charitable or religious trusts will, however, be able to accumulate income from voluntary contributions for future application to charitable or religious purposes for a maximum period up to ten years, without forfeiting exemption from tax, if they comply with certain procedural requirements laid down in section 11 in this behalf. These requirements are that (1) the trust or institution should give notice to the Income-tax Officer, specifying the purpose for which the income is to be accumulated and the period for which the accumulation is proposed to be made, and (2) the income so accumulated should be invested in Government or other approved securities or deposited in post office savings banks, scheduled banks, co-operative banks or approved financial institutions.

Thus, it can be seen from the Circular that the objective of the amendment made with effect from 1st April, 1973 was to make the trust or institution liable to tax on the voluntary contributions received in certain cases like where it has not been applied for the objects of the trust, it has been received by a private religious trust, or it has been received by a trust created for the benefit of any particular religious community or caste and to make the charitable and religious trusts to apply the contributions only on the objects of the trust and to apply for the accumulation thereof where it has not been so utilised before the year-end. In other words, the intention is expressed to regulate voluntary contributions of an ordinary nature.

This position under the law continued till 1st April, 1989 and the issue deliberated in this article could never have arisen till then as the Act itself had provided expressly that the voluntary contributions received with a specific direction that they shall form part of the corpus would not be regarded as ‘income’ and, hence, not chargeable to tax. The issue under consideration arose when the law was amended with effect from 1st April, 1989. The Direct Tax Laws (Amendment) Act, 1987 deleted the words ‘not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution’ from sub-clause (iia) of section 2(24) with effect from 1st April, 1989.

The Revenue authorities read sub-clause (iia) as amended with effect from 1st April, 1989, in contrast to the erstwhile sub-clause (iia), to hold that even the voluntary contributions received with a specific direction that they shall form part of the corpus of the trust would be considered as income chargeable to tax subject to the provisions dealing with exemptions upon satisfaction of several conditions, including that of registration of the trust with the income-tax authority.

The aforesaid interpretation of the Revenue is on the basis of the Circular No. 516 dated 15th June, 1988, Circular No. 545 dated 24th September, 1989, Circular No. 549 dated 31st October, 1989 and Circular No. 551 dated 23rd January, 1990 explaining the provisions of the Direct Tax (Amendment) Act, 1987 [as amended by the Direct Tax Laws (Amendment) Act, 1989]. The relevant extract dealing with the amendment to section 2(24)(iia) is reproduced below –

4.3 Under the old provisions of sub-clause (iia) of clause (24) of section 2 any voluntary contribution received by a charitable or religious trust or institution with a specific direction that it shall form part of the corpus of the trust or institution was not included in the income of such trust or institution. Since this provision was being widely used for tax avoidance by giving donations to a trust in the form of corpus donations so as to keep this amount out of the regulatory provisions of sections 11 to 13, the Amending Act, 1987 amended the said sub-clause (iia) of clause (24) of section 2 to secure that all donations received by a charitable or religious trust or institution, including corpus donations, were treated as income of such trust or institution.

Analysing the impact of the amendment, the eminent jurist Mr. Nani Palkhivala, in his commentary Law and Practice of Income Tax page 156 of the 11th edition, has commented:

‘This, however, does not mean that such capital contributions are now taxable as income. Sometimes express exclusion is by way of abundant caution, due to the over-anxiety of the draftsman to make the position clear beyond doubt. But in such a case, the later omission of such express exclusion does not necessarily involve a change in the legal position. Section 12 still provides that voluntary contributions specifically made to the corpus of a charitable trust are not deemed to be income, and the same exclusion must be read as implicit in section 2(24)(ii-a). It would be truly absurd to expect a charitable trust to disburse as income any amount in breach of the donor’s specific direction to hold it as corpus; such breach in many cases would involve depriving charity of the benefit of acquiring a lasting asset intended by the donor. Under this sub-clause, only voluntary contributions received by such institutions as are specified therein are taxable as income. A voluntary contribution received by an institution not covered in this sub-clause is not taxable as income.’

Further, in the commentary on section 12(1), page 688 of the same edition, it is stated:

‘The correct legal position is as under:
(i) All contributions made with a specific direction that they shall form part of the corpus of the trust are capital receipts in the hands of the trust. They are not income either under the general law or under section 2(24)(ii-a).
(ii) Section 2(24)(ii-a) deems revenue contributions to be income of the trust. It thereby prevents the trust from claiming exemption under general law on the ground that such contributions stand on the same footing as gifts and are therefore not taxable.
(iii) Section 12 goes one step further and deems such revenue contributions to be income derived from property held under trust. It thereby makes applicable to such contributions all the conditions and restrictions under sections 11 and 13 for claiming exemption.
(iv) Section 11(1)(d) specifically grants exemption to capital contributions to make the fact of non-taxability clear beyond doubt. But it proceeds on the erroneous assumption that such contributions are of income nature – income in the form of voluntary contributions. This assumption should be disregarded.’

This supports the argument that corpus donations are capital receipts, which are not in the nature of income at all.

Taking a view as is canvassed by the Revenue would tantamount to interpreting a law in a manner that holds that where an exemption has been expressly provided for any income, then it needs to be presumed that in the absence of the specific provision the income is taxable otherwise; such a view also means that any receipt that is not expressly and specifically exempted is always taxable; that a deletion of an express admission of the exemption, as is the case under consideration, would automatically lead to its taxation irrespective of the position in law that such receipt even before introduction of the express provision for exempting it was never taxable. In this regard, a reference may be made to the decision in the case of CIT vs. Shaw Wallace 6 ITC 178 (PC) wherein it was held as under –

‘15. Some reliance has been placed in argument upon section 4(3)(v) which appears to suggest that the word “income” in this Act may have a wider significance than would ordinarily be attributed to it. The sub-section says that the Act “shall not apply to the following classes of income,” and in the category that follows, Clause (v) runs:
Any capital sum received in commutation of the whole or a portion of a pension, or in the nature of consolidated compensation for death or injuries, or in payment of any insurance policy, or as the accumulated balance at the credit of a subscriber to any such Provident Fund.
16. Their Lordships do not think that any of these sums, apart from their exemption, could be regarded in any scheme of taxation of income, and they think that the clause must be due to the over-anxiety of the draftsman to make this clear beyond possibility of doubt. They cannot construe it as enlarging the word “income” so as to include receipts of any kind, which are not specially exempted. They do not think that the clause is of any assistance to the appellant.’

Similarly, the Karnataka High Court in the case of International Instruments (P) Ltd. vs. CIT [1982] 133 ITR 283 held that a receipt which is not an income does not become income, for the years before its inclusion, just because it is later on included as one of the items exempted from income-tax. Thus, it was held that merely because the exemption has been provided it cannot be presumed that it would necessarily be taxable otherwise. Similarly, merely because the voluntary contributions which were capital in nature otherwise were specifically excluded from the definition of income, it cannot be presumed that they were otherwise falling within the definition of income. The Courts in several cases had already held that such voluntary contributions received with a specific direction that they should be forming part of the corpus are receipt of capital nature and not income chargeable to tax. In view of this, the omission of a specific exclusion, w.e.f. 1st April, 1989, provided to it from the definition of income till the date, should not be considered as sufficient to bring it within the scope of the term ‘income’ so as to make it chargeable to tax from the date of the amendment.

All the decisions cited above, wherein a favourable view has been taken, have been rendered for the A.Ys. beginning from 1st April, 1989 onwards post amendment in sub-clause (iia) of section 2(24). Reliance was placed by the Revenue, in these cases, on the amended definition of income provided in section 2(24)(iia) and yet the Tribunals took a view that the corpus donations did not fall within the scope of term ‘income’ as they were capital receipts and, hence, the fact that the exemption otherwise provided in section 11(1)(d) was not available due to non-registration, though argued, was not considered to be relevant at all.

In the case of Smt. Basanti Devi & Shri Chakhan Lal Garg Education Trust, the matter pertaining to A.Y. 2003-04 had travelled to the Delhi High Court and the Revenue’s appeal was dismissed by the High Court (ITA 927/2009, order dated 23rd September, 2009), by taking a view that the donations received towards the corpus of the trust would be capital receipt and not revenue receipt chargeable to tax. The further appeal of the Revenue before the Supreme Court has also been dismissed by an order dated 17th September, 2018, though on account of low tax effect. Therefore, the view as adopted in these cases should be preferred, irrespective of the amendment made with effect from 1st April, 1989.

The Chennai Bench of the Tribunal has disagreed with the decisions of the other Benches taking a favourable view which were cited before it, on the ground that the ratio of the Supreme Court’s decision in the case of U.P. Forest Corporation (Supra) had not been considered therein. Nothing could have turned otherwise even if the Tribunal, in favourably deciding those cases, had examined the relevance of the Supreme Court decision. On a bare reading of the decision, it is clear that the facts in the said case related to an issue whether the corporation in question was a local authority or not and, of course, also whether an assessee claiming exemption u/s 11 should have been registered under the Income-tax Act or not. The Court was pleased to hold that an assessee should be registered for it being eligible to claim the exemption of income u/s 11. The issue in that case was not related to exemption for the corpus donation at all and the Court was never asked whether such a donation was exempted or not because of non-registration of the corporation under the Act in that regard.

With utmost respect, one fails to understand how this important fact was not comprehended by the Chennai Bench. The Bench was seriously mistaken in applying the ratio of the Supreme Court decision which has no application to the facts of the case before it. The issue in the case before the Bench was whether receipt of a corpus donation was a capital receipt or not which was not liable to tax in respect of such a receipt, not due to application of section 11, but on application of the general law of taxation which cannot tax a receipt that is not in the nature of income. Veeravel Trust may explore the possibility of filing a Miscellaneous Application seeking rectification of the order.

The issue under consideration here and the issue that was before the Supreme Court in the case of U.P. Forest Corporation were distinguished by the Bengaluru Bench of the Tribunal in the case of Vokkaligara Sangha (Supra) as follows –

‘5.3.6 Before looking into the facts of the case, we notice that Revenue has relied upon a judgment of the Hon’ble Apex Court in the case of U.P. Forest Corporation & Another vs. DCIT reported in 297 ITR 1 (SC). According to the aforesaid decision, registration under section 12AA of the Act is mandatory for availing the benefits under sections 11 and 12 of the Act. However, the question that arises for our consideration in the case on hand is not the benefit under sections 11 and 12 of the Act, but rather whether voluntary contributions are income at all. Thus, with due respects, the aforesaid decision, in our view, would not be of any help to Revenue in the case on hand.’

The Chennai Bench, with due respect, has looked at the issue from the perspective of exemption u/s 11(1)(d). Had it been called upon to specifically adjudicate the issue as to whether the corpus donation was an income at all in the first place, and not an exemption u/s 11, the view could have been different.

Further, if a view is taken that the corpus donations received by a religious or charitable trust would be regarded as income under sub-clause (iia), then it will result in a scenario whereunder treatment of corpus donations would differ depending upon the type of entity which is receiving such corpus donations. If they are received by a religious or charitable trust or institution then it would be regarded as income, but if they are received by any other entity then it would not fall under sub-clause (iia) so as to treat it as income, subject, of course, to the other provisions of the Act.

In the case of CIT vs. S.R.M.T. Staff Association [1996] 221 ITR 234 (AP), the High Court held that only when the voluntary contributions were received by the entities referred to in sub-clause (iia), such receipts would fall within the definition of income and the receipts by entities other than the specified trusts and associations would not be liable to tax on application of sub-clause (iia). In the case of Pentafour Software Employees Welfare Foundation (Supra), a case where the assessee was a company incorporated u/s 25 of the Companies Act, the Madras High Court in the context of the taxability or otherwise of the corpus donations, held that the receipt was not taxable, more so where it was received by a company. An interpretation which results in an illogical conclusion should be avoided.

Reference can also be made to the Memorandum explaining the provisions of the Finance Bill, 2017 wherein, while explaining the rationale of inserting Explanation 2 to section 11(1), it was mentioned that a corpus donation is not considered as income of the recipient trust. The relevant extract from the Memorandum is reproduced below –

‘However, donation given by these exempt entities to another exempt entity, with specific direction that it shall form part of corpus, is though considered application of income in the hands of donor trust but is not considered as income of the recipient trust. Trusts, thus, engage in giving corpus donations without actual applications.’

The issue may arise as to why a specific exemption is provided to such corpus donations under section 11(1)(d) which applies only when the trust or institution receiving such donations satisfies all the applicable conditions, including that of registration with the income-tax authorities. In this regard, as explained by Mr. Palkhivala in the commentary referred to above, this specific exemption should be regarded as having been provided out of abundant caution though not warranted, as such corpus donations could not have been regarded as income in the first place.

The Finance Act, 2021 with effect from 1st April, 2022 requires that such voluntary contributions are invested or deposited in one or more of the forms or modes specified in sub-section (5) maintained specifically for such corpuses. In our view, the amendment stipulates a condition for those who are seeking an exemption u/s 11 of the Act but for those who hold that the receipt of the corpus donation at the threshold itself is not taxable in view of the receipt being of a capital nature, need not be impressed by the amendment; a non-taxable receipt cannot be taxed for non-compliance of a condition not intended to apply to a capital receipt.

In any case, if there exist divergent views on the issue as to whether or not a particular receipt can be regarded as income, then a view in favour of the assessee needs to be preferred.

It may be noted that in one of the above-referred decisions (Serum Institute of India Research Foundation), the Department had made an argument that such corpus donations received by an unregistered trust be brought to tax u/s 56(2). The Tribunal, however, decided the matter in favour of the assessee, on the ground of judicial discipline, following the earlier Tribunal and High Court decisions.

The better view is therefore that corpus donations received by a charitable or religious trust, registered or unregistered, are a capital receipt, not chargeable to income-tax at all.

An assessment order which does not comply with the mandatory procedure laid down in section 144C is non-est and an order u/s 263 revising such an order is a nullity as a non-est order cannot be a subject matter of revision u/s 263

14 Manorama Devi Jaiswal vs. ITO [TS-1054-ITAT-2021 (Kol)] A.Y.: 2014-15; Date of order: 17th November, 2021 Sections: 144C, 263

An assessment order which does not comply with the mandatory procedure laid down in section 144C is non-est and an order u/s 263 revising such an order is a nullity as a non-est order cannot be a subject matter of revision u/s 263

FACTS
In the case of the assessee, the PCIT passed an order u/s 263 wherein he stated that since before completion of final assessment a draft assessment order should have been served on the assessee as per the mandatory provision of section 144C and which the A.O. had not complied with, therefore the assessment order passed by him on 25th September, 2017 was erroneous and prejudicial to the interest of the Revenue.

Aggrieved, the assessee preferred an appeal to the Tribunal where it challenged the assumption of revisionary jurisdiction assumed by the PCIT.

HELD
The Tribunal noted that the Coordinate Bench has in the case of Mohan Jute Bags Mfg. Co. vs. PCIT [ITA No. 416/Kol/2020; A.Y. 2014-15] held that ‘…the A.O.’s omission to frame draft assessment order breached the Rule of Law and consequently, his non-action to frame draft assessment order before passing the final assessment order was in contravention of the mandatory provision of law as stipulated in section 144C of the Act, consequently his action is arbitrary and whimsical exercise of power which offends Articles 14 and 21 of the Constitution of India and therefore an action made without jurisdiction and ergo the assessment order dated 25th September, 2017 is null in the eyes of law and therefore is non-est.’

The Tribunal held that since the mandatory provision of law stipulated in section 144C was not complied with, the assessment order itself becomes a nullity in the eyes of the law and therefore is non-est. When the foundation itself for the assumption of revisionary jurisdiction u/s 263 does not exist, that in this case the assessment order itself is non-est, in such a scenario the PCIT could not have exercised his revisionary jurisdiction in respect of a null and void assessment order. The Tribunal held that the impugned order of the PCIT is also a nullity. The appeal filed by the assessee was allowed.

Whether loss of current year can be set off from the income declared u/s 115BBD is a highly debatable issue which cannot be rectified u/s 154 Interpretation of ‘expenditure’ or ‘allowance’ in section 115BBD to cover current year loss is a highly debatable issue

13 Rakesh Kumar Pandita vs. ACIT [TS-1002-ITAT-2021 (Del)] A.Y.: 2012-13; Date of order: 22nd October, 2021 Sections: 115BBD, 154

Whether loss of current year can be set off from the income declared u/s 115BBD is a highly debatable issue which cannot be rectified u/s 154

Interpretation of ‘expenditure’ or ‘allowance’ in section 115BBD to cover current year loss is a highly debatable issue

FACTS
The assessee company filed its return of income for A.Y. 2012-13 declaring a total income of Rs. 26,26,860. The return was processed u/s 143(1) and the total income was determined to be Rs. 31,51,660. In the intimation though the loss of current year adjusted was mentioned at Rs. 22,53,768, the same was not adjusted while computing the total income assessed. The assessee filed an application for rectification u/s 154.

The A.O. was of the opinion that since the assessee has declared income u/s 115BBD and calculated the tax at the special rate of 15%, the same cannot be set off against losses. He accordingly rejected the application made by the assessee u/s 154.

Aggrieved, the assessee preferred an appeal to the CIT(A) who held that the question whether current year loss can be set off from the income declared u/s 115BBD is a highly debatable issue and a debatable issue cannot be rectified u/s 154.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal observed that in the intimation the loss of the current year has been mentioned at Rs. 22,53,768 and that the assessee has returned income in respect of dividend received from a foreign company u/s 115BBD. It noted that as per sub-section (2), no deduction in respect of expenditure or allowance should be allowed to the assessee under any provision of the Act in computing its income by way of dividends referred to in sub-section (1). The interpretation of ‘expenditure’ or ‘allowance’ to cover current year loss is a highly debatable issue. The Tribunal dismissed the appeal filed by the assessee.

Vivad Se Vishwas – Pending appeal – Application for condonation of delay pending before CIT(A) – Notice of hearing issued – Application under VSV rejected by Pr. CIT on the ground that appeal was not admitted – Held not justified

4 Stride Multitrade Pvt. Ltd. vs. Asstt. CIT Circle – 13(2)(2) [Writ Petition (L) No. 12932 of 2021; Date of order: 21st September, 2021 (Bombay High Court)]

Vivad Se Vishwas – Pending appeal – Application for condonation of delay pending before CIT(A) – Notice of hearing issued – Application under VSV rejected by Pr. CIT on the ground that appeal was not admitted – Held not justified

The petitioner challenged the order of rejection passed by the Pr. CIT under the provisions of the Direct Tax Vivad Se Vishwas Act, 2020 (‘VSV’ Act).

The petitioner had filed its original return of income tax for A.Y. 2017-18 on 30th October, 2017 declaring total income at loss of Rs. 23,92,61,385. The case was selected for scrutiny and respondent No. 1 passed an assessment order dated 19th December, 2019 u/s 144. Aggrieved by this, the petitioner filed an appeal before respondent No. 3 u/s 246A on 6th February, 2020. The time limit for filing the appeal u/s 246A expired on 18th January, 2020 but the appeal was filed on 6th February, 2020 along with an application for condonation of delay. The delay was of 19 days. On 24th January, 2020 the petitioner had paid the filing fees for the appeal.

On 20th January, 2021, the petitioner received a communication from the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, inquiring with it whether it would wish to opt for the Vivad Se Vishwas Scheme, 2020, or would like to contest the appeal. The petitioner was told to furnish the ground-wise written submission in support of the grounds of appeal along with supporting documents and evidences if it was not opting for the VSV Scheme, 2020.

The Court observed that since this communication has come from the Commissioner of Income Tax (Appeals) and the Commissioner of Income Tax (Appeals) is asking the petitioner to furnish a ground-wise written submission on the grounds of appeal, it would mean that the condonation of delay application had been allowed by the Commissioner of Income Tax (Appeals). Therefore, for respondent No. 2 to say that there is no order condoning the delay and, hence, the application / declaration of the petitioner under the VSV Act is rejected, is incorrect.

Moreover, section 2(1)(a)(i) of the VSV Act provides for a person in whose case an appeal or a writ petition or special leave petition has been filed either by himself or by the 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 petitioner has admittedly made its declaration in Form 1 on 21st January, 2021, i.e., within the prescribed period.

The Central Board of Direct Taxes issued a Circular dated 4th December, 2020 in which question 59 and the answer thereto reads as under:

‘Q.59. Whether the taxpayer in whose case the time limit for filing of appeal has expired before 31st January, 2020 but an application for condonation of delay has been filed is eligible?

Answer: If the time limit for filing appeal expired during the period from 1st April, 2019 to 31st January, 2020 (both dates included in the period), and the application for condonation is filed before the date of issue of this Circular, and appeal is admitted by the appellate authority before the date of filing of the declaration, such appeal will be deemed to be pending as on 31st January, 2020.’

Therefore, where the time limit for filing of appeal has expired before 31st January, 2020 but an appeal with an application for condonation is filed before the date of the Circular, i.e., 4th December, 2020, such appeal will be deemed to be pending as on 31st January, 2020. In the answer to question 59 the expression used is ‘an appeal is admitted by the appellate authority before the date of filing of the declaration’. This has been dealt with by a Division Bench of Delhi High Court in the case of Shyam Sunder Sethi vs. Pr. Commissioner of Income Tax-10 and Ors. in Writ Petition (C) 2291/2021 and CM APPL. 6677/2021 dated 3rd March, 2021 wherein it is held that an appeal would be ‘pending’ in the context of section 2(1)(a) of the VSV Act when it is first filed till its disposal and the Act does not stipulate that the appeal should be admitted before the specified date, it only adverts to its pendency. The Court opined that the respondent could not have wrongly equated admission of the appeal with pendency. The Court, therefore, held that the appeal would be pending as soon as it is filed and until such time that it is adjudicated upon and a decision is taken qua the same. The Court agreed with the view expressed by the Division Bench in Shyam Sunder Sethi (Supra).

The Court held that the Commissioner of Income Tax (Appeals) himself has addressed a letter dated 20th January, 2021 asking the petitioner to furnish ground-wise submissions on the grounds of appeal if he was not opting for the VSV Scheme, 2020. This itself would also mean that the delay has been condoned. The order of rejection dated 26th February, 2021 is bad in law and is accordingly set aside. The respondent is directed to process the forms filed by the petitioner under the provisions of the VSV Act.

Reopening of assessment – Beyond four years – Precondition – Failure on part of the assessee to disclose fully and truly all material facts necessary – No power to review

3 Ananta Landmark Pvt. Ltd. vs. Dy. CIT Central Circle 5(3)
[Writ Petition No. 2814 of 2019; Date of order: 14th September, 2021 (Bombay High Court)]

Reopening of assessment – Beyond four years – Precondition – Failure on part of the assessee to disclose fully and truly all material facts necessary – No power to review

The petitioner had filed its return for A.Y. 2012-13 u/s 139 along with its audited profit and loss account, balance sheet and auditor’s report. It received a notice u/s 143(2) and also u/s 142(1) calling upon it to furnish the documents mentioned as per the annexure to the notice. There were four relevant items mentioned in the annexure… By its letter dated 14th August, 2014, the petitioner submitted all the documents asked for and also clarified that the tax audit report in Form 3CD for the A.Y. 2012-13 was not applicable.

Thereafter, the petitioner received another notice calling upon it to provide certain details, one of which was ‘details of interest expenses claimed u/s 57’. These details were provided vide a letter dated 3rd December, 2014. A personal hearing was granted at which even further details were sought. The petitioner provided even more documents and details by its letter of 17th December, 2014.

After considering all the details supplied, an assessment order dated 20th February, 2015 was passed accepting the petitioner’s explanations and computation of income. But more than four years after this assessment order, the petitioner received yet another notice dated 26th March, 2019 u/s 148 stating as under:

‘I have reasons to believe that your income chargeable to tax for the A.Y. 2012-13 has escaped assessment within the meaning of section 147 of the Income Tax Act, 1961’.

In response, the petitioner, without prejudice to its rights and contentions, sought the reasons for this belief. The respondent by its letter dated 28th May, 2019 provided the reasons recorded for reopening of the assessment. In short, the issue raised in the reopening was in regard to deduction claimed u/s 57.

The petitioner responded by its letter dated 19th June, 2019 filing its objections to the reopening of the assessment. According to it, there was no failure to truly and fully disclose material facts and, in any case, it was a mere change of opinion and there was no fresh tangible material for initiating reassessment proceedings. Respondent No. 1 then passed an order dated 30th September, 2019 with reference to the objections raised by the petitioner to the issuance of notice u/s 148.

It was stated by the Department that subsequent to the assessment proceedings it was noticed that the assessee had wrongly claimed deduction u/s 57. Accordingly, the A.O. found reasons to decide on reopening the assessment. This issue had gone unnoticed by the A.O. during the course of the original assessment proceedings for A.Y. 2012-13 and therefore the jurisdictional requirement u/s 147 was fulfilled and reopening u/s 147 cannot be challenged. Further, the A.O. has not had any discussion in respect of the points on which assessment has been reopened, thus it can be hardly stated that the A.O. had formed an opinion on such points during the original assessment proceedings.

The High Court held that the A.O. had no jurisdiction to issue the notice u/s 148. It further observed as follows:

A) It is settled law that where the assessment is sought to be reopened after the expiry of a period of four years from the end of the relevant year, the proviso to section 147 stipulates a requirement that there must be a failure on the part of the assessee to disclose fully and truly all necessary material facts. Since in the present case the assessment is sought to be reopened after a period of four years, the proviso to section 147 is applicable.

B) 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 is 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.

C) 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. Considering the reasons for reopening, the Court noticed that except stating that a sum of Rs. 7,66,66,663 which was chargeable to tax has escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary, there is nothing else in the reasons. The Court held that a general statement that the escapement of income is by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment is not enough. The A.O. should indicate what is the material fact that was not truly and fully disclosed to him. In the affidavit in reply, it is stated that the reassessment proceedings was based on audit objections.

D) The Court held that the reason for reopening an assessment should be that of the A.O. alone and he cannot act merely on the dictates of any another person in issuing the notice. The Court said that in every case the Income Tax Officer must determine for himself what is the effect and consequence of the law mentioned in the audit note and whether in consequence of the law which has come to his notice he can reasonably believe that income has escaped assessment. The basis of his belief must be the law of which he has now become aware. The opinion rendered by the audit party in regard to the law cannot, for the purpose of such belief, add to or colour the significance of such law. Therefore, the true evaluation of the law in its bearing on the assessment must be made directly and solely by the Income Tax Officer.

E) In the present case, the reasons which have been recorded by the A.O. for reopening of the assessment do not state that the assessee had failed to disclose fully and truly all material facts necessary for the purpose of assessment. The reasons for reopening an assessment have to be tested / examined only on the basis of the reasons recorded at the time of issuing a notice u/s 148 seeking to reopen an assessment. These reasons cannot be improved upon and / or supplemented, much less substituted by affidavit and / or oral submissions.

F) As regards the ground that the A.O. had not held any discussion in respect of those points on which assessment was reopened and hence he had not formed any opinion and thus the window of reopening of assessment would remain open for the A.O. on those points, these were not the grounds in the reasons for reopening. The entire case of the respondent while issuing the reason for reopening was ‘failure to disclose truly and fully material facts’.

G) As regards the ground that the disclosure of material facts with respect to the setting off of the interest expenses u/s 57 might be full but it cannot be considered as true, and hence it is failure on the part of the assessee, the mere production of books of accounts or other documents are not enough in view of Explanation 1 to section 147, etc., the words used are ‘omission or failure to disclose fully and truly all material facts necessary for his assessment for that year’. It postulates a duty on every assessee to disclose fully and truly all material facts necessary for assessment. What facts are material, and necessary for assessment, will differ from case to case. In every assessment proceeding, the assessing authority will, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee or discovered by him on the basis of the facts disclosed, or otherwise, the assessing authority has to draw inferences as regards certain other facts; and ultimately, from the primary facts and the further facts inferred from them, the authority has to draw the proper legal inferences and ascertain the proper tax leviable on a correct interpretation of the taxing enactment..

Thus, when a question arises whether certain income received by an assessee is capital receipt or revenue receipt, the assessing authority has to find out what primary facts have been proved, what other facts can be inferred from them, and taking all these together to decide what should be the legal inference. There can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee.

H) Whether it is a disclosure or not within the meaning of section 147 would depend on the facts and circumstances of each case and the nature of the document and circumstances in which it is produced. The duty of the assessee is to fully and truly disclose all primary facts necessary for the purpose of assessment. It is not part of his duty to point out what legal inference should be drawn from the facts disclosed. It is for the Income Tax Officer to draw a proper reference. In the case at hand, the petitioner had filed its annual return along with computation of taxable income along with MAT (minimum alternate tax) calculation as per provisions of section 115JB, audited annual financials including auditor’s report, balance sheet, profit and loss account and notes to accounts, annual tax statement in Form 26AS u/s 203AA in response to the notices received u/s 142(1) and 143(2). The petitioner also explained how the borrowing costs that are attributable to the acquisition or construction of assets have been provided for, what are the short-term borrowings and from whom have they been received. It also gave details of interest expenses claimed u/s 57 in response to the further notice of 10th October, 2014 u/s 142 (1), attended personal hearings and explained and gave further details as called for in the personal hearing vide its letter dated 17th December, 2014 – and after considering all this, the assessment order dated 20th February, 2015 was passed accepting the return of income filed by the assessee.

The A.O. had in his possession all primary facts and it was for him to make necessary inquiries and draw a proper inference as to whether from the interest paid of Rs. 75,79,35,292 an amount of Rs. 7,66,66,663 has to be allowed as deduction u/s 57 or the entire interest expenses of Rs. 75,79,35,292 should have been capitalised to the work in progress against claiming just Rs. 7,66,66,663 as deduction u/s 57.

The A.O. had had all the material facts before him when he made the original assessment. When the primary facts necessary for assessment are fully and truly disclosed, he is not entitled to change of opinion to commence proceedings for reassessment. Even if the A.O. who passed the assessment order may have raised too many legal inferences from the facts disclosed, on that account the A.O. who has decided to reopen the assessment is not competent to reopen assessment proceedings. Where on consideration of the material on record one view is conclusively taken by the A.O., it would not be open to him to reopen the assessment based on the very same material in order to take another view. As noted earlier, the petitioner has filed the annual returns with the required documents as provided for u/s 139. There was nothing more to disclose and a person cannot be said to have omitted or failed to disclose something when he had no knowledge of such a thing. One cannot be expected to disclose a thing or said to have failed to disclose it, unless it is a matter which he knows or knows about. In this case, except for a general statement in the reasons for reopening, the A.O. has not disclosed what was the material fact that the petitioner had failed to disclose.

The Court observed that the petitioner had truly and fully disclosed all material facts necessary for the purpose of assessment. Not only material facts were disclosed truly and fully, but they were carefully scrutinised and figures of income as well as deduction were reworked carefully by the A.O. In the reasons for reopening, the A.O. has, in fact, relied on the audited accounts to say that the claim of deduction u/s 57 was not correct, and the figures mentioned in the reason for reopening of assessment are also found in the audited accounts of the petitioner. In the reasons for reopening, there is not even a whisper as to what was not disclosed. In the order rejecting the objections, the A.O. admits that all details were fully disclosed. Thus, this is not a case where the assessment is sought to be reopened on the reasonable belief that income had escaped assessment on account of failure of the assessee to disclose truly and fully all material facts that were necessary for computation of income, but this is a case where the assessment is sought to be reopened on account of change of opinion of the A.O. about the manner of computation of the deduction u/s 57.

Consequently, the petition is allowed. The notice dated 26th March, 2019 issued by respondent No. 1 u/s 148 seeking to reopen the assessment for the A.Y. 2012-13 and the order dated 30th September, 2019 are quashed and set aside.

Refund – Withholding of refund – Condition precedent – A.O. must apply his mind before withholding refund – Reasons for withholding must be recorded in writing and approval of Commissioner or Principal Commissioner obtained – Discretion to withhold refund must be exercised in judicious manner – Withholding of refund without recording reasons – Not sustainable

16 Mcnally Bharat Engineering Company Ltd. vs. CIT [2021] 437 ITR 265 (Cal) A.Y.: 2017-18; Date of order: 6th August, 2021 Ss. 143(1), 241A and 244A of ITA, 1961

Refund – Withholding of refund – Condition precedent – A.O. must apply his mind before withholding refund – Reasons for withholding must be recorded in writing and approval of Commissioner or Principal Commissioner obtained – Discretion to withhold refund must be exercised in judicious manner – Withholding of refund without recording reasons – Not sustainable

For the A.Y. 2017-18, the assessee declared loss in its return of income and claimed refund of the entire tax deducted at source. The assessee received a notice u/s 143(2) and an intimation u/s 143(1) regarding the refund payable thereunder with interest for the A.Y. 2017-18 u/s 244A. Subsequently, the refund was withheld u/s 241A by the A.O. without assigning any reasons.

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

‘i) The very essence of passing of the order u/s 241A was application of mind by the A.O. to the issues which were germane for withholding the refund on the basis of statutory prescription contained in section 241A. The power of the A.O. under the provisions of section 241A could be exercised only after he had formed an opinion that the refund was likely to adversely affect the Revenue and with the prior approval of the Chief Commissioner or Commissioner as an order for refund after the assessment u/s 143(3) pursuant to a notice u/s 143(2) was subject to appeal or further proceedings.

ii) Having not done so, the officer had acted arbitrarily. At the point of time when the refund was notified, there was no other demand pending against the assesse either for a prior or a subsequent period. The procedure followed by the A.O. did not also show proper application of two independent provisions as in section 241A and section 143 wherein once a refund was declared after scrutiny proceedings and such refund was withheld, a reasoned order had to follow because the assessment in such a case was done after production of materials and evidence required by the A.O. No reasons were assigned by him by referring to any materials that the refund declared would adversely affect the Revenue.

iii) That apart, the assessee was a public limited company whose accounts were stringently scrutinised at the internal level. It was, therefore, more important to apply the provisions more cautiously while withholding the refund after it had been declared on completion of assessment on scrutiny. The assessee became entitled to the refund immediately on the completion of the assessment and the refund having been notified. The A.O. could not have withheld the refund to link such refund with any demand against the assessee for a subsequent period when such demand was not in existence on the date when the refund was notified.

iv) The competent officer being authorised under the statute to withhold the refund if he had reasons to believe that it would adversely affect the Revenue, could or could have withheld the refund after the refund had been declared only after assigning reasons and not otherwise. The A.O. had withheld the refund without assigning any reason though the statute mandated the recording of reasons. Having not done so, the A.O. had acted arbitrarily. The withholding of the refund for the A.Y. 2017-18 was not sustainable and therefore was set aside and quashed. The assessee was entitled to refund with interest till the actual date of refund.’

Penalty – Penalty u/s 271AAB in search cases – Income-tax survey – Survey of assessee firm pursuant to search and seizure of another group – No assessment u/s 153A – Where search u/s 132 has not been conducted penalty cannot be levied u/s 271AAB

15 Principal CIT vs. Silemankhan and Mahaboobkhan [2021] 437 ITR 260 (AP) A.Y.: 2016-17; Date of order: 12th July, 2021 Ss. 132, 133A, 153C, 271AAB and 260A of ITA, 1961

Penalty – Penalty u/s 271AAB in search cases – Income-tax survey – Survey of assessee firm pursuant to search and seizure of another group – No assessment u/s 153A – Where search u/s 132 has not been conducted penalty cannot be levied u/s 271AAB

In the course of a search conducted u/s 132A against an entity, the statements of its partners were recorded u/s 132(4). Pursuant thereto, a survey u/s 133A was conducted in the assessee firm and a notice was issued u/s 153C, whereupon the assessee filed a return admitting additional income. The Tribunal, referring to the proposition of law that no penalty u/s 271AAB could be imposed when search u/s 132 was not conducted against the assessee and the consistent view taken by the Tribunal, held that the imposition of penalty u/s 271AAB was illegal.

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

‘i) When the return of income is filed in response to a notice u/s 153C by an assessee in whose case search has not been conducted u/s 132, penalty u/s 271AAB cannot be imposed. Penalty under the provision can be imposed only when a search has been initiated against the assessee.

ii) No penalty u/s 271AAB could be imposed when admittedly a search u/s 132 had not been conducted in the assessee’s premises. The notice issued u/s 153C was incidental to the search proceedings of the searched party and could not be a foundation to impose penalty against the assessee u/s 271AAB. The legal position was based on the clear and unequivocal meaning transpiring from the words used in the section and cannot yield to any other interpretation. The view had been consistently followed by the Tribunal and was binding on the Department in such cases. No contrary view either of any High Court or the Supreme Court had been placed.

iii) In the light of the settled proposition of law, the provisions of section 271AAB could not be invoked to impose penalty on the assessee on whom search was not conducted. There was no perversity or illegality in the finding of the Tribunal. No question of law arose.’

Housing project – Special deduction u/s 80-IB(10) – Open terrace of building not to be included for computation of built-up area – Time limit for completion of project – Date of approval of building plan and not date of lay-out – Completion certificate issued by local panchayat would satisfy requirement of section – Assessee entitled to deduction

14 CIT vs. Shanmugham Muthu Palaniappan [2021] 437 ITR 276 (Mad) A.Y.: 2010-11; Date of order: 15th June, 2021 S. 80-IB(10) of ITA, 1961

Housing project – Special deduction u/s 80-IB(10) – Open terrace of building not to be included for computation of built-up area – Time limit for completion of project – Date of approval of building plan and not date of lay-out – Completion certificate issued by local panchayat would satisfy requirement of section – Assessee entitled to deduction

The assessee developed housing projects and claimed deduction u/s 80-IB(10) for the A.Y. 2010-11. The Tribunal held that (a) the open terrace area of the building should not be included while computing the built-up area for the purpose of claiming deduction u/s 80-IB(10), (b) the time limit for completion of the eligible project should not be computed from the date on which the lay-out was approved for the first time but only from the date on which the building plan approval was obtained for the last time, and (c) the completion certificate issued by the local panchayat would satisfy the requirements of the section instead of the completion certificate issued by Chennai Metropolitan Development Authority which had originally approved the plan.

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

‘The Tribunal was right in holding that, (i) the open terrace area should not be included while computing the built-up area for the purpose of claiming deduction u/s 80-IB(10), (ii) the time limit for completion of the eligible project should not be computed from the date on which the lay-out was approved for the first time, but only from the date on which the building plan approval was obtained for the last time, and (iii) the completion certificate issued by the local panchayat would satisfy the requirements of the section instead of the completion certificate issued by the Chennai Metropolitan Development Authority which had originally approved the plan.’

ALLOWABILITY OF PORTFOLIO MANAGEMENT FEES IN COMPUTING CAPITAL GAINS

ISSUE FOR CONSIDERATION
Many investors in the stock market, especially high net-worth individuals or investors who have no investing experience, use the services of portfolio managers to manage their share and / or debt portfolios. Such services of expert portfolio managers are used to maximise the returns on investments. The portfolio managers charge the investors an annual fee for their services. Such fee is normally charged as a percentage of the value of the portfolio and may also include a fee linked to the performance of the portfolio. For instance, if the likely returns at the end of the year exceed a particular threshold percentage, the portfolio manager may get a percentage of the excess return over the threshold rate of return by way of a fee. Often, particularly for high net-worth individuals, such fees may constitute a substantial amount. Such fees include STT, stamp duty and other charges and are apart from the brokerage on purchase and sale of shares.

Investors have sought to claim deduction of such portfolio management fees in the computation of capital gains. There have been several conflicting decisions of the Tribunal on the deductibility of portfolio management fees while computing the capital gains. While the Mumbai Bench has held in several cases that such portfolio management fees are not deductible, the Pune, Delhi and Kolkata Benches, and even some Mumbai Benches of the Tribunal, have held that such fees are an allowable deduction in the computation of capital gains.

DEVENDRA MOTILAL KOTHARI’S CASE
The issue first came up before the Mumbai Bench of the Tribunal in the case of Devendra Motilal Kothari vs. DCIT 132 ITD 173, a case relating to A.Y. 2004-05.

In this case, the assessee declared certain long-term capital gains (LTCG) and short-term capital gains (STCG) after setting off the long-term capital losses and short-term capital losses. In the course of assessment, the A.O. noticed that the assessee had added portfolio management fees of Rs. 85,63,233 to the purchase cost of the shares while computing the capital gains. According to the A.O., the fees paid by the assessee for portfolio management services were not a part of the purchase cost of the shares. He, therefore, asked the assessee to explain why these fees should not be disallowed while computing the capital gains. The assessee submitted that the fees and other charges formed part of the cost of purchase and / or expenditure incurred by him and therefore must be taken into account whilst determining the chargeable capital gain. The assessee claimed that such fees and other expenses incurred by him as an investor, including fees for managing the investments, constituted the cost of purchase and were allowable for the purpose of computing the STCG or LTCG.

The A.O. disallowed the claim of the assessee while computing the STCG and LTCG, holding that these did not form part of the cost of acquisition of the shares.

In the appeal before the Commissioner (Appeals), it was contended by the assessee that the portfolio management fees constituted the cost of purchase of shares and securities and therefore was allowable as deduction while computing the capital gains. It was also submitted that without payment of these fees, no investments could have been made by the assessee and the question of realisation of capital gains would not have arisen. Alternatively, it was also contended that the portfolio management fees paid could be allocated between the purchase and sale of shares for the purpose of computing capital gains.

The Commissioner (Appeals) requested the assessee to submit a working, allocating the portfolio management fees paid in connection with the purchase and sale of shares, and also in relation to the opening and closing stock of shares during the year under consideration. The assessee submitted that the management fees paid was an allowable expenditure for the purpose of computing capital gains. Alternatively, it was also submitted that these fees could be allocated on the basis of the values of opening stock, long-term purchases, short-term purchases, long-term capital sale, short-term capital sale and closing stock, and based on such allocation, deduction may be allowed while computing LTCG and STCG.

The Commissioner (Appeals) found, on the basis of two portfolio management agreements filed with him, that the quantification of the fees was based on either the market value of the assets or the net value of the assets of the assessee as held by him either at the beginning or at the end of each quarter. He held that the assessee could not explain as to how the fees paid to the portfolio managers on such explicit basis could be considered differently so as to constitute either the cost of acquisition of the assets or expenditure incurred for selling such assets. He noted in this context that nothing was furnished by the assessee to establish any such nexus.

He held that the quarterly payment of fees by the assessee to the portfolio manager had no nexus either with the acquisition of the assets or the transfer of specific assets. He also held that it was just not possible to break up the fees paid by the assessee to the portfolio manager so as to hold that the same was relatable to the expenditure incurred solely for the purchase or transfer of assets. The assessee was paying these fees to the portfolio managers even on the interest accrued to him and the dividend received and it was therefore not acceptable that these fees were exclusively paid for acquiring or selling of shares as claimed by the assessee. The disallowance made by the A.O. of the assessee’s claim for deduction of portfolio management fees while computing the capital gains was therefore confirmed by the Commissioner (Appeals).

Before the Tribunal, it was submitted on behalf of the assessee that he had entered into an Investment Management Agreement with four concerns for managing his investments and fees was paid to them for these services. These fees were paid for the advice given by the Investment Management Consultants for purchase and sale of particular shares and securities as well as for the advice given by them not to sell particular shares and securities. Thus, it was contended that the expenditure incurred on the payment of these fees was in connection with the acquisition / improvement of assets as well as in connection with the sale of assets. Therefore, the fees were deductible in computing the capital gains arising to the assessee from the sale of assets, i.e., shares and securities, as per the provisions of section 48.

Without prejudice to the contention that the portfolio management fees was deductible u/s 48 in computing capital gains and as an alternative, it was contended on behalf of the assessee that this expenditure was deductible even on the basis of Real Income Theory and the Rule of Diversion of Income by Overriding Title. It was contended that these fees were in the nature of a charge against the consideration received by the assessee on the sale of shares and securities, and therefore were deductible from the sale consideration, being Diversion of Income by Overriding Title.

It was argued on behalf of the Revenue that the relevant provisions in respect of computation of income from capital gains were very specific and the Real Income Theory could not be applied while computing the income from capital gains. It was submitted that portfolio management services were generally not required in the case of investment in shares and that was the reason why there was no provision for allowing deduction for portfolio management fees in the computation of capital gains. It was contended that the income can be taxed in generic terms applying the Real Income Theory, but this theory was not relevant for allowance of any deduction.

The Revenue further argued that the basis on which the portfolio management fees was paid by the assessee was such that there was no relationship with the purchase or sale of shares. Even without making any purchase or sale of shares and securities, the assessee was liable to pay a substantial sum as portfolio management fees.

The Tribunal noted that u/s 48 expenditure incurred wholly and exclusively in connection with transfer and the cost of acquisition of the asset and cost of any improvement thereto, were deductible from the full value of the consideration received or accruing to the assessee as a result of transfer of the capital assets. While the assessee had claimed a deduction in computing the capital gains, he had, however, failed to explain as to how the fees could be considered as cost of acquisition of the shares and securities or the cost of any improvement thereto. According to the Tribunal, the assessee had also failed to explain as to how the fees could be treated as expenditure incurred wholly and exclusively in connection with the sale of shares and securities.

On the other hand, the basis on which the fees were paid by the assessee showed that the fees had no direct nexus with the purchase and sale of shares, and the fees was payable by the assessee, going by the basis thereof, even without there being any purchase or sale of shares in a particular period. Also, when the Commissioner (Appeals) required the assessee to allocate the fees in relation to purchase and sale of shares as well as in relation to the shares held as investment on the last date of the previous year, the assessee could not furnish such details nor could he give any definite basis on which such allocation was possible.

The Tribunal concluded, therefore, that the fees paid by the assessee for portfolio management was not inextricably linked with the particular instance of purchase and sale of shares and securities so as to treat the same as expenditure incurred wholly and exclusively in connection with such sale, or the cost of acquisition / improvement of the shares and securities, so as to be eligible for deduction in computing capital gains u/s 48.

Even though the assessee was under an obligation to pay the fees for portfolio management, the mere existence of such an obligation to pay was not enough for the application of the Rule of Diversion of Income by an Overriding Title. The true test for applicability of the said rule was whether such obligation was in the nature of a charge on source, i.e., the profit-earning apparatus itself, and only in such cases where the source of earning income was charged by an overriding title it could be considered as Diversion of Income by an Overriding Title. The Tribunal noted that the profit arising from the sale of shares was received by the assessee directly, which constituted its income at the point when it reached or accrued to the assessee. The fee for portfolio management, on the other hand, was paid separately by the assessee to discharge his contractual liability. In the Tribunal’s view, it was thus a case of an obligation to apply income which had accrued or arisen to the assessee and it amounted to a mere application of income.

The Tribunal further held, following the Supreme Court decision in the case of CIT vs. Udayan Chinubhai 222 ITR 456, that the Theory of Real Income could not be applied to allow deduction to the assessee which was otherwise not permissible under the Income-tax Act. What was not permissible in law as deduction under any of the heads could not be allowed as a deduction on the principle of the Real Income Theory.

The Tribunal therefore dismissed the assessee’s appeal, holding that the portfolio management fees was not deductible in computing the capital gains.

This view of the Tribunal was followed in subsequent decisions of the Mumbai Bench of the Tribunal in the cases of Pradeep Kumar Harlalka vs. ACIT 143 TTJ 446 (Mum), Homi K. Bhabha vs. ITO 48 SOT 102 (Mum), Capt. Avinash Chander Batra vs. DCIT 158 ITD 604 (Mum), ACIT vs. Apurva Mahesh Shah 172 ITD 127 (Mum) and Mateen Pyarali Dholkia vs. DCIT (2018) 171 ITD 294 (Mum).

KRA HOLDING & TRADING (P) LTD.’S CASE
The issue again came up before the Pune Bench of the Tribunal in the case of KRA Holding & Trading (P) Ltd. vs. DCIT 46 SOT 19, in cases pertaining to A.Ys. 2002-03 and 2004-05 to 2006-07.

For A.Y. 2004-05, the assessee paid fees of Rs. 69,22,396 to a portfolio manager, consisting of termination fee of Rs. 59,15,574 and annual maintenance fee of Rs. 10,06,823. The capital gains on the sale of shares were disclosed net of such fees.

The A.O. disallowed such fees on the ground that the payment constituted ‘profit sharing fee’ paid to the portfolio manager and that the same was not authorised by or borne out of any agreement between the assessee and the portfolio manager or the SEBI (Portfolio Managers) Rules & Regulations, 1993.

Before the Commissioner (Appeals), the assessee submitted that the expenditure was incurred in connection with the acquisition of shares. Therefore, the expenditure was required to be capitalised as done by the assessee in the books of accounts. As per the assessee, this expenditure was part of the cost of acquisition of shares as there was a direct and proximate nexus between the fees paid to the portfolio manager and the process of acquisition of the securities and the sale of securities.

Without prejudice, the assessee argued that part of the fee was attributable to the act of selling of securities and, therefore, part of the fees could be said to be expenditure incurred wholly and exclusively in connection with the transfer. Further, it was argued that the fee was paid wholly and exclusively for acquiring and selling securities during the year under review. Therefore, the fees so paid should be loaded on the shares / securities purchased and sold during the year in the value proportion. In respect of the shares purchased during the year, the fees loaded would be the cost of acquisition and in respect of shares sold during the year the fees loaded would represent expenditure incurred wholly and exclusively in connection with the transfer.

The Commissioner (Appeals) dismissed the assessee’s appeal.

It was argued on behalf of the assessee before the Tribunal, that section 48 allowed deduction of any expenditure incurred wholly and exclusively in connection with transfer and this expenditure being an outflow to the assessee, should be loaded to the cost of the investments. It was claimed that what was taxable in the hands of the assessee was the actual income that reached the assessee and, therefore, the fees paid to the portfolio manager had to be deducted from the capital gains earned by the assessee.

Reliance was placed on behalf of the assessee on the jurisdictional High Court decision in the case of CIT vs. Smt. Shakuntala Kantilal 190 ITR 56 (Bom) for the proposition that when the genuineness and certainty and necessity of the payments was beyond doubt, and if it was only a case of absence of the enabling provisions in section 48, ‘such type of payments were deductible in two ways, one, by taking full value of consideration, i.e., net of such payments, or deducting the same as expenditure incurred wholly and exclusively in connection with the transfer.’ As per the High Court, the Legislature, while using the expression ‘full value of consideration’, has contemplated both additions as well as deductions from the apparent value. What it means is the real and effective consideration. The effective consideration is that after allowing the deductible expenditure. The expression ‘in connection with such transfer’ was certainly wider than the expression ‘for the transfer’. As per the High Court, any amount, the payment of which is absolutely necessary to effect the transfer, will be an expenditure covered by this clause.

On behalf of the Revenue it was contended that (i) the expenditure in question was directly unconnected with the securities in question and the same cannot be loaded to the cost of the acquisition; (ii) securities is a plural word, whereas the capital gains is calculated considering each capital asset on standalone basis, and for this there is need for identification of the asset-specific expenditure, be it for arriving at the cost of acquisition or for transfer-specific expenditure. Reliance was placed on the Mumbai Tribunal decision in Devendra Motilal Kothari (Supra).

In counter arguments, it was stated on behalf of the assessee that the Tribunal decision was distinguishable on facts. In that case, the assessee claimed the deduction which was calculated based on the global turnover reported by the portfolio manager, and where such turnover also included the dividend income, the basis was unscientific and unspecific, etc. Further, it was pointed out that the assessee in that case failed to discharge the onus of establishing the nexus that the fee paid to the portfolio manager was incurred wholly and exclusively in connection with the transfer of the assets; whereas, in the case being considered by the Pune Tribunal, the assessee not only demonstrated the direct nexus of the expenditure to the acquisition and sale / transfer of the securities successfully but also the fee in question was strictly on the NAV of the securities and not on the dividends or other miscellaneous income. It was claimed that the basis was totally and exclusively capital-value-oriented, consistently followed by the assessee and it constituted an acceptable basis. It was argued that when the expenditure of fee paid to the portfolio manager was genuine and an allowable claim, the claim must be allowed under the provisions of section 48.

The Tribunal observed that the scope of section 48 as per the binding judgment of the High Court in Shakuntala Kantilal (Supra) was that the claim of bona fide or genuine expenditure should be allowable in favour of the assessee so long as the incurring of the expenditure was a matter of fact and the necessity of making such a payment was the imminent requirement for the transfer of the asset. According to the Tribunal, it was now binding on its part to take the view that the expression ‘in connection with’ had wider meaning than the expression ‘for the transfer’.

The Tribunal observed that for allowing the claim of deduction in the computation of the capital gains, the expenditure had to be distinctly and intricately linked to the asset and its transfer. The onus was on the assessee to demonstrate the said linkage between the expenditure and the asset’s transfer. It was evident and binding that if the expenditure was undisputedly, necessarily and genuinely spent for the asset’s transfer within the scope of the provisions of section 48, the claim could not be disallowed for want of an express provision in section 48.

The Tribunal noted the following facts:
(i) the assessee made the payment of fee to the portfolio manager and the genuineness of the said payment was undisputed;
(ii) the Revenue authorities had also not disputed the requirement or necessity of the said payments;
(iii) quantitatively speaking, in view of the adverbial expression ‘wholly’ used in section 48(i), the payment of fee @ 5% was only restricted to the NAV of the securities and not the global turnover, including the other income;
(iv) regarding the purpose of payment in view of the adverbial expression, ‘exclusively’ used in section 48(i), the same was intended only for the twin purposes of the acquisition of the securities and for the sale of the same;
(v) the NAV was defined as the ‘net asset value of the securities of the client’ and the assessee calculated the fee linked to the securities’ value only and not including other income, such as interest or dividend, etc.

The Tribunal was of the opinion that:
(i) the expenditure was directly connected to the asset and its transfer;
(ii) it was genuinely incurred as accepted by the Revenue;
(iii) it was a bona fide payment made as per the norms of the ‘arm’s length principle’ since the portfolio manager and the assessee were unrelated;
(iv) the necessity of incurring of expenditure was imminent and it was in the normal course of the investment activity;
(v) the provisions of section 48 had to be read down in view of the ratio in the case of Shakuntala Kantilal (Supra) to accommodate the claim of such expenditure legally.

According to the Tribunal, the expression ‘in connection with such transfer’ enjoyed much wider meaning and, therefore, the fee paid to the portfolio manager had to be construed to have been expended for the purposes of acquisition and transfer of the investment of the securities. The Tribunal was of the view that the expression ‘transfer’ involved various sub-components and the first sub-component must be of purchase and possession of the securities. Unless the assessee was in possession of the asset, he could not transfer the same. Therefore, the expression ‘expenditure’ incurred wholly and exclusively in connection with ‘such transfer’ read with ‘as a result of the transfer of the capital asset’ mentioned in section 48 and 48(i) must necessarily encompass the transfer involved at the stage of acquisition of the securities till the stage of transfer involved in the step of sale of the impugned securities. Such an interpretation of section 48 of the Act was a necessity to avoid the likely absurdity.

The Tribunal therefore held that the expenditure was allowable u/s 48.

The view taken by the Pune Bench of the Tribunal in this case has been followed by the Pune and other Benches of the Tribunal in the cases of DCIT vs. KRA Holding & Trading (P) Ltd. 54 SOT 493 (Pune), Serum International Ltd. vs. Addl. CIT [IT Appeal No. 1576/PN/2012 and 1617/PN/2012, dated 18th February, 2015], RDA Holding & Trading (P) Ltd. vs. Addl. CIT [IT Appeal No. 2166/PN/2013 dated 29th October, 2014], Hero Motocorp Ltd. vs. DCIT [ITA No. 6282/Del/2015 dated 13th January, 2021], Amrit Diamond Trade Centre Pvt. Ltd. vs. ACIT [ITA No. 2642/Mum/2013 dated 15th January, 2016], Shyam Sunder Duggal HUF vs. ACIT [ITA No. 2998/Mum/2011 dated 22nd February, 2019] and Joy Beauty Care (P) Ltd. vs. DCIT [ITA No. 856/Kol/2017 dated 5th September, 2018].

OBSERVATIONS
A portfolio manager’s services, his fees and many related aspects are governed by the SEBI (Portfolio Managers) Regulations, 2000. Services include taking investment decisions on behalf of the client that can largely be classified into three parts:
a. identifying the scrip and the time and value of purchase,
b. decision as to retention of an investment, and
c. identifying the scrip and the time and price for exit.

The services do not include brokerage. Fees, though composite, are payable for performing the above-listed functions. The Regulations require the portfolio manager to share the manner of charging the fees and, importantly, for each service rendered to the client in the agreement. These fees are annually charged on the basis of the value of the portfolio or any other agreeable basis. In addition, though not always, fees are charged by sharing a part of the profit that accrues to the client.

In the context of section 48 of the Income-tax Act, the part of the fees attributable to the advisory services leading to the purchase should qualify to be included in the cost of acquisition and the other part of the fees attributable to the advisory services leading to the sale of the scrip should qualify to be included in the expenses incurred for the transfer. Unless otherwise stated in section 48, deduction of these parts of the fees should not be resisted. At the most, there could be a need to scientifically identify the parts of the fees attributable to these activities and allocate the parts rationally. Paying a lump sum or a composite fee should not be a ground for its blanket disallowance, nor should the manner of such payment take away the fact that the major part of the fees is paid for advising or deciding on various components of the purchase and sale of the scrip. No one pays the fees to a portfolio manager only for advice to retain the investment, though that part is relevant, but it is not a deciding factor for seeking the services of the portfolio manager. Besides, the advice to continue to retain a scrip is intended to fetch a better price realisation for the scrip and such advice should therefore also be construed as advice in relation to the sale of the investment.

Even otherwise, this should not discourage the claim for its allowance once it is accepted that the fees are paid mainly for advice on purchase and sales of investment; in the absence of a provision similar to section 14A, no part of an indivisible expenditure can be disallowed.

The issue in case of composite charges should not be whether it is allowable or not, at the most it could be how much out of the total is allowable. Even the answer here should be that no part of it could be disallowable where no provision for its segregation exists in the Act. [Maharashtra Sugars Ltd. 82 ITR 452(SC) and Rajasthan State Warehousing Corporation Ltd. 242 ITR 450(SC).]

As regards the fees representing the sharing of profit, we are of the considered opinion that such part is diverted at source under a contract which is not an agreement for partnership and surely is for payment for services offered.

The lead dissenting decision in the case of Devendra Motilal Kothari (Supra) was delivered against the claim for allowance, largely on account of the inability of the assessee to provide the basis for allocation of expenses on rational basis. This part is made clear by the Tribunal in its decision, making it clear that the expenditure could have been allowed in cases where the allocation was made available.

The other reason for dissenting with the decision of the Pune Bench in the KRA Investment case (Supra) was that the Bench had followed the Bombay High Court decision in Shakuntala Kantilal (Supra ) which, as noted in Pradeep Harlalka’s case (Supra), was overruled by the same Court in its later decision in Roshanbanu’s case (Supra). With great respect, without appreciating the facts in both the cases and, importantly, the part that had been overruled, it was incorrect on the part of the Mumbai Bench to proceed to disallow a legitimate claim simply because the decision referred to or even relied on was overruled. The reasons and rationale provided by the Court and borrowed by the Pune Bench for allowance of the expenditure could not have been ignored simply by stating that the decision relied upon by the Bench was overruled.

The Pune Bench of the Tribunal in KRA Holding & Trading’s case (Supra), placed substantial reliance on the Bombay High Court decision in the case of Shakuntala Kantilal (Supra) while deciding the matter. In Pradeep Kumar Harlalka’s case (Supra), the Tribunal noted that in the case of CIT vs. Roshanbanu Mohammed Hussein Merchant 275 ITR 231 (Bom), the Bombay High Court had observed that the decision in the case of Shakuntala Kantilal (Supra) was no longer good law in the light of subsequent Supreme Court decisions in the cases of R.M. Arunachalam vs. CIT 227 ITR 222, VSMT Jagdishchandran vs. CIT 227 ITR 240 and CIT vs. Attili N. Rao 252 ITR 880. All these decisions were rendered in the context of deductibility of mortgage debt and estate duty u/s 48 as expenditure incurred for transfer of the property.

Had the Bench looked into the facts of both the court cases and the conclusions arrived at therein, it could have appreciated that it was only a part of the decision, unrelated to the allowance of the expenditure of the PMS kind that was overruled.

It’s important to note that the following relevant part of the Shakuntala Kantilal decision continues to be valid:
‘The Legislature while using the expression “full value of consideration”, in our view, has contemplated both additions to as well as deductions from the apparent value. What it means is the real and effective consideration. That apart, so far as (i) of section 48 is concerned, we find that the expression used by the Legislature in its wisdom is wider than the expression “for the transfer”. The expression used is “the expenditure incurred wholly and exclusively in connection with such transfer”. The expression “in connection with such transfer” is, in our view, certainly wider than the expression “for the transfer”. Here again, we are of the view that any amount the payment of which is absolutely necessary to effect the transfer will be an expenditure covered by this clause. In other words, if without removing any encumbrance including the encumbrance of the type involved in this case, sale or transfer could not be effected, the amount paid for removing that encumbrance will fall under clause (i). Accordingly, we agree with the Tribunal that the sale consideration requires to be reduced by the amount of compensation.’

These parts of the decision are not overruled by the decision of the Supreme Court. With due respect to the Bench of the Tribunal that held that the expenditure on fees was not allowable simply because the decision of one court was found, in the context of the facts, to be not laying down the good law, requires reconsideration. The fact that the many parts of the decision continued to be relevant could not have been ignored. It is these parts that should have been examined by the Tribunal to decide the case for allowance or, in the alternative, it should have independently adjudicated the issue without being influenced by the observation of the Apex Court made in the context of the facts in the case before it.

In Shakuntala Kantilal, the Bombay High Court examined the meaning of the terms ‘full value of consideration’ (to mean the real and effective consideration, including both additions to and deductions from the apparent value), and ‘expenditure incurred wholly and exclusively in connection with such transfer’ (to mean any amount the payment of which is absolutely necessary to effect the transfer), in deciding the matter regarding deductibility of compensation paid to previous intending buyer of the property.

In R.M. Arunachalam’s case (Supra), the Supreme Court examined the deductibility of estate duty paid as cost of improvement of the inherited asset. In this decision, the Supreme Court did not examine any issue relating to full value of consideration, cost of acquisition or expenses in connection with transfer at all. The Court specifically refused to answer the question regarding diversion of income by overriding title, which involved the question whether apart from the deductions permissible under the express provision contained in section 48, deduction on account of diversion was permissible, since the issue had not been raised before the Tribunal or the High Court.

In V.S.M.R. Jagdishchandran’s case (Supra), the Supreme Court considered whether the discharge of a mortgage debt created by the owner himself amounted to cost of acquisition of the property deductible u/s 48. The Court in this case did not examine the issue regarding full value of consideration or expenditure in connection with transfer. In Attili N. Rao’s case (Supra), the assessee’s property had been mortgaged with the Excise Department for payment of kist dues, the property was auctioned by the Government and the proceeds, net of the kist dues, was paid to the assessee. In this case, two of the questions before the Supreme Court were whether the charge was to be deducted in computing the full value of consideration, or could it be regarded as an expenditure incurred towards the cost of acquisition of the capital asset. The Supreme Court did not answer these questions while holding that the gross realisation was to be considered for computation of capital gains.

The Supreme Court, therefore, does not seem to have specifically overruled the Bombay High Court decision in the case of Shakuntala Kantilal (Supra), specifically those aspects dealing with the expenses in connection with the transfer.

On the other hand, in a subsequent decision in Kaushalya Devi vs. CIT 404 ITR 536, the Delhi High Court had an occasion to examine a situation identical to that prevailing in the Shakuntala Kantilal case. While holding that the payment of liquidated damages to the previous intending purchaser was an expenditure incurred wholly and exclusively in connection with the transfer, the Delhi High Court observed that,

…the words ‘wholly and exclusively’ used in section 48 are also to be found in section 37 of the Act and relate to the nature and character of the expenditure, which in the case of section 48 must have connection, i.e., proximate and perceptible nexus and link with the transfer resulting in income by way of capital gain. The word ‘wholly’ refers to the quantum of expenditure and the word ‘exclusively’ refers to the motive, objective and purpose of the expenditure. These two words give jurisdiction to the taxing authority to decide whether the expenditure was incurred in connection with the transfer. The expression ‘wholly and exclusively’, however, does not mean and indicate that there must exist a necessity or compulsion to incur an expense before an expenditure is to be allowed. The word ‘connection’ in section 48(i) reflects that there should be a causal connect and the expenditure incurred to be allowed as a deduction must be united, or in the state of being united with the transfer, resulting in income by way of capital gains on which tax has to be paid. The expenditure, therefore, should have direct concern and should not be remote or have an indirect result or connect with the transfer. A practical and pragmatic view in the circumstances should be taken to tax the real income, i.e., the gain.

The Delhi High Court further observed that: ‘the words “wholly and exclusively” require and mandate that the expenditure should be genuine and the expression “in connection with the transfer” require and mandate that the expenditure should be connected and for the purpose of transfer. Expenditure, which is not genuine or sham, is not to be allowed as a deduction. This, however, does not mean that the authorities, Tribunal or the Court can go into the question of subjective commercial expediency or apply subjective standard of reasonableness to disallow the expenditure on the ground that it should not have been incurred or was unreasonably large. In the absence of any statutory provision on these aspects, discretion exercised by the assessee who has incurred the said expenditure must be respected, for interference on subjective basis will lead to unpalatable and absurd results. As in the case of section 37 of the Act, jurisdiction of the authorities, Tribunal or Court is confined to investigate and decide as to whether the expenditure was actually incurred, i.e., the expenditure was genuine and was factually expended and paid to the third party’.

If one applies this ratio to the deductibility of portfolio management charges in computing capital gains, the portfolio manager is paid for the services of advising on what shares to buy and when to buy and sell the shares, and of carrying out the transactions. To the extent that the services are rendered in connection with the purchase of the shares, the fees constitute part of the cost of acquisition of the shares, and to the extent that the fees relate to the sale of shares, the fees are expenses incurred wholly and exclusively for the transfer of the shares. In either situation, the fees should clearly be deductible in computing the capital gains, as held by the Pune Bench of the Tribunal.

If one analyses the facts of the cases as well, it can be clearly observed that the decision in Devendra Motilal Kothari’s case was to a great extent influenced by the fact that the assessee was unable to apportion the fee between the purchases, sales and the closing stock on a rational basis, whereas in KRA Holding & Trading’s case, the assessee was able to demonstrate such bifurcation on a reasonable basis. Therefore, if a rational allocation of the fees is carried out, there is no reason as to why such fees should not be allowed as a deduction, either as cost of acquisition or as expenses in connection with the transfer.

It may also be noted that as observed by the Tribunal in Joy Beauty Centre’s case (Supra), the Department had filed an appeal in the Bombay High Court against the Pune Tribunal’s decision in the case of KRA Holding & Trading (Supra). The appeal has been admitted by the Bombay High Court only on the question of whether the income was in the nature of business income or capital gains. Therefore, the Pune Tribunal’s decision in respect of allowability of portfolio management fees has attained finality.

There is no dispute that the objective behind the hiring of the portfolio manager’s services is to seek advice on purchase and sale of scrips, which expenses, without much suspicion, are allowable in computing the capital gains.

It would be inequitable to disallow a genuine expenditure incurred for earning a taxable income on the pretext that no express and specific provision for its allowance exists in the Act. In our opinion, the existing provisions of section 48 are wide enough to support the deduction of the fees.

Any attempt to isolate a part of the expenditure for disallowance should be avoided on the grounds of the composite expenditure and the expense in any case representing either the cost of acquisition or an expense in connection with the transfer.

As clarified by the Tribunal in the KRA Holding’s case, where the assessee demonstrated the direct nexus of the expenditure to the acquisition and sale / transfer of the securities successfully, and also the fee in question was strictly on the NAV of the securities and not on the dividends or other miscellaneous income, such fee should be allowable in computing the capital gains.

The better view of the matter, therefore, seems to be that portfolio management fees are deductible in computing the capital gains, as held by the Pune, Delhi, Kolkata and some Mumbai Benches of the Tribunal.

Exemption u/s 10(10C) – Amount received under early retirement option scheme of bank – Exemption not claimed in return but later in representation to Principal Commissioner on basis of Supreme Court ruling in case of another employee – That exemption not claimed in return of income not material – Assessee entitled to benefit of exemption

13 Gopalbhai Babubhai Parikh vs. Principal CIT [2021] 436 ITR 262 (Guj) A.Y.: 2004-05; Date of order: 20th January, 2021 Ss. 10(10C) and 264 of ITA, 1961

Exemption u/s 10(10C) – Amount received under early retirement option scheme of bank – Exemption not claimed in return but later in representation to Principal Commissioner on basis of Supreme Court ruling in case of another employee – That exemption not claimed in return of income not material – Assessee entitled to benefit of exemption

The assessee was a bank employee and opted for the scheme of early retirement declared by the bank. In his return of income for the A.Y. 2004-05, he did not claim the benefit of exemption u/s 10(10C) on the amount received under the early retirement option scheme. Thereafter, relying on the dictum of the Supreme Court in the case of a similarly situated employee of the same bank, to the effect that the employee was entitled to the exemption u/s 10(10C), the assessee filed applications before the Principal Commissioner and claimed exemption u/s 10(10C) under the scheme. The Principal Commissioner was of the view that the assessee, unlike in the case before the Supreme Court, had not claimed such deduction in his return, and secondly, the assessee was expected to file a revision application u/s 264 and not file a representation in that regard. Therefore, he rejected the claim of the assessee.

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

‘i) On the facts, the assessee was entitled to the exemption u/s 10(10C) for the amount received from his employer bank at the time of his voluntary retirement under the early retirement option scheme. Even if the assessee had not claimed the exemption in his return of income for the A.Y. 2004-05, he could claim it at a later point of time. The orders passed by the Principal Commissioner rejecting the benefit of exemption u/s 10(10C) are set aside.

ii) It is declared that the writ applicant is entitled to claim exemption u/s 10(10C) for the amount of Rs. 5,00,000 received from the ICICI Bank Ltd. at the time of his voluntary retirement under the scheme in accordance with the law. It is clarified that this order has been passed in the peculiar facts of the case and shall not be cited as a precedent.’

Direct Tax Vivad Se Vishwas Act, 2020 – Resolution of disputes – Sum payable by declarant – Difference between appeal by assessee and that by Revenue – Lower rate of deposit of disputed tax where appeal is preferred by Revenue – Appeal to Tribunal by Revenue – Tribunal remanding matter to A.O. – Appeal from order by assessee before High Court – High Court restoring Revenue’s appeal to Tribunal – Appeal was by Revenue – Assessee entitled to lower rate of deposit of disputed tax

12 Cooperative Rabobank U.A. vs. CIT [2021] 436 ITR 459 (Bom) A.Y.: 2002-03; Date of order: 7th July, 2021 Direct Tax Vivad Se Vishwas Act, 2020

Direct Tax Vivad Se Vishwas Act, 2020 – Resolution of disputes – Sum payable by declarant – Difference between appeal by assessee and that by Revenue – Lower rate of deposit of disputed tax where appeal is preferred by Revenue – Appeal to Tribunal by Revenue – Tribunal remanding matter to A.O. – Appeal from order by assessee before High Court – High Court restoring Revenue’s appeal to Tribunal – Appeal was by Revenue – Assessee entitled to lower rate of deposit of disputed tax

The assessee was a bank established in the Netherlands. It filed its return for the A.Y. 2002-03 declaring Nil income. The assessment order was passed assessing the business profits attributable to its permanent establishment at Rs. 31,25,060. The Commissioner (Appeals) deleted the addition. The Revenue filed an appeal before the Tribunal which remanded the issue to the A.O. Against the order, the assessee filed an appeal before the High Court on 23rd September, 2015 u/s 260A. The assessee also filed a Miscellaneous Application before the Tribunal which was rejected by an order dated 21st August, 2018. Thereafter, on 29th August, 2018, the High Court passed an order setting aside both the orders of the Tribunal, viz., the order dated 1st April, 2015 restoring the issue to the file of the A.O., as well as the order dated 21st August, 2018 dismissing the Miscellaneous Application filed by the assessee. The High Court directed the Tribunal to decide the matter afresh.

Meanwhile, the assessee made a declaration in Form 1 along with an undertaking in Form 2 according to the provisions of the Direct Tax Vivad Se Vishwas Act, 2020. The assessee indicated an amount payable under the 2020 Act as Rs. 7,50,014 which was 50% of the disputed tax. On 28th January, 2021, Form 3 was issued by the designated authority indicating the amount payable as Rs. 15,00,029 which was 100% of the disputed tax.

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

‘i) A plain reading of the Table in section 3 of the Direct Tax Vivad Se Vishwas Act, 2020 suggests that in the case of an eligible appellant, if it is a non-search case, the amount that is payable would be 100% of the disputed tax, and if it is a search case it would be 125% of the disputed tax. However, in a case where the appeal is filed by the Income-tax authority, the amount payable shall be one-half of the amount calculated for payment of 50% of disputed tax or 100%.

ii) The Court had sent back the matter to the Tribunal and what was before the Tribunal was a matter by the Revenue. Factually as well as in law, it was the Revenue’s matter which stood revived. It was also not the Revenue’s case that it had not accepted the decision of the Court. The whole process resurrected under the orders of the High Court was not the proceedings in the Tribunal by the assessee but of the Revenue preferred u/s 253 of the 1961 Act where the Revenue was the appellant. Maybe the appeal by the Revenue is revived at the instance of the assessee because of its proceedings in the High Court, but that would by no stretch of imagination make the appeal before the Tribunal an appeal by the assessee u/s 253. Hence, the first proviso to section 3 of the 2020 Act would become applicable and, accordingly, the amount payable by the assessee would be 50% of the amount, viz., 50% of the disputed tax.’

Charitable purpose – Exemption u/s 11 – Conditional exemption where trust is carrying on business – Meaning of ‘business’ – Trust running residential college – Maintenance of hostel in accordance with statutory requirement – Maintenance of hostel did not amount to business – Trust entitled to exemption

Dayanand Pushpadevi Charitable Trust vs. Addl. CIT 11 [2021] 436 ITR 406 (All) A.Y.: 2010-11; Date of order: 23rd June, 2021 Ss. 2(13), 2(15) and 11 of ITA, 1961

Charitable purpose – Exemption u/s 11 – Conditional exemption where trust is carrying on business – Meaning of ‘business’ – Trust running residential college – Maintenance of hostel in accordance with statutory requirement – Maintenance of hostel did not amount to business – Trust entitled to exemption

The assessee was registered as a charitable trust. The trust was also recognised and registered u/s 12A as an institution whose objects were charitable in nature. The trust ran a dental college which was a residential institution. In pursuance of the statutory obligation imposed by the Dental Council of India requiring all students to reside in the halls of residence or hostel built by the institute within its campus, the assessee ran a hostel for residence of the students (both boys and girls) admitted in the institute. The hostel fees charged from the students included a mess fee. The A.O. concluded that the hostel activities of the trust were separable from its educational activities and would fall within the meaning of ‘business’ u/s 2(13) and could not be treated as ‘charitable purposes’ u/s 2(15). The benefit of section 11 was denied to the assessee.

The assessment order was affirmed in appeals both by the Commissioner (Appeals) and the Tribunal.

But the Allahabad High Court allowed the appeal filed by the assessee and held as under:

‘i) Under sub-section (4A) of section 11, income of any business of a trust in the nature of profit and gains of such business can be exempted under sub-section (1) of section 11 only if two preconditions mentioned in the sub-section are fulfilled. The first condition is that the business must be incidental to the attainment of the objectives of the trust. The crucial word in sub-section (4A) is “business” which has to be understood according to the meaning provided u/s 2(13). Any interpretation or meaning given to the word “business” in the literal parlance cannot be read into the Act as the word “business” has been defined in the Act itself.

ii) The applicability of sub-section (4A) of section 11 presupposes income from a business, being profits and gains of the business, and hence the test applied is whether the activity which is pursued is integral or subservient to the dominant object or is independent of or ancillary or incidental to the main object or forms a separate activity in itself. The issue whether the institution is hit by sub-section (4A) of section 11 will essentially depend upon the individual facts of the case where considering the nature of the individual activity, it will have to be tested whether it forms an incidental, ancillary or connected activity and whether it was carried out predominantly with the profit motive in the nature of trade or commerce.

iii) Having regard to the object and purpose for which the institution in question had been established by the trust and the mandate of the Dental Council of India in the Gazette Notification of the year 2007, its activity in maintaining the hostel by charging hostel fee (for its maintenance and providing mess facility) was an integral part of the main activity of “education” of the assessee. The hostel and mess facility sub-served the main object and purpose of the trust and were an inseparable part of its academic activity. The hostel fee could not be said to be income derived from the “business” of the trust. The activity being directly linked to the attainment of the main objectives of the trust, the requirement of maintaining separate books of accounts with regard to such activity for seeking benefit of exemption u/s 11(1) was, therefore, not attracted.

iv) There was no material on record with the Revenue to hold that the hostel activity was a separate business. From any angle, it could not be proved by the Revenue that the income from the hostel fee could be treated as profits and gains of the separate business or commercial activity. The assessee was entitled to exemption u/s 11.’

Assessment – Faceless assessment – Variation in income to assessee’s prejudice – Personal hearing not given before passing assessment order and consequential notices though requested – Assessment order and subsequent notices of demand and penalty set aside

10 Satia Industries Limited vs. NFAC [2021] 437 ITR 126 (Del) Date of order: 31st May, 2021 Ss. 144B(7)(vii), 156 and 270A of ITA, 1961

Assessment – Faceless assessment – Variation in income to assessee’s prejudice – Personal hearing not given before passing assessment order and consequential notices though requested – Assessment order and subsequent notices of demand and penalty set aside

The assessee filed a writ petition challenging the assessment order and the consequential notice, issued u/s 156, towards tax demand and u/s 270A for initiation of penalty proceedings on the ground that no personal hearing was granted despite a request being made.

The High Court set aside the assessment order and the consequential notices issued u/s 156 towards tax demand and u/s 270A for initiation of penalty proceedings and gave liberty to the Department to proceed from the stage of issuing a notice-cum-draft assessment order with directions to afford an opportunity of hearing to the assessee.

Assessment – Faceless assessment – Writ – Request by assessee for personal hearing – Orders passed and consequential notices of demand and penalty without affording personal hearing – No information on whether steps enumerated in provision taken – Proceedings under assessment order and subsequent notices stayed while notice on writ petition issued

9 Lemon Tree Hotels Limited vs. NFAC [2021] 437 ITR 111 (Del) A.Y.: 2018-19; Date of order: 21st May, 2021 Ss. 143(3), 144B, 144B(7), 156, 270A and 274 of ITA, 1961

Assessment – Faceless assessment – Writ – Request by assessee for personal hearing – Orders passed and consequential notices of demand and penalty without affording personal hearing – No information on whether steps enumerated in provision taken – Proceedings under assessment order and subsequent notices stayed while notice on writ petition issued

For the A.Y. 2018-19, a notice-cum-draft assessment order was issued to the assessee calling upon it to file its objections. Since the matter was complex both on the facts and on law, the assessee made a request for a personal hearing to the A.O. But orders were passed u/s 143(3) r.w.s. 144B and consequential notices of demand were issued u/s 156 and for initiation of penalty proceedings u/s 274 r.w.s. 270A.

The assessee filed a writ petition contending that the order and notices were passed in breach of the principles of natural justice. The Delhi High Court, while issuing notice on the writ petition, stayed the operation of the order passed u/s 143(3) r.w.s. 144B and the consequential notices of demand issued u/s 156 and for initiation of penalty proceedings u/s 274 r.w.s. 270A, on the grounds that the Department did not inform whether steps under sub-clause (h) of section 144B(7)(xii) had been taken.

The High Court observed that in faceless assessment, prima facie, once an assessee requests for a personal hearing the officer in charge, under the provisions of clause (viii) of section 144B(7) would, ordinarily, have to grant a personal hearing. According to the provisions of section 144B(7)(viii), the discretion of the officer in charge of the Regional Faceless Assessment Centre is tied in with the circumstances covered in sub-clause (h) of section 144B(7)(xii).

Appeal to Appellate Tribunal – Powers of Tribunal – Tribunal cannot transfer case from Bench falling within jurisdiction of a particular High Court to Bench under jurisdiction of different High Court Appeal to High Court – Writ – Competency of appeal – Competency of writ petition – Meaning of ‘every order’ of section 260A – Order must relate to subject matter of appeal – Order transferring case – Appeal not maintainable against order – Writ petition maintainable

8 MSPL Ltd. vs. Principal CIT [2021] 436 ITR 199 (Bom) A.Ys.: 2005-06 to 2008-09; Date of order: 21st May, 2021 Ss. ss. 255 and 260A of ITA, 1961 r.w.r. 4 of ITAT Rules, 1963; and Article 226 of Constitution of India

Appeal to Appellate Tribunal – Powers of Tribunal – Tribunal cannot transfer case from Bench falling within jurisdiction of a particular High Court to Bench under jurisdiction of different High Court

Appeal to High Court – Writ – Competency of appeal – Competency of writ petition – Meaning of ‘every order’ of section 260A – Order must relate to subject matter of appeal – Order transferring case – Appeal not maintainable against order – Writ petition maintainable

The assessee was engaged in the business of mining, running a gas unit and generating power through windmills. The relevant period is the A.Ys. 2005-06 to 2008-09. Following centralisation of the cases at Bangalore, the assessments were carried out at Bangalore and in all the assessment orders the A.O. was the Assistant Commissioner. The first appeals against the assessment orders were preferred before the Commissioner (Appeals) at Bangalore, after which the appeals were filed before the Tribunal at Bangalore. On 20th August, 2020, the President of the Tribunal passed an order u/r 4 of the Income-tax (Appellate Tribunal) Rules, 1963 directing that the appeals be transferred from the Bangalore Bench to be heard and determined by the Mumbai Benches of the Tribunal.

The assessee filed a writ petition challenging the order. The Bombay High Court allowed the writ and held as under:

‘i) Section 255 of the Income-tax Act, 1961 deals with the procedure of the Appellate Tribunal. Sub-section (1) of section 255 says that the powers and functions of the Appellate Tribunal may be exercised and discharged by Benches constituted by the President of the Appellate Tribunal from among the Members thereof. Sub-section (5) says that the Tribunal shall have power to regulate its own procedure and that of its various Benches while exercising its powers or in the discharge of its functions. This includes notifying the places at which Benches shall hold their sittings. This provision cannot be interpreted in such a broad manner as to clothe the President of the Tribunal with jurisdiction to transfer a pending appeal from one Bench to another Bench outside the headquarters in another State.

ii) The Income-tax (Appellate Tribunal) Rules, 1963 have been framed in exercise of the powers conferred by sub-section (5) of section 255 of the Act to regulate the procedure of the Appellate Tribunal and the procedure of the Benches of the Tribunal. Sub-rule (1) of Rule 4 empowers the President to direct hearing of appeals by a Bench by a general or special order, and sub-rule (2) deals with a situation where there are more than two Benches of the Tribunal at any headquarters and provides for a transfer of an appeal or an application from one Bench to another within the same headquarters. Thus, this provision cannot be invoked to transfer a pending appeal from one Bench under one headquarters to another Bench in different headquarters.

iii) Section 127 of the Act deals with transfer of any case from one A.O. to another A.O. In other words, it deals with transfer of assessment jurisdiction from one A.O. to another. While certainly the appropriate authority u/s 127 has the power and jurisdiction to transfer a case from one A.O. to another subject to compliance with the conditions mentioned therein, the principles governing the section cannot be read into transfer of appeals from one Bench to another Bench that, too, in a different State or Zone for the simple reason that it is not a case before any A.O.

iv) A careful reading of section 260A(1) would go to show that an appeal shall lie to the High Court from “every order” passed in appeal by the Tribunal if the High Court is satisfied that the case involves a substantial question of law. The expression “every order” in the context of section 260A would mean an order passed by the Tribunal in the appeal. In other words, the order must arise out of the appeal, it must relate to the subject matter of the appeal. An order related to transfer of the appeal would be beyond the scope and ambit of sub-section (1) of section 260A.

v) Clause (2) of Article 226 makes it clear that the power to issue directions, orders or writs by any High Court within its territorial jurisdiction would extend to a cause of action or even a part thereof which arises within the territorial limits of the High Court, notwithstanding the fact that the seat of the authority is not within the territorial limits of the High Court.

vi) The writ petition was maintainable because the petitioner had no other statutory remedy. Having regard to the mandate of Clause (2) of Article 226 of the Constitution, the Bombay High Court had jurisdiction to entertain the petitions.

vii) The fact that the assessee may have expressed no objection to the transfer of the assessment jurisdiction from the A.O. at Bangalore to the A.O. at Mumbai after assessment for the assessment years covered by the search period, could not be used to non-suit the petitioner in his challenge to the transfer of the appeals from one Bench to another Bench in a different State and in a different Zone. The two were altogether different and had no nexus with each other.

viii) The orders dated 19th March, 2020 and 20th August, 2020 were wholly unsustainable in law.’

If an assessee admits certain undisclosed income of the company in which he is a Director, on the basis of incriminating material found and seized during search, since income / entries in such seized material belonged to company, impugned additions made in hands of assessee on account of such undisclosed income of company was unjustified and liable to be deleted

12 JCIT vs. Narayana Reddy Vakati [2021-88-ITR(T) 128 taxmann.com 377 (Hyd-Trib)] ITA No.: 1226 to 1230 (Hyd) of 2018 A.Ys.: 2010-11 to 2014-15; Date of order:
21st April, 2021

If an assessee admits certain undisclosed income of the company in which he is a Director, on the basis of incriminating material found and seized during search, since income / entries in such seized material belonged to company, impugned additions made in hands of assessee on account of such undisclosed income of company was unjustified and liable to be deleted

FACTS
During survey, a loose sheet bundle was impounded containing details of certain receipts and payments. The assessee admitted the same to be income from undisclosed sources. The same was assessed as additional income in the hands of the assessee. However, the assessee did not offer the said income to tax in his return of income. Hence, a show cause notice was issued as to why undisclosed income admitted during the search / post-search proceedings should not be added to his total income. The assessee stated that the income was inappropriately admitted in his hands instead of the company. He also furnished year-wise statements stating that these amounts do not belong to him.

However, the A.O. concluded that the assessee’s reply could not be accepted. The assessee had not retracted from his disclosure of income till filing of return. There was an almost 16-month gap from the search. In this period, he never brought his version before the DDIT (Inv.) or before the A.O. that the amounts disclosed pertained to the company.

Therefore, the A.O. concluded that the assessee adopted this device to evade taxes on admitted income by offering the same in the hands of the company and never furnished the required information such as books of accounts, receipts and payments account, etc., and submitted a reply to the show cause notice at the last minute deliberately to avoid verification of the transactions. Hence, the assessee’s reply was not considered.

On further appeal to the CIT(A), the assessee submitted that though he had admitted certain amount in his hands in the course of his statement u/s 132(4), the seized material forming the basis of the additions belonged to the company. Hence, while filing return of income he had reconciled the material and submitted a letter to the A.O. to the effect and pleaded with him to assess the said admitted income in the hands of the company. He also contended that the A.O. neither accepted his plea nor made any attempt to verify the facts set out by him in the letter. Therefore, in the absence of any seized material found during the course of search belonging to the assessee, no addition can be made.

The CBDT in its Circular in letter F.No.286/98/20l3-lT (Inv-II), dated 18th December, 2014, instructed the A.O. not to obtain disclosures and rather focus on gathering evidences during the search. Thus, the additions in the hands of the assessee were made only on the basis of the statement made uls. 132(4) which was given by the assessee in a state of confusion and without thinking of the consequences and its impact in the future. The CIT(A) observed that the claim of the assessee was not contradicted by the A.O. The income had to be taxed in the right hands irrespective of the admission made during the search, on the basis of evidences found or gathered during the assessment proceedings. The A.O. assessed the income on substantive basis in the hands of the assessee and on protective basis in the hands of the company. As the material and the entries in the statements related to the business of the company, the CIT(A) held that income was not taxable in the individual’s hands and accordingly deleted the addition made by the A.O. Aggrieved, the Revenue filed an appeal to the Tribunal.

HELD
The Tribunal observed that there is not even an indication in the Revenue’s grounds that the impugned additions pertain to the assessee himself rather than his company. The Apex Court’s landmark decision in ITO vs. C.H. Atchaiah [1996] 84 Taxman 630/218 ITR 239 (SC) had held long back that the A.O. can and must tax the right person and the right person alone. The Tribunal also relied on another landmark decision in the case of Saloman vs. Saloman and Co. Ltd. [1897] AC 22, that in corporate parlance a company is very much a body corporate and a distinct entity apart from its Director.

Therefore, it upheld the action of the CIT(A) in deleting the additions made by the A.O.

Provisions of section 56(2)(vii)(b)(ii) will not apply to a case where there was an allotment prior to A.Y. 2014-15 – The amended provisions cannot apply merely because the agreement was registered after the provision came into force

11 Naina Saraf vs. PCIT [TS-897-ITAT-2021 (Jpr)] A.Y.: 2015-16; Date of order: 14th September, 2021 Sections: 56(2)(vii), 263


Provisions of section 56(2)(vii)(b)(ii) will not apply to a case where there was an allotment prior to A.Y. 2014-15 – The amended provisions cannot apply merely because the agreement was registered after the provision came into force

FACTS

The assessee, a practising advocate of Rajasthan High Court, e-filed the return of income declaring therein a total income of Rs. 27,38,450. In the course of assessment proceedings before the A.O., the assessee filed a registered purchase deed in respect of purchase of immovable property and various other details required by the A.O. The A.O. completed the assessment accepting the returned income.
 

Subsequently, the PCIT observed that the assessee had purchased an immovable property for a consideration of Rs. 70,26,233 as co-owner with 50% share in the said property and the stamp duty value thereof was determined at Rs. 1,03,12,220; therefore, the difference of Rs. 32,85,987 was to be treated as income from other sources. The PCIT held that the A.O. having failed to invoke section 56(2)(vii)(b) during assessment proceedings, the order he had passed was erroneous insofar as it is prejudicial to the interest of the Revenue. He invoked the jurisdiction u/s 263 and issued a show cause notice, and after considering the submissions of the assessee, passed an order u/s 263 on the ground that there was no agreement and therefore the assessee cannot be given benefit of the first proviso to section 56(2)(vii)(b)(ii). The PCIT set aside the assessment order passed by the A.O. and directed him to complete the assessment afresh after giving an opportunity to the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that on 23rd September, 2006, the assessee applied for allotment of Flat No. 201 at Somdatt’s Landmark, Jaipur. The flat was allotted vide allotment letter dated 6th March, 2009 on certain terms and conditions mentioned in the allotment letter. The assessee agreed to the allotment by signing the letter of allotment on 11th November, 2009 as a token of acceptance. Prior to the registration of the transaction on 9th December, 2014, the assessee had paid Rs. 45,26,233 against the total sale consideration of Rs. 65,57,500. The allotment letter contained all substantive terms and conditions which created the respective rights and obligations of the parties and bound the respective parties. The allotment letter provided detailed specifications of the property, its identification and terms of the payment, providing possession of the subject property in the stipulated period and so on. The seller had agreed to sell and the assessee agreed to purchase the flat for an agreed price mentioned in the allotment letter.

 
The Tribunal held that,

i) What is important is to gather the intention of the parties and not to go by the nomenclature. There being an offer and acceptance by the competent parties for a lawful purpose with their free consent, the Tribunal held that all the attributes of a lawful agreement are available as per the provisions of the Indian Contract Act, 1872. Such agreement was acted upon by the parties and pursuant to the allotment letter the assessee paid a substantial amount of consideration of Rs. 45,26,233 as early as in the year 2008 itself. For all intents and purposes, such an allotment letter constituted a complete agreement between the parties. Relying on the decisions in the cases of Hasmukh N. Gala vs. ITO [(2015) 173 TTJ 537] and CIT vs. Kuldeep Singh [(2014) 270 CTR 561 (Delhi HC)] rendered in the context of the provisions of section 54, the Tribunal was convinced that the assessee had already entered into an agreement by way of allotment letter on 11th November, 2009 in A.Y. 2010-11;

ii) the pre-amended law which was applicable up to A.Y. 2013-14 never contemplated a situation where immovable property was received for inadequate consideration. It was only in the amended law specifically made applicable from A.Y. 2014-15 that any receipt of immovable property for inadequate consideration has been subjected to the provisions of section 56(2)(vii)(b), but not before that. Therefore, the applicability of the said provisions could not be insisted upon in the assessment years prior to A.Y. 2014-15;

iii) in the present case, since there was a valid and lawful agreement entered into by the parties long back in A.Y. 2010-11 when the subject property was transferred and substantial obligations discharged, the law contained in section 56(2)(vii)(b) as it stood at that point of time did not contemplate a situation of receipt of property by the buyer for inadequate consideration. The Tribunal held that the PCIT erred in applying the said provision;

iv) the Tribunal did not find itself in agreement with the contention of the DR that allotment was provisional as it was subject to further changes because of some unexpected happening which may be instructed by the approving authority, resulting in increase or decrease in the area and so on because, according to the Tribunal, it is a standard practice to save the seller (builder) from unintended consequences;

v) the Tribunal, relying on the decision of the Ranchi Bench in the case of Bajranglal Naredi vs. ITO [(2020) 203 TTJ 925], held that the mere fact that the flat was registered in the year 2014, falling in A.Y. 2015-16, the amended provisions of section 56(2)(vii)(b)(ii) could not be applied;

vi) the assessment order subjected to revision is not erroneous and prejudicial to the interest of the Revenue.

The appeal filed by the assessee was allowed.

Non-compliance with section 194C(7) will not lead to disallowance u/s 40(a)(ia)

10 Mohmed Shakil Mohmed Shafi Mutawalli vs. ITO [TS-889-ITAT-2021 (Ahd)] A.Y.: 2012-13; Date of order: 16th September, 2021 Sections: 40(a)(ia), 194C

Non-compliance with section 194C(7) will not lead to disallowance u/s 40(a)(ia)

FACTS
The original assessment u/s 143(3) was finalised on 26th March, 2014 determining total income of Rs. 9,15,737. Subsequently, the CIT passed an order u/s 263 directing the A.O. to make a fresh assessment after granting an opportunity to the assessee on the issue of non-deduction of tax on freight payment of Rs. 10,63,995. Subsequently, assessment u/s 143(3) was finalised on 16th February, 2015 wherein the A.O. held that only submission of the PAN of the transporter was not sufficient with respect to payment to the transporter. Consequently, the claim of transport expenses of Rs. 10,63,995 was disallowed.

Aggrieved, the assessee preferred an appeal to the CIT(A) who dismissed it, holding that the assesse had not complied with the provisions of section 194C(7).

The assessee then preferred an appeal to the Tribunal and submitted copies of the documents submitted before the lower authorities, which included copies of invoices, transportation bills, along with particulars of truck number, PAN, phone numbers and complete addresses of the transporters.

HELD
The Tribunal observed that,
i) The A.O. has neither disproved the genuineness of the evidences furnished before him nor made any further verification / examination related to claim of such expenditure debited to the P&L Account;
ii) The CIT(A) has sustained the disallowance merely on technical basis that the assessee has failed to comply with the provisions of section 194C(7);
iii) The Kolkata Bench of the Tribunal has, in the case of Soma Ghosh vs. DCIT 74 taxmann.com 90 held that if the assessee complies with the provisions of section 194C(6), no disallowance u/s 40(a)(ia) is permissible even though there is a violation of provisions of section 194C(7). The Karnataka High Court has in the case of CIT vs. Marikamba Transport Co. 57 taxman.com 273 held that in the case of payment made to a sub-contractor, non-filing of Form No. 15I/J is only a technical defect and the provisions of section 40(a)(ia) should not be attracted in such a case.

The Tribunal held that since the assessee has furnished copies of PAN along with copies of invoices of the transportation bill comprising the complete address of the transporter, phone number and complete particulars of the goods loaded through the transporter and the A.O. has not taken any steps to disprove the genuineness of the transportation expenses, it is not appropriate to disallow the claim of transportation expenses simply for a technical lapse u/s 194(7). This ground of appeal filed by the assessee was allowed.

Assessee not liable to deduct tax at source from asset valuer’s fees paid by the lender bank and later recovered from the assessee

9 Hindustan Organic Chemicals Ltd. vs. DCIT [TS-955-ITAT-2021 (Mum)] A.Y.: 2011-12; Date of order: 30th September, 2021 Sections: 40(a)(ia), 194J

Assessee not liable to deduct tax at source from asset valuer’s fees paid by the lender bank and later recovered from the assessee

FACTS
In the course of assessment proceedings, the A.O. observed from Form No. 3CD that the assessee had paid a sum of Rs. 3 lakhs to Sigma Engineering (Rasayani Unit) from which tax had not been deducted at source. The A.O. disallowed the sum of Rs. 3,00,000 u/s 40(a)(ia).

Aggrieved, the assessee preferred an appeal to the CIT(A) and submitted that it had availed credit facilities from State Bank of India (SBI) by mortgaging assets. The SBI had appointed Sigma Engineering Consultant for submitting a valuation report of the assets to secure their advances. Sigma raised a bill of Rs. 3,30,900 which included service tax. SBI made payment of the said amount and debited the sum from the assessee’s account. The assessee submitted that since it was a payment made to a banking company, it was not liable to deduct TDS. The CIT(A) upheld the action of the A.O.

Still aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal observed that the services of the consultant were utilised for the purpose of SBI in order to secure the assets mortgaged to it. The consultant was appointed by SBI and after submission of the report, the bank settled the fee and recovered it from the assessee. Although the charges were ultimately collected from the assessee, but the services were provided exclusively for the purpose of securing mortgaged assets assigned to the bank. TDS provisions would be applicable only when the services are utilised and respective payments are made directly to the service provider. In this case the assessee neither appointed the consultant nor paid the consultancy charges but was only the observer and, therefore, the provisions of section 40(a)(ia) of the Act do not apply.

Reopening of assessment – Information of shell companies – Right to cross-examination – Violation of the principle of natural justice – These pleas to be raised at time of reassessment – Reopening justified

8 M/s Amber, Bhubaneswar vs. The Deputy Commissioner of Income-tax, Circle-2(1) & Others [Writ petition (C) No. 14369 of 2019; Date of order: 5th July, 2021; Orissa High Court]

Reopening of assessment – Information of shell companies – Right to cross-examination – Violation of the principle of natural justice – These pleas to be raised at time of reassessment – Reopening justified

The petitioner filed its return of income for the A.Y. 2012-13 electronically on 28th September, 2012 disclosing a total income of Rs. 34,80,490. These tax returns were subjected to scrutiny under CASS and an assessment order was passed u/s 143(3) on 15th November, 2014 by the A.O. purportedly being satisfied with the genuineness of the transactions and documents, etc., disclosed by the petitioner.

Being aggrieved by certain disallowances of expenses in the aforementioned assessment order, the petitioner filed an appeal before the Commissioner of Income-tax (Appeals). Thereafter, the impugned notice u/s 147 was issued to the petitioner by the A.O. on 29th March, 2019 pursuant to which the petitioner sought the reasons for such reopening. The petitioner filed objections on 18th June, 2019. On 26th June, 2019, the A.O. rejected the objections and on 26th July, 2019 issued a notice u/s 142(1) seeking further details from the petitioner. The petitioner then filed the writ petition against the rejection order.

The petitioner submitted that the reopening was based on a mere change of opinion of the A.O. and, therefore, was bad in law. The reasons for which the assessment was sought to be reopened had already been considered in detail by the A.O. in the original assessment order.

On behalf of the Income-tax Department, it was submitted that the objections of the petitioner had been considered
in sufficient detail by the A.O. and had been rightly rejected.

The Court observed that the reasons for reopening of the assessment, as disclosed by the Department in its communication dated 17th May, 2019, inter alia state how the DTIT Investigating Unit-1, Kolkata in its letter dated 15th January, 2019 passed on information in the case of beneficiaries identified in the ‘Banka Group of Cases’. Apparently, a search and seizure / survey operation was conducted in the case of the Banka Group on 21st May, 2018. It was found that there were various paper / shell companies controlled by one Mr. Mukesh Banka for the purpose of providing accommodation entries in the nature of unsecured loans or in other forms. It appeared that the petitioner firm was one of the beneficiaries who had obtained accommodation entries in the financial year 2013-14 from two such paper companies controlled by the said Mr. Mukesh Banka, the details of which had been set out in the reasons for reopening the assessment as furnished to the petitioner.

The said information appears to have been analysed by the Department vis-à-vis the case record of the petitioner for the A.Y. 2012-13. It transpired that in the original assessment proceedings the petitioner had furnished the ledger accounts of both the above ‘shell’ companies for the financial year 2011-12 and these showed that the petitioner had taken loans of Rs. 15 lakhs from them. The statement made by Mr. Mukesh Banka u/s 132(4) was also set out in the reasons for the reopening. It needs to be noted that while the original assessment u/s 143(3) was completed on 15th November, 2014 and an assessment order passed, the information gathered by the Department pursuant to the search and seizure operation on the Banka Group of Companies emerged only on 21st May, 2018 and thereafter. Clearly, this information was not available with the Department earlier. Prima facie, therefore, it does not appear that the reassessment was triggered by a mere change of opinion by the A.O. Further, it is not possible to accept the plea of the petitioner that such opinion was based on the very same material that was available with the A.O. The fact of the matter is that there was no occasion for the A.O. to have known of the transactions involving the petitioner and the shell companies controlled by Mr. Mukesh Banka.

It was then contended by the petitioner that despite the petitioner asking for copies of the statement of Mr. Mukesh Banka and seeking cross-examination, this was denied to him and, therefore, there was violation of the principle of natural justice.

The Court observed that the non-supply of the copy of Mr. Banka’s statement (which incidentally has been extracted in full in the reasons for reopening), or not providing an opportunity to cross-examine Mr. Banka at the stage of objections, shall not vitiate the reopening of the assessment. Such opportunity would be provided, if sought by the petitioner and if so permitted in law, in the reassessment proceedings. Consequently, the Court reserved the right of the petitioner to raise all the defences available to it in accordance with law in the reassessment proceedings, including the right to cross-examine the deponents of the statements relied upon by the Department in the reassessment proceedings, The writ petition is accordingly dismissed.

Revision – Application for revision – Conditions precedent – No appeal filed against assessment order and expiry of time limit for filing appeal – Application for revision valid

42 Aafreen Fatima Fazal Abbas Sayed vs. ACIT [2021] 434 ITR 504 (Bom) A.Y.: 2018-19; Date of order: 8th April, 2021 S. 264 of ITA, 1961

Revision – Application for revision – Conditions precedent – No appeal filed against assessment order and expiry of time limit for filing appeal – Application for revision valid

The petitioner is an individual and for the A.Y. 2017-18 had offered in the return of income, long-term capital gains of Rs. 3,07,60,800 which had arisen on surrender of tenancy rights for that year. The assessment for A.Y. 2017-18 was completed u/s 143(3) vide assessment order dated 24th December, 2019. For A.Y. 2018-19, the petitioner had received income from house property of Rs. 12,69,954 and income from other sources of Rs. 14,35,692, making a total income of Rs. 27,05,646. After claiming deductions and set-off on account of deduction of tax at source and advance tax, the refund was determined at Rs. 34,320.

However, while filing return of income on 20th July, 2018 for the A.Y. 2018-19, the figure of long-term capital gains of Rs. 3,07,60,800 was wrongly copied by the petitioner’s accountant from the return of income filed for the A.Y. 2017-18, and the same was mistakenly included in the return for the A.Y. 2018-19. The return filed by the petitioner for the A.Y. 2018-19 was 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 purported to have been inadvertently shown in the return of income was determined, thereby raising a tax demand of Rs. 87,40,612. 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 before the A.O. on 25th July, 2019 seeking to rectify the mistake of 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). The petitioner had not received any order of acceptance or rejection of this application. In the meantime, the petitioner also made the grievance on the e-filing portal of the Central Processing Centre 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 letters dated 17th October, 2019, 20th February, 2020 and 24th November, 2020 with the A.O., requesting him to rectify the mistake u/s 154.

In order to alleviate the misery and bring to the notice of the higher authorities the delay in the disposal of the rectification application, the petitioner approached the Principal Commissioner u/s 264 on 27th January, 2021, seeking revision of the order of 2nd May, 2019 passed u/s 143(1), narrating the aforementioned facts and requesting the Principal Commissioner to direct the A.O. to recalculate tax liability for the A.Y. 2018-19 after reducing the amount of long-term capital gains from the total income of the petitioner for the said year.

However, instead of considering the application on merits, the Principal Commissioner of Income-tax-19, vide order dated 12th February, 2021, 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).

The petitioner therefore filed this writ petition and challenged the order. The Bombay High Court allowed the writ petition and held as under:

‘i) The assessee had not filed an appeal against the order u/s 143(1) u/s 246A of the Act and the time of 30 days to file the appeal had also admittedly expired. Once such an option had been exercised, a plain reading of the section suggested that it would not then be necessary for the assessee to waive such right. That waiver would have been necessary if the time to file the appeal had not expired. The application for revision was valid.

ii) The order dated 12th February, 2021 passed by the Principal Commissioner, the respondent No. 2, is set aside. We direct respondent No. 2 to decide the application filed by the petitioner u/s 264 afresh on merits and after hearing the petitioner, pass a
reasoned / speaking order in line with the aforesaid discussion for grant of relief prayed for in the said application.

Obiter dicta: Where 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, is 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.’

Direct Tax Vivad se Vishwas Act, 2020 – Scope of – Act deals with disputed tax – Application for revision u/s 264 relating to tax demand – Applicant eligible to make declaration under Direct Tax Vivad se Vishwas Act

41 Sadruddin Tejani vs. ITO [2021] 434 ITR 474 (Bom) A.Ys.: 1988-89 to 1998-99; Date of order: 9th April, 2021 S. 264 of ITA, 1961 and Direct Tax Vivad se Vishwas Act, 2020

Direct Tax Vivad se Vishwas Act, 2020 – Scope of – Act deals with disputed tax – Application for revision u/s 264 relating to tax demand – Applicant eligible to make declaration under Direct Tax Vivad se Vishwas Act

The petitioner was engaged in the business of retail footwear. He had filed declarations in Form 1 and undertaking in Form 2 in respect of each of the A.Ys. 1988-89 to 1997-98, u/s 4(1) of the Direct Tax Vivad se Vishwas Act, 2020 on 18th November, 2020. However, the same was rejected on 30th January, 2021.

Being aggrieved, 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) The Direct Tax Vivad se Vishwas Act, 2020 is aimed not only to benefit the Government by generating timely revenue but also to benefit the taxpayers by providing them with peace of mind, certainty and saving time and resources rather than spending the same otherwise. The Preamble clearly provides that this is an Act to provide for resolution of disputed tax and for matters connected therewith or incidental thereto. The emphasis is on disputed tax and not on disputed income.

ii) For a declarant to file a valid declaration there should be disputed tax in the case of such declarant. The definition of “tax arrears” clearly refers to an aggregate of the amount of disputed tax, interest chargeable or charged on such disputed tax, etc., determined under the provisions of the Income-tax Act, 1961. From a plain reading of the provisions of the 2020 Act and the Rules, it emerges that the designated authority would have to issue Form 3 as referred to in section 5(1) specifying the amount payable in accordance with section 3 of the 2020 Act in the case of a declarant who is an eligible appellant not falling u/s 4(6) nor within the exceptions in section 9 of the 2020 Act.

iii) The assessee had filed an application u/s 264 for adjustment or credit of Rs. 12,43,000 paid in respect of the tax demands of the A.Ys. 1988-89 to 1998-99 as according to him this amount had been adjusted only against the demand for the A.Y. 1987-88. While this application was pending, the Direct Tax Vivad se Vishwas Act, 2020 was enacted, followed by the Direct Tax Vivad se Vishwas Rules, 2020. The assessee filed applications under the 2020 Act and Rules. The assessee having filed a revision application u/s 264 for the A.Ys. 1988-89 to 1998-99 for adjustment of Rs.12,43,000 which application was pending before the Commissioner, admittedly being an eligible appellant, squarely satisfied the definition of “disputed tax” as contained in section 2(1)(j)(F) of the 2020 Act. This was because if the revision application u/s 264 were rejected, the assessee would purportedly be liable to pay a demand of Rs. 88,90,180 including income tax and interest. The assessee as eligible appellant had filed a declaration u/s 4 with the designated authority under the provisions of section 4 of the 2020 Act in respect of tax arrears, which included the disputed tax which would become payable as may be determined. This was not only a case where there was a disputed tax but also tax arrears as referred to in section 3 of the 2020 Act.

iv) The designated authority had not raised any objection under any provision of the 2020 Act or Rules with respect to the declarations or undertakings furnished by the assessee, nor passed any order let alone a reasoned or speaking order rejecting the declarations. The designated authority had summarily rejected the declarations without there being any such provision in the 2020 Act or the Rules. There was also no fetter on the designated authority to determine the disputed tax at an amount other than that declared by the assessee. The designated authority under the 2020 Act was not justified in rejecting the declarations filed by the assessee.

v) Accordingly, we set aside the rejections. We direct respondent No. 2 to consider the applications made by the petitioner by way of declarations dated 18th November, 2020 in Form 1 as per law and proceed with them according to the scheme of the Direct Tax Vivad se Vishwas Act and Rules in the light of the above discussion within a period of two weeks from the date of this order. The petition is allowed in the above terms.’

Deduction of tax at source – Condition precedent – Mere entries in accounts – No accrual of income and no liability to deduct tax at source

40 Toyota Kirloskar Motor (P) Ltd. vs. ITO (TDS) LTU [2021] 434 ITR 719 (Karn) A.Y.: 2012-13; Date of order: 24th March, 2021 S. 201(1) of ITA, 1961

Deduction of tax at source – Condition precedent – Mere entries in accounts – No accrual of income and no liability to deduct tax at source

The assessee is a joint venture and is a subsidiary of Toyota Motor Corporation, Japan. It is engaged in manufacturing and sale of passenger cars and multi-utility vehicles. The assessee follows the mercantile system of accounting and as per its accounting policies, at the end of the financial year, i. e., 31st March of every year, the assessee makes provision for marketing expenses, overseas expenses and general expenses on an estimated basis in respect of works contracts services which are in the process of completion but the vendor is yet to submit the bills to ascertain the closest amount of profits / loss. The aforesaid provision is made in conformity with Accounting Standard 29. Subsequently, as and when invoices are received from the vendors the invoice amount is debited to the provisions already made with corresponding credit at the respective vendor’s account. The assessee also deducts tax at source as required under the provisions of the Act and remits the same along with interest to the Government.

For the A.Y. 2012-13, the assessee had made a provision towards marketing, overseas and general expenses to the extent of Rs. 1114,718,613. However, at the time of filing of the return of income the provision which remained unutilised as per the books of accounts as on 30th April, 2012 and on 31st October, 2012 in respect of overseas and domestic payments, respectively, for an amount of Rs. 9,27,41,239 was not claimed as deduction u/s 40(a)(i) and (ia) and the same was offered to tax. Subsequent to filing of the return, the assessee received invoices from the vendors for the A.Y. 2012-13 and the amount mentioned in the invoices was debited to the provision already made with a corresponding credit to the respective vendors’ account. The amount indicated in the invoices for a sum of Rs. 5,589,454 was utilised against the provision and the deduction of tax at source along with interest was also discharged at the time of credit of the invoice amount to the account of the vendor. Subsequently, the amount which remained unutilised, i.e., a sum of Rs. 8,71,32,988 in the provision account after completion of negotiation / finalisation of services, was reversed in the books of accounts of the assessee. The assessee received a communication on 30th July, 2013 asking it to furnish details of computation of income, audit report in Form 3CD for the year ending 31st March, 2012 reflecting the details of disallowances made u/s 40(a)(i) and (ia). The assessee thereupon furnished the information vide communication dated 12th August, 2013.

The A.O. initiated the proceedings u/s 201 and also u/s 201(1A) and treated the assessee as assessee-in-default in respect of the amount made in the provision, which was reversed / unutilised for a sum of Rs. 8,71,32,988 and the amount of deduction of tax at source and interest on the aforesaid amount u/s 201(1A) was computed at Rs. 14,18,327 and Rs. 25,195 was levied for late remittance of tax deducted at source. Thus, a total sum of Rs. 17,10,879 was determined as payable by the assessee.

The Commissioner (Appeals) affirmed the order passed by the A.O. The Tribunal dismissed the appeal preferred by the assessee.

In appeal before the High Court, the assessee raised the following question of law:

‘Whether in the facts and circumstances of the present case, the Income-tax Appellate Tribunal was right in law in affirming the order of the Commissioner of Income-tax (Appeals) in treating the appellant as “assessee-in-default” u/s 201(1) for non-deduction of tax at source from the amount of Rs. 8,74,32,988 when such amount had not accrued to the payee or any person at all?’

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

‘i) In the instant case, the provisions were created during the course of the year and reversal of entry was also made in the same accounting year. The A.O. erred in law in holding that the assessee should have deducted tax as per the rate applicable along with interest. The authorities under the Act ought to have appreciated that in the absence of any income accruing to anyone, the liability to deduct tax at source on the assessee could not have been fastened and, consequently, the proceeding u/s 201 and u/s 201(1A) could not have been initiated.

ii) For the aforementioned reasons, the substantial question of law is answered in favour of the assessee and against the Revenue.

iii) In the result, the impugned orders dated 31st October, 2017, 20th June, 2014 and 11th March, 2014 passed by the Tribunal, the Commissioner of Income-tax (Appeals) and the A.O., respectively, are hereby quashed. In the result, the appeal is allowed.’

Business expenditure – Year in which expenditure is deductible – Business – Difference between setting up and commencement of business – Incorporation as company, opening of bank account, training of employees and lease agreement in accounting year relevant to A.Y. 2012-13 – Licence for business obtained in February, 2012 – Assessee entitled to deduction of expenditure incurred for business in A.Y. 2012-13

39 Maruti Insurance Broking Pvt. Ltd. vs. Dy. CIT [2021] 435 ITR 34 (Del) A.Y.: 2012-13; Date of order: 12th April, 2021 S. 37 of ITA, 1961

Business expenditure – Year in which expenditure is deductible – Business – Difference between setting up and commencement of business – Incorporation as company, opening of bank account, training of employees and lease agreement in accounting year relevant to A.Y. 2012-13 – Licence for business obtained in February, 2012 – Assessee entitled to deduction of expenditure incurred for business in A.Y. 2012-13

The assessee was incorporated on 24th November, 2010. The first meeting of its board of directors was held on 29th November, 2010 when certain decisions were taken, including, according to the assessee, setting up of its business; appointment of the chief executive officer and the principal officer; approval of the draft application for obtaining a broker’s licence in the prescribed form under Regulation 6 of the IRDA (Insurance Brokers) Regulations, 2002 (in short ‘2002 Regulations’) [this application had to be filed for obtaining the licence]; a decision as to the registered office of the assessee; and a decision concerning the opening of a current account with HDFC Bank at Surya Kiran Building, 19, K.G. Marg, New Delhi 110001.

On 29th November, 2010 itself, an agreement was executed between the assessee and Maruti Suzuki India Limited (MSIL). Via this agreement, the persons who were employees of MSIL were sent on deputation to the assessee and to meet its objective, were made to undergo a minimum of 100 hours of mandatory training as insurance brokers. These steps were a precursor to the application preferred by the assessee with the Insurance Regulatory and Development Authority (IRDA) for issuance of a direct-broker licence. The application was lodged with the IRDA on 1st December, 2010. While this application was being processed, presumably by the IRDA, the assessee took certain other steps in furtherance of its business. Accordingly, on 1st June, 2011, the assessee executed operating lease agreements for conducting insurance business from various locations across the country. Against these leases, the assessee is said to have paid rent as well. The assessee set up 29 offices in 29 different locations across the country for carrying on its insurance business. The assessee was finally issued a direct broker’s licence by the IRDA on 2nd February, 2012.

For the A.Y. 2011-12, the assessee filed return of income on 30th September, 2011 declaring a business loss amounting to Rs. 57,582. For the A.Y. 2012-13, the return of income was filed on 29th September, 2012 declaring a net loss of Rs. 2,78,22,376. In this return, the assessee claimed the impugned deduction, i. e., business expenses amounting to Rs. 2,77,99,046. The A.O. held that since the licence was issued by the IRDA on 2nd February, 2012, the assessee’s business could not have been set up prior to that date, and therefore the entire business expenditure amounting to Rs. 2,78,22,376 was required to be disallowed and capitalised as pre-operative expenses.

The Commissioner (Appeals) upheld the order of the A.O. The Tribunal sustained the view taken by both the Commissioner of Income-tax (Appeals) as well as the A.O.

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

‘i) The Income-tax Act, 1961 does not define the expression “setting up of business”. This expression finds mention though (sic) in section 3 of the Income-tax Act, 1961 which defines “previous year”. The previous year gets tied in with section 4 of the Act, which is the charging section. In brief, section 4, inter alia, provides that income arising in the previous year is chargeable to tax in the relevant assessment year. Firstly, there is a difference between setting up and commencement of business. Secondly, when the expression “setting up of business” is used, it merely means that the assessee is ready to commence business and not that it has actually commenced its business. Therefore, when the commencement of business is spoken of in contradiction to the expression “setting up of business”, it only refers to a point in time when the assessee actually conducts its business, a stage which it necessarily reaches after the business is put into a state of readiness. A business does not, metaphorically speaking, conform to the “cold start” doctrine. There is, in most cases, a hiatus between the time a person or entity is ready to do business and when business is conducted. During this period, expenses are incurred towards keeping the business primed up. These expenses cannot be capitalised.

ii) The assessee did all that was necessary to set up the insurance broking business. The assessee after its incorporation opened a bank account, entered into an agreement for deputing employees (who were to further its insurance business), gave necessary training to the employees, executed operating lease agreements, and resultantly set up offices at 29 different locations across the country. Besides this, the application for obtaining a licence from the IRDA was also filed on 1st December, 2010. The Authority took more than a year in dealing with the assessee’s application for issuance of a licence. The licence was issued only on 2nd February, 2012 although the assessee was all primed up, i. e., ready to commence its business since 1st June, 2011, if not earlier. The assessee was entitled to deduction of the expenses incurred for the business in the A.Y. 2012-13.’

Business income – Scope of section 28(iv) – Amalgamation of companies – Excess of net consideration over value of companies taken over – Not assessable as income

38 CIT (LTU) vs. Areva T&D India Ltd. [2021] 434 ITR 604 (Mad) A.Y.: 2006-07; Date of order: 25th March, 2021 S. 28(iv) of ITA, 1961

Business income – Scope of section 28(iv) – Amalgamation of companies – Excess of net consideration over value of companies taken over – Not assessable as income

The assessee is engaged in the business of manufacturing heavy electrical equipment. Three companies were amalgamated with the assessee company and on amalgamation the assets stood transferred to the assessee company with effect from 1st January, 2006. The net excess value of the assets over the liability of the amalgamating company amounted to Rs. 54,26,56,000 and had been adjusted against the general reserve of the assessee company. In the assessment proceedings for the A.Y. 2006-07, the assessee was called upon to explain why the said excess asset, which was taken over as liability during the current year, should not be taxed u/s 28(iv). The explanation offered by the assessee was not accepted and the A.O. held that the said amount had to be charged to Income-tax under the head ‘Profits and gains of business’ u/s 28(iv).

The Commissioner (Appeals) allowed the assessee’s claim and deleted the addition. The Tribunal dismissed the appeal filed by the Revenue.

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

‘i) For applicability of section 28(iv) the income must arise from business or profession and the benefit which is received has to be in a form other than in the shape of money. The provisions of section 28(iv) make it clear that the amount reflected in the balance sheet of the assessee under the head “Reserves and surplus” cannot be treated as a benefit or perquisite arising from business or exercise of profession.

ii) The difference in amount post amalgamation was the amalgamation reserve and it cannot be said that it was out of normal transaction of the business being capital in nature, which arose on account of amalgamation of four companies, it cannot be treated as falling u/s 28(iv).’

Reassessment – Validity – Sections 147 and 148 – Failure to furnish reasons recorded by A.O. – Furnishing of reasons while matter pending before Tribunal to cure default in first instance – Order of Tribunal remanding matter and subsequent assessment and demand notice set aside

47. New Era Shipping Ltd. vs. CIT [2020] 430 ITR 431 (Bom.) Date of order: 27th October, 2020 A.Y.: 2004-05

Reassessment – Validity – Sections 147 and 148 – Failure to furnish reasons recorded by A.O. – Furnishing of reasons while matter pending before Tribunal to cure default in first instance – Order of Tribunal remanding matter and subsequent assessment and demand notice set aside

Upon receipt of notice u/s 148 for the A.Y. 2004-05, the assessee requested for the reasons for the notice. No reasons were furnished and the A.O. passed a reassessment order u/s 147. The reasons were ultimately furnished to the assessee before the Tribunal which remanded the matter to the A.O.

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

‘i) It was not open to the A.O. to refuse to furnish the reasons for issuing notice u/s 148. By such refusal, the assessee was deprived of the valuable opportunity of filing objections to the reopening of the assessment u/s 147. The approach of the A.O. was contrary to the law laid down by the Supreme Court.

ii) On the facts, the furnishing of reasons for reopening of the assessment at the stage when the matter was pending before the Tribunal could not cure the default in the first instance. The remand ordered by the Tribunal and the consequential assessment order and demand notice issued on the basis thereof were set aside.’

Loss – Set-off – Deduction u/s 10B – Scope of sections 10B and 70 – Assessee having three industrial units two of which export-oriented – Assessee not claiming deduction u/s 10B – Deduction cannot be thrust on it – Assessee entitled to set off losses from export-oriented units against profits of domestic tariff area unit

46. Karle International Pvt. Ltd. vs. ACIT [2020] 430 ITR 74 (Karn.) Date of order: 7th September, 2020 A.Y.: 2008-09

 

Loss – Set-off – Deduction u/s 10B – Scope of sections 10B and 70 – Assessee having three industrial units two of which export-oriented – Assessee not claiming deduction u/s 10B – Deduction cannot be thrust on it – Assessee entitled to set off losses from export-oriented units against profits of domestic tariff area unit

 

The assessee was a private limited company engaged in the business of manufacture and export of readymade garments. For the A.Y. 2008-09 the assessee filed the return of income declaring total income of Rs.12,89,760. The assessee had three units, two of which were export-oriented, and showed profit and loss from all of them. The assessee had set off losses of the units against the profits of the unit making profits and offered the balance to tax under the head ‘Income from business’. The A.O., inter alia, held that losses of the export-oriented units could not be allowed to be set off against the profits of unit No. I.

 

The Commissioner (Appeals) and the Tribunal upheld the decision of the A.O.

 

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

 

‘i) It is a well-settled legal proposition that where the assessee does not want the benefit of deduction from the taxable income, it cannot be thrust upon the assessee. Section 10B is not a provision in the nature of an exemption but provides for a deduction of such profit and gains as are derived by 100% export-oriented undertakings from the export of articles or things or computer software.

 

ii) Section 10B does not contain any prohibition that prevents an assessee from setting off losses from one source against income from another source under the same head of income as prescribed u/s 70. Section 10B(6)(ii) restricts the carrying forward and setting off of loss under sections 72 and 74 but does not provide anything regarding intra-head set-off u/s 70 and inter-head set-off u/s 71. The business income can be computed only after setting off business loss against the business income in the year in accordance with the provisions of section 70.

 

iii) Section 10A is a code by itself and section 10A(6)(ii) does not preclude the operation of sections 70 and 71. Paragraph 5.2 of the Circular issued by the Central Board of Direct Taxes dated 16th July, 2013 [(2013) 356 ITR (St.) 7] clearly provides that income or loss from various sources, i. e., eligible and ineligible units under the same head, are aggregated in accordance with the provisions of section 70.

 

iv) The assessee was entitled to set off the loss from the export-oriented unit against the income earned in the domestic tariff area unit in accordance with section 70.’

Housing project – Special deduction u/s 80-IB(10) – Principle of proportionality – Projects comprising eligible and ineligible units – Assessee can be given special deduction proportionate to units fulfilling conditions laid down in section 80-IB(10)

45. Devashri Nirman LLP vs. ACIT [2020] 429 ITR 597 (Bom.) Date of order: 26th November, 2020 A.Ys.: 2007-08 to 2011-12

Housing project – Special deduction u/s 80-IB(10) – Principle of proportionality – Projects comprising eligible and ineligible units – Assessee can be given special deduction proportionate to units fulfilling conditions laid down in section 80-IB(10)

The assessee’s housing projects DG and VV comprised 105 and 90 residential units, respectively. The assessee was denied the deduction u/s 80-IB by the A.O. on the ground that the area of five residential units in DG and three residential units in VV exceeded 1,500 square feet which was in breach of the conditions prescribed in clause (c) of section 80-IB(10).

The Commissioner (Appeals) directed the A.O. to allow deduction u/s 80-IB(10) on a proportionate basis. The Tribunal dismissed the appeals filed by both the assessee and the Department.

On appeals by the assessee and the Department, the Bombay High Court held as under:

‘i) Clause (c) of section 80-IB(10) does not exclude the principle of proportionality in any manner.

ii) The Tribunal was justified in holding that the assessee was entitled to deduction u/s. 80-IB(10) on proportionate basis. The view taken by the Commissioner (Appeals) and the Tribunal need not be interfered with.’

Exempt income – Disallowance u/s 14A – Disallowance of expenditure incurred to earn exempt income – No evidence of such expenditure – Failure by A.O. to record dissatisfaction – No disallowance could be made u/s 14A

44. CIT vs. Brigade Enterprises Ltd. (No. 2) [2020] 429 ITR 615 (Karn.) Date of order: 22nd October, 2020 A.Y.: 2009-10

Exempt income – Disallowance u/s 14A – Disallowance of expenditure incurred to earn exempt income – No evidence of such expenditure – Failure by A.O. to record dissatisfaction – No disallowance could be made u/s 14A

The assessee was engaged in the business of real estate development. For the A.Y. 2009-10 the A.O. made a disallowance u/s 14A.

The Commissioner (Appeals) sustained the disallowance of the interest disallowed u/s 14A read with Rule 8D of the Income-tax Rules, 1962, to the extent of Rs. 1,09,99,962 u/s 14A read with Rule 8D(2)(iii) and deleted the disallowance of interest u/s 14A read with Rule 8D(2)(ii) to the extent of Rs. 15,27,310. The Tribunal, inter alia, held that there was no material on record to substantiate that overdraft account was utilised for making tax-free investments and the investment proceeds were from the public issue of shares. Therefore, it could not be held that funds from the overdraft account from which interest had been paid had been invested in mutual funds which yielded income exempt from tax. Thus, deletion of disallowance u/s 14A read with Rule 8D(2)(ii) to the tune of Rs. 15,27,310 was upheld.

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

‘i) The A.O. had not rendered any finding with regard to the incorrectness of the claim of the assessee either with regard to its accounts or that he was not satisfied with the claim of the assessee in respect of such expenditure in relation to exempt income as is required in accordance with section 14A(2) for making a disallowance under Rule 8D.

ii) Thus, the Tribunal had rightly concluded that the A.O. had not recorded the satisfaction with regard to the claim of the assessee for disallowance u/s 14A read with Rule 8D(2). Section 14A was not applicable.’

Business expenditure – Deduction u/s 37 – Company – Discount on employees stock option plan – Deductible

43. CIT (LTU) vs. Biocon Ltd. [2020] 430 ITR 151 (Karn.) Date of order: 11th November, 2020 A.Y.: 2004-05

Business expenditure – Deduction u/s 37 – Company – Discount on employees stock option plan – Deductible

The following question of law was raised before the Karnataka High Court:

‘Whether on the facts and in the circumstances of the case and in law the Tribunal was right in holding that the discount on issue of Employees Stock Option Plan (ESOP) is allowable deduction in computing the income under the head profits and gains of the business?’

The High Court held as under:

‘i) From a perusal of section 37(1) it is evident that the provision permits deduction of expenditure laid out or expended and does not contain a requirement that there has to be a pay-out. If an expenditure has been incurred, section 37(1) would be attracted. Section 37 does not envisage incurrence of expenditure in cash.

ii) An assessee is entitled to claim deduction under the provision if the expenditure has been incurred. It is well settled in law that if a business liability has arisen in the accounting year, it is permissible as deduction even though the liability may have to be quantified and discharged at a future date.

iii) Section 2(15A) of the Companies Act, 1956 defines “employees stock option” to mean option given to whole-time directors, officers or the employees of the company, which gives such directors, officers or employees the benefit or right to purchase or subscribe at a future date to securities offered by the company at a pre-determined price. In an employees stock option plan, a company undertakes to issue shares to its employees at a future date at a price lower than the current market price. The employees are given stock options at a discount and the same amount of discount represents the difference between the market price of shares at the time of grant of option and the offer price. In order to be eligible for acquiring shares under the scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vests with the employees.

iv) The expression “expenditure” also includes a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which they are issued and the market value of the shares would be expenditure incurred for the purposes of section 37(1). The primary object of the exercise is not to waste capital but to earn profits by securing consistent services of the employees and, therefore, it cannot be construed as short receipt of capital.

v) The deduction of the discount on the employees stock option plan over the vesting period was in accordance with the accounting in the books of accounts, which had been prepared in accordance with the Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. For A.Y. 2009-10 onwards, the A.O. had permitted the deduction of the employees stock option plan expenses. The Revenue could not be permitted to take a different stand with regard to the A.Y. 2004-05. The expenses were deductible.’

Appeal to ITAT – Duty of Tribunal to consider issue on merits – Document not filed due to mistake of counsel for assessee – Dismissal of appeal not justified – Appeal should have been decided on merits

42. Swetha Realmart LLP vs. CIT [2020] 430 ITR 159 (Karn.) Date of order: 3rd November, 2020 A.Y.: 2016-17

Appeal to ITAT – Duty of Tribunal to consider issue on merits – Document not filed due to mistake of counsel for assessee – Dismissal of appeal not justified – Appeal should have been decided on merits

 

For the A.Y. 2016-17, the assessee had filed an appeal before the Income-tax Appellate Tribunal against the order of the Commissioner (Appeals). The Tribunal, by an order dated 29th May, 2020, dismissed the appeal inter alia on the ground that in the absence of documentary evidence in support of the assessee’s claim that the property sold in question was not a depreciable asset, no ground is made out to interfere with the order passed by the Commissioner (Appeals).

 

The assessee filed an appeal before the High Court against this order of the Tribunal. The following question was raised:

 

‘Whether, in the facts and circumstances of the case, the Tribunal is right in law in dismissing the appeal instead of disposing the matter on its merits.’

 

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

 

‘i) It is trite law that for the fault committed by counsel, a party should not be penalised.

 

ii) Due to inadvertence, the senior chartered accountant engaged by the assessee could not comply with the directions of the Tribunal to file documents. The Tribunal, in fact, should have adjudicated the matter on the merits instead of summarily dismissing it. The order of dismissal was not valid.

 

iii) The substantial question of law framed by this Court is answered in favour of the assessee and against the Revenue.

 

iv) In the result, the order passed by the Tribunal is quashed. The matter is remitted to the Tribunal. Needless to state that the assessee shall file the audited accounts and computation of income as directed by the Tribunal within a period of four weeks from the date of receipt of the certified copy of the order passed today before the Tribunal. Thereupon, the Tribunal shall proceed to adjudicate the appeal on its merits.’