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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.’

Appeal to Commissioner (Appeals) – Powers of Commissioner (Appeals) – Sections 246 and 251 of ITA, 1961 – Commissioner (Appeals) has power to consider claim not raised in return or revised return

41. Sesa Goa Ltd. vs. Addl. CIT [2020] 430 ITR 114 (Bom.) Date of order: 12th March, 2020 A.Y.: 2005-06


 
Appeal to Commissioner (Appeals) – Powers of Commissioner (Appeals) – Sections 246 and 251 of ITA, 1961 – Commissioner (Appeals) has power to consider claim not raised in return or revised return

 

The Bombay High Court held as under:

 

‘i) Appellate authorities under the Income-tax Act, 1961 have very wide powers while considering an appeal which may be filed by the assessee. The appellate authorities may confirm, reduce, enhance or annul the assessment or remand the case to the Assessing Officer. This is because, unlike an ordinary appeal, the basic purpose of a tax appeal is to ascertain the correct tax liability of the assessee in accordance with law.

 

ii) The Commissioner (Appeals) has undoubted power to consider a claim for deduction not raised in the return or revised return.’

 

Section 244A – Refunds – Interest on – Where assessee, a contractor, followed project completion method of accounting and during A.Y.s. 2003-04 to 2005-06 it had received certain payments after deduction of tax at source and in the return of income filed for A.Y. 2005-06 it had disclosed payments received during three A.Y.s., 2003-04 to 2005-06 and AO passed assessment order and granted refund to assessee, on such refund, interest in terms of section 244A would be payable from respective assessment years

Principal CIT vs. Kumagai Skanska HCC ITOCHU Group; [2019] 102 taxmann.com 416 (Bom): Date of order: 29th January, 2019 A.Y.s..: 2003-04 to 2005-06

Section 244A – Refunds – Interest on – Where assessee, a contractor, followed project completion method of accounting and during A.Y.s. 2003-04 to 2005-06 it had received certain payments after deduction of tax at source and in the return of income filed for A.Y. 2005-06 it had disclosed payments received during three A.Y.s., 2003-04 to 2005-06 and AO passed assessment order and granted refund to assessee, on such refund, interest in terms of section 244A would be payable from respective assessment years

The assessee was engaged in the business of civil construction. It followed the project completion method of accounting to offer its income to tax. During the A.Y.s. 2003-04, 2004-05 and 2005-06, it had received certain payments as a contractor on which the payer had deducted tax at source. In the return of income filed for A.Y. 2005-06, it had declared a certain loss. In the said return, it had claimed the income relatable to the payments made during the said year as well as during the earlier two A.Y.s. 2003-04 and 2004-05.

The assessment order passed by the Assessing Officer gave rise to refund. The assessee contended before the Assessing Officer that on such refund interest in terms of section 244A would be payable from the respective assessment years. The Assessing Officer held that the income in relation to the payments on which tax was deducted at source was returned by the assessee in the A.Y. 2005-06 and, therefore, interest could not be   paid on the refund for any period prior to the said assessment year.

The Tribunal held in favour of the assessee.

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

“i)  Section 244A pertains to interest on refunds. In the instant case, the assessee’s case falls under clause (a) of sub-section (1) of section 244A. Clause (a) of sub-section (1) of section 244A covers situations where the refund is out of any tax collected at source or paid by way of advance tax or treated as paid u/s. 199. This reference to treat tax as paid u/s. 199 would clearly cover the tax deducted at source. In the instant case, the assessee had suffered deduction of tax at source at the time of payments. In that view of the matter, the case of the assessee would clearly be covered under clause  (a) to sub-section (1) of section 244. In such a situation, this clause provides that interest shall be calculated at the rate of 1/2 per cent for every month or part thereof, comprising a period from the 1st day of April of the assessment year to the date on which the refund is granted, provided the return is filed before the due date, specified in sub-section (1) of section 139.

ii)  Here the reference ‘from the 1st day of April of the assessment year’, which is the starting point for computing the interest payable, must be to the assessment year in which the tax was deducted at source. This expression has to be read along with the main body of clause (a) which refers to the refund arising out of,  inter alia, the tax treated to have been paid as per section 199. Any other view would be held untenable, since the Revenue which has received the tax deducted at source from the payments to be made to the assessee and appropriated the same would refund the same but the interest would be accounted much later when the return giving rise to the refund is filed.

iii)  In view of the aforesaid, the Tribunal had not committed any error. The appeal filed by the Revenue deserved to be dismissed.”

Section 14A – Even suo motu disallowance made by an assessee u/s 14A needs to be restricted to the extent of exempt income

16. Chalet Hotels Ltd. vs. DCIT Mahavir Singh (V.P.) and Rajesh Kumar (A.M.) ITA No. 3747/Mum/2019 A.Y.: 2015-16 Date of order: 11th January, 2021 Counsel for Assessee / Revenue:Madhur Agarwal / V. Sreekar


 

Section 14A – Even suo motu disallowance made by an assessee u/s 14A needs to be restricted to the extent of exempt income

 

FACTS

The A.O., while assessing the total income of the assessee, invoked the provisions of section 14A read with Rule 8D and disallowed a sum of Rs. 27,15,12,687 and of Rs. 2,14,47,136 under Rule 8D(2)(iii). Thereby, he disallowed a total sum of Rs. 29,29,59,823 u/s 14A.

 

Aggrieved, the assessee preferred an appeal to the CIT(A) where, in the course of the proceedings it claimed that the assessee has earned exempt income only to the extent of Rs. 13,17,233 and the same may be adopted for making disallowance under Rule 8D(2)(iii).

 

The CIT(A) deleted the disallowance made by the A.O. under Rule 8D(2)(ii), i.e., interest expenditure amounting to Rs. 27,15,12,687, but confirmed the disallowance under Rule 8D(2)(iii) being administrative expenses at Rs. 5,86,52,973 as against the exempt income claimed by the assessee at Rs. 13,17,233. The CIT(A) restricted the disallowance to the amount suo motu computed by the assessee at Rs. 5,86,52,973.

 

Aggrieved, the assessee preferred an appeal to the Tribunal.

 

HELD

The Tribunal noted that the short point of dispute is whether the disallowance under Rule 8D(2)(iii) is to be restricted to the extent of exempt income, i.e., dividend income earned by the assessee at Rs. 13,17,233 or the disallowance as suo motu computed by the assessee at Rs. 5,86,52,973.

Having gone through the decision of the Supreme Court in the case of Maxopp Investments Ltd. (Supra) wherein the Supreme Court has categorically held that the disallowance cannot exceed the exempt income the Tribunal deleted the suo motu disallowance made by the assessee at Rs. 5,86,52,973 and restricted the disallowance to the extent of the exempt income claimed by the assessee at Rs. 13,17,233.

Sections 43CA and 263 – In a case where the A.O. has taken a possible view after inquiring into the matter and appreciating the facts and documents filed by the assessee, the PCIT has no jurisdiction to set aside the assessment

15. Ranjana Construction Pvt. Ltd. vs. PCIT George George K. (J.M.) and B.R. Baskaran (A.M.) ITA No. 4308/Mum/2019 A.Y.: 2014-15 Date of order: 11th January, 2021 Counsel for Assessee / Revenue: N.R. Agrawal / Bharat Andhle

Sections 43CA and 263 – In a case where the A.O. has taken a possible view after inquiring into the matter and appreciating the facts and documents filed by the assessee, the PCIT has no jurisdiction to set aside the assessment

FACTS

The assessee e-filed its return of income for A.Y. 2014-15 declaring a total income of Rs. 1,60,260.

Vide an allotment letter dated 12th June, 2010, the assessee agreed to sell to Mr. Vasant Kumar Pujari, the buyer, Flat No. A-302 in Kailash Heights for a consideration of Rs. 36,65,000. He (the assessee) received an account payee cheque for Rs. 2,50,000 dated 22nd June, 2010 as token advance. Thereafter, he received Rs. 18,32,500 up to 20th December, 2012. The sale agreement was registered on 26th June, 2013. On the date of registration, the stamp duty value of the said flat was Rs. 57,48,160 which was reflected in the AIR on the Department website. In the course of assessment proceedings, a notice was issued u/s 142(1) asking the assessee to furnish the date of property purchased / sold details. (These were contained in the AIR information generated by the Department from the ITES.)

The assessment of total income of the assessee was completed u/s 143(3) and an order dated 8th September, 2016 was passed u/s 143(3) accepting the returned income.

Subsequently, the PCIT, after issuing a show cause notice to the assessee and rejecting its contentions, set aside the order passed u/s 263 and directed the A.O. to examine the issue after giving sufficient opportunity of being heard to the assessee. The PCIT held that:
i) the agreement does not mention allotment of the flat vide allotment letter dated 12th June, 2010;
ii) allotment letter is not forming part of the registered agreement;
iii) the assessee has not filed any evidence of having filed the allotment letter with the Stamp Duty Authority;
iv) the agreement does not mention about booking amount claimed to have been paid by the assessee vide the allotment letter;
v) the agreement mentions that the purchaser has perused the commencement certificate, plans and other documents and has approached the promoters for allotment of the flat. The allotment letter is dated 12th June, 2010 and the commencement certificate is dated 28th June, 2010 which contradicts the clauses in the agreement.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD


The Tribunal observed that according to the learned PCIT, the business income should have been computed by taking the deemed consideration as on the date of registration and not on the date of agreement to sell as per the observations in the revisionary order. Besides, the Tribunal also found that this issue has been specifically raised by the A.O. in the notice issued u/s 142(1) wherein a copy of the AIR as generated by the ITES was attached and the assessee was called upon to reconcile the entries appearing therein. The assessee had duly filed reconciliation vide letter dated 24th August, 2016 submitting a copy of the sale agreement and also the necessary details of the said deal. The A.O., after examining such details, accepted the business income of the assessee based on the stamp value as on the date of the agreement to sell.

The Tribunal held that the A.O. has taken a possible view after inquiring into the matter and appreciating the facts and documents filed by the assessee. Since the A.O. took a possible view, the PCIT has no jurisdiction to set aside the assessment. The Tribunal found itself inclined to quash the revisionary proceeding on this count alone.

On merits, the Tribunal held that the assessee has a fool-proof case as the income has been assessed pursuant to sections 43CA(3) and (4) which clearly provide that if the date of agreement and the date of registration are not the same, the stamp value as on the date of agreement shall be taken for the purpose of computing the income of the assessee and not the date of registration.

The Tribunal allowed the appeal of the assessee by setting aside the order of the PCIT.

Sections 45, 48 and 50CA – There is no provision in the Act authorising the A.O. to refer valuation of shares transferred for the purpose of calculating capital gains – Sale consideration disclosed in the share purchase agreement ought to be adopted for calculating the long-term capital gains in the case of transfer of shares – Section 50CA of the Act inserted w.e.f. 1st April, 2018 clearly indicates that prior to that date there was no provision under the Act authorising the A.O. to refer for valuation of shares for the purpose of calculating capital gains

14. ACIT vs. Manoj Arjun Menda George George K. (J.M.) and B.R. Baskaran (A.M.) ITA No. 1710/Bang/2016 A.Y.: 2012-13 Date of order: 4th January, 2021 Counsel for Revenue / Assessee:  Rajesh Kumar Jha / V. Srinivasan

Sections 45, 48 and 50CA – There is no provision in the Act authorising the A.O. to refer valuation of shares transferred for the purpose of calculating capital gains – Sale consideration disclosed in the share purchase agreement ought to be adopted for calculating the long-term capital gains in the case of transfer of shares – Section 50CA of the Act inserted w.e.f. 1st April, 2018 clearly indicates that prior to that date there was no provision under the Act authorising the A.O. to refer for valuation of shares for the purpose of calculating capital gains

FACTS

The assessee, an individual, filed his return of income for A.Y. 2012-13 declaring a total income of Rs. 7,22,25,230. Vide Share Purchase Agreement dated 20th October, 2011, the assessee along with other shareholders sold their entire shareholding in Millennia Realtors Private Limited (MRPL) to Ambuja Housing & Urban Infrastructure Company Limited (AHUIC) for a consideration of Rs. 66.81 crores. The purchasers also agreed to pay Rs. 17.76 crores as accrued interest on debentures. Thus, the total amount payable by AHUIC to the shareholders of MRPL worked out to Rs. 84.58 crores. The assessee held 13.29% of the shareholding in MRPL and hence received Rs. 11.24 crores for his portion of the shares sold. In his return of income, he computed long-term capital loss and carried forward the same.

In the course of the assessment proceedings, the assessee submitted copies of the share purchase agreement and the valuation report dated 20th October, 2011 referred to in the share purchase agreement. The A.O., based on the information sought by him u/s 133(6) from Oriental Bank of Commerce, the bankers of MRPL, and also the property consultant who facilitated the transfer of shares of MRPL, came to the conclusion that the fair market value of the shares of MRPL disclosed in the share purchase agreement was on the lower side. Therefore, he held that to arrive at the correct FMV the shares need to be valued and said that the most appropriate way to value them is the Net Asset Valuation method (NAV).

After adopting valuation under the NAV method, the A.O. held that the sale consideration of the shares transferred by the assessee and the other shareholders has to be taken as Rs. 166.72 crores against Rs. 66.81 crores as agreed upon in the sale / purchase agreement dated 20th October, 2011 and the assessee’s share in the consideration works out to Rs.24.52 crores against Rs. 11.24 crores. Accordingly, the A.O. arrived at the long-term capital gain of Rs. 3,33,23,661 as against the loss of Rs. 9,94,59,651 as calculated by the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who, following the judgment of the Apex Court in the case of George Henderson & Co. Limited [66 ITR 622 (SC)] and other judicial pronouncements, held that there is no provision under the Income-tax Act empowering the A.O. to refer a matter for valuation in relation to the transfer of a capital asset, being transfer of shares. The CIT(A) allowed the appeal of the assessee.

But the aggrieved Revenue preferred an appeal to the Tribunal where, on behalf of the assessee, it was contended that the issue in question is squarely covered by the decision of the Tribunal in the case of another shareholder, viz., Raj Arjun Menda, in ITA No. 1720/Bang/2016 (order dated 20th February, 2020).

HELD

The Tribunal observed that the co-ordinate bench in the case of Raj Arjun Menda (Supra) has decided an identical issue in favour of the assessee. The Tribunal held that the transfer of the assets being the shares of a company, there is no provision under the Act for referring the matter for valuation. Accordingly, the Tribunal in that case confirmed the order of the CIT(A) and held that the consideration disclosed in the share purchase agreement dated 20th October, 2011 should be adopted for the purpose of computation of long term-capital gains on the sale of shares.

Following the decision in the same case, viz., Raj Arjun Menda (Supra), the Tribunal held that the CIT(A) is justified in holding that the sale consideration disclosed in the sale purchase agreement ought to be adopted for calculating the long-term capital gains in the case of transfer of shares. It also mentioned that section 50CA inserted w.e.f. 1st April, 2018 would have no application to the instant case since it was dealing with A.Y. 2012-2013. In other words, section 50CA inserted w.e.f. 1st April, 2018 clearly indicates that prior to that date there was no provision authorising the A.O. to refer the shares for valuation for the purpose of calculating capital gains.

Whereas a part of a composite itinerary, the employee of the assessee employer availing LTC has travelled to a foreign sector along with destination in India, the assessee employer cannot be faulted for not deducting tax at source from LTC allowed to employee, given that such amount was no longer exempt to the employee u/s 10(5)

29. 124 taxmann.com 354 State Bank of India vs. ACIT, TDS IT Appeal No. 1717 (Mum.) of 2019 A.Y.: 2012-13 Date of order: 27th January, 2021

 

Whereas a part of a composite itinerary, the employee of the assessee employer availing LTC has travelled to a foreign sector along with destination in India, the assessee employer cannot be faulted for not deducting tax at source from LTC allowed to employee, given that such amount was no longer exempt to the employee u/s 10(5)

 

FACTS

During the course of a survey u/s 133A it was found that certain employees of the assessee have claimed LTC (Leave Travel Concession) facility wherein ‘travel to places outside India was involved’. It was noted that some of the employees had taken a very circuitous route, involving travel abroad to one or more domestic destinations. The A.O. noted that the admissible LTC in these cases was treated as tax-exempt u/s 10(5) and that such exemption was not available in cases where the employee travels out of India. The A.O. contended that to that extent, the assessee was in error in not deducting tax at source in respect of such payment of the LTC facility. The A.O. also noted that ‘the employees travelled to the Indian destinations not by the direct and shortest route but by a circuitous route, including a foreign journey. Thus, the A.O. held that the LTC payment should have been included in the income of the employees concerned while deducting tax at source from the salaries, and the assessee is required to be treated as an assessee in default for not deducting the related tax at source. The assessee carried the matter in appeal before the CIT(A) who upheld the A.O.’s contention.

 

Aggrieved, the assessee preferred an appeal before the Tribunal.

 

HELD

There is no specific bar in the law on travel eligible for exemption u/s 10(5), involving a sector of overseas travel, and in the absence of such a bar the assessee employer cannot be faulted for not inferring such a bar. The reimbursement is restricted to airfare, on the national carrier, by the shortest route as is the mandate of rule 2B. The employee has travelled, as a part of that composite itinerary involving a foreign sector as well, to the destination in India. The guidance available to the assessee employer indicates that in such a situation the exemption u/s 10(5) is available to the employee, though to the extent of farthest Indian destination by the shortest route, and that is what the assessee employer has allowed.

 

Due to the position with respect to taxability of such LTC in the hands of the employee, the assessee employer cannot be faulted for not deducting tax at source from the LTC facility allowed by him to the employees. Once the estimation of income in the hands of the employee under the head ‘income from salaries’ by the employer was bona fide and reasonable, the assessee employer cannot be held to be in default.

 

The appeal of the assessee employer was allowed.

Sections 143(2) and 143(3) – Assessment order passed by a jurisdictional officer in a case where the notice u/s 143(2) was not issued by him but by a non-jurisdictional officer is bad in law and void ab initio

28. [2021] 123 taxmann.com 395 (Luck.)(Trib.) ITO vs. Arti Securities & Services Ltd. A.Y.: 2014-15 Date of order: 6th November, 2020

Sections 143(2) and 143(3) – Assessment order passed by a jurisdictional officer in a case where the notice u/s 143(2) was not issued by him but by a non-jurisdictional officer is bad in law and void ab initio

FACTS

In an appeal filed by the Revenue, the assessee filed an application under Rule 27 of the ITAT Rules and raised two issues – one related to limited scrutiny and another related to jurisdiction. The Tribunal admitted the application of the assessee and heard and decided the jurisdictional ground.

The assessee had e-filed return of income on 26th September, 2014 declaring income of Rs. 11,11,750 and the case was selected for scrutiny u/s 143(2) vide notice issued by DCIT, Circle-4, Kanpur and DCIT-6, Kanpur on the same date, i.e., 3rd September, 2015. As per assessment order dated 29th December, 2016 read with transfer memo dated 16th May, 2016, the case was transferred from DCIT-6, Kanpur to Income-tax Officer-6(1), Kanpur on the ground of monetary limit vide order dated 28th April, 2016 passed by the Pr. CIT-2, Kanpur. The jurisdictional Income-tax Officer, Kanpur did not issue any notice u/s 143(2) and completed the assessment without issuing any notice u/s 143(2).

The jurisdictional A.O. started the proceedings from 18th May, 2016 by mentioning that case records were received from DCIT-6, Kanpur because of change of monetary limit.

In the course of appellate proceedings, it was submitted on behalf of the assessee that on this copy of the order sheet there is no mention of issue of notice u/s 143(2), nor is there any mention of any order passed by the Commissioner u/s 127. Besides, when the first notice u/s 143(2) was issued on 3rd September, 2015, Revenue was aware of the fact that as per monetary limit for ITR of Rs. 11,11,750, the competent A.O. to issue notice u/s 143(2) was the Income-tax Officer-6(1), Kanpur.

HELD

The Tribunal noted that
i) The assessee filed return of income declaring income of Rs.11,11,750;
ii) The jurisdictional A.O. was the Income-tax Officer, Ward-6, Kanpur (as per CBDT instruction No. 1/2011);
iii) Two notices u/s 143(2) were issued by DCIT-4, Kanpur and DCIT-6, Kanpur on the same date, i.e., 3rd September, 2015;
iv) The statutory notice u/s 143(2) has not been issued by the jurisdictional A.O.;
v) No order u/s 127 has been passed by the CIT transferring the case from DCIT-6 to Income-tax Officer-6, Kanpur.

Considering the ratio of the decisions of the Tribunal in the case of Krishnendu Chowdhury vs. ITO [2017] 78 taxmann.com 89 (Kol.); Sukumar Chandra Sahoo vs. Asst. CIT [IT Appeal No. 2073 (Kol.) of 2016, dated 27th September, 2017] and Bajrang Bali Industries vs. ACIT [IT Appeal No. 724 (LKW) of 2017, dated 30th November, 2018], the Tribunal allowed the jurisdictional ground taken by the assessee and held that the notice u/s 143(2) was not issued by an officer having jurisdiction on the assessee and who had passed the assessment order, therefore in view of non-issue of statutory notice u/s 143(2), the assessment order is bad in law and void ab initio and hence all further proceedings including the order passed by the learned CIT(A) is bad in law and, therefore, the appeal filed by Revenue against the order of the CIT(A) does not stand and is dismissed.

The appeal of the Revenue was dismissed by allowing one of the grounds of the assessee raised under Rule 27 of the ITAT Rules.

Section 45 – In a case where notional income has been received by the assessee as per development agreement and no real income has been received as the developer vanished and there was neither any development nor any area received by the assessee, capital gains will not be chargeable to tax if the possession is taken back by the assessee and there was no development

27. [2020] 122 taxmann.com 169 (Hyd.)(Trib.) Santosh Kumar Subbani vs. ITO
A.Y.: 2007-08 Date of order: 13th November, 2020

Section 45 – In a case where notional income has been received by the assessee as per development agreement and no real income has been received as the developer vanished and there was neither any development nor any area received by the assessee, capital gains will not be chargeable to tax if the possession is taken back by the assessee and there was no development

FACTS

For A.Y. 2007-08, the assessee had not filed his original return of income. The A.O., having received information with regard to transfer of property by the assessee through a sale-cum-development-agreement-cum-GPA with M/s 21st Century Investments & Properties Ltd., vide document No. 5126/2007 dated 26th March, 2007, issued a notice u/s 148, in response to which the assessee filed the return of income admitting to total income of Rs. 74,380 from other sources and agricultural income of Rs. 1,65,340.

As per the information received by the A.O., under the development-agreement-cum-GPA, the assessee transferred the land, admeasuring 0.15 guntas, at Nizampet. The agreement provided that the developer has to complete the development within 24 months and the assessee has to receive 5,000 square feet built-up area.

The assessee submitted before the A.O. that the developer did not perform the construction activity and argued that there is no case of capital gains. The A.O. conducted inquiries through an Inspector and found that no development had taken place on the said land. However, since, the assessee has handed over the property as per the agreement dated 26th March, 2007 to the developer, in the view of the A.O.  it was hit by section 2(47)(v) and accordingly he assessed the SRO value of Rs. 11,89,883 as sale consideration and determined a short-term capital gain of Rs. 4,38,029.

Aggrieved, the assessee preferred an appeal to the CIT(A) who dismissed the appeal.

HELD


The Tribunal noted that after entering into the agreement, the developer has vanished and no real development took place till date as verified and confirmed by the A.O. through the Departmental Inspector and hence no developed area was received by the assessee. It is clear that there was no real income except notional income as per the development agreement which has never been received by the assessee. According to the Tribunal, the issue which decides the taxability of capital gains is whether the possession is lying with the developer or taken over by the assessee. During the course of appeal proceedings, upon inquiry by the Tribunal, the AR submitted that till date the development agreement was not cancelled and no public notice was issued by the assessee for cancellation of the same.

The Tribunal held that the issue is required to be remitted back to the file of the A.O. with a direction to decide the capital gains after verifying whether or not the possession is taken back by the assessee and whether the assessee has cancelled the development agreement. In case the possession is taken back by the assessee and there has been no development, the assessee succeeds in the appeal.

Section 147 – Reassessment – Oversight, inadvertence or mistake of A.O. or error discovered by him on reconsideration of same material is mere change of opinion and does not give him power to reopen a concluded assessment

7. Dell India (P) Ltd. vs. Joint Commissioner of Income Tax, Bangalore [Writ Appeal No. 1145 of 2015, dated 27th January, 2021 (Karnataka High Court)(FB)]

Section 147 – Reassessment – Oversight, inadvertence or mistake of A.O. or error discovered by him on reconsideration of same material is mere change of opinion and does not give him power to reopen a concluded assessment

By the order dated 2nd September, 2015, a Division Bench of the Court directed that this writ appeal should be placed before the Chief Justice for considering the issue of referring the following three questions to a larger Bench. The said three questions are as under:

‘1.        Whether the Division Bench judgment in the case of Commissioner of Income-tax vs. Rinku Chakraborthy [2011] 242 ITR 425 lays down good law?

2.        Whether the judgment in Rinku Chakraborthy (Supra) is per incurium in view of the fact that it relies upon the judgment of the Apex Court in the case of Kalyanji Mavji & Co. vs. Commissioner of Income-tax 1976 CTR 85, which has been specifically overruled by the Apex Court in the case of Indian & Eastern Newspaper Society vs. Commissioner of Income-tax [1979] 110 ITR 996?

3.        Whether “reason to believe” in the context of section 147 of the Income-tax Act can be based on mere “change of opinion” of the A.O.?’

The scope of the adjudication is limited to deciding the three questions of law framed by the Division Bench.

The assessee company manufactures and sells computer hardware and other related products. It provides warranty services to the customers and the price of the standard warranty period is covered by the sale price of the computer hardware and other products. The assessee company also provides extended or upsell warranty which covers the period beyond the standard warranty. It charges an additional amount as consideration for this. Although the assessee company recovers the consideration for extended warranty with the price of the products along with sales tax or service tax, as the case may be, the revenue in connection with extended warranty is recognised and offered to income-tax proportionately over the period of the service contract, which spreads beyond the financial year in which the sale in relation to the product concerned is made. The assessee has adopted the ‘deferred revenue’ system under the mercantile system of accounting.

During the assessment proceedings, the A.O. examined the issue of deferred revenue by calling for details from the assessee. He agreed with the accounting system followed by the assessee as regards accounting of the consideration for extended warranty.

A notice u/s 148 was issued to the assessee. While arriving at the net revenue of Rs. 31,10,85,96,000 for the A.Y. 2009-10, reduction of Rs. 2,16,89,00,773 was made as smart debits deferred revenue account. It is alleged in the reasons that the said income of Rs. 2,16,89,00,773 had escaped assessment for the A.Y. 2009-10.

The assessee replied to the notice u/s 148 and objected to the reasons recorded. It submitted that the reasons recorded for reopening the assessment for the A.Y. 2009-10 are based on mere change of opinion and hence cannot be termed as valid reasons. It was submitted that as the A.O. has taken a different view for different assessment years, it amounts to merely a change of opinion. The Joint Commissioner of Income-tax, by a letter dated 24th February, 2015, rejected the objections raised by the assessee and directed it to appear for the reassessment proceedings for the A.Y. 2009-10.

Being aggrieved by the said notice u/s 148 and the rejection of its preliminary objections to the said notice, a writ petition was filed before the learned single Judge of the High Court. The Judge rejected the petition on the ground that there was no error in initiation of the proceedings u/s 148.

The assessee submitted that in the case Rinku Chakraborthy [2011] 242 CTR 425 the Division Bench had concluded that where an A.O. erroneously fails to tax a part of the assessable income, there is an income escaping assessment and, accordingly, the A.O. has jurisdiction u/s 147 to reopen the assessment. In doing so, it relied on the observations of the Apex Court in the case of Kalyanji Mavji and Company [1976] 1 SCC 985. It is further submitted that the observations made in the case of Kalyanji Mavji and Company (Supra) are no longer good law in their entirety, in the light of the subsequent decision of the Apex Court in the case of Indian and Eastern Newspaper Society [1979] 4 SCC 248 where the Apex Court held that those particular observations in Kalyanji Mavji and Company did not lay down the correct position of law. In the light of the observations of the Apex Court in the case of Indian and Eastern Newspaper Society, it is clear that a mistake, oversight or inadvertence in assessing any income would not give the power to an A.O. to reopen the assessment by exercise of powers u/s 147. That would amount to a review, which is outside the scope of section 147.

The subsequent judgment of the Apex Court in the case of Indian and Eastern Newspaper Society was not brought to the notice of this Court in the case of Rinku Chakraborthy. He urged that there are specific provisions in the Act for correcting errors / mistakes such as the power of rectification u/s 154 and one cannot resort to section 147 to correct errors or to review an earlier order.

The Division Bench held that the decision in the case of Rinku Chakraborthy is based only on what is held in clause (2) of paragraph 13 of the decision in the case of Kalyanji Mavji and Company. The decision rendered in the latter case was by a Bench of two Judges. Subsequently, a larger Bench of three Judges in the case of Indian and Eastern Newspaper Society has clearly held that oversight, inadvertence or mistake of the A.O. or error discovered by him on the reconsideration of the same material does not give him power to reopen a concluded assessment. It was expressly held that the decision in the case of Kalyanji Mavji and Company on this aspect does not lay down the correct law. The decision in the case of Rinku Chakraborthy is based solely on the decision of the Apex Court in the case of Kalyanji Mavji and Company and in particular what is held in clause (2) of paragraph 13. The said part is held as not a good law by a subsequent decision of the Apex Court in the case of Indian and Eastern Newspaper Society.

The second question was answered in the affirmative, in view of the consistent decisions of the Apex Court holding that ‘reason to believe’ in the context of section 147 cannot be based on mere change of opinion of the A.O.

The third question was answered in the negative. The Court observed that in view of settled law, framing of question No. 3 was not warranted at all.

DEDUCTION FOR CONTRIBUTION BY EMPLOYER TO SPECIFIED FUNDS – SECTION 40A(9)

ISSUE FOR CONSIDERATION
For an employer, staff welfare expense is normally an allowable business deduction under section 36 or 37 in computing his income under the head ‘Profits and Gains of Business or Profession’. However, the allowability of business deductions is restricted by the provisions of section 40A. Section 40A(9), inserted by the Finance Act, 1984 with retrospective effect from 1st April, 1980, provides that no deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, AOP, BOI, society or other institution for any purpose. Exceptions are provided, for permitting deductions, for payment of contributions to specified funds being recognised provident fund, approved superannuation fund, approved gratuity fund and towards a pension scheme referred to in section 80CCD [i.e., sums paid for the purposes and to the extent provided by or under clauses (iv), (iva) or (v) of section 36(1)], or for payments required by or under any other law.

The issue has come up before the High Courts as to whether all contributions to funds, other than those specified, are hit by the embargo of section 40A(9) leading to disallowance of expenditure, or whether the provisions for disallowance apply only to funds which merely accumulate and do not spend such contributions on staff welfare. While the Kerala High Court has taken the view that in terms of section 40A(9) the payment of contributions would be disallowed where the contribution is to a fund other than the specified funds, the Bombay and Karnataka High Courts have taken a more liberal view, holding that the prohibition does not apply to contributions to genuine funds and the deduction would be allowed irrespective of section 40A.

ASPINWALL & CO.’S CASE

The issue had come up before the Kerala High Court in the case of Aspinwall and Co. Ltd. vs. DCIT 295 ITR 533.

In this case, pertaining to assessment years 1990-91, 1991-92 and another year post assessment year 1980-81, the assessee had made a contribution to the Executive Staff Provident Fund, which was not a recognised provident fund, and claimed a deduction for such contribution. Such contribution had been allowed to it as a deduction u/s 37 for A.Y. 1979-80 by the Kerala High Court vide its decision reported in 194 ITR 739, and also for A.Y. 1977-78 by the Kerala High Court in a decision reported in 204 ITR 225 u/s 36(1)(iv), following its own earlier decision. The A.O. had disallowed such contribution.

The assessee contended before the Kerala High Court that in view of the decisions of the High Court in the earlier years in its own cases, it was entitled to get deduction for the amount paid to the unrecognised provident fund u/s 36(1)(iv) or (v), or in the alternative u/s 37. On behalf of the Revenue, it was contended that the earlier decisions of the Kerala High Court would not apply to the assessment years in question in view of the insertion of sub-section (9) to section 40A with retrospective effect from 1st April, 1980.

The Kerala High Court analysed the provisions of section 40A(9) to hold that after the insertion of sub-section (9), no deduction be allowed in respect of any sum paid by the assessee as an employer towards contribution to a provident fund, except where such amount was paid for the contribution to a recognised provident fund and for the purposes of and to the extent provided by or u/s 36(1)(iv). The High Court noted that section 37(1) was a general provision which stated that any expenditure, other than of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession, was to be allowed in computing the income chargeable under the head ‘profits and gains of business or profession’. According to the High Court, in view of the provisions of section 40A(9), no deduction could be allowed in respect of any sum paid towards contribution to a provident fund by taking recourse to the residuary section 37(1).

The Kerala High Court analysed the Explanatory Notes to the Finance Act, 1984 in relation to section 40A(9) to hold that the intention of the Legislature was to deny the deduction in respect of sums paid by the assessee as employer towards contribution to any fund, trust, company, etc., for any purposes, except to a recognised fund and that, too, within the limits laid down under the relevant provisions. Placing reliance on the decision of the Supreme Court in Shri Sajjan Mills Ltd. vs. CIT 156 ITR 585, where the Supreme Court had held that unless the conditions laid down in section 40A(7) were fulfilled, a deduction could not be allowed on general principles under any other provisions of the Act relating to computation of income under the head ‘profits and gains of business or profession’, the Kerala High Court held that section 40A had to be given effect to, notwithstanding anything contained in sections 30 to 39 of the Act, and
in view of that no deduction could be allowed in respect of any contribution towards an unrecognised provident fund.

The Kerala High Court noted that the deduction u/s 36(1)(iv) was subject to the prescribed limits, which limits had been laid down in Rules 75, 87 and 88 of the Income Tax Rules, 1962. Section 40A(9) referred to the purposes and the extent provided by or u/s 36(1)(iv), and therefore only such amounts, within the prescribed limits, could be allowed as a deduction.

The Kerala High Court, therefore, held that no deduction could be allowed u/s 37(1) in respect of contribution to the unrecognised provident fund, having regard to the provisions of section 40A(9).

This decision of the Kerala High Court was followed again by the Kerala High Court in the case of TCM Ltd. vs. CIT 196 Taxman 129 (Ker), where the issue related to the deduction for a contribution to an Employees’ Welfare Fund.

STATE BANK OF INDIA’S CASE

The issue came up again recently before the Bombay High Court in the case of Pr. CIT vs. State Bank of India 420 ITR 376.

In this case, the assessee claimed expenditure of Rs. 50 lakhs incurred towards contribution to a fund created for the welfare of its retired employees. The A.O. disallowed such expenditure, invoking the provisions of section 40A(9).

The Tribunal allowed the assessee’s claim, observing that the assessee had made such contribution to a fund for the medical benefits specially envisaged for the retired employees of the bank. In the opinion of the Tribunal, section 40A(9) was inserted to discourage the practice of creation of bogus funds and not to disallow the general expenditure incurred for welfare of the employees. The Tribunal also noted that the A.O. had not doubted the bona fides of the assessee in creation of the fund, and that such fund was not controlled by the assessee. Proceeding on the basis that the A.O. and the Commissioner (Appeals) had not doubted the bona fides in creation of the trust and that the expenditure was incurred wholly and exclusively for the employees, the Tribunal allowed the assessee’s appeal and deleted the disallowance.

The Bombay High Court, on appeal by the Revenue, analysed the provisions of section 40A(9) to hold that the case of the assessee did not fall in any of the clauses of section 36(1) mentioned in section 40A(9), i.e., clauses (iv), (iva) or (v). It referred to the provisions of the Explanatory Memorandum and the Notes to the Finance Act, 1984 when section 40A(9) was introduced to hold that the purpose of inserting sub-section (9) in section 40A was not to discourage the general expenditure by an employer for the welfare activities of the employees. The Bombay High Court was of the view that the purpose of insertion of section 40A(9) was to restrict the claim of expenditure by the employers towards contribution to funds, trust, association of persons, etc., which were wholly discretionary and which did not impose any restriction or condition for expending such funds, which had possibility of misdirecting or misuse of such funds after the employer claimed benefit of deduction thereof. Basically, according to the Bombay High Court, the inserted provision was not meant to hit the allowance of the general expenditure by an employer for the welfare and the benefit of the employees.

The Court placed reliance on its earlier decisions in the cases of CIT vs. Bharat Petroleum Corporation Ltd. 252 ITR 43 where a donation to a club created for social, cultural and recreational activities of its members was allowed, by holding the expenditure to be on staff welfare activity; CIT vs. Indian Petrochemicals Corporation Ltd. 261 Taxman 251, where contributions to various clubs and facilities meant for use by staff and their family members were held allowable; and Pr. CIT vs. Indian Oil Corporation, ITA No. 1765 of 2016, where expenditure on setting up or providing grant-in-aid to Kendriya Vidyalaya Schools where children of staff of the assessee would receive education, was held to be allowable as a deduction.

The Bombay High Court in the case was not asked to examine or consider the ratio of the decision of the Kerala High Court in the case of Aspinwall Ltd. (Supra) and the said decision remains to be dissented with. In fact, the Court relied on another decision of the Kerala High Court in the case of PCIT vs. Travancore Cochin Chemicals Ltd. 243 ITR 284 to support its action to allow the deduction. It held that the contribution to a fund for the healthcare of retired employees was an allowable deduction and was not disallowable u/s 40A(9).

A similar view was also taken by the Karnataka High Court in the case of CIT vs. Motor Industries Co. Ltd. 226 Taxman 41, where the Court held that the contribution made by the assessee towards a benevolent fund created for the benefit of its employees was entitled to deduction, notwithstanding section 40A(9), though there was no compulsion under any other law for making such contribution. The Karnataka High Court relied on its earlier decision in the case of the same assessee, in ITA 3 of 2002 dated 2nd November, 2007. Such contribution was made pursuant to a Memorandum of Understanding embodying the terms of a settlement arrived at between the management and employees of the company.

OBSERVATIONS


It is interesting to note that both the Kerala as well as the Bombay High Courts relied on the same Explanatory Memorandum to the Finance Act, 1984 explaining the rationale behind introduction of sub-section (9) in section 40A, for arriving at diametrically opposite conclusions. The Explanatory Notes read as under:

(ix) Imposition of restrictions on contributions by employers to non-statutory funds.
16.1 Sums contributed by an employer to a recognised provident fund, an approved superannuation fund and an approved gratuity fund are deducted in computing his taxable profits. Expenditure actually incurred on the welfare of employees is also allowed as deduction. Instances have come to notice where certain employers have created irrevocable trusts, ostensibly for the welfare of employees, and transferred to such trusts substantial amounts by way of contribution. Some of these trusts have been set up as discretionary trusts with absolute discretion to the trustees to utilise the trust property in such manner as they may think fit for the benefit of the employees without any scheme or safeguards for the proper disbursement of these funds. Investment of trust funds has also been left to the complete discretion of the trustees. Such trusts are, therefore, intended to be used as a vehicle for tax avoidance by claiming deduction in respect of such contributions, which may even flow back to the employer in the form of deposits or investment in shares, etc.
16.2 With a view to discouraging creation of such trusts, funds, companies, association of persons, societies, etc., the Finance Act has provided that no deduction shall be allowed in the computation of taxable profits in respect of any sums paid by the assessee as an employer towards the setting up or formation of or as contribution to any fund, trust, company, association of persons, body of individuals, or society or any other institution for any purpose, except where such sum is paid or contributed (within the limits laid down under the relevant provisions) to a recognised provident fund or an approved gratuity fund or an approved superannuation fund or for the purposes of and to the extent required by or under any other law.
16.3 With a view to avoiding litigation regarding the allowability of claims for deduction in respect of contributions made in recent years to such trusts, etc., the amendment has been made retrospectively from 1st April, 1980. However, in order to avoid hardship in cases where such trusts, funds, etc., had, before 1st March, 1984, bona fide incurred expenditure (not being in the nature of capital expenditure) wholly and exclusively for the welfare of the employees of the assessee out of the sums contributed by him, such expenditure will be allowed as deduction in computing the taxable profits of the assessee in respect of the relevant accounting year in which such expenditure has been so incurred, as if such expenditure had been incurred by the assessee. The effect of the underlined words will be that the deduction under this provision would be subject to the other provisions of the Act, as for instance, section 40A(5), which would operate to the same extent as they would have operated had such expenditure been incurred by the assessee directly. Deduction under this provision will be allowed only if no deduction has been allowed to the assessee in an earlier year in respect of the sum contributed by him to such trust, fund, etc.’

The Kerala High Court interpreted the Memorandum to mean that the intention of the Legislature was to deny the deduction in respect of the sums paid by the assessee to all funds, trusts, AOPs, etc., other than those specified in section 36(1)(iv), (iva) and (v), while the Bombay High Court understood it to mean that the inserted provision applied only to trusts which were discretionary, with possibility of misdirection or misuse of such contributions, and not applicable to any genuine expenditure.

The intention of the Legislature behind the amendment may be gathered from paragraph 16.1 of the Explanatory Notes, where the types of cases of misuse sought to be plugged have been set out. The amendment is intended to apply in cases where the employer had discretion in utilisation of funds and in investment of funds without any safeguards, and which could be used as tools of tax avoidance by claiming deduction in respect of such contributions, which could flow back to the employer in the form of deposits or investment in shares, etc. It was certainly not intended to apply to genuine staff welfare trusts, where the amount of contributions was expended on staff welfare, where the contribution was really in the nature of staff welfare expenses. Clearly, the amendment was not targeted to curtail the allowance of staff welfare expenditure but only to curb misuse of claim for deduction of a payment disguised as staff welfare expenditure, of amounts not intended to be spent on staff welfare expenditure.

The Kerala High Court itself, in CIT vs. Travancore Cochin Chemicals Ltd. 243 ITR 284, while considering a payment towards proportionate share of expenses of assessee for running of a school wherein children of the assessee’s employees were studying, had held that such expenditure was expenditure for the smooth functioning of the business of the assessee and also expenditure wholly and exclusively for the welfare of the employees of the assessee and, thus, allowable.

In Sandur Manganese & Iron Ores Ltd. vs. CIT 349 ITR 386, the Supreme Court had occasion to examine the provisions of section 40A(9) and their applicability to payments made to schools claimed as welfare expenses towards providing education to its employees’ children. The Tribunal and High Court had concluded that those payments made by the assessee constituted ‘reimbursement’ to schools promoted by the assessee, and accordingly had upheld the disallowance. The Supreme Court on appeal observed that section 40A(9) of the Act was inserted as a measure for combating tax avoidance. Noting that the A.O. had observed that certain payments had been made to educational institutions other than those promoted by the assessee, in view of these facts, the Supreme Court further directed the ITAT to record a separate finding as to whether the claim for deduction was being made for payments to the school promoted by the assessee or to some other educational institutions / schools and thereafter apply section 40A(9). The action of the Court indicates that the expenditure where incurred for payments to funds, etc., not promoted by the assessee, were to be separately considered.

In Kennametal India Ltd. vs. CIT 350 ITR 209 (SC), the Tribunal had held that the amount paid by a company towards employees’ welfare trust had been reimbursed. The Supreme Court on appeal held that there was a difference between the reimbursement and contribution; the assessee could make a claim for deduction in case of the reimbursement, if the quantified amount was certified by the Chartered Accountant of the assessee. This decision supports the case for allowance of the expenditure on payment by way of reimbursement.

Having noted the above, it is possible for the Government to contend that the language of section 40A(9) is fairly clear and not ambiguous and may not permit the luxury of interpreting the provision by examining the intent behind the insertion of the provision. In simple words, it prohibits the allowance of all those payments specified therein, unless the same are covered by the provisions of section 36(1), clauses (iv), (iva) and (v). At the same time, it has to be appreciated that there is nothing in the language that provides for the disallowance of expenditure, including the reimbursement thereof, which is wholly and exclusively incurred for the purposes of the business. In cases where the contribution can be shown to be expenditure of such a nature, in our considered opinion, there can be no disallowance.

Again, the allowance of expenditure or payment would, to a large extent, depend upon the factual position relating to the contribution, its size, its objective and the composition of the recipient fund / trust. A distinction can be drawn between cases where:
1. the trusts are controlled by the employer, provisions of section 40A(9) may apply;
2. the contributions by the employer are of large amounts intended to remain invested by the trust and where the trustees have the discretion to invest the funds with the employer, the provisions of section 40A(9) may apply;
3. the contributions by the employer are to meet the annual staff welfare expenditure incurred by the trust, provisions of section 40A(9) may not apply;
4. the expenditure is in the nature of staff welfare or reimbursement thereof, the provisions of section 40A(9) should not apply.

The better view of the matter seems to be that the provisions relating to disallowance would not apply to genuine staff welfare expenditure or reimbursement thereof, even though routed through funds, trusts, AOPs, etc.

Offence and prosecution – Wilful attempt to evade tax – Section 276C, read with section 132

7 Income Tax Department vs. D.K. Shivakumar [Criminal Revision Petition No. 329 to 331 of 2019; Date of order: 5th April, 2021; Karnataka High Court]

Offence and prosecution – Wilful attempt to evade tax – Section 276C, read with section 132

During a search, the assessee tore a piece of paper containing details of alleged unaccounted loan transactions. It was found that the assessee had advanced huge amount of loan to these persons / entities. He did not disclose the said unaccounted financial transactions in his returns of income and further, the statements of several persons disclosed that the assessee had received huge amount of interest on the said unaccounted loan, which was not reflected in the books of accounts or in the returns of income.

The Revenue filed complaints before the Special Court; the only circumstance relied on by the Revenue / complainant in support of the alleged charges was that during the search action, certain unaccounted loan transactions with several persons / entities were detected and the said unaccounted financial transactions were not disclosed in the returns of income for the relevant years and that the assessee had received huge amount of interest on the said unaccounted loans. The Special Court discharged the assessee mainly on the ground that the ‘complaints filed by the complainant estimating the undisclosed income of the accused and launching the prosecution is without jurisdiction’ and that the piece of paper torn by the respondent / accused was not a document lawfully compelled to be produced as evidence and that the same was not ‘obliterated, nor rendered illegible’ making out the offences under sections 201 and 204 of IPC but reserved the Revenue’s liberty to launch fresh prosecution after estimating the undisclosed income of the assessee / accused by the jurisdictional A.O. on the basis of the materials produced by the authorised officer for the search and such other materials as were available with him. Accordingly, the Special Court had discharged the assessee of the charges.

On the criminal revision petition filed by the petitioner / Revenue, the High Court observed that the allegations, even if accepted as true, did not prima facie constitute offences u/s 276C(1). The gist of the offence under this section is the wilful attempt to evade any tax, penalty or interest chargeable or imposable or underreporting of income. What is made punishable is ‘attempt to evade tax, penalty or interest’ and not the ‘actual evasion of the tax’. The expression ‘attempt’ is nowhere defined under the Act or IPC. In legal parlance, an ‘attempt’ is understood to mean ‘an act or movement towards commission of an intended crime’. It is doing ‘something in the direction of commission of offence’. Viewed in that sense ‘in order to render the accused / respondent guilty of attempt to evade tax, penalty or interest, it must be shown that he has done some positive act with an intention to evade any tax, penalty or interest’ as held by the Supreme Court in Prem Dass vs. ITO [1999] 5 SCC 241 that a positive act on the part of the accused is required to be established to bring home the charge against the accused for the offence u/s 276C(2).

The Court further held that there is no presumption under law that every unaccounted transaction would lead to imposition of tax, penalty or interest. Until and unless it is determined that unaccounted transactions unearthed during search are liable for payment of tax, penalty or interest, no prosecution could be launched on the ground of attempt to evade such tax, penalty or interest. Therefore, the prosecution initiated against the assessee was bad in law and contrary to procedure prescribed under the Code of Criminal Procedure and the provisions of the Income-tax Act and, thus, the revision petitions were dismissed.

Appeal to Appellate Tribunal – Rectification of mistake u/s 254(2) – Powers of Tribunal – Jurisdiction limited to correcting ‘error apparent on face of record’ – Tribunal cannot review its earlier order or rectify error of law or re-appreciate facts – Assessee has remedy of appeal to High Court

37 Vrundavan Ginning and Oil Mill vs. Assistant Registrar / President [2021] 434 ITR 583 (Guj) Date of order: 18th March, 2021 Ss. 253, 254, 254(2), 260A of ITA, 1961

Appeal to Appellate Tribunal – Rectification of mistake u/s 254(2) – Powers of Tribunal – Jurisdiction limited to correcting ‘error apparent on face of record’ – Tribunal cannot review its earlier order or rectify error of law or re-appreciate facts – Assessee has remedy of appeal to High Court

In the appeal filed by the assessee against the order passed by the A.O., the Commissioner (Appeals) granted relief to the assessee in respect of the addition on account of understatement of net profit by lowering the value of closing stock and confirmed the addition made by the A.O. The assessee filed a further appeal before the Tribunal on the grounds that the Commissioner (Appeals) erred in (a) confirming the addition made on account of purchases by holding that the purchases of raw cotton from the partners were bogus, (b) confirming the addition made on account of purchases of raw cotton from the relatives of the partners holding them to be unexplained / unsubstantiated, and (c) confirming the addition made on account of alleged suppression in value of closing stock by discarding / disregarding the method of valuation consistently followed and accepted in the past assessments.

The Tribunal held that the Commissioner (Appeals) rightly held that the assessee did not follow either of the methods of valuation of closing stock, i.e., either on the basis of cost price or market price, whichever was lower, rather the assessee followed net realisable value which was an ad hoc method and without any basis, that the net realisation method was neither based on cost price nor calculated on the basis of market price and there was no scientific method of calculation of the net realisable value, and that there was no infirmity in the orders of the authorities below.

Thereafter, the assessee filed a miscellaneous application u/s 254 contending that (a) the copies of returns filed in which agricultural income disclosed by the partners in the hands of the Hindu Undivided Family were furnished, (b) the partners in turn disclosed share in the HUF income in their individual returns and had claimed exemption u/s 10(2) and such exemption claimed was not disturbed by the A.O., (c) the purchases from the partners and relatives were made at market rate and comparable purchase vouchers along with a chart were furnished indicating no excess payment to the partners and relatives, (d) there was complete quantity tally on day-to-day basis, and (e) there was no rejection of book results and that 20% disallowance was sustained by the Tribunal while adjudicating ground Nos. 1 and 2 without taking into account the above stated facts, and therefore the order of the Tribunal needed to be rectified to such extent and consequential required relief was to be granted on ground No. 3 in respect of the addition on account of alleged suppression in value of closing stock.

The Tribunal held that the power of rectification u/s 254 could be exercised only when the mistake which was sought to be rectified was an obvious patent mistake and apparent from the record and not a mistake which was required to be established by arguments and a long-drawn process of reasoning on points on which there could conceivably be two opinions. It was further held that after a detailed discussion the disallowance was restricted to 20% of the purchase made from the partners and relatives of the partners and 80% of the purchases made by the assessee were allowed; and qua ground No. 3 relating to the addition made on account of suppression in the value of closing stock, the issue was discussed and thereafter it was concluded that the assessee adopted an ad hoc method for the valuation of closing stock without any basis and that the scope of sub-section (2) of section 254 was restricted to rectifying any mistake in the order which was apparent from record and did not extend to reviewing of the earlier order. The Tribunal rejected the miscellaneous application filed by the assessee.

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

‘i) Section 254(2) makes it clear that a “mistake apparent from the record” is rectifiable. To attract the jurisdiction u/s 254(2), a mistake should exist and must be apparent from the record. The power to rectify the mistake, however, does not cover cases where a revision or review of the order is intended. A mistake which can be rectified under this section is one which is patent, obvious and whose discovery is not dependent on argument. The language used in section 254(2) is that rectification is permissible where it is brought to the notice of the Tribunal that there is any mistake apparent from the record. The amendment of an order, therefore, does not mean obliteration of the order originally passed and its substitution by a new order which is not permissible, under the provisions of this section. Further, where an error is far from self-evident, it ceases to be an “apparent” error. Undoubtedly, a “mistake” capable of rectification u/s 254(2) is not confined to clerical or arithmetical mistakes. It does not cover any mistake which may be discovered by a complicated process of investigation, argument or proof. An error “apparent on the face of the record” should be one which is not an error that depends for its discovery on an elaborate argument on questions of fact or law.

ii) The power to rectify an order u/s 254(2) is limited. It does not extend to correcting errors of law or re-appreciating factual findings. Those properly fall within the appellate review of an order of a court of first instance. What legitimately falls for consideration are errors (mistakes) apparent from the record.

iii) The language used in Order 47, Rule 1 of the Code of Civil Procedure, 1908 is different from the language used in section 254(2). Power is conferred upon various authorities to rectify any “mistake apparent from the record”. Though the expression “mistake” is of indefinite content and has a large subjective area of operation, yet, to attract the jurisdiction to rectify an order u/s 254(2) it is not sufficient if there is merely a mistake in the order sought to be rectified. The mistake to be rectified must be one apparent from the record. A decision on a debatable point of law or disputed question of fact is not a mistake apparent from the record.

iv) The Appellate Tribunal, in its own way, had discussed qua ground No. 3 the issue relating to the addition made on account of suppression in the value of closing stock and had recorded a particular finding. If the assessee was dissatisfied, then it had to prefer an appeal u/s 260A, and if the court was convinced, then it could remit the matter to the Tribunal for fresh consideration of ground No. 3. As regards the findings recorded by the Tribunal, so far as ground No. 3 was concerned, the assessee could seek appellate remedies. The power to rectify an order u/s 254(2) is limited.’

Section 115JB(2)(i) – Where an amount debited for diminution in value of Investments and Non-Performing Assets is in nature of an actual write-off, clause (i) of Explanation (1) to sub-section (2) of section 115JB is not attracted and thus the aforesaid amount is not to be added back while computing book profits

33 Dy. Commissioner of Income Tax vs. Peerless General Finance and Investment Co. Ltd. [2021] 85 ITR(T) 1 (Kol-Trib)] IT Appeal No. 50 (Kol) of 2009 A.Y.: 2002-03; Date of order: 3rd December, 2020

Section 115JB(2)(i) – Where an amount debited for diminution in value of Investments and Non-Performing Assets is in nature of an actual write-off, clause (i) of Explanation (1) to sub-section (2) of section 115JB is not attracted and thus the aforesaid amount is not to be added back while computing book profits

FACTS

While computing profit for the year, the assessee had debited an amount in the Profit & Loss Account for diminution in value of Investments and Non-Performing Loans & Advances and had reduced the same from the asset side of the balance sheet to the extent of the corresponding amount. The assessee contended that the amount so debited to the P&L account is in the nature of an actual write-off and not in the nature of mere provision and, thus, should not be added back while computing book profits u/s 115JB.

The A.O. added back the amount debited for diminution in Investment and NPA (Non-Performing Assets) while computing the book profits treating it as unascertained liability as envisaged in clause (c) of Explanation (1) to sub-section (2) of section 115JB. The CIT(A) held that the said amount could not be treated as unascertained liability and allowed the assessee’s appeal.

Aggrieved by the order, Revenue filed an appeal before the Tribunal and the Tribunal upheld the action of the A.O. Aggrieved by this order, the assessee filed an appeal before High Court which remanded back the matter with a direction to proceed and determine the issue in the light of the decision of the Gujarat High Court in CIT vs. Vodafone Essar Gujarat Ltd. [2017] 397 ITR 55 (Guj), i.e., whether clause (i) of Explanation (1) to sub-section (2) of section 115JB would be attracted or not in the facts of this case.

HELD


To determine whether the amount so debited to the P&L account for diminution in Investment and NPA was an instance of write-off or a provision, the Tribunal observed that the Gujarat High Court in CIT vs. Vodafone Essar Gujarat Ltd. (Supra) explained a situation where a provision created in respect of assets would be considered as a write-off and not as a provision as per clause (i) of Explanation (1) to sub-section (2) of section 115JB.

The Gujarat High Court had held that
a) where an assessee debits an amount to the P&L account and simultaneously obliterates such provision from its account by reducing the corresponding amount from the respective assets on the asset side of the balance sheet, and
b) consequently, at the end of the year, shows the respective assets as net of the provision, it would amount to an actual write-off and such actual write-off would not attract clause (i) of the Explanation (1) to sub-section (2) of section 115JB.

In the present case, the Tribunal observed that the provision for diminution in Investment / Provision for NPA was not a mere provision but an actual write-off. Provision for Investments / Provision for NPA was created by the assessee by debiting the P&L account and simultaneously the corresponding amount from Investments / Loans & Advances shown on the asset side of the balance sheet was also reduced / adjusted and Investments / Loans & Advances were recorded in the books, net of provision.

Hence, applying the above principle laid down by the Gujarat High Court, the Tribunal finally held that the said provision for diminution in Investments and Provision for NPA would amount to an actual ‘write-off’ and therefore would not attract clause (i) of the Explanation.

Thus, the action of the CIT(A) on the issue was confirmed by the Tribunal and the Revenue’s appeal was dismissed.

ITAT holds that amendments of Finance Act, 2021 to section 43B and 36(1)(va) apply prospectively

32 Crescent Roadways Pvt. Ltd. [2021] TS-510-ITAT-2021 (Hyd)] A.Y.: 2015-16; Date of order: 1st July, 2021 Section 43B, 36(1)(va)

ITAT holds that amendments of Finance Act, 2021 to section 43B and 36(1)(va) apply prospectively

FACTS

The assessee company had remitted employees’ contribution towards PF, ESI before the due date of filing return u/s 139(1) – but after the due date prescribed in the corresponding PF, ESI statutes. For the year under consideration, the A.O. disallowed the amounts on the ground that they had been remitted after the due date prescribed in the corresponding statute, i.e., under the PF / ESI Acts. On appeal, the CIT(A) confirmed the disallowance.

Aggrieved, the assessee preferred an appeal with the Tribunal.

HELD


The Tribunal held that the legislative amendments incorporated in sections 36(1)(va) and 43B by the Finance Act, 2021 are prospective in application and are therefore applicable w.e.f. 1st April, 2021. Therefore, the disallowance of employees’ contributions towards PF, ESI for the A.Y. under consideration was not sustainable and accordingly deleted the additions made on account of such disallowance.

ITAT holds that corrigendum to the valuation report to be considered in ascertainment of value u/s 56(2)(viib)

31 I Brands Beverages Pvt. Ltd. [2021] TS-546-ITAT-2021 (Bang)] A.Y.: 2015-16; Date of order: 13th July, 2021 Section 56(2)(viib)

ITAT holds that corrigendum to the valuation report to be considered in ascertainment of value u/s 56(2)(viib)

FACTS

The assessee, who was engaged in the manufacture and sale of beverages, allotted 4,80,000 shares of a nominal value Rs. 10 per share at a premium of Rs. 365 per share following the discounted cash flow method as per the valuation report. The A.O. noted that the value per share as per projections was Rs. 37.49 per share and it was mistakenly arrived at as Rs. 374.95 per share, and therefore assessed the difference of Rs. 16.2 crores as income u/s 56(2)(viib). On appeal with the CIT(A), the assessee submitted a corrigendum to the valuation report as additional evidence, contending it to be read with the original valuation report which showed the fair market value at Rs. 374.95 per share. The CIT(A), based on a remand report called from the A.O., held that additional evidence in the form of corrigendum was not admissible and confirmed the additions made by the A.O.

Aggrieved, the assessee is in appeal before the Tribunal.

HELD


The Tribunal observed that the corrigendum to the original report was issued on account of error and it formed part of the original valuation report. It further held that the corrigendum could not be treated as additional evidence by the CIT(A) and therefore there was no reason to reject it. The Tribunal holds that the corrigendum and the original report shall constitute the full report to be examined by the A.O. and accordingly remits the matter to the A.O. for determination of value per share.

SHOULD CHARITY SUFFER THE WRATH OF SECTION 50C?

INTRODUCTION
In this article, the applicability of section 50C in the case of a charitable trust has been deliberated upon. Before we proceed any further, a basic understanding of the method of computation of capital gains in the case of a charitable trust would be very helpful.

COMPUTATION OF ‘INCOME’ IN THE CASE OF A CHARITABLE TRUST

Section 11 of the Income-tax Act deals with computation of income from property held for charitable and religious purposes. Section 11(1) provides the incomes that shall not be included in the total income of the previous year of the person in receipt of the income.

It is well settled that the ‘income’ as referred to in section 11(1) must be computed in accordance with commercial principles and not in accordance with the ordinary provisions of the Act.

In this regard, reference may be made to the following materials:
• Board Circular No. 5P (XX-6), dated 19th June, 1968;
• CIT vs. Ganga Charity Trust Fund [1986] 162 ITR 612 (Guj);
• CIT vs. Trustee of H.E.H. the Nizam’s Supplemental Religious Endowment Trust [1981] 127 ITR 378 (AP);
• CIT vs. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485 (Mad);
• CIT vs. Janaki Ammal Ayya Nadar Trust [1985] 153 ITR 159 (Mad) (para 13);
• CIT vs. Programme for Community Organisation [1997] 228 ITR 620 (Ker) upheld in CIT vs. Programme for Community Organisation [2001] 248 ITR 1 (SC);
• CIT vs. Rajasthan and Gujarati Charitable Foundation [2018] 402 ITR 441 (SC); and
• DIT(E) vs. Iskcon Charities [2020] 428 ITR 479 (Karn) (para 7).

Section 11(1A) and computation of capital gains in the hands of a charitable trust:
Section 11(1A) provides that for the purposes of section 11(1), where a capital asset held wholly for charitable or religious purposes is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then, the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified thereunder.

Given that the exemption u/s 11(1)(a) is subject to condition of application or accumulation, the Legislature found that such condition mandating application or accumulation of capital gains could lead to eroding the corpus of the trust. Hence, with a view to ease the onerous condition of requiring application or accumulation of capital gains for religious or charitable purposes, the Legislature introduced section 11(1A) vide Finance (No. 2) Act, 1971 with effect from 1st April, 1962. This is forthcoming from the Circular No. 72, dated 6th January, 1972.

It may be noted that section 11(1A) only deems acquisition of another capital asset held for charitable or religious purposes as application for the purposes of section 11(1). This is clear from the preamble of section 11(1A), which uses the words ‘for the purposes of sub-section (1)’.

It may be noted that the computation of capital gains will also have to be made u/s 11(1) by applying commercial principles as capital gains is also an ‘income’ u/s 11(1) and cannot receive any different treatment. Reference may be made to the Board Circular No. 5P (XX-6), dated 19th June, 1968 which provides that even income under the head ‘capital gains’ will have to be computed under commercial principles in case of a charitable trust.

APPLICABILITY OF PROVISIONS OF SECTION 50C

For section 50C to apply, the following prerequisites must be satisfied:
i) Consideration received or accruing as a result of a transfer of a capital asset is less than the value adopted or assessed or assessable by any Authority of a State Government for the purpose of stamp duty in respect of such transfer; and
ii) The capital asset being transferred is land or building, or both.

Section 50C is a deeming provision which deems the Stamp Duty Value (SDV) adopted, assessed or assessable as the full value of consideration for the purpose of computation of capital gains u/s 48.

It is well settled that the scope of a deeming provision must be restricted to the purpose for which it is created and must not be extended beyond such purpose. Such legal fiction must be carried to its logical conclusion and must not be taken to illogical lengths. One should not lose sight of the purpose for which the legal fiction was introduced. In this regard, reference may be made to the judgments in CIT vs. Mother India Refrigeration Industries P. Ltd. [1985] 155 ITR 711 [SC] and CIT vs. Ajax Products Ltd. [1965] 55 ITR 741 [SC].

Thus, the provisions of section 50C, which deem the SDV as the full value of consideration for the purposes of section 48, cannot be extended to the case of a charitable trust, in whose case the capital gains must be computed in accordance with commercial principles.

Even otherwise, it may be noted that there can be no room for importing a deeming fiction of Chapter IV-E in computing the income of a charitable trust on commercial principles u/s 11(1).

In the following judgments it has been held that section 50C has no application in case of charitable or religious trusts:
• ACIT vs. Shri Dwarikadhish Temple Trust, Kanpur (ITA No. 256 & 257/Lkw/2011, dated 21st August, 2014) (paras 4.3-6.2);
• ACIT vs. The Upper India Chamber of Commerce [ITA No. 601/Lkw/2011, dated 5th November, 2014 (2014) 46-B BCAJ 282] (paras 4 & 5).

It would also be pertinent to note that section 50C was inserted into the Income-tax Act much after section 11(1A) was introduced. However, the Legislature has not chosen to make an amendment to section 11(1A) after insertion of section 50C, thereby indicating that the Legislature does not intend to take away the benefit of section 11(1A) in the case of a trust with the introduction of section 50C into the statute book.

Wherever the Legislature has sought to provide for application of normal provisions of the Act in the case of a charitable trust, it has expressly provided so. It has done so because it is aware that the income of a charitable trust is to be computed in accordance with commercial principles. [See Explanation (ii) to section 11(1A) and Explanation 3 to section 11(1).]

However, it has consciously chosen not to import the fiction of section 50C into sections 11(1) and 11(1A) and hence section 50C would not be applicable in the case of a charitable trust.

It is a settled principle of interpretation that law has to be interpreted in the manner that it has been worded. Nothing is to be read into and nothing is to be implied in it while reading the law. There is no intendment to law. In this regard, reference may be made to the judgment in CIT vs. Kasturi & Sons Ltd. (1999) 237 ITR 24 (SC).

Even otherwise, it may be noted that section 50C is incompatible with the scheme of sections 11(1) and 11(1A) as there cannot be an application or accumulation of any artificial income or consideration created by way of a deeming fiction.

In CIT vs. Jayashree Charity Trust [1986] 159 ITR 280 (Cal), it was held that though section 198 provides that the amounts deducted by way of income tax are deemed to be ‘income received’, what is deemed to be income
can neither be spent nor accumulated for charitable purposes. Hence, the deeming provisions of section 198 should not be construed in a way to frustrate the object of section 11.

It may also be noted that a charitable trust cannot be expected to do the impossible act of applying / accumulating / investing a notional consideration which it has neither received nor is going to receive. In this regard, reference may be made to the judgments in Krishnaswamy S. Pd. vs. Union of India [2006] 281 ITR 305 (SC) and Engineering Analysis Centre of Excellence Private Limited vs. CIT [2021] 125 taxmann.com 42 (SC).

The interpretation that section 50C does not apply to charitable trusts saves the provisions of section 11 from the vice of the absurdity of requiring the application / accumulation / investment of a notional consideration.

Thus, the provisions of section 50C do not apply to the case of a charitable trust.

NON-APPLICABILITY OF SECTION 50C BY APPLYING MISCHIEF PRINCIPLE

By applying the Mischief rule, or Heydon’s rule of interpretation, while interpreting the provision, the real intention behind the enactment of the statute needs to be gone into in order to understand what mischief it seeks to remedy. This principle of interpretation finds support of the judgment in K.P. Varghese vs. ITO [1981] 131 ITR 597 (SC).

The overarching reason for insertion of section 50C would be to curb generation of black money by understating the agreed consideration on records. Under the erstwhile provisions, the A.O. without any evidence to the contrary could not question the consideration stated to have been agreed between the parties to a transaction by presuming the market value to be the full value of consideration. Hence, in order to plug evasion of taxes by understating consideration, section 50C has been inserted into the statute books. In Gouli Mahadevappa vs. ITO [2013] 356 ITR 90 (Karn), it has been held that the ultimate object and purpose of section 50C is to see that the undisclosed income of capital gains received by the assessees should be taxed.

In the case of a charitable trust, there can be no motivation whatsoever to generate any black money as the entire income generated is exempt from taxation if the conditions u/s 11 are met.

In case of a charitable trust, deposit of sale consideration into a Fixed Deposit amounts to utilisation as envisaged in section 11(1A). In this regard, reference may be made to Board Circular No. 833 of 1975 dated 24th September, 1975 and the judgment of the Calcutta High Court in CIT vs. Hindusthan Welfare Trusts [1994] 206 ITR 138 (Cal). Hence, a mere investment in a Fixed Deposit could amount to utilisation.

Thus, when there is no motivation to generate black money in case of a charitable trust, the mischief sought to be remedied by section 50C does not arise.

It may be noted that even qua the buyer of the land or building, the provisions of section 56(2)(x) do not apply by virtue of exception provided in clause (VII) of proviso to section 56(2)(x). Therefore, neither party will have any tax advantage in fixing a consideration lower than the actual consideration.

As discussed earlier, section 11(1A) was brought into the statute to do away with the erosion of the corpus. Thus, when the intention of the Legislature was to ensure that there is no erosion of corpus by way of requiring application of actual income, it can never be the intention of the Legislature to import section 50C into section 11(1A) and require the application or utilisation of an artificial sum, thereby eroding the corpus.

It can never be the intention of the Legislature to give a benefit with one hand and then take the same away with the other. Hence, a sincere attempt must be made to reconcile the provisions to ensure that the benefit given by the Legislature is not taken away. In this regard, reference may be made to the judgment in Goodyear India Ltd. vs. State of Haryana [1991] 188 ITR 402 (SC).

Thus, even applying the mischief rule of interpretation, section 50C cannot be applied in the case of a charitable trust.

IMPACT OF DECISIONS RENDERED IN THE CONTEXT OF INTERPLAY BETWEEN SECTIONS 50C AND 54-54H ON SECTION 11(1A)

Under section 11(1A)(a)(i), if the entire net consideration is utilised in acquiring another capital asset, the whole of such capital gains arising from the transfer shall be deemed to have been applied to charitable or religious purposes.

It may be noted that the definition of ‘Net consideration’ in Explanation (iii) to section 11(1A) is similar to that contained in Explanation 5 to section 54E(1), Explanation (b) to section 54EA(1), Explanation to section 54F(1) and section 54GB(6)(c).

In certain judgments, it has been held that though section 50C must not be applied for the purposes of computing ‘net consideration’ as referred to in sections 54F and 54EC, the capital gains referred to therein will also have to be computed without giving effect to the provisions of section 50C. In the said judgments, it has been held that the capital gains for the purposes of section 45(1) will have to be computed in accordance with section 48 read with section 50C. Thus, the effect would be that though the exemptions under sections 54F and 54EC are based on capital gains computed without applying the provisions of section 50C, the capital gains for the purposes of section 45(1) would be determined after applying the provisions of section 50C, thereby effectively taxing the difference between the deemed consideration as determined u/s 50C and the actual consideration agreed between the parties to the sale.

The same may be demonstrated by way of an illustration:

Particulars

Amount (Rs.)

Amount (Rs.)

Full value of consideration (actual sale consideration – Rs. 20 lakhs
or SDV – Rs. 36 lakhs, whichever is higher) [A]

 

36,00,000

Less: Indexed cost of acquisition [B]

 

(1,93,506)

Income chargeable under the head capital gains [C] = [A] – [B]

 

34,06,494

Less: Exemption u/s 54F [D]

 

(18,06,494)

Actual sale value [D1]

20,00,000

 

Less: Indexed cost of acquisition [D2]

(1,93,506)

 

Capital gain u/s 54F [D3] = [D1] – [D2]

18,06,494

 

Net consideration received

20,00,000

 

Amount invested in new asset

20,00,000

 

Deduction u/s 54F(1)(a) [since the net consideration is invested,
entire capital gains is exempt] [D4]

18,06,494

 

Taxable long-term capital gains [E] = [C] – [D]

 

16,00,000

From the above illustration it is clear that though the assessee has invested Rs. 20,00,000 in the acquisition of a new asset which is equal to the net consideration of Rs. 20,00,000, the assessee is suffering tax on a long-term capital gain of Rs. 16,00,000 (Rs. 36,00,000 – Rs. 20,00,000), which is nothing but the difference between the deemed sale consideration u/s 50C of Rs. 36,00,000 and the actual sale consideration of Rs. 20,00,000.

The above implications have been approved in:

• Shri Gouli Mahadevappa vs. ITO [2011] 128 ITD 503 (Bang) upheld in Gouli Mahadevappa vs. ITO [2013] 356 ITR 90 (Karn);
• Jagdish C. Dhabalia vs. ITO [TS-143-HC-2019 (Bom)];
• Mrs. Nila V. Shah vs. CIT [2012] 21 taxmann.com 324 (Mum) / [2012] 51 SOT 461 (Mum).

Without going into the correctness of the said judgments, the ratios laid thereunder have no application in the context of charitable trusts for the following reasons:

• The same were laid down in the context of sections 54F and 54EC and not in the context of section 11(1A).
• Sections 54F and 54EC form part of Chapter IV, whereas section 11 forms part of Chapter III. Thus, section 11 is to be applied prior to the stage of computation of income under Chapter IV which deals with computation of total income, and hence section 50C which forms part of Chapter IV would have no application in the context of section 11.
• Unlike section 54F which deals with exemption from chargeability u/s 45, section 11(1A) provides for computation of capital gains deemed to be applied to charitable or religious purposes. As held by various courts, ‘Application’ can be only of real income.
• Even if one were to conclude that section 50C would be applicable to the case of a charitable trust, the fiction imported for determining the full value of consideration will necessarily have to be imported into the utilisation of such consideration. This is based on the principle of parity of reasoning, which has been upheld by the Supreme Court in CIT vs. Lakshmi Machine Works [2007] 290 ITR 667 (SC) and CIT vs. HCL Technologies Ltd. [2018] 404 ITR 719 (SC).
• The Board, vide Circular No. 5P (XX-6), dated 19th June, 1968, has itself stated that the income of the trust (including capital gains) must be computed by applying commercial principles. Thus, no notional income u/s 50C can be brought to tax in case of a charitable trust.
• The courts have reached the said conclusions keeping in mind the mischief sought to be remedied by section 50C. As discussed above, the mischief sought to be remedied by application of section 50C does not arise in the case of a charitable trust.
• Sections 11(1) and 11(1A) being exemption provisions with beneficial purposes, must be interpreted liberally. In this regard, reference may be made to the judgment in Government of Kerala vs. Mother Superior Adoration Convent [2021] 126 taxmann.com 68 (SC), wherein the five-judge Bench’s decision in Commissioner of Customs vs. Dilip Kumar & Co. [2018] 9 SCC 1 (SC), was distinguished on the ground that the said judgment did not refer to the line of authorities which made a distinction between exemption provisions generally and exemption provisions which have a beneficial purpose.

CONCLUSION
On the basis of the above, it may be argued that section 50C does not have any application in the case of a charitable trust. Hence, the capital gains as referred to in section 11(1A) will have to be computed without applying the provisions of section 50C. Any other interpretation will lead to the absurd result of requiring a charitable trust to apply / accumulate / invest notional gains which have never accrued or arisen to it, which can never be the intention of the Legislature.

 

Faceless Assessment u/s 144B – Personal hearing demanded by assessee on receipt of show cause notice-cum-draft assessment order – No personal hearing granted – Final assessment order passed – Liable to be set aside

6 Sanjay Aggarwal vs. National Faceless Assessment Centre, Delhi [(2021) Writ Petition (C) 5741/2021, Date of order: 2nd June, 2021 (Delhi High Court)]

Faceless Assessment u/s 144B – Personal hearing demanded by assessee on receipt of show cause notice-cum-draft assessment order – No personal hearing granted – Final assessment order passed – Liable to be set aside

The petitioner, via a writ petition, challenged the assessment order dated 28th April, 2021 for the A.Y. 2018-19 and consequential proceedings. The grievance of the petitioner is that although a personal hearing was sought, on account of the fact that the matter was complex and required explanation, the respondent / Revenue chose not to accord the same. Thus, the respondent / Revenue had committed an infraction of the statutory scheme encapsulated in section 144B.

The petitioner claimed that in respect of the A.Y 2018-19 the return was filed on 27th October, 2018, declaring its income at Rs. 33,43,690.

On 22nd September, 2019, a notice was issued u/s 143(2) read with Rule 12E of the Income-tax Rules, 1962, whereby the petitioner’s return was selected for scrutiny. Two issues were flagged by the A.O.; first, deductions made under the head ‘income from other sources’, and second, the aspect concerning unsecured loans.

A notice u/s 142(1) was served on the petitioner on 6th December, 2020 which was followed by various communications issued by the respondent / Revenue and replied by the petitioner.

The respondent / Revenue served a show cause notice-cum-draft assessment order dated 13th April, 2021 on the petitioner, proposed for a disallowance of Rs. 1,00,26,692 u/s 57. Consequently, a proposal was made to vary the income, resulting in the enhancement of the declared income to Rs. 1,33,70,380. The petitioner contended that, thereafter, several requests were made to the respondent / Revenue for grant of personal hearing. However, the respondent / Revenue did not pay heed to the requests and proceeded to issue a second show cause notice along with a draft assessment order dated 23rd April, 2021. Furthermore, the petitioner was directed to file its response / objections by 23:59 hours of 25th April, 2021.

According to the petitioner, although the time frame for filing the response / objections to the aforementioned show cause notice-cum-draft assessment order was very short, he filed the response / objections on 24th April, 2021. The respondent / Revenue, without according a personal hearing to the petitioner, passed the impugned assessment order dated 28th April, 2021. The petitioner submitted that the impugned assessment order, passed u/s 143(3) read with section 144B, is contrary to the statutory scheme incorporated u/s 144B. It is also contended that such assessment proceedings are non est in the eyes of the law.

The Revenue contended that the expression used in clause (vii) of sub-section (7) of section 144B is ‘may’ and not ‘shall’, and therefore there is no vested right in the petitioner to claim a personal hearing. Thus, according to the Revenue, failure to grant personal hearing to the petitioner did not render the proceedings non est as the same was not mandatory.

The High Court observed the following facts:
• That prior to the issuance of the show cause notice-cum-draft assessment order dated 23rd April, 2021, a show cause notice-cum-draft assessment order was issued on 13th April, 2021. Between these two dates, the petitioner had, on two occasions, asked for personal hearing in the matter.
• After the show cause notice-cum draft assessment order dated 23rd April, 2021 was issued, via which the petitioner was invited to file his response / objections, the petitioner, once again, while filing his reply, asked for being accorded personal hearing in the matter.

Thus, in sum and substance of the requests made, the petitioner continued to press the respondent / Revenue to accord him a personal hearing, before it proceeded to pass the impugned assessment order. According to the petitioner, the request was made as the matter was complex and therefore required some explanation.

The Court also observed that the respondent / Revenue made proposals for varying the income, both via the show cause notice dated 13th April, 2021 as well as the show cause notice-cum-draft assessment order dated 23rd April, 2021. As noticed above, the declared income was proposed to be substantially varied.

The Court referred to the provision of section 144B as to why the Legislature had provided a personal hearing in the matter:

‘144B. Faceless assessment –
(1)…………

(7) For the purposes of faceless assessment —
………….
(vii) in a case where a variation is proposed in the draft assessment order or final draft assessment order or revised draft assessment order, and an opportunity is provided to the assessee by serving a notice calling upon him to show cause as to why the assessment should not be completed as per such draft or final draft or revised draft assessment order, the assessee or his authorised representative, as the case may be, may request for personal hearing so as to make his oral submissions or present his case before the income-tax authority in any unit;
(viii) the Chief Commissioner or the Director General, in charge of the Regional Faceless Assessment Centre, under which the concerned unit is set up, may approve the request for personal hearing referred to in clause (vii) if he is of the opinion that the request is covered by the circumstances referred to in sub-clause (h) of clause (xii);
…………
(xii) the Principal Chief Commissioner or the Principal Director General, in charge of the National Faceless Assessment Centre shall, with the prior approval of the Board, lay down the standards, procedures and processes for effective functioning of the National Faceless Assessment Centre, Regional Faceless Assessment Centres and the unit setup, in an automated and mechanised environment, including format, mode, procedure and processes in respect of the following, namely:—
………..
(h) circumstances in which personal hearing referred to in clause(viii) shall be approved;

[Emphasis]

The Court observed that a perusal of clause (vii) of section 144B(7) would show that liberty has been given to the assessee, if his / her income is varied, to seek a personal hearing in the matter. Therefore, the usage of the word ‘may’ cannot absolve the respondent / Revenue from the obligation cast upon it to consider the request made for grant of personal hearing. Besides this, under sub-clause (h) of section 144B(7)(xii) read with section144B(7)(viii), the respondent / Revenue has been given the power to frame standards, procedures and processes for approving the request made for according personal hearing to an assessee who makes a request qua the same. The Department counsel informed the court that there are no such standards, procedures and processes framed yet.

Therefore, in the facts and circumstances of the case, it was held that it was incumbent upon the respondent / Revenue to accord a personal hearing to the petitioner. The impugned order was set aside.

Search and seizure – Condition precedent – Reasonable belief that assets in possession of person would not be disclosed – Application of mind to facts – Cash seized by police and handed over to Income-tax Authorities – Subsequent issue of warrant of authorisation – Seizure and retention of cash – Invalid

36 MECTEC vs. Director of Income-Tax (Investigation) [2021] 433 ITR 203 (Telangana) Date of order: 28th December, 2020 S. 132 of ITA, 1961

Search and seizure – Condition precedent – Reasonable belief that assets in possession of person would not be disclosed – Application of mind to facts – Cash seized by police and handed over to Income-tax Authorities – Subsequent issue of warrant of authorisation – Seizure and retention of cash – Invalid

The petitioner in W.P. No. 23023 of 2019 is a proprietary concern carrying on the business of purchase of agricultural lands and agricultural products throughout the country and claims that it has 46 branches at different places all over the country having an employee strength of about 300. It also deals as a wholesale trader of agricultural products, vegetables, fruits and post-harvest crop activities. The petitioner in W.P. No. 29297 of 2019 is Vipul Kumar Mafatlal Patel, an employee of the petitioner in W.P. No. 23023 of 2019.

The petitioner states that it has business transactions in the State of Telangana also and that it entrusted a sum of Rs. 5 crores to its employee Vipul Kumar Patel for its business purposes. The said individual had come to Hyderabad with friends, and on 23rd August, 2019 their car, a Maruti Ciaz car bearing No. TS09FA 4948, was intercepted by the Task Force Police of the State of Telangana. According to the petitioner, the said employee, his friends, the cash of Rs. 5 crores together with the above vehicle and another car and two-wheeler were detained illegally from 23rd August, 2019 onwards by the Telangana State Police.

The GPA holder of the petitioners filed on 27th August, 2019 a habeas corpus petition for release of the said persons, the cash and vehicles in the High Court of Telangana.

The Task Force Police filed a counter-affidavit in the said writ petition claiming that the discovery of cash with the said persons was made on 26th August, 2019 and that the police had handed over the detenues along with the cash to the Principal Director of Income-tax, Ayakar Bhavan, Hyderabad for taking further action against them.

The Telangana High Court allowed the writ petitions and held as under:

‘i) Admittedly, the Task Force Police addressed a letter under exhibit P5, dated 26th August, 2019 to the Principal Director of Income-tax, Ayakar Bhavan, Hyderabad stating that he is handing over both the cash and the detenues to the latter and the Deputy Director of Income-tax, Unit 1(3), Hyderabad (second respondent in W.P. No. 23023 of 2019) acknowledged receipt of the letter on 27th August, 2019 and put his stamp thereon.

ii) However, a panchanama was prepared by the second respondent on 28th August, 2019 (exhibit R8) as if a search was organised by a search party consisting of eight persons who are employees of the Income-tax Department including the second respondent (without mentioning the place where the alleged search was to be conducted in the panchanama); that there were also two panch witnesses, one from Nalgonda District, Telangana and another from Dabilpura, Hyderabad who witnessed the search at the place of alleged search; that a warrant of authorisation dated 28th August, 2019 was issued to the second respondent u/s 132 to search the place (whose location was not mentioned in the panchanama) by the Principal Director of Income-tax (Inv.), Hyderabad; the search warrant was shown at 9.00 a.m. on 28th August, 2019 to Vipul Kumar Patel who was present at the alleged place (not mentioned specifically); that a search was conducted at the place (not mentioned specifically in the panchanama); and allegedly the cash of Rs. 5 crores was seized at that time from his custody.

iii) Section 132 deals with procedure for search and seizure of cash or gold or jewellery or other valuable things. In DGIT (Investigation) vs. Spacewood Furnishers Pvt. Ltd. [2015] 374 ITR 595 (SC) the Supreme Court dealt with the exercise of power by the competent authority to issue warrant for authorisation for search and seizure as follows: The authority must have information in its possession on the basis of which a reasonable belief can be founded that: (a) the person concerned has omitted or failed to produce books of accounts or other documents for production of which summons or notice had been issued, or such person will not produce such books of accounts or other documents even if summons or notice is issued to him, or such person is in possession of any money, bullion, jewellery or other valuable article which represents either wholly or partly income or property which has not been or would not be disclosed. Such information must be in the possession of the authorised official before the opinion is formed. There must be application of mind to the material and the formation of opinion must be honest and bona fide. Consideration of any extraneous or irrelevant material will vitiate the belief or satisfaction. Mere possession of cash of large quantity, without anything more, could hardly be said to constitute information which could be treated as sufficient by a reasonable person, leading to an inference that it was income which would not have been disclosed by the person in possession for the purpose of the Act.

iv) There were no circumstances existing for the Principal Director (Investigation) to issue any warrant for search or seizure u/s 132 on 28th August, 2019 when the cash had been handed over to the Income-tax Department by the Task Force Police on 27th August, 2019 and therefore the seizure of the cash from Vipul Kumar Patel by the respondents and its retention till date was per se illegal. Intimation by the police to the Income-tax Department on 27th August, 2019 would not confer jurisdiction on the Income-tax Department to retain and withhold cash, that, too, by issuance of an invalid search warrant u/s 132; and there was no basis for the Income-tax Department to invoke the provisions of sections 132, 132A and 132B since there was no “reason to believe” that the assessee had violated any provision of law. In the absence of any rival claim for the cash amount of Rs. 5 crores by any third party, the respondents could not imagine a third-party claimant and on that pretext retain the cash indefinitely from the petitioner, thereby violating article 300A of the Constitution of India.

v) For all the aforesaid reasons, the writ petitions are allowed; the action of the respondents in conducting panchanama dated 28th August, 2019 and seizing cash of Rs. 5 crores from Vipul Kumar Patel, employee of the petitioner in W.P. No. 23023 of 2019, and retaining it till date is illegal and ultra vires the provisions of the Income-tax Act, 1961 and also violative of Articles 14 and 300A of the Constitution of India; the respondents are directed to forbear from conducting any further inquiry pursuant to the said panchanama under the said Act; and they shall refund within four weeks from the date of receipt of a copy of this order the said cash of Rs. 5 crores to the petitioner in W.P. No. 23023 of 2019 with interest at 12% p.a. from 28th August, 2019 till date of payment to the said petitioner. The respondents shall also pay costs of Rs. 20,000 to the petitioner in W.P. No. 23023 of 2019.’

Penalty – Concealment of income – Notice – Essentials of notice – Notice must clearly specify charges against assessee – Notice in printed form without deleting inapplicable portions – Not valid

35 Mohd. Farhan A. Shaikh vs. Dy. CIT [2021] 434 ITR 1 [Bom (FB)] Date of order: 11th March, 2021 Ss. 271 and 274 of ITA, 1961

Penalty – Concealment of income – Notice – Essentials of notice – Notice must clearly specify charges against assessee – Notice in printed form without deleting inapplicable portions – Not valid

In view of the conflict in the decisions of the Division Benches of the Bombay High Court, the following question was referred to the Full Bench.

‘[In] the assessment order or the order made under sections 143(3) and 153C of the Income-tax Act, [when] the Assessing Officer has clearly recorded satisfaction for the imposition of penalty on one or the other, or both grounds mentioned in section 271(1)(c), [would] a mere defect in the notice of not striking out the relevant words
[. . .] vitiate the penalty proceedings?’

The Full Bench held as under:

‘i) According to the well-settled theory of precedents every decision contains three basic ingredients: (i) findings of material facts, direct and inferential. An inferential finding of fact is the inference which the judge draws from the direct or perceptible facts; (ii) statements of the principles of law applicable to the legal problems disclosed by the facts; and (iii) judgment based on the combined effect of (i) and (ii) above. For the purposes of the parties themselves and their privies, ingredient (iii) is the material element in the decision for it determines finally their rights and liabilities in relation to the subject matter of the action. It is the judgment that stops the parties from reopening the dispute. However, for the purpose of the doctrine of precedents, ingredient (ii) is the vital element in the decision. This indeed is the ratio decidendi.

ii) If the assessment order clearly records satisfaction for imposing penalty on one or the other, or both grounds, mentioned in section 271(1)(c) of the Income-tax Act, 1961, does a mere defect in the notice – not striking off the irrelevant matter – vitiate the penalty proceedings? It does. The primary burden lies on the Revenue. In the assessment proceedings, it forms an opinion, prima facie or otherwise, to launch penalty proceedings against the assessee. But that translates into action only through the statutory notice u/s 271(1)(c) read with section 274. True, the assessment proceedings form the basis for the penalty proceedings, but they are not composite proceedings to draw strength from each other. Nor can each cure the other’s defect. A penalty proceeding is a corollary; nevertheless, it must stand on its own. These proceedings culminate under a different statutory scheme that remains distinct from the assessment proceedings. Therefore, the assessee must be informed of the grounds of the penalty proceedings only through statutory notice. An omnibus notice suffers from the vice of vagueness. More particularly, a penal provision, even with civil consequences, must be construed strictly. And ambiguity, if any, must be resolved in the affected assessee’s favour.

iii) The Supreme Court in the case of Dilip N. Shroff vs. Joint CIT [2007] 291 ITR 519 (SC) treats omnibus show cause notices as betraying non-application of mind and disapproves of the practice, to be particular, of issuing notices in printed form without deleting or striking off the inapplicable parts of that generic notice.’

[CIT vs. Smt. Kaushalya [1995] 216 ITR 660 (Bom) overruled. CIT vs. Samson Perinchery [2017] 392 ITR 4 (Bom); Pr. CIT vs. Goa Coastal Resorts and Recreation P. Ltd. [2020] 16 ITR-OL 111 (Bom); Pr. CIT vs. New Era Sova Mine [2021] 433 ITR 249 (Bom); and Pr. CIT vs. Goa Dourado Promotions P. Ltd. [2021] 433 ITR 268 (Bom) affirmed.]

Offences and prosecution: – (a) Wilful attempt to evade tax – False verification – Delayed payment of tax does not amount to tax evasion – Misstatement must be deliberate – Burden of proof on Revenue to prove that misstatement was deliberately made to evade tax – Assessee forced to upload return mentioning tax had been paid because of defect in software system set up by Income-tax Department – No offence committed u/s 276C or 277; (b) Company – Liability of directors – All directors cannot be proceeded against automatically – Specific allegation against specific directors necessary; and (c) Cognizance of offences – Accused outside jurisdiction of magistrate – Effect of section 204 of CrPC

34 Confident Projects (India) Pvt. Ltd. and Others. vs. IT Department [2021] 433 ITR 147 (Karn) A.Ys.: 2013-14, 2014-15; Date of order: 28th January, 2021 Ss. 276C, 277 of ITA, 1961 and ss. 202, 204 of CrPC, 1973

Offences and prosecution: – (a) Wilful attempt to evade tax – False verification – Delayed payment of tax does not amount to tax evasion – Misstatement must be deliberate – Burden of proof on Revenue to prove that misstatement was deliberately made to evade tax – Assessee forced to upload return mentioning tax had been paid because of defect in software system set up by Income-tax Department – No offence committed u/s 276C or 277; (b) Company – Liability of directors – All directors cannot be proceeded against automatically – Specific allegation against specific directors necessary; and (c) Cognizance of offences – Accused outside jurisdiction of magistrate – Effect of section 204 of CrPC

Proceedings were initiated by the Income-tax Department against the petitioner company and its directors for offences u/s 276C(2) and 277. Summons were issued.

The Karnataka High Court allowed the writ petition filed by the petitioner company and directors and held as under:

‘i) All the directors of a company cannot be automatically prosecuted for any violation of the Act. There have to be specific allegations made against each of the directors intended to be prosecuted and such allegations should amount to an offence and satisfy the requirement of that particular provision under which the prosecution is sought to be initiated, more so when the prosecution is initiated by the Income-tax Department which has all the requisite material in its possession and a preliminary investigation has been concluded by the Department before filing of the criminal complaint.

ii) The court taking cognizance of an offence is required to apply its mind to the allegations made and the applicable statute and thereafter pass a reasoned order in writing taking cognizance. It should be apparent from a reading of the order of cognizance that the requirement of “sufficient grounds for proceedings” in terms of section 204 of the Code has been complied with. At the time of taking cognizance, there must be a proper application of judicial mind to the materials before the court either oral or documentary, as well as any other information that might have been submitted or made available to the court. The test that is required to be applied by the court while taking cognizance is as to whether on the basis of the allegations made in the complaint, or on a police report, or on information furnished by a person other than a police officer, there is a case made out for initiation of criminal proceedings. For this purpose, there is an assessment of the allegations required to be made applying the law to the facts and thereby arriving at a conclusion by a process of reasoning that cognizance is required to be taken. An order of cognizance cannot be abridged, formatted or formulaic. The order has to make out that there is a judicial application of mind, since without such application the same may result in the initiation of criminal proceedings when it was not required to be so done.

iii) The order of taking cognizance is a safeguard in-built in the criminal justice system so as to avoid malicious prosecution and frivolous complaints. When a complaint or a police report or information by a person other than police officer is placed before the court, the judicial officer must apply judicious mind coupled with discretion which is not to be exercised in an arbitrary, capricious, whimsical, fanciful or casual way.

iv) Cognizance of any offence alleged being one of commission or omission attracting penal statutes can be taken only if the allegations made fulfil the basic requirement of the penal provision. At this point, it is not required for the court taking cognizance to ascertain the truth or veracity of the allegation but only to appreciate if the allegations taken at face value, would amount to the offence complained of or not. If yes, cognizance could be taken, if no, taking cognizance would be refused. The only manner of ascertaining this is by the manner of recordal made by the court in the order taking cognizance. The order passed by the court taking cognizance should therefore reflect such application of mind to the factual situation. Mere reference to the provisions in respect of which offences are alleged to have been committed would not be in compliance with the requirement of the statute when there are multiple accused; the order is required to disclose the application of mind by the court taking cognizance as regards each accused.

v) Section 202 of the Code of Criminal Procedure, 1973 provides for postponement of issue of process. Section 202 of the Code provides for safeguard in relation to persons not residing within the jurisdiction of a magistrate, not to be called or summoned by the court unless the magistrate were to come to a conclusion that their presence is necessary and only thereafter issue process against the accused. The protection u/s 202(2) of the Code is provided so as to not inconvenience an accused to travel from outside the jurisdiction of the court taking cognizance to attend to the matter in that court. Therefore, before issuing summons to an accused residing outside the jurisdiction, there has to be application of mind by the court issuing summons and after conducting an inquiry u/s 202(2) of the Code the court issuing summons has to come to a conclusion that such summons are required to be issued to an accused residing outside its jurisdiction.

vi) In the event of an accused being an individual, if the accused has temporary residence within the jurisdiction of the magistrate, again merely because he does not have a permanent residence, there is no inquiry which is required to be conducted u/s 202 of the Code. It would, however, be required for the magistrate in the event of issuance of summons or process to record why the inquiry u/s 202 of the Code is not being held. When the accused has no presence within the jurisdiction of the magistrate where the offence has been committed, then it would be mandatory for an inquiry u/s 202 of the Code to be held.

vii) Income-tax had been paid and the authorities had received the necessary taxes. If at all, for the delay, there could be an interest component which could have been levied. The delayed payment of Income-tax would not amount to evasion of tax, so long as there was payment of tax, more so for the reason that in the returns filed there was an acknowledgement of tax due to be paid.

viii) The 26 AS returns indicated payment of substantial amount of money due to tax deduction at source. Apart from that, the assessee-company had also made several payments on account of the Income-tax dues. But on account of non-availability of funds, the entire amount could not be paid before the returns were to be uploaded, more particularly since the last date of filing was 30th September, 2013 for A.Y. 2013-14 and 30th September, 2014 for A.Y. 2014-15. The assessee had been forced to upload the returns by mentioning that the entire amount had been paid since without doing so the returns would not have been accepted by the software system set up by the Income-tax Department. Therefore, the statement made had been forced upon the assessee by the Income-tax Department and could not be said to be a misstatement within the meaning and definition thereof u/s 277. There was no wilful misstatement by the assessee in the proceedings.

ix) That the order passed by the magistrate did not indicate any consideration by the magistrate, as required u/s 202. It could be ex facie seen that the order of the magistrate did not satisfy the requirement of arriving at a prima facie conclusion to take cognizance and issue process, let alone to the accused residing outside the jurisdiction of the magistrate. The order taking cognizance dated 29th March, 2016 in both matters was not in compliance with the requirement of section 191(1)(a) of the Code and further did not indicate that the procedure u/s 204 of the Code had been followed. The order dated 29th March, 2016 taking cognizance was not in compliance with applicable law and therefore was not valid.

x) That admittedly accused No. 6 resided beyond the jurisdiction of the trial court. It could be seen from the order dated 29th March, 2016 that there was no postponement by the magistrate, but as soon as the magistrate received a complaint he had issued process to accused No. 6 who was resident outside the jurisdiction of the magistrate. The magistrate could not have issued summons to petitioner No. 6 without following the requirements and without conducting an inquiry u/s 202 of the Code.

xi) The prosecution initiated by the respondent against the petitioners was misconceived and not sustainable.’

Non-resident – Income deemed to accrue or arise in India – Commission paid outside India for obtaining orders outside India – Amount could not be deemed to accrue or arise in India

33 Principal CIT vs. Puma Sports India P. Ltd. [2021] 434 ITR 69 (Karn) A.Y.: 2013-14; Date of order: 12th March, 2021 S. 5(2)(b) r.w.s. 9(1)(i) and 40(a)(i)(B) of ITA, 1961

Non-resident – Income deemed to accrue or arise in India – Commission paid outside India for obtaining orders outside India – Amount could not be deemed to accrue or arise in India

The assessee company was a subsidiary of P of Austria. The assessee was engaged in the trading of sports gear, mainly footwear, apparel and accessories. The purchases by the assessee consisted of import from related parties and unrelated third parties as well as domestic purchases from the local manufacturers. The assessee was also engaged as a sourcing agent in India for footwear and apparel. It identified suppliers who could provide the required products to the specifications and standards required by W of Hong Kong, which was the global sourcing agent for the P group and for performing such services it received a commission of 3% of the freight on board price. The A.O. held that the assessee failed to deduct tax at source in view of the specific provision of section 5(2)(b) read with section 9(1)(i) and the expenses made by the assessee without deducting the tax at source were not permissible keeping in view section 40(a)(i)(B).

The Tribunal deleted the disallowance.

The appeal filed by the Revenue was admitted on the following substantial questions of law:

‘Whether on the facts and in the circumstances of the case, the Tribunal is right in setting aside the disallowance made u/s 40(a)(i) for the sum of Rs. 7,29,13,934 by holding that the income of the non-residents by way of commission cannot be considered as accrued or arisen or deemed to accrue or arise in India as the services of such agents were rendered or utilised outside India and the commission was also paid outside India?’

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

‘i) The Supreme Court in the case of CIT vs. Toshoku Ltd. [1980] 125 ITR 525 (SC) while dealing with non-resident commission agents has held that if no operations of business are carried out in the taxable territories, the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India.

ii) The associated enterprises had rendered services outside India in the form of placing orders with the manufacturers who were already outside India. The commission was paid to the associated enterprises outside India. No taxing event had taken place within the territories of India and the Tribunal was justified in allowing the appeal of the assessee.’

Depreciation – Condition precedent – User of machinery – Windmill generating a small amount of electricity – Entitled to depreciation

32 CIT(LTU) vs. Lakshmi General Finance Ltd. [2021] 433 ITR 94 (Mad) A.Y.: 1999-2000; Date of order: 1st March, 2021 S. 32 of ITA, 1961

Depreciation – Condition precedent – User of machinery – Windmill generating a small amount of electricity – Entitled to depreciation

For the A.Y. 1999-2000, the assessment was reopened u/s 147 on the basis of fresh information about excess depreciation laid on windmills. The reassessment was completed withdrawing the excess depreciation of Rs. 1.10 crores.

The Commissioner (Appeals) found that though the windmills were said to be connected with the grid at 2100 hours on 31st March, 1999, the meter reading practically showed 0.01 unit of power and the A.O. disallowed the 50% depreciation claimed by the assessee on the ground that they were not actually commissioned during the year under consideration. He upheld the decision of the A.O. The Tribunal allowed the assessee’s claim for depreciation and held that the assessee is entitled to 50% depreciation on two windmills.

In the appeal by the Revenue, the following question of law was raised:

‘Whether on the facts and circumstances of the case the Income Tax Appellate Tribunal was right in holding that the assessee was entitled to claim depreciation on the windmills even though the windmills had not generated any electricity during the previous year and thus there was no user of the asset for the purpose of the business of generation of power?’

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

‘i) Trial production by machinery kept ready for use can be considered to be used for the purpose of business to qualify for depreciation; it would amount to passive use and would qualify for depreciation.

ii) Though the assessee’s windmills were said to be connected with the grid at 2100 hours on 31st March, 1999, the meter reading practically showed 0.01 unit of power and the A.O. disallowed 50% depreciation claimed by the assessee on the ground that the machines were not actually commissioned during the A.Y. 1999-2000. The Tribunal held that the assessee was entitled to 50% depreciation on two windmills.

iii) On the facts and circumstances of the case, the Tribunal was right in holding that the assessee was entitled to claim depreciation on the windmills.’

Appeal to Appellate Tribunal – Rectification of mistakes: – (a) Power of Tribunal to rectify mistake – Error must be apparent from record – Tribunal allowing rectification application filed by Department on sole ground of contradiction in its earlier orders and assessee had not filed rectification petition in subsequent case – No error apparent on face of record – Tribunal wrongly allowed rectification application filed by Department; (b) Levy of penalty u/s 271(1)(c)(i)(a) – Failure by Tribunal to consider applicability of Explanation to section 271(1) to cases u/s 271(1)(c)(i)(b) – Not ground for rectification

30 P.T. Manuel and Sons vs. CIT [2021] 434 ITR 416 (Ker) A.Y.: 1982-83; Date of order: 1st March, 2021 Ss. 254(2) and 271(1) of ITA, 1961

Appeal to Appellate Tribunal – Rectification of mistakes: – (a) Power of Tribunal to rectify mistake – Error must be apparent from record – Tribunal allowing rectification application filed by Department on sole ground of contradiction in its earlier orders and assessee had not filed rectification petition in subsequent case – No error apparent on face of record – Tribunal wrongly allowed rectification application filed by Department; (b) Levy of penalty u/s 271(1)(c)(i)(a) – Failure by Tribunal to consider applicability of Explanation to section 271(1) to cases u/s 271(1)(c)(i)(b) – Not ground for rectification

For the A.Y. 1982-83, there was a delay in filing the return of income by the assessee. The A.O. rejected the explanation offered by the assessee for the delay and imposed a penalty u/s 271(1)(a).

The Commissioner (Appeals) partly allowed the assessee’s appeal on the ground that there was a delay of only five months in filing the return which was properly explained and directed the A.O. to determine the quantum of penalty in the light of the directions given by the Tribunal in Ramlal Chiranjilal vs. ITO [1992] 107 Taxation 1 (Trib). The Tribunal confirmed the order of the Commissioner (Appeals).

The Department filed an application for rectification u/s 254(2) contending that the decision in Ramlal Chiranjilal’s case was not applicable and the direction to follow that decision was incorrect and that the Tribunal in the case relating to a sister concern of the assessee decided not to follow that decision. On this basis, the Tribunal allowed the application for rectification.

On a reference by the assessee, the Kerala High Court held as under:

‘i) A mistake which can be rectified u/s 254(2) is one which is patent, which is obvious and whose discovery is not dependent on argument or elaboration. An error of judgment is not the same as a mistake apparent from the record and cannot be rectified by the Tribunal u/s 254(2).

ii) Conclusions in a judgment may be inappropriate or erroneous. Such inappropriate or erroneous conclusions per se do not constitute mistakes apparent from the record. However, non-consideration of a binding decision of the jurisdictional High Court or Supreme Court can be said to be a mistake apparent from the record.

iii) The different view taken by the very same Tribunal in another case, on a later date, can be relied on by either of the parties while challenging the earlier decision or the subsequent decision in an appeal or revisional forum, but cannot be a ground for rectification of the order passed by the Tribunal. It can at the most be a change in opinion based upon the facts in the subsequent case. The subsequent wisdom may render the earlier decision incorrect, but not so as to render the subsequent decision a mistake apparent from the record calling for rectification u/s 254.

iv) The Tribunal was wrong in allowing the rectification application filed by the Department on the basis of a decision rendered subsequent to the order that was sought to be rectified. The reasoning of the Tribunal was erroneous. A decision taken subsequently in another case was not part of the record of the case. A subsequent decision, subsequent change of law, or subsequent wisdom that dawned upon the Tribunal were not matters that would come within the scope of ‘mistake apparent from the record’ before the Tribunal. The Tribunal had not found that there was any mistake in the earlier order apparent from the record warranting a rectification. The only reason mentioned was that there was a contradiction in the orders passed and no rectification application had been filed by the assessee in the subsequent case. The satisfaction of the Tribunal about the existence of a mistake apparent on the record was absent.

v) The Department’s further contention was for the proposition that the reason for filing the rectification application was on account of the omission of the Tribunal to consider the Explanation to section 271(1) (as it then stood). Even though the order of rectification issued by the Tribunal did not refer to any such contention having been raised, such contention had no basis. Penalty was levied u/s 271(1)(c)(i)(a) (as it then stood), while the Explanation applied to the cases covered by section 271(1)(c)(i)(b) (as it then stood). In such view also the rectification application filed by the Department could not have been allowed by the Tribunal.’

Appeal to Appellate Tribunal – Rectification of mistake – Application for rectification – Limitation – Starting date for limitation is actual date of receipt of order of Tribunal

29 Anil Kumar Nevatia vs. ITO [2021] 434 ITR 261 (Cal) A.Y.: 2009-10; Date of order: 23rd December, 2020 Ss. 253, 254(2) and 268 of ITA, 1961

Appeal to Appellate Tribunal – Rectification of mistake – Application for rectification – Limitation – Starting date for limitation is actual date of receipt of order of Tribunal

The order of the Tribunal passed on 19th September, 2018 was served on the assessee on 5th December, 2018. On 3rd June, 2019, the assessee filed an application u/s 254(2) for rectification of the said order. The Tribunal held that there was a delay of 66 days in filing the application and declined to entertain it, stating that being a creature of the statute it did not have any power to pass an order u/s 254(2) beyond a period of six months from the end of the month in which the order sought to be rectified was passed.

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

‘i) If section 254(2) is read with sections 254(3) and 268 which provide for exclusion of the time period between the date of the order and the date of service of the order upon the assessee, no hardship or unreasonableness can be found in the scheme of the Act.

ii) The Tribunal was wrong in not applying the exclusion period in computing the period of limitation and rejecting the application of the assessee filed u/s 254(2) as barred by limitation. The order was passed on 19th September, 2018, and the copy of the order was admittedly served upon the assessee on 5th December, 2018. Therefore, the Tribunal should have excluded the time period between 19th September and 5th December, 2018 in computing the period of limitation.

iii) The appeal is, accordingly, allowed. The Tribunal below is directed to hear the application u/s 254(2) taken out by the assessee on the merits and dispose of the same within a period of six weeks from the date of communication of this order.’

Section 148 read with section 148-A – Notice u/s 148 issued post 1st April, 2021 – Conditional legislation – The Notifications dated 31st March, 2021 and 27th April, 2021 whereby the application of section 148, which was originally existing before the amendment was deferred, meaning the reassessment mechanism as prevalent prior to 31st March, 2021 was saved by the Notification

2 Palak Khatuja, W/o Vinod Khatuja vs. Union of India [Writ Petition (T) No. 149 of 2021; date of order: 23rd August, 2021 (Chhattisgarh High Court)]

Section 148 read with section 148-A – Notice u/s 148 issued post 1st April, 2021 – Conditional legislation – The Notifications dated 31st March, 2021 and 27th April, 2021 whereby the application of section 148, which was originally existing before the amendment was deferred, meaning the reassessment mechanism as prevalent prior to 31st March, 2021 was saved by the Notification

The petitioners filed their income tax return for A.Y. 2015-16 and F.Y. 2014-15. Subsequently, on the basis of some information available, an initial scrutiny was done; however, no concealment was found but again a notice u/s 148 was issued. It was submitted that on 30th June, 2021 when the notice u/s 148 was issued, the power to issue the notice was preceded by a new provision of law and thereby section 148 is to be read with section 148A. It was contended that as per the amended Finance Act, 2021, which was published in the Gazette on 28th March, 2021, sections 2 to 88 were notified to come into force on the first day of April, 2021 and accordingly the new section 148A was inserted which prescribed that before issuing the notice u/s 148, the A.O. was bound to conduct an inquiry giving an opportunity of hearing to the assessee with the prior approval of the specified authority and a show cause notice in detail was necessary specifying a particular date for hearing.

It was further submitted that since the operation of section 148A came into effect on 1st April, 2021, as such, the notice issued to the petitioner on 30th June, 2021 u/s 148, without following the procedure u/s 148A, that is, without giving an opportunity of hearing, would be illegal and contrary to the provisions of section 148A and it cannot be sustained. It was further submitted that although the Revenue has placed reliance on a certain Notification of the Ministry of Finance, but when the law has been enacted by the Parliament then in such a case the Notification issued by the Ministry of Finance would not override even to extend the period of operation of the section of the old Act of section 148. It was therefore submitted that the impugned notice is illegal and is liable to be quashed.

On its part, the Revenue contended that because of the pandemic and lockdown of all activities, including the normal working of the office, a lot of people could not file their returns and submit the necessary papers. As such, the Ministry of Finance, in exercise of its power under the Finance Act, issued the Notification whereby the application of the old provisions of section 148 was extended initially up to 30th April, 2021 and thereafter up to the 30th day of June, 2021. Therefore, the notice dated 30th June, 2021 would be within the ambit of the power of the Department in the extended time of its operation till 30th June, 2021. Thus, the notice u/s 148 is legal and valid.

The Court observed that the notice u/s 148 was issued for A.Y. 2015-16 on 30th June, 2021. The grievance of the petitioners was that the notice of like nature could have been issued till the cut-off date of 30th March, 2021 as subsequent thereto the new section 148A intervened before the issuance of notice directly u/s 148. The Finance Act, 2021 was Notified on 28th March, 2021 which purports that sections 2 to 88 shall come into force on the first day of April, 2021 and sections 108 to 123 shall come into force on such date as the Central Government notifies in the Official Gazette. The relevant part wherein section 148A is enveloped is covered u/s 42 of the Finance Act, 2021. By introduction of section 148A, it was 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, provide an opportunity of being heard, serve a show cause notice and prescribe the time. The question raised for consideration was whether, with the promulgation of the Act on the 1st day of April, 2021, the notice directly issued u/s 148 on 30th June, 2021 is valid or not as the bar of 148A was created by insertion of the section on 1st April, 2021.

The Court further observed that on account of the pandemic, Parliament had enacted the Taxation & Other Laws (Relaxation & Amendment of Certain Provisions) Act, 2020. In the Act, any time limit specified, prescribed or notified between 20th March, 2020 and 31st December, 2021 or any other date thereafter, after December, 2021, gave the Central Government the power to notify. The necessity occurred because of the Covid pandemic lockdown in the backdrop of the fact that few of the assessees could not file their returns. Likewise, since the offices were closed, the Department also could not perform the statutory duty under the Income-tax Act. Considering the complexity, the Parliament thought it proper to delegate to the Ministry of Finance the date of applicability of the amended section. The delegation is not a self-contained and complete Act and was only made in the interest of flexibility and smooth working of the Act, and the delegation therefore was a practical necessity. The Ministry of Finance having been delegated with such power, this delegation can always be considered to be a sound basis for administrative efficiency and it does not by itself amount to abdication of power.

Reading both the Notifications, dated 31st March and 27th April, 2021, whereby the application of section 148 which was originally existing before the amendment was deferred, meant thereby that the reassessment mechanism as prevalent prior to 31st March, 2021 was saved by the Notification. The Notification is made by the Ministry of Finance, Central Government considering the fact of lockdown all over India and it can be always assumed that the deferment of the application of section 148A was done in a controlled way. It is a settled proposition that any modification of the Executive’s decision implies a certain amount of discretion and has to be exercised with the help of the legislative policy of the Act and cannot travel beyond it and run counter to it, or change the essential features, the identity, structure or the policy of the Act. Therefore, the legislative delegation exercised by the Central Government by Notification to uphold the mechanism as it prevailed prior to March, 2021 is not in conflict with any Act and Notification by the Executive, i.e., the Ministry of Finance, and would be a part of legislative function.

The Court relied on the principle as laid down in the case of A.K. Roy vs. Union of India reported in AIR 1982 SC 710, wherein the Supreme Court held that the Constitution (Forty-Fourth) Amendment Act, 1978, which conferred power on the Executive to bring the provisions of that Act into force did not suffer from excessive delegation of legislative power. The Court observed that the power to issue a Notification for bringing into force the provisions of a constitutional amendment is not a constituent power, because it does not carry with it the power to amend the Constitution in any manner. Likewise, in this case, by the delegation to the Executive of the power to the Central Government to specify the date by way of relaxation of time limit, the main purpose of the Finance Act is not defeated. Therefore, it would be a conditional legislation. The Legislature has declared the Act and has given the power to the Executive to extend its implementation by way of Notification. The Legislature has resorted to conditional legislation to give the power to the Executive to decide under what circumstances the law should become operative or when the operation should be extended and this would be covered by the doctrine of the conditional legislation.

Thus, by the aforesaid Notifications, the operation of section 148 was extended, and thereby deferment of section 148A was done by the Ministry of Finance by way of conditional legislation in the peculiar circumstances which arose during the pandemic and lockdown and the Central Government cannot be said to have encroached upon the turf of Parliament.

By effect of such Notification, the individual identity of section 148, which was prevailing prior to the amendment and insertion of section 148A, was insulated and saved till 30th June, 2021.

Considering the situation for the benefit of the assessee and to facilitate individuals to come out of the woods, the time limit framed under the IT Act was extended. Likewise, certain rights which were reserved in favour of the Department were also preserved and extended at parity. Consequently, the provisions of section 148 which were prevailing prior to the amendment of the Finance Act, 2021 were also extended. The power to issue notice u/s 148 which was there prior to the amendment was also saved and the time was extended. As a result, the notice issued on 30th June, 2021 would also be saved. The petitions were dismissed accordingly.

Immunity u/s 270AA – No bar or prohibition against the assessee challenging an order passed by the A.O. rejecting its application made under sub-section 1 of section 270 AA – Application u/s 264 against rejection of such application maintainable

1 Haren Textiles Private Limited vs. Pr. CIT 4 & Ors. [Writ Petition No. 1100 of 2021; Date of order: 8th September, 2021 (Bombay High Court)]

Immunity u/s 270AA – No bar or prohibition against the assessee challenging an order passed by the A.O. rejecting its application made under sub-section 1 of section 270 AA – Application u/s 264 against rejection of such application maintainable

The petitioner, engaged in the business of manufacturing and selling fabrics and a trading member of the National Stock Exchange, filed its return for the A.Y. 2017-2018 on 31st October, 2017 declaring a total income of Rs. 2,27,11,320. The A.O. initiated scrutiny assessment by issuing statutory notices under sections 143(2) and 142(1) of the Act. He passed an assessment order dated 19th December, 2019 u/s 143(3) determining the total income of the petitioner at Rs. 7,41,84,730. He determined book profit under the provisions of section 115(JB) at Rs. 2,19,33,505. Following this, the A.O. issued a demand notice dated 19th December, 2019 u/s 156 raising a demand of Rs. 1,80,14,619. The petitioner noted that the A.O. had not correctly allowed the Minimum Alternate Tax (MAT) credit available to it while determining the tax liability. Hence it filed an application dated 6th January, 2020 u/s 154 seeking rectification of the assessment order. The A.O. accepted the submission of the petitioner and granted the MAT credit available and issued a revised Computation Sheet dated 14th January, 2020 determining the correct amount of tax liability of the petitioner. He also issued a revised notice of demand dated 14th January, 2020 u/s 156 raising a demand of Rs. 57,356 payable within 30 days from the service of the said notice.

The petitioner accepted the order passed by the A.O. u/s 154 and on 29th January, 2020 paid fully the tax demand of Rs. 57,356. Thereafter, on 30th January, 2020 it filed an application u/s 270AA in the prescribed Form No. 68 before the A.O. seeking immunity from penalty, etc. This application was rejected by the A.O. by an order dated 28th February, 2020. Aggrieved by this order, the petitioner filed an application dated 18th December, 2020 before the Pr. CIT under the provisions of section 264. The Pr. CIT rejected this application on the ground that sub-section 6 of section 270AA specifically prohibits revisionary proceedings u/s 264 against the order passed by the A.O. u/s 270AA(4). This order was challenged by the petitioner before the High Court.

The Court observed that under sub-section 6 of section 270AA, no appeal under section 246(A) or an application for revision u/s 264 shall be admissible against the order of assessment or reassessment referred to in clause (a) of sub-section 1, in a case where an order under sub-section 4 has been made accepting the application. This only means that when an assessee makes an application under sub-section 1 of section 270AA and such an application has been accepted under sub-section 4 of section 270AA, the assessee cannot file an appeal u/s 246(A) or an application for revision u/s 264 against the order of assessment or reassessment passed under sub-section 3 of section 143 or section 147. This does not provide for any bar or prohibition against the assessee challenging an order passed by the A.O. rejecting its application made under sub-section 1 of section 270AA. The application before the Pr. CIT was an order challenging an order of rejection passed by the A.O. of an application filed by the petitioner under sub-section 1 of section 270AA seeking grant of immunity from imposition of penalty and initiation of proceedings under sub-section 276C or section 277CC.

Therefore, the Pr. CIT was not correct in rejecting the application on the ground that there is a bar under sub-section 6 of section 270AA in filing such application. The impugned order was set aside and the matter was remanded back to the Pr. CIT to consider de novo.

TDS – Credit for tax deducted at source – Effect of section 199 – Assessee acting as collection agent for television network – Subscription charges collected from cable operators and paid to television network – Amounts routed through assessee’s accounts – Assessee entitled to credit for tax deducted at source on such amounts

7 Principal CIT vs. Kal Comm. Private Ltd. [2021] 436 ITR 66 (Mad) A.Ys.: 2009-10 to 2011-12; Date of order: 26th April, 2021 S. 199 of ITA, 1961

TDS – Credit for tax deducted at source – Effect of section 199 – Assessee acting as collection agent for television network – Subscription charges collected from cable operators and paid to television network – Amounts routed through assessee’s accounts – Assessee entitled to credit for tax deducted at source on such amounts

The assessee acted as the collection agent of a television network and collected the subscription charges and the invoices, raised in the name of the assessee on the subscription income from the pay channels during the relevant year, and remitted them to the network. For the A.Ys. 2009-10, 2010-11 and 2011-12 the assessee was denied credit for the tax deducted at source on such amounts.

The Tribunal allowed the claim for credit of the tax deducted at source.

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

‘i) Under section 199(2), credit for tax deducted at source can be allowed only when the corresponding income is offered for taxation in the year in which such tax deducted at source is claimed and deduction of tax at source was allowed without the corresponding income being declared in the profit and loss account.

ii) On a perusal of the agreement dated 14th October, 2002 entered into between the television network and the assessee, it is clear that the assessee was entitled to a fixed commission on the collection amount from the network. The agreement was entered into much prior to the A.Ys. 2009-10, 2010-11 and 2011-12. All these collection charges had been credited to the account “subscription charges” as and when they were billed and this account was debited at the end of the financial year when the sum was paid back to the network. Therefore, the amounts in question had been routed through the accounts maintained by the assessee, which formed part of the balance sheet and, in turn, formed part of the profit and loss account. Therefore, the amount received by the assessee was the collection of subscription charges on behalf of the principal, viz., the television network and did not partake of the character of income chargeable to tax in its hands.

iii) In the assessee’s case, the income chargeable to tax was only the commission income and interest income. Therefore, the subscription charges collected on behalf of the television network was chargeable as income only in the hands of the network and did not partake of the character of any expenditure, revenue or capital in the hands of the assessee. Merely because the income had been offered and processed in the hands of the network, credit for tax deducted in the name of the assessee could not be denied. The assessee was entitled to credit for the tax deducted at source.’

Recovery of tax – Attachment of property – Transfer void against the Revenue – Death of seller before executing sale of house property under agreement – Supreme Court directing seller’s heirs to execute sale – Attachment of property for recovery of income tax due from firms in which heirs were partners for periods subsequent to sale agreement – TRO cannot declare transfer void – Non-release of registered sale deed by sub-registrar – Not justified

6 J. Manoharakumari vs. TRO [2021] 436 ITR 42 (Mad) Date of order: 21st April, 2021 Ss. 226, 281 of ITA, 1961

Recovery of tax – Attachment of property – Transfer void against the Revenue – Death of seller before executing sale of house property under agreement – Supreme Court directing seller’s heirs to execute sale – Attachment of property for recovery of income tax due from firms in which heirs were partners for periods subsequent to sale agreement – TRO cannot declare transfer void – Non-release of registered sale deed by sub-registrar – Not justified

The petitioner, on payment of advance, entered into a sale agreement in respect of the house property (family property) with one JP, the mother of the third and fourth respondents, A and S, who were minors at the time of execution of the sale agreement. However, JP refused to execute the sale deed. During the pendency of the suit filed by the petitioner in the Additional District and Sessions Court, JP died and A and S, who by then had attained majority, were impleaded in the suit filed to execute the sale receiving the balance consideration. On dismissal of the suit, the petitioner filed an appeal before the High Court which directed A and S to refund the advance received by JP. The Supreme Court allowed the special leave petition filed by the petitioner. Thereafter, the petitioner filed a petition before the Additional District and Sessions Court. When A and S failed to execute the sale deed in terms of the sale agreement dated 30th June, 1994 and the order dated 31st March, 2017 of the Supreme Court in the special leave petition, the Additional District Judge executed the sale deed in favour of the petitioner on 29th June, 2018 and presented it before the Sub-Registrar for registration.

The petitioner was informed through a communication that the property in question was attached for recovery of arrears of tax due to the Income-tax Department from the firms in which S and her husband were partners and, therefore, the petitioner should obtain a certificate to the effect that there were no tax dues in respect of the said property from the Tax Recovery Officer of the Income-tax Department. The Tax Recovery Officer took the stand that the purported sale deed executed by the Court was contrary to section 281, that a copy of the attachment order was served on the office of the Sub-Registrar and an entry of encumbrance in respect of the property was also entered, that the petitioner could not perfect the title over the property, and that the Sub-Registrar could not release the registered sale deed in favour of the petitioner unless the tax arrears were cleared.

The Madras High Court allowed the writ petition filed by the petitioner and held as under:

‘i) Section 281 applies only to a situation where an assessee during the pendency of any proceeding under the Act, or after completion thereof, but before the service of a notice under rule 2 of the Second Schedule, creates a charge on, or parts with the possession (by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever) of any of his assets in favour of any other person. Only such charge or transfer is void as against any claim in respect of any tax or any other sum payable by the assessee as a result of completion of such proceedings or otherwise. According to the proviso to section 281 such charge or transfer shall not be void if it is made (i) for adequate consideration and without notice of the pendency of such proceeding or, as the case may be, without notice of such tax or other sum payable by the assessee; or (ii) with the previous permission of the A.O.

ii) Admittedly, the transfer of the property was on account of the final culmination of the litigation by the order of the Supreme Court. There was only a delay in the execution of the sale deed due to the pendency of the proceedings as the third and fourth respondent’s mother (since deceased) declined to execute the sale deed under the sale agreement dated 30th June, 1994. The third and the fourth respondents, A and S, who were minors at the time of execution of the sale agreement on 30th June, 1994, ought to have executed the sale deed in favour of the petitioner. The subsequent tax liability of the fourth respondent and her husband for the A.Ys. 2012-13 and 2013-14 could not be to the disadvantage of the petitioner, since the petitioner had been diligently litigating since 2004. Therefore, the benefit of the decree in a contested suit could not be denied merely because the seller or one of the persons had incurred subsequent tax liability. The benefit of a decree would date back to the date of the suit. Therefore, the communication dated 6th July, 2018 which required the petitioner to obtain clearance could not be countenanced.

iii) The tax liability of the firms of which S and her husband were partners arose subsequent to the commitment in the sale agreement dated 30th June, 1994. The Sub-Registrar is directed to release the sale deed dated 29th June, 2018 and to cancel all the encumbrances recorded against the property in respect of the tax arrears of the firms of the fourth respondent S and her husband.’

International transactions – Draft assessment order – Procedure to be followed – Mandatory – Tribunal in appeal from final assessment order remanding matter to Assistant Commissioner / TPO – A.O. straightaway passing final order – Not valid – A.O. bound to have passed draft order first – Order quashed and matter remanded

5 Durr India Private Limited vs. ACIT [2021] 436 ITR 111 (Mad) A.Ys.: 2009-10 to 2011-12; Date of order:  27th May, 2020 Ss. 92CA(4), 143(3), 144C of ITA, 1961

International transactions – Draft assessment order – Procedure to be followed – Mandatory – Tribunal in appeal from final assessment order remanding matter to Assistant Commissioner / TPO – A.O. straightaway passing final order – Not valid – A.O. bound to have passed draft order first – Order quashed and matter remanded

For the A.Y. 2009-10, pursuant to the report of the Transfer Pricing Officer, the Assistant Commissioner passed a draft assessment order against which the assessee filed an application before the Dispute Resolution Panel u/s 144C. Pursuant to the order of the Dispute Resolution Panel, the Assistant Commissioner passed an assessment order u/s 144C read with section 143(3). On appeal to the Tribunal, the Tribunal remanded the case back to the Assistant Commissioner / Transfer Pricing Officer. Thereafter, pursuant to the order of the Transfer Pricing Officer on remand by the Tribunal, the Assistant Commissioner passed the final order.

The assessee filed a writ petition contending that such final order being not preceded by a draft assessment order was without jurisdiction. The Madras High Court allowed the writ petition and held as under:

‘i) When the law mandated a particular thing to be done in a particular manner, it had to be done in that manner. The final assessment order u/s 144C read with section 143(3) had been passed without jurisdiction.

ii) Once the case was remitted back to the Assistant Commissioner / Transfer Pricing Officer, it was incumbent on their part to have passed a draft assessment order u/s 143(3) read with section 92CA(4) and section 144C(1). They could not bypass the statutory safeguards prescribed under the Act and deny the assessee the right to file an application before the Dispute Resolution Panel.

iii) The final order is quashed and the case remitted back to the Assistant Commissioner to pass a draft assessment order.’

HUF – Partition – Scope of section 171 – Section 171 applicable only where Hindu Family is already assessed as HUF – Deceased father of assessees not assessed as karta of HUF when alive – Inherited property shared under orally recorded memorandum by legal heirs – Proportionate consideration out of sale thereof declared in returns filed by legal heirs in individual capacity and exemption u/s 54F allowed by A.O. – Reassessment to tax capital gains in hands of karta – Unsustainable

4 A.P. Oree (Kartha) [Estate of A.R. Pandurangan (HUF)] vs. ITO [2021] 436 ITR 3 (Mad) A.Y.: 2008-09; Date of order: 2nd June, 2021 Ss. 54F, 148, 171 of ITA, 1961

HUF – Partition – Scope of section 171 – Section 171 applicable only where Hindu Family is already assessed as HUF – Deceased father of assessees not assessed as karta of HUF when alive – Inherited property shared under orally recorded memorandum by legal heirs – Proportionate consideration out of sale thereof declared in returns filed by legal heirs in individual capacity and exemption u/s 54F allowed by A.O. – Reassessment to tax capital gains in hands of karta – Unsustainable

The assessee was one of the four legal heirs of the deceased ARP. Part of the inherited agricultural land was sold without physical division. The share of each heir was orally divided between them under a memorandum of oral recording and the sale proceeds were distributed in proportion with their respective shares in the land and the balance portion of the land continued to remain in their names without physical division. For the A.Y. 2008-09, they filed their returns of income as individuals and claimed exemption from levy of tax on capital gains u/s 54F which was allowed by the A.O. On the ground that there was no physical division of the property, that the memorandum recording oral partition did not amount to partition u/s 171, and that therefore the capital gains was to be assessed in the hands of the estate of the deceased ARP (HUF) and the exemption allowed u/s 54F was contrary to section 171, notice was issued u/s 148 to the estate of ARP (HUF) and a consequential order was passed in the name of the assessee as karta.

The assessee filed a writ petition and challenged the notice u/s 148 and the order. The Madras High Court allowed the writ petition and held as under:

‘i) Section 171 makes it clear that it is applicable only where a Hindu family is already assessed as a Hindu undivided family. Otherwise, there is no meaning to the expression “hitherto” in section 171(1).

ii) During the lifetime of ARP, the deceased father of the assessees, the family was not assessed as a Hindu undivided family. It was only where there was a prior assessment as a Hindu undivided family and during the course of assessment u/s 143 or section 144 it was claimed by or on behalf of a member of such family which was assessed as a Hindu undivided family that there was a partition whether total or partial among the members of such family, that the A.O. should make an Inquiry after giving notice of inquiry to all the members. Where no such claim was made, the question of making inquiry by an A.O. did not arise and only in such circumstances would the definition of “partition” in Explanation to section 171 be attracted. The definition could not be read in isolation. Where a Hindu family was never assessed as a Hindu undivided family, section 171 would not apply even when there was a division or partition of property which did not fall within the definition.

iii) The notice issued u/s 148 to the estate of ARP (HUF) coparceners and the consequential order issued in the name of the assessee as the karta were unsustainable.’

Exemption u/s 10B – Export of computer software – Assessee omitting to claim exemption in return – Rectification of mistake – Revision – Rejection of rectification application and revision petition on ground of delay in filing revised return – Unjustified – Assessee entitled to benefit

3 L-Cube Innovative Solutions P. Ltd. vs. CIT [2021] 435 ITR 566 (Mad) A.Y.: 2006-07; Date of order: 5th February, 2021 Ss. 10B, 139(5), 154, 264 of ITA, 1961

Exemption u/s 10B – Export of computer software – Assessee omitting to claim exemption in return – Rectification of mistake – Revision – Rejection of rectification application and revision petition on ground of delay in filing revised return – Unjustified – Assessee entitled to benefit

The assessee provided software services and was entitled to the benefit u/s 10B. It failed to claim this benefit in its return of income filed u/s 139 for the A.Y. 2006-07. The assessee received the intimation dated 28th March, 2018 u/s 143(1) on 18th May, 2008. Since the time limit for filing a revised return u/s 139(5) had expired on 31st March, 2008, it filed a rectification application before the A.O. u/s 154. The A.O. rejected the application and held that if there was any mistake found in the return the assessee ought to have filed a revised return on or before 31st March, 2008. Against this rejection, the assessee filed a first revision petition u/s 264 which was rejected; a second revision petition filed was also rejected.

The assessee then filed a writ petition challenging the rejection of the claim for deduction. The Madras High Court allowed the writ petition and held as under:

‘i) The rejection of the revision application filed by the assessee u/s 264 was not justified as the Officers acting under the Income-tax Department were duty-bound to extend the substantive benefits that were legitimately available to the assessee.

ii) The rejection of the application for rectification by the A.O. u/s 154 was unjustified, since the assessee was entitled to the substantive benefits u/s 10B and the delay, if any, was attributed on account of the system. Even if the intimation dated 28th March, 2008 was despatched on the same day after it was signed, in all likelihood it could not have been received by the assessee on 31st March, 2008 to file a revised return on time. Therefore, the assessee was entitled to rectification u/s 154.’

Direct Tax Vivad se Vishwas Act, 2020 – Condition precedent for making declaration – Application should be pending on 31st January, 2020 from order dismissed ‘in limine’ – Appeal to Appellate Tribunal – Appeal dismissed based on mistake on 22nd June, 2018 – Tribunal rectifying order and passing fresh order restoring appeal on 11th May, 2020 – Order passed by Tribunal on 22nd June, 2018 was ‘in limine’ – Appeal pending on 31st January, 2020

2 Bharat Bhushan Jindal vs. Principal CIT [2021] 436 ITR 102 (Del) A.Y.: 2011-12; Date of order: 26th April, 2021 Direct Tax Vivad se Vishwas Act, 2020

Direct Tax Vivad se Vishwas Act, 2020 – Condition precedent for making declaration – Application should be pending on 31st January, 2020 from order dismissed ‘in limine’ – Appeal to Appellate Tribunal – Appeal dismissed based on mistake on 22nd June, 2018 – Tribunal rectifying order and passing fresh order restoring appeal on 11th May, 2020 – Order passed by Tribunal on 22nd June, 2018 was ‘in limine’ – Appeal pending on 31st January, 2020

For the A.Y. 2011-12, the A.O. passed the assessment order on 21st March, 2014 increasing the taxable income considerably. The assessee preferred an appeal before the Commissioner (Appeals), which was allowed on 29th January, 2016. The Revenue filed an appeal on 10th March, 2016 before the Tribunal. The appeal was, however, dismissed by the Tribunal on 22nd June, 2018, based on a mistaken belief that in the earlier assessment years it had taken a view against the Revenue and in the favour of the assessee. This obvious mistake, once brought to the notice of the Tribunal, via a miscellaneous application preferred by the Revenue, was rectified by an order dated 11th May, 2020. The miscellaneous application was filed before the specified date, i.e., 31st January, 2020. As per the information available on the Tribunal’s portal, the miscellaneous application was filed on 13th November, 2018. The Tribunal, realising the mistake that had been made, recalled its order dated 22nd June, 2018 and restored the Revenue’s appeal and directed that the appeal be heard afresh. As a matter of fact, the Tribunal fixed the date of hearing, via the very same order, in the appeal on 6th July, 2020. The assessee filed Forms 1 and 2 with the designated authority under the Direct Tax Vivad se Vishwas Act, 2020 in the first instance on 21st March, 2020. The assessee filed revised Forms 1 and 2, on 27th January, 2021, and thereafter on 20th March, 2021. In the interregnum, both sets of Forms 1 and 2, which were filed on 21st March, 2020 and 27th January, 2021, were rejected.

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

‘i) A careful perusal of the order dated 22nd June, 2018 would show that the Revenue’s appeal was dismissed at the threshold, based on a mistaken impression that the Tribunal had taken a view against the Revenue. Circular No. 21 of 2020 [(2020) 429 ITR (St.) 1] requires fulfilment of two prerequisites for an appeal to be construed as pending on the specified date (i.e., 31st January, 2020) in terms of the provisions of the 2020 Act. First, the miscellaneous application should be pending on the specified date, i.e., 31st January, 2020. Second, the miscellaneous application should relate to an appeal which had been dismissed “in limine” before 31st January, 2020.

ii) There was no dispute that the miscellaneous application was filed and was pending on the specified date, i. e., 31st January, 2020. As regards the second aspect, the order of the Tribunal dated 22nd June, 2-018 could only be construed as an order that dismissed the Revenue’s appeal “in limine”. The Revenue’s appeal was pending on the specified, date, i. e., 31st January, 2020. The order of rejection was not valid.’

Direct Tax Vivad se Vishwas Act – Scope of – Meaning of disputed tax – Difference between disputed tax and disputed income – Appeal against levy of tax pending – Declaration filed under Act cannot be rejected on ground that assessee had offered an amount for taxation

1 Govindrajulu Naidu vs. Principal CIT [2021] 434 ITR 703 (Bom) A.Y.: 2014-15; Date of order: 29th April, 2021 The Direct Tax Vivad se Vishwas Act, 2020

Direct Tax Vivad se Vishwas Act – Scope of – Meaning of disputed tax – Difference between disputed tax and disputed income – Appeal against levy of tax pending – Declaration filed under Act cannot be rejected on ground that assessee had offered an amount for taxation

The assessee filed a return of income for the A.Y. 2014-15 u/s 139(1) declaring a total income of Rs. 67,55,710. The assessment was completed u/s 143(3) assessing the income at Rs. 67,66,640. Thereafter, in 2019, a survey action was undertaken at the office premises of the assessee. However, no incriminating material was found. Under pressure, the assessee agreed to offer the amount of Rs. 5,76,00,000 allegedly received as his income. Later, he retracted from his statement under an affidavit filed before respondent No. 2. The assessment for the assessment year was reopened by a notice issued u/s 148. The assessee filed a return showing the amount of Rs. 5,76,00,000 as his income and declared a total amount of Rs. 6,43,69,719 and on reassessment the total amount was assessed at Rs. 6,44,09,400. The assessee filed an appeal u/s 246A before the Commissioner (Appeals) and raised the ground that the respondent had erred in taxing the amount of Rs. 5,76,00,000 as income of the assessee for the relevant assessment year. The appeal was pending. During the pendency of the appeal, the Direct Tax Vivad se Vishwas Act, 2020 was enacted. As required under the provisions of this Act, the assessee filed a declaration to the designated authority in the prescribed form. The declaration was rejected on the online portal without giving an opportunity to the assessee observing that there was no disputed tax in the case of the declarant, as the declarant had himself filed a return reflecting the income.

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

‘i) The Direct Tax Vivad se Vishwas Act, 2020 and the rules have been brought out with a specific purpose, object and intention to expedite realisation of locked up revenue, providing certain reliefs to assessees who opt to apply under the Act. Such an option is available only to a few persons. The preamble to the Act provides for resolution of disputed tax and matters connected therewith or incidental thereto. The emphasis is on disputed tax and not on disputed income. The term “disputed tax” has been assigned specific definition in the Act and would have to be appreciated in the context of the Act. The disputed tax means an income tax payable by assessee under the provisions of the Income-tax Act, 1961 on the income assessed by the authority and where any appeal is pending before the appellate forum on the specified date, against any order relating to tax payable under the Income-tax Act. It does not presumably ascribe any qualification to the matter / appeal except that it should concern the Income-tax Act. Further the definition of “dispute” as appearing under Rule 2(b) of the Direct Tax Vivad se Vishwas Rules, 2020 shows that “dispute” means an appeal or writ petition or special leave petition by the declarant before the appellate forum. “Disputed income” has also been defined under clause (g) of section 2(1) to mean the whole or so much of the total income as is relatable to disputed tax.

ii) The scheme of the 2020 Act does not make any distinction and categorise the appeals. The Act does not go into the ground of appeal.

iii) The Department did not dispute that an appeal had been filed by the assessee before the appellate forum. There existed a dispute as referred to under the 2020 Act and the Rules. In such a scenario, the Department’s contention that the assessee had offered the income and as such the tax thereon could not be considered disputed tax, would not align itself with the object and the purpose underlying the bringing in of the 2020 Act. The rejection of the declaration under the 2020 Act was not valid.’

Artheon Battery [TS-863-ITAT-2021 (Pun)] A.Y.: 2014-15; Date of order: 7th September, 2021 Section 28(iv)

8 Artheon Battery [TS-863-ITAT-2021 (Pun)] A.Y.: 2014-15; Date of order: 7th September, 2021 Section 28(iv)

FACTS
The assessee is engaged in the business of manufacturing the complete line of lead-acid batteries, serving domestic and export markets as well. The A.O. found that the assessee had credited an amount of Rs. 25.19 crores being waiver of ECB loan amount. The assessee submitted that the ECB was availed to acquire capital assets and hence was capital in nature. The A.O. did not accept the assessee’s submissions and held that the amount was taxable u/s 28(iv). On appeal, the CIT(A) held the amount to be capital in nature.

Aggrieved, the Revenue preferred an appeal before the Tribunal.

HELD
The Tribunal found that the assessee had transferred the waiver amount of ECB directly to its capital reserve. It referred to the Apex Court ruling in Mahindra & Mahindra (404 ITR 1) wherein it was held that ‘in order to invoke the provisions u/s 28(iv) of the Act, the benefit which is received has to be in some other form rather than in the shape of money’. The Tribunal held that the amount received as cash receipt due to the waiver of loan cannot be taxed under the provisions of section 28(iv), and noted that in the instant case the loan amount waived was credited to capital reserve. Therefore, it held that the ratio of the SC ruling would be applicable as the benefit was received in some form other than in the shape of money. The Tribunal upheld the CIT(A)’s order.
 

BUSINESS INCOME OF A CHARITABLE INSTITUTION

ISSUE FOR CONSIDERATION
Section 11 of the Income-tax Act confers exemption from tax in respect of an income derived from ‘property held under trust’, in the circumstances specified in clauses (a) to (c) of section 11(1), to a charitable institution or a trust or such other person registered u/s12A of the Act.

Section 11(4) provides that a ‘property held under trust’ includes a business undertaking held in trust and the income from such business, subject to the power of the A.O., shall not be included in the total income of the institution.

Sub-section (4A) provides for the denial of the benefit of tax exemption u/s 11(1) and prohibits the application of sub-sections (2), (3) and (3A) in relation to any income being profits and gains of business, unless the business is incidental to the attainment of the main objectives of the trust and separate books of accounts are maintained for the business.

The ‘property held under trust’ is required to be held for the charitable or religious purposes for its income to qualify for exemption from taxation. The term ‘charitable purpose’ is defined by section 2(15) and includes relief of the poor, education, yoga, medical relief, preservation of environment and of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility. A proviso to section 2(15) stipulates some stringent conditions in respect of an institution whose object is the advancement of general public utility, where it is carrying on any business to advance its objects. The said proviso does not apply to institutions whose objects are other than those of advancing general public utility, provided their objects otherwise qualify to be treated as charitable purposes.

The sum and substance of the aforesaid provisions, in relation to business carried out by an institution, is that a business run by it would be construed as a ‘property held under trust’ and its income, subject to the proviso to section 2(15), would be exempt from tax u/s 11. The conditions prescribed u/s (4A), where applicable, would require the business to be incidental to the attainment of the objectives of the trust and separate books of accounts would have to be maintained in respect of the business by the institution.

Some interesting controversies have arisen around the true meaning and understanding of the terms ‘property held under trust’ and ‘incidental to the attainment of the objectives of the trust’ and in relation to the applicability of sub-section (4A) to cases where provisions of sub-section (4) are applicable. The Delhi High Court has held that a business carried on with borrowed funds and unrelated to the objects of the trust could not be held to be a ‘property held under trust’. It has also held that for a business to be incidental to the attainment of the objects of the trust, its activities should be intricately related to its objects. It also held that the provisions of sub-section (4A) and sub-section (4) cannot apply simultaneously. As against the above decision, the Madras High Court has held that a business carried on by the trust is a ‘property held under trust’ and such business would be construed to be incidental to the attainment of the objectives of the trust where the profits of such business are utilised for meeting the objects of the trust and, of course, separate books of accounts are maintained by the trust.

Some of these issues have a chequered history and were the subject matter of many Supreme Court decisions, including in the cases of J.K. Trust, 32 ITR 535; Surat Art Silk Cloth Manufacturers Association, 121 ITR 1; and Thanthi Trust, 247 ITR 785. Besides the above, the Supreme Court had occasion to examine the meaning of the term ‘not involving the carrying out of any activity of profit’ and the concept of business held in trust in the cases of CIT vs. Dharmodayam Co., 109 ITR 527 (SC); Dharmaposhanam Co. vs. CIT, 114 ITR 463 (SC); and Dharmadeepti vs. CIT, 114 ITR 454 (SC).

MEHTA CHARITABLE PRAJNALAY TRUST’S CASE

The issue came up for consideration in the case of CIT vs. Mehta Charitable Prajnalay Trust, 357 ITR 560 before the Delhi High Court. The assessment years involved therein were 1992-93 to 1994-95; 2001-02; and 2005-06 to 2007-08. The trust was constituted in the year 1971 for promotion of education, patriotism, Indian culture and running of dispensaries and hospitals and many other related charitable objects with a donation of Rs. 2,100. Besides pursuing the above objects, the trust commenced Katha manufacturing business in the year 1972 with the aid and assistance of borrowings from banks and sister concerns in which the settlors, trustees or their relatives had substantial interest. At some point of time, the Katha manufacturing unit was leased to a related concern on receipt of lease rent. The trust made purchases and sales from its head office through the two related concerns.

The exemption u/s 11 claimed by the trust was denied by the A.O. for some of the years and such denial was confirmed by the CIT(A) on the ground that the Katha business was carried on by the trustees and not by the beneficiaries of the trust, as was required by the then applicable section 11(4A), and the exemption was not available to the trust in respect of the profits of the Katha business. In respect of some other years, the CIT(A) held that the business was held under trust and was covered by section 11(4) of the Act and on application of the said section, the provisions of sections 11(4A) were not applicable and therefore the trust was entitled for the exemption. For the years under consideration, the A.O. denied the exemption for the same reasons, besides holding that carrying on of the Katha business was not incidental to the attainment of the objects of the trust. The orders of the A.O. for those years were sustained by the CIT(A) for reasons different from those of the A.O.

On appeal, the Tribunal, following its decision for the A.Y. 1989-90, held that the Katha business carried on by the assessee was incidental to the attainment of the objects of the trust, which were for charitable purposes. Relying on the judgment of the Supreme Court in Thanthi Trust (Supra), in which the effect of the amendment was considered, the Tribunal held that the said decision squarely covered the controversy in the present case about the business being incidental to the attainment of the objects of the trust.

The High Court noted that the Tribunal did not specifically address itself to the question which arose out of the order of the CIT(A), whether the business itself can be said to be property held under trust within the meaning of section 11(4). There was no discussion in the order of the Tribunal as to the impact of the various clauses of the trust deed which were referred to by the CIT(A) while making a distinction between the objects of the trust and the powers of the trustees. In respect of all the other assessment years, namely, 1993-94, 1994-95, 2001-02 and 2005-06 to 2007-08, the Tribunal followed the order passed by it for the A.Y. 1992-93.

On an appeal by Revenue, the Delhi High Court in appreciation of the contentions of the parties, held as under:
• There was no exhaustive definition of the words ‘property held under trust’ in the Act; however, sub-section (4) provided that for the purposes of section 11 the words ‘property held under trust’ include a business undertaking so held.

• The question whether sub-section (4A) would apply even to a case where a business was held under trust was answered in the negative in several authoritative pronouncements. Thus, if a property was held under trust, and such property was a business, the case would fall u/s 11(4) and not u/s 11(4A). Section 11(4A) would apply only to a case where the business was not held under trust. In view of the settled legal position, the contention of the Revenue, that the provisions of section 11(4A) were sweeping and would also take in a case of business held under trust, was not acceptable.

• In the facts of the present case, and having regard to the terms of the trust deed and the conduct of the trustees, it could not be said that the Katha business was itself held under trust. There was a difference between a property or business held under trust and a business carried on by or on behalf of the trust, a distinction that was recognised in Surat Art Silk Cloth Manufacturers Association (Supra), a decision of five Judges of the Supreme Court. It was observed that if a business undertaking was held under trust for a charitable purpose, the income therefrom would be entitled to the exemption u/s 11(1).

• In the case before the Court, the finding of the CIT(A), in his order for the A.Y. 1992-93, was that the Katha business was not held under trust but it was a business commenced by the trustees with the aid and assistance of borrowings from the sister concerns in which the settlors and the trustees or their close relatives had substantial interest, as well as from banks. It was thus with the help of borrowed funds, or in other words, the funds not belonging to the assessee trust, that the Katha business was commenced and profits started to be earned.

• There was a distinction between the objects of a trust and the powers given to the trustees to effectuate the purposes of the trust. The Katha business was not even in the contemplation of the settlors and, therefore, could not have been settled upon trust, even where they were empowered to start any business.

• There was thus no nexus or integration between the amount originally settled upon the trust and the later setting up and conduct of the Katha business. Moreover, the distinction between the original trust fund and the later commencement of the business with the help of borrowed funds should be kept in mind in the context of ascertaining whether the particular Katha business was even in the contemplation of the settlors of the trust.

• There was no connection between the carrying on of the Katha business and the attainment of the objects of the trust, which were basically for the advancement of education, inculcation of patriotism, Indian culture, running of dispensaries, hospitals, etc. The mere fact that the whole or some part of the income from the Katha business was earmarked for application to the charitable objects would not render the business itself being considered as incidental to the attainment of the objects. The Delhi High Court was in agreement with the view taken by the CIT(A) in his order for A.Y. 1992-93 that the application of the income generated by the business was not the relevant consideration and what was relevant was whether the activity was so inextricably connected to or linked with the objects of the trust that it could be considered as incidental to those objectives.

• Prima facie, the observations in the case of Thanthi Trust (Supra) would appear to support the assessee’s case in the sense that even if the Katha business was held not to constitute a business held under trust, but only as a business carried on by or on behalf of the trust, so long as the profits generated by it were applied for the charitable objects of the trust, the condition imposed u/s 11(4A) should be held to be satisfied, entitling the trust to the tax exemption.

• The observations of the Apex Court, however, have to be understood in the light of the facts before it. The assessee in that case carried on the business of a newspaper and that business itself was held under trust. The charitable object of the trust was the imparting of education which fell u/s 2(15). The newspaper business was certainly incidental to the attainment of the object of the trust, namely, that of imparting education. The observations were thus made having regard to the fact that the profits of the newspaper business were utilised by the trust for achieving the object, namely, education. The type of nexus or connection which existed between the imparting of education and the carrying on of the business of a newspaper did not exist in the present case. There was no such nexus between the Katha business and the objects of the assessee trust that can constitute the carrying on of the Katha business, an activity incidental to the attainment of the objects, namely, advancing of education, patriotism, Indian culture, running of hospitals and dispensaries, etc.

• It would be disastrous to extend the sweep of the observations made by the Supreme Court in the case of the Thanthi Trust (Supra), on the facts of that case, to all cases where the trust carried on business which was not held under trust and whose income was utilised to feed the charitable objects of the trust. The observations of the Supreme Court must be understood and appreciated in the background of the facts in that case and should not be extended indiscriminately to all cases.

The Delhi High Court held that a business carried on with borrowed funds and unrelated to the objects of the trust could not be held to be a ‘property held under trust’. It has also held that for a business to be incidental to the attainment of the objects of the trust, its activity should be intricately related to its objects. It also held that where a property was held under trust and such property was a business, the case would fall u/s 11(4) and not u/s 11(4A). Section 11(4A) would apply only to a case where the business was not held under trust. It therefore held that the Katha business was not a property held under trust, the provisions of section 11(4) did not apply, and the provisions of section 11(4A) would have to be applied. Since the business was not incidental to the attainment of the objects of the trust as required by section 11(4A), the trust was not entitled to exemption in respect of the business income.

The Special Leave Petition filed by the assessee against this decision has been admitted by the Supreme Court as reported in Mehta Charitable Prajnalay Trust vs. CIT, 248 Taxman 145 (SC).

BHARATHAKSHEMAM’S CASE


The issue recently arose in the case of Bharathakshemam vs. PCIT, 320 CTR (Ker) 198, a case that required the Court to adjudicate whether the assessee trust was eligible for exemption from tax u/s 11, in respect of the business of Chitty / Kuri which was utilised for medical relief, an object of the trust, and could such business be considered as a business incidental or ancillary to the attainment of the objects of the trust. In that case, the Revenue had relied on the decision of the Delhi High Court in the case of Mehta Charitable Prajnalay Trust (Supra) to support the contention that the business carried on by the trust had no connection or nexus with the charitable objects of the trust. It was the Revenue’s contention that the business, being run by the trust, should itself be connected or should have a nexus with the object of medical relief, for example, running a dispensary or a hospital or a drugstore or even a medical college; surely, running a Chitty / Kuri business was none of them and therefore could not be said to be incidental or ancillary to the objects of the trust, and the fact that the profit of such business was utilised entirely for medical relief was not sufficient for excluding the income of the business from taxation.

In this case, the facts gathered from the order of the High Court reveal that the claim for exemption of the trust in respect of its profit from its Chitty / Kuri business was denied by the A.O. on the grounds that such a business was not incidental or ancillary to the attainment of the objects of the trust. The A.O. had also evoked the proviso to section 2(15) which was held by the Court to be irrelevant in view of the finding that the said proviso had a restricted application to the cases where a business was being carried on for pursuing its object of carrying on an activity of general public utility. In the case before the Court, the main object was providing medical relief and the profits of the business were utilised for medical relief which was the main object of the trust.

The first appellant authority held that the business was carried out by the trust for the mutual benefit of the subscribers to the Chitty / Kuri and the substantial profit of the business was passed on to such subscribers and therefore such business, which retained minor profits, could not have been treated as incidental to the objects of the trust. It also held that the profit, even where applied fully to the objects of the trust, could not have deemed the business to be incidental to the main objects of the trust. On appeal by the assessee to the Tribunal, it agreed with the findings of the first appellate authority and also referred to the first proviso to section 2(15) to hold that the business of the trust was not incidental to the attainment of the objects of the trust.

On further appeal to the High Court, relying on a few decisions of the courts, the Kerala High Court held that the proviso to section 2(15) had no relation to the case of the trust which had as its object providing medical relief. This part is not relevant to the issues under consideration here and is mentioned only for completeness.

The Court also observed, though not relevant to the issue before it, that in the aftermath of the deletion of section 13(1)(bb) and insertion of sub-section (4), the distinction between a business held in trust and one run by the trust was not very relevant and the observations in the minority judgment in the case of Thanthi Trust (Supra) should not be applied in preference to the observations of the majority, more so when the court later on delivered a unanimous judgment of the five judges.

On the issue of satisfaction of the condition of sub-section (4A), relating to the business being incidental to the attainment of the objects of the trust, the Kerala High Court exclusively relied on paragraph 25 of the decision of the Supreme Court in the case of the Thanthi Trust (Supra) for holding that the business of Chitty / Kuri was incidental to the attainment of the objects of the trust. The said paragraph 25 is reproduced hereunder:

‘The substituted sub-section (4A) states that the income derived from a business held under trust wholly for charitable or religious purposes shall not be included in the total income of the previous year of the trust or institution if “the business is incidental to the attainment of the objective of the trust or, as the case may be, institution” and separate books of accounts are maintained in respect of such business. Clearly, the scope of sub-section (4A) is more beneficial to a trust or institution than was the scope of sub-section (4A) as originally enacted. In fact, it seems to us that the substituted sub-section (4A) gives a trust or institution a greater benefit than was given by section 13(1)(bb). If the object of Parliament was to give trusts and institutions no more benefit than that given by section 13(1)(bb), the language of section 13(1)(bb) would have been employed in the substituted sub-section (4A). As it stands, all that it requires for the business income of a trust or institution to be exempt is that the business should be incidental to the attainment of the objectives of the trust or institution. A business whose income is utilised by the trust or the institution for the purposes of achieving the objectives of the trust or the institution is, surely, a business which is incidental to the attainment of the objectives of the trust. In any event, if there be any ambiguity in the language employed, the provision must be construed in a manner that benefits the assessee. The trust, therefore, is entitled to the benefit of section 11 for A.Y. 1992-93 and thereafter. It is, we should add, not in dispute that the income of its newspaper business has been employed to achieve its objectives of education and relief to the poor and that it has maintained separate books of accounts in respect thereof.’

The Kerala High Court, in paragraph 13, examined the facts and the decision of the Delhi High Court in the case of Mehta Charitable Prajnalay Trust (Supra) relied upon by the Revenue. In paragraph 14 it reiterated the above-referred paragraph 25 of the decision in the case of the Thanthi Trust (Supra) to disagree, in paragraph 15, with the ratio of the decision of the Delhi High Court in the case of Mehta Charitable Prajnalay Trust (Supra). The Court also held that the Chitty / Kuri business did not require any initial investment and therefore the facts in the case before it were found to be different from the facts in the case before the Delhi High Court. The Kerala High Court also noted that the example cited by the Delhi High Court was relevant only in the context of section 13(1)(bb), which became irrelevant on its deletion; on simultaneous insertion of sub-section (4A), the case was to be adjudicated by reading the substituted provision that did not stipulate any condition that business carried on by the trust should be connected or should have nexus with the charitable purpose for such business to be treated as being carried on as incidental to the attainment of the objects of the trust. It held that the Chitty / Kuri business was incidental to the main object as long as its profits were applied for medical relief, which was the object of the trust. The trust was accordingly granted the exemption in respect of its profits of the Chitty / Kuri business.

OBSERVATIONS
The issue that moves in a narrow compass, is about the eligibility of a trust for exemption u/s 11 where it carries on a business, the corpus whereof is supplied by the borrowings from the sister concerns of the settlor / trustees and the profit thereof is used for the purpose of meeting the objects of the trust; should such business be treated as one ‘held in trust’ and if yes, whether the business can be said to be incidental to the attainment of the objects of the trust.

A business run by a charitable institution, whether out of borrowed funds or from the funds settled on it, is surely a ‘property held under trust’ as is confirmed by the express provisions of sub-section (4) of section 11 and this understanding is confirmed by the decision of the Supreme Court in the case of Thanthi Trust (Supra). In this case, the Supreme Court observed ‘A public charitable trust may hold a business as part of its corpus. It may carry on a business which it does not hold as a part of its corpus. But it seems that the distinction has no consequence insofar as section 13(1)(bb) is concerned.’ The doubt, if any, was eliminated by the deletion of section 13(1)(bb) w.e.f. 1st April, 1983. Section 13(1)(bb) provided that nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof, in the case of a charitable trust or institution for the relief of the poor, education or medical relief, which carries on any business, any income derived from such business, unless the business is carried on in the course of the actual carrying out of a primary purpose of the trust or institution.

The Supreme Court also stated in the Thanthi case:
 ‘Sub-section (4) of section 11 remains on the statute book and it defines property held under trust for the purposes of that section to include a business so held. It then states how such income is to be determined. In other words, if such income is not to be included in the income of the trust, its quantum is to be determined in the manner set out in sub-section (4).
Sub-section (1)(a) of section 11 says that income derived from property held under trust only for charitable or religious purposes, to the extent it is used in the manner indicated therein, shall not be included in the total income of the previous year of the trust. Sub-section (4) defines the words “property held under trust” for the purposes of section 11 to include a business held under trust. Sub-section (4A) restricts the benefit under section 11 so that it is not available for income derived from business unless ……’

The Supreme Court therefore clearly indicated that both sub-sections (4) and (4A) of section 11 have to be read together.

The position now should be accepted as settled unless the A.O. finds that the business is not owned and run by the institution. It is difficult to concur with a view that a business owned and run by a trust or on its behalf may still not be held to be ‘a property held under trust’. Sub-section (4) should help in concluding the debate. Yes, where the business itself is not owned or run by the trust, there can be a possibility to hold that it is not ‘a property held in trust’, but only in such cases based on conclusive findings that the business belongs to a person other than the trust.

The fact that the business is a ‘property held in trust’ by itself shall not be sufficient to exempt its income u/s 11 unless the business is found to be incidental to attainment of the objects of the trust and further the institution maintains separate books of accounts for such business. These conditions are mandated by the Legislature on insertion of sub-section (4A) into section 11 w.e.f. 1st April, 1992. In our considered opinion, the compliance of the conditions of sub-section (4A) is essential even for a business held as a ‘property held under a trust’. A co-joint reading of sub-sections (4) and (4A) is advised in the interest of the harmonious construction of the provisions that enables an institution to claim the exemption from tax.

The term ‘property held under trust’ is not defined in the Act; however, vide sub-section (4), for the purposes of section 11, the words ‘property held under trust’ include a business undertaking held by the trust. This by itself shall not qualify the trust to claim an exemption from tax. In our opinion, it is not correct to hold that once the case falls under section 11(4), the conditions of section 11(4A) will not have to be satisfied. For a valid claim of exemption, it is necessary to satisfy the twin conditions: that the business is a property held in the trust and the same is incidental to the attainment of the objects of the trust and that separate books of accounts are maintained of such business. It is also incorrect to hold that the provisions of sub-section (4A) would apply only to a business which is not a property held in trust; taking such a view would disentitle a trust altogether from claiming exemption for non-compliance of conditions of sections 11(1)(a) to (c) of the Act; the whole objective of insertion of sub-section(4A) would be lost inasmuch as it cannot be read in isolation of section 11(1)(a) to (c).

As regards the meaning of the term ‘incidental to the objects of the trust’, the better view is to treat the conditions as satisfied once the profits of the business are spent on the objects of the trust. There is nothing in section 11(4A) to indicate that there is a business nexus to the objects of the trust, for example, a business of running a laboratory or a school or a hospital w.r.t. the object of medical relief. The profit of the business of running a newspaper or printing press shall satisfy the conditions of section 11(4A) once it is utilised for the charitable purposes, i.e., the objects of the trust, even where there is no business nexus with the objects of the trust.

Attention is invited to the decision of the Madras High Court in the case of Wellington Charitable Trust, 330 ITR 24. In that case, the Court held that when a business income was used towards the achievement of the objects of the trust, it would amount of carrying on of a business ‘incidental to the attainment of the objects of the trust’. Importance is given to the application of the business income and not its source, its use and not its origin. Nothing would be gained by exempting an income which has a nexus with the objects of the trust but is not utilised for meeting the objects of the trust. The provisions of section 11(4) and section 11(4A) will have to be read together for a harmonious construction; it would not be correct to hold that section 11(4A) would override section 11(4) as doing so would make the very provision of section 11(4) otiose and redundant. The Court should avoid an interpretation that would defeat the provision of the law where there is no express bar in section 11(4A) that prohibits the application of section 11(4). The provisions should be construed to be complementary to each other.

Having said that, it would help the case of the trust, for an exemption, where the settlor of the trust has settled the business in the trust and the objects of the trust include the carrying on of such business for the attainment of the charitable objects of the trust.

Surbhit Impex [130 taxmann.com 315] A.Y.: 2014-15; Date of order: 17th September, 2021 Section 41(1)

7 Surbhit Impex [130 taxmann.com 315] A.Y.: 2014-15; Date of order: 17th September, 2021 Section 41(1)

FACTS
The assessee was engaged in the business of trading. During the course of assessment proceedings, the A.O. noticed that it owed amounts of Rs. 1.25 crores and Rs. 1.88 crores, respectively, to two Chinese entities and which were outstanding. The assessee submitted that since the consignment received was not of good quality, the payment was not made. The A.O. treated the same as ceased liabilities and accordingly made an addition of Rs. 3.13 crores u/s 41(1). On appeal, the CIT(A) deleted the additions. Aggrieved, the Revenue preferred an appeal before the Tribunal.

HELD
The Tribunal noted the undisputed position that at the relevant point of time, proceedings against the assessee for recovery of these amounts were pending before the judicial forums and remarked that these amounts could not have been said to have ceased to be payable by the assessee. The Tribunal further remarked that the very basic, foundational condition that there has to be benefit in respect of such trading liability by way of ‘remission and cessation’ was not satisfied in the relevant year, and thus upheld the CIT(A)’s order.

The Tribunal observed that sometimes Departmental appeals are filed without carefully looking at undisputed basic foundational facts in a routine manner, and remarked that the Income-tax Authorities ought to be more careful in deciding matters to be pursued in further appeals.

Section 142(2A) – Reference to DVO cannot be made by an authority who is not empowered to do so – An invalid valuation report of DVO cannot be considered as incriminating material – In absence of any incriminating material for the unabated assessment years, additions cannot be made

6 ACIT vs. Narula Educational Trust [2021-86ITR(T) 365 (Kol-Trib)] IT(SS) Appeal Nos. 07 to 12 & 42 to 47(Kol) of 2020 A.Ys.: 2008-09 to 2013-14; Date of order:  5th February, 2021

Section 142(2A) – Reference to DVO cannot be made by an authority who is not empowered to do so – An invalid valuation report of DVO cannot be considered as incriminating material – In absence of any incriminating material for the unabated assessment years, additions cannot be made

FACTS
The assessee was an educational institution operating through various institutions. On 13th March, 2014, a search action u/s 132(1) was carried out at its administrative office. During post-search operations, the DGIT(Inv) made reference to the Departmental Valuation Officer (DVO) for valuing the immovable properties. The DVO reported the value of the properties to be higher than the value disclosed by the assessee. Pursuant to the provisions of section 153A, an assessment for the A.Ys. 2008-09 to 2012-13 was undertaken and the A.O. proposed to make an addition based on the report of the DVO. The assessee objected to the valuation methodology adopted by the DVO; accordingly, the A.O. requested the DVO to reconsider the valuation. However, as the DVO did not submit the report within the statutory time limit of six months, the A.O. proceeded to make an addition based on the initial valuation report as called upon by the DGIT(Inv).

Before the CIT(A), the assessee raised the point that since the DVO did not furnish the report to the A.O. within the time limit, hence the reference stood infructuous. The CIT(A), exercising his co-terminus powers (as that of A.O.), himself made reference to the DVO; however, since the DVO did not furnish a reply within the time limit, the CIT(A) deleted the addition on the ground that since the DVO did not furnish a report, hence the earlier report of the DVO [as sought by DGIT(Inv)] stood non-est and could not be relied upon by the A.O.

On appeal by the Revenue before the ITAT, the assessee argued that, firstly, the DGIT(Inv) had no power at that point of time to refer to the DVO for valuation, and secondly, since there was no incriminating material found during the course of the search action, no addition can be made as the assessments for these years were unabated.

HELD
The DGIT(Inv) was empowered to make reference for valuation to the DVO only after the amendment in section 132 made vide the Finance Act, 2017 w.e.f. 1st April, 2017 and not prior to it. Thus, the DGIT(Inv) did not have jurisdiction to make a reference in the year 2014. Accordingly, the impugned additions were directed to be deleted relying on the ratio laid down by the Supreme Court in the case of Smt. Amiya Bala Paul vs. CIT [2003] 262 ITR 407 (SC) where it was held that reference to the DVO cannot be made by an authority that is not empowered to do so.

It was observed that assessments for the relevant years were unabated because no assessments were pending for those years before the A.O. as on the date of the search. Further, the accounts of the assessee were audited, and that neither the search party nor the A.O. pointed out any mistake in the correctness or completeness of the books. On perusal of the panchnama it was evident that the search party did not even visit the educational institutions. Thus, the reference made by the DGIT(Inv) to the DVO was without any incriminating material that was unearthed during the search proceedings. There was no whisper of any incriminating material seized during the search to justify the addition in these unabated assessments other than the invalid valuation report. Such invalid valuation report of the DVO cannot be held to be incriminating material, since it was not a fallout of any incriminating material unearthed during the search to suggest any investment in the building which was over and above the investment shown by the assessee. Therefore, no addition was permissible for unabated assessments unless it was based on relevant incriminating material found during the course of search qua the assessee and qua the assessment year.

Principle of consistency – Where in earlier years in the assessee’s own case the benefit of exemption u/s 11 was allowed, the Revenue’s appeal against the order of CIT(A) was dismissed, thereby upholding the claim of exemption u/s 11, following the principle of consistency

5 ACIT (Exemptions) vs. India Habitat Centre [2021-86-ITR(T) 290 (Del-Trib)] IT Appeal No. 5779 (Del) of 2017 A.Y.: 2014-15; Date of order: 1st February, 2021

Principle of consistency – Where in earlier years in the assessee’s own case the benefit of exemption u/s 11 was allowed, the Revenue’s appeal against the order of CIT(A) was dismissed, thereby upholding the claim of exemption u/s 11, following the principle of consistency

FACTS
The assessee-society was registered u/s 12A vide order dated 13th January, 1989. It had satisfied the requirements of Education, Medical Relief, Environment, Relief of Poor and Claim of General Public Utility and thus, its activities were charitable as mandated in section 2(15).

The Department had started disputing the nature of activities undertaken by the assessee and rejected the claim of exemption under sections 11 and 12 read with the proviso to section 2(15). As an abundant precaution, the assessee started making an alternate claim for exemption under the principle of mutuality, it being a members’ association.

For the relevant A.Y., the A.O. noted that its activities were hybrid, were partly covered by the provisions of section 11 read with section 2(15) and partly by the principle of mutuality. The A.O. denied the exemption u/s 11 and under mutuality since separate books of accounts were not maintained and income could not be bifurcated under the principle of mutuality or otherwise.

Aggrieved, the assessee challenged the assessment order before the CIT(A). The CIT(A) relied on the earlier decisions of the higher appellate forums in its own case and held that the assessee was engaged in charitable activities and granted the benefit of exemption u/s 11. Aggrieved by the order, the Revenue filed an appeal before the Tribunal.

HELD
The Tribunal observed that a coordinate bench of the Tribunal in the assessee’s own case for the A.Y. 2008-09 had reviewed all the case laws and various decisions on this aspect to reach the conclusion that when the society was registered as a charitable trust, its income cannot be computed on the principle of mutuality but was required to be computed under sections 11, 12 and 13. This decision was followed by another decision of a co-ordinate bench in ITA No. 4212/Del/2012 for the A.Y. 2009-10 in the assessee’s own case.

The Tribunal held that the history of the assessee as noted in the submissions of the counsel clearly showed that all the issues raised in the Departmental appeal had been considered and decided in earlier years, therefore, the principle of consistency applied to the same facts. The Tribunal observed that the facts in the relevant assessment year were identical to the facts in the earlier years in the assessee’s own case, the fact that the assessee was a registered society u/s 12A and that the nature of activities and objects of the assessee were the same as had been considered in earlier years.Considering the above background and history of the assessee in the light of various orders referred to by its counsel during the course of arguments and the Order of the ITAT and the Delhi High Court in A.Y. 2012-2013 in the assessee’s own case, the Tribunal did not find any infirmity in the order of the CIT(A) in allowing the appeal of the assessee-society and the Departmental appeal was accordingly dismissed.

In the case of an assessee who had not undertaken any activities except development of flats and construction of various housing projects, expenses incurred by way of professional fees are allowable while computing income offered during survey

4 Anjani Infra vs. DCIT [TS-825-ITAT-2021 (Surat)] A.Y.: 2013-14; Date of order: 26th July, 2021 Sections 37, 68, 115BBE

In the case of an assessee who had not undertaken any activities except development of flats and construction of various housing projects, expenses incurred by way of professional fees are allowable while computing income offered during survey

FACTS

The assessee firm was a part of Shri Lavjibhai Daliya and Shri Jayantibhai Babaria group on whom search action was carried out on 17th July, 2012. In the course of the survey action, a partner of the assessee offered additional unaccounted income of Rs. 8,00,54,000. In the course of assessment proceedings, the A.O. noticed that the assessee has debited expenditure of Rs. 8 lakh from the income disclosed in the survey. In support of the claim, the assessee, in the course of assessment proceedings, submitted that the assessee is engaged only in the business of building construction and developing residential and other housing projects. No other activities or investments are carried out or undertaken by the assessee firm. The disclosure was made towards on-money in the business of real estate. The professional fee of Rs. 8 lakh was paid to their legal consultant. The A.O. treated the additional income declared in the survey as deemed income of the assessee u/s 68 and disallowed professional fees. Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O. The aggrieved assessee then preferred an appeal to the Tribunal.

HELD


The Tribunal observed that the narrow dispute is whether the assessee can claim expenses of professional fees against additional unaccounted income disclosed during the survey. The Tribunal noted that while making disclosure of Rs. 8 crores, the partners gave the bifurcation of undisclosed income. In the statement there is no averment that the assessee will not claim any expense. The assessee had not undertaken any other activities except the development of flats and construction of various housing projects. On similar facts, in the case of DCIT vs. Suyog Corporation [ITA No. 568/Ahd/2012] the Tribunal confirmed the order of the CIT(A) allowing expenses against on-money to the assessee who was also engaged in similar business activities. A similar view was taken in the case of DCIT vs. Jamnadas Muljibhai [(2006) 99 TTJ 197 (Rajkot)] by treating on-money as business receipt of the assessee.

The Tribunal, considering the decisions of the co-ordinate benches and also the fact that professional fees were paid to the firm of consultants after deducting TDS, held that there is no justification in disallowing such expenses.

Explanation 2 to section 37(1) is prospective w.e.f. A.Y. 2015-16

3 National Building Construction Corporation Ltd. vs. Addl. CIT [TS-815-ITAT-2021 (Del)] A.Y.: 2014-15; Date of order: 11th August, 2021 Section: Explanation 2 to section 37(1)

Explanation 2 to section 37(1) is prospective w.e.f. A.Y. 2015-16

FACTS

The assessee in its return of income claimed deduction of Rs. 5,72,32,442 incurred on account of expenses on corporate social responsibility (CSR). It was submitted before the A.O. that CSR expenses were incurred for the purpose of projecting its business and said the expenditure was incurred in accordance with the guidelines of the Ministry of Heavy Industry and Public Enterprises. It was also submitted that the expenses have enhanced the brand image of the company, which in turn has had a positive long-term impact on the business of the assessee.The A.O. held Explanation 2 to section 37(1) to be clarificatory and consequently disallowed the claim of the CSR expenses of Rs. 5,72,32,442.

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

HELD


The Tribunal noted that the co-ordinate bench of the Tribunal has in the case of Addl. CIT vs. Rites Limited [ITA Nos. 6447 and 6448/Del/2017; A.Y. 2013-14] held that Explanation 2 to section 37(1) is prospective in nature and applies w.e.f. A.Y. 2015-16. It also noted that the expenses have been incurred on the direction of the relevant Ministry / Government of India and neither the A.O. nor the D.R. have rebutted the contention of the assessee that expenses have been incurred for enhancing the brand image of the company which are wholly and exclusively for the purpose of the business of the assessee – but both the authorities have disallowed the expenses on the ground that Explanation 2 is clarificatory and retrospective in nature.The Tribunal, following the decision of the co-ordinate bench, held that Explanation 2 is prospective in nature and accordingly CSR expenses incurred in the year under consideration cannot be disallowed by invoking Explanation 2 to section 37(1).

This ground of appeal filed by the assessee was allowed.

Claim for deduction of interest u/s 24(b) is allowable even though assessee had not got possession of the house property

2 Abeezar Faizullabhoy vs. CIT(A) [TS-859-ITAT-2021 (Mum)] A.Y.: 2015-16; Date of order: 1st September, 2021 Section 24

Claim for deduction of interest u/s 24(b) is allowable even though assessee had not got possession of the house property

FACTS

The assessee purchased a residential house vide a registered agreement dated 20th September, 2009 for a consideration of Rs. 1,60,89,250. For acquiring the property, the assessee took a loan on which interest of Rs. 2,69,842 was paid by him during the year under consideration. In the return of income the assessee claimed deduction of Rs. 2,00,000 u/s 24(b) which was declined by the A.O. on the ground that the assessee had not taken possession of the property in question.Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O. Still aggrieved, the assessee preferred an appeal to the Tribunal.

HELD


The Tribunal on perusal of section 24(b) held that for claiming deduction of interest u/s 24(b) there is neither any such precondition nor an eligibility criterion prescribed that the assessee should have taken possession of the property purchased or acquired by him. The first and second provisos to section 24(b) only contemplate an innate upper limit of the amount of deduction qua properties referred to in section 23(2). These provisos by no means jeopardise the entitlement of the assessee to claim deduction of interest payable by him on capital borrowed for the purposes mentioned in the section, provided the property does not fall within the realm of section 23(2).

The view of the CIT(A), viz., that in the absence of any control / domain over the property in question the assessee would not be in receipt of any income from the same, therefore, the fact that allowing deduction u/s 24(b) qua the said property would be beyond comprehension was held by the Tribunal to be absolutely misconceived and divorced of any force of law. It held that the logic given by the CIT(A) for declining the claim for deduction militates against the mandate of sections 22 to 24.

The Tribunal further held that determination of annual value is dependent on the ‘ownership’ of the property, irrespective of the fact of whether or not the assessee has taken possession. As per the plain literal interpretation of section 24(b), there is no bar on an assessee to claim deduction of interest payable on a loan taken for purchasing a residential property, although the possession of the same might not have been vested with him.

The Tribunal set aside the order of the CIT(A) and directed the A.O. to allow the assessee’s claim for deduction of Rs. 2 lakh u/s 24(b).

Reassessment made merely on the basis of AIR information was quashed as having been made on invalid assumption of jurisdiction

1 Tapan Chakraborty vs. ITO [TS-644-ITAT-2021 (Kol)] A.Y.: 2009-10; Date of order: 7th July, 2021 Section: 147

Reassessment made merely on the basis of AIR information was quashed as having been made on invalid assumption of jurisdiction

FACTS

For the A.Y. 2009-10, the assessee, a transport contractor, filed his return of income declaring a total income of Rs. 1,85,199 u/s 44AE. Reassessment proceedings were commenced on the basis of AIR information that the assessee has deposited a sum of Rs. 10,64,200 in his savings account which deposit was held by the Revenue to be cash credit u/s 68.

In the reasons recorded, the A.O. noticed that the assessee has declared business income of Rs. 1,85,199 and has a savings bank account with Oriental Bank of Commerce, perusal of the bank statement whereof shows a deposit of Rs. 10,64,200 to be in cash out of the total deposits of Rs. 16,11,720.

According to the A.O., the assessee failed to substantiate the cash deposit with any supporting evidence and hence concluded the amounts to be cash credit u/s 68.

HELD


Quietus of the completed assessments can be disturbed only when there is information or evidence / material regarding undisclosed income or the A.O. has information in his possession showing escapement of income. The statutory mandate is that the A.O. must record ‘reason to believe’ the escapement of income. The Tribunal observed that if adverse information may trigger ‘reason to suspect’, then the A.O. has to make reasonable inquiry and collect material which would make him believe that there is in fact an escapement of income. ‘Reason’ is the link between the information and the conclusion. ‘Reason to believe’ postulates a foundation based on information and a belief based on a reason. After a foundation based on information is made, there must still be some reason which should warrant the holding of a belief that income chargeable to tax has escaped assessment. The Tribunal noted that the Supreme Court in M/s Ganga Saran & Sons (P) Ltd. vs. 130 ITR 1 (SC) has held that the expression ‘reason to believe’ occurring in section 147 is stronger than the expression ‘is satisfied’ and such requirement has to be met by the A.O. before he usurps the jurisdiction to reopen an assessment. The Tribunal held that the A.O. did not meet the conditions precedent in the reasons recorded by him and therefore, assumption of jurisdiction by the A.O. to reopen is invalid and consequently reopening was held to be bad in law and was quashed.

Revision u/s 263 – Inquiry conducted by the A.O. – Inadequacy in conduct of inquiry – Revision bad in law

10 Principal Commissioner of Income Tax vs. M/s Brahma Centre Development Pvt. Ltd. [Income Tax Appeal No. 116 & 118 of 2021; Date of order: 5th July, 2021 (Delhi High Court)] [Arising from ITA Nos. 4341/Del/2019 and 4342/Del/2019; A.Ys.: 2012-2013 and 2013-2014]

Revision u/s 263 – Inquiry conducted by the A.O. – Inadequacy in conduct of inquiry – Revision bad in law

The PCIT vide his orders dated 28th March, 2019, interfered with the assessment orders dated 31st January, 2017 and 27th September, 2017 passed by the A.O. concerning the respondent / assessee pertaining to A.Ys. 2012-13 and 2013-14, respectively.

The PCIT had interfered with the original assessment orders because of a view held by him that interest earned by the assessee against fixed deposits was adjusted, i.e., deducted from the value of the inventory and not credited to the Profit & Loss account. The PCIT noted that the tax auditor, in the report filed in Form 3CD, had observed that interest earned on fixed deposits pertained to ‘other income’ and had not been credited to the P&L account. The interest earned on fixed deposits in A.Y. 2012-13 was Rs. 9,47,04,585, whereas in A.Y. 2013-14 it was Rs. 4,32,91,517.

Consequently, after the PCIT had issued two separate show cause notices to the assessee concerning the aforementioned A.Ys. dated 20th February, 2019 and had received replies against the same, he proceeded to pass two separate orders of even date, i.e., 28th March, 2019 concerning A.Ys. 2012-13 and 2013-14. The PCIT interfered with the orders of assessment on the ground that they had been passed without making any inquiries as to whether the interest earned by the assessee had any nexus with the real estate project the construction of which was undertaken by the assessee. Thus, according to the PCIT, the assessment orders were ‘erroneous’ insofar as they were prejudicial to the interests of the Revenue. In the appeals preferred before the Tribunal by the assessee, the view held by the PCIT was reversed. Thus, the Revenue approached the High Court by way of the instant appeals.

The High Court observed that it is not in dispute that the assessee was engaged, inter alia, in the business of promotion, construction and development of commercial projects. It is also not in dispute that the assessee had undertaken construction / development of a project allotted to it by the Haryana State Industrial and Infrastructure Development Corporation (‘HSIIDC’). It was observed that on 11th August, 2016, the Chartered Accountants of the assessee, i.e., BSR and Co. LLP, filed their response to certain queries raised by the A.O. at a hearing held before him on 9th August, 2016 concerning A.Y. 2013-14. One of the queries raised concerned the exclusion of interest received on fixed deposits from the category / head ‘income from other sources’. Likewise, in response to a notice dated 14th September, 2017 issued by the A.O. under sections 154 and 155 in respect of A.Y. 2012-13, a reply was submitted by the assessee on 12th October, 2017. In the notice dated 14th September, 2017, inter alia, it was brought to the attention of the assessee that audit scrutiny had, amongst others, raised objections regarding the interest earned on fixed deposits in A.Y. 2012-13 which was not credited to the P&L account and had been deducted from the value of inventory. The assessee had filed an appropriate reply.

The Court observed that having regard to the aforesaid documents, it cannot be said that the inquiry or verification was not carried out by the A.O. The Tribunal has recorded findings of fact concerning the inquiry made by the A.O.

The fact that the A.O. has not given reasons in the assessment order is not indicative, always, of whether or not he has applied his mind. Therefore, scrutiny of the record is necessary and while scrutinising the record the Court has to keep in mind the difference between lack of inquiry and perceived inadequacy in inquiry. Inadequacy in conduct of inquiry cannot be the reason based on which powers u/s 263 can be invoked to interdict an assessment order. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately.

The Income-tax Officer had made inquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given a detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the assessee. Such decision of the Income-tax Officer cannot be held to be ‘erroneous’ simply because in his order he did not offer an elaborate discussion in that regard. The A.O., having received a response to his query about the adjustment of interest in the A.Y.s concerned, against inventory, concluded that there was a nexus between the receipt of funds from investors located abroad and the real estate project, which upon being invested generated interest. Thus, it cannot be said that the conclusion arrived at by the A.O., that such adjustment was permissible in law, was erroneous.

The Court observed that in the instant cases, it was not as if the funds were surplus and therefore invested in a fixed deposit. The funds were received for the real estate project and while awaiting their deployment, they were invested in a fixed deposit which generated interest.

Furthermore, the Court observed that it need not examine whether Clauses (a) and (b) of Explanation 2 appended to section 263 could have been applied to the A.Y.s in question since, on facts, it has been found by the Tribunal that an inquiry was, indeed, conducted by the A.O.

Thus, for the reasons stated, the Revenue appeals are dismissed.

Direct tax Vivad se Vishwas – Appellant – Communication of assessment order – Order must be served in accordance with section 282 of the Act – Time limit to file appeal had not expired as petitioner had not received the assessment order

9 Ashok G. Jhaveri vs. Union of India & Others [Writ petition No. 722 of 2021; Date of order: 28th July, 2021 (Bombay High Court)]

Direct tax Vivad se Vishwas – Appellant – Communication of assessment order – Order must be served in accordance with section 282 of the Act – Time limit to file appeal had not expired as petitioner had not received the assessment order

The petitioner had filed a return of income for A.Y. 2012-13 in March, 2013, declaring a total income of Rs. 7,02,170. The respondent issued a notice u/s 148 reopening the assessment for the said A.Y. 2012-13 in March, 2019.

According to the petitioner, he received a notice u/s 274 r/w/s 271 (1)(c) on 25th December, 2019 via e-mail and the said notice was also uploaded on his e-filing portal account. He had responded to the same through the e-filing portal on 23rd January, 2020, pointing out that he had not received the assessment order u/s 143(3) r/w/s 147, nor had the same been uploaded on the e-filing portal and therefore he was unable to reply to the show cause notice.

The petitioner had requested the respondent to send the assessment order to the address mentioned in his letter dated 29th January, 2020 filed on 3rd February, 2020. The petitioner was issued a letter by respondent No. 4, referring to the outstanding demand and directed to pay 20% of the outstanding demand amount. The petitioner once again, by an on-line response dated 8th February, 2020, communicated that the assessment order has not been received at his end; neither was the order uploaded on the e-filing portal nor was it served with the Notice of Demand u/s 156.

In the meantime, the Direct Tax Vivad se Vishwas Act, 2020 (‘DTVSV Act, 2020’) came into force under a Notification dated 17th March, 2020 to help settle matters in respect of disputed tax. The petitioner once again approached the respondents to issue the assessment order. He received the assessment order on 15th December, 2020 – which had been passed on 22nd December, 2019.

Now, u/s 2(1)(a)(ii) of the DTVSV Act, the term ‘appellant’ is defined as being an assessee in whose case the assessment order is passed by the A.O. and the time limit to file an appeal against such order has not expired on 31st January, 2020. The petitioner had opted for the DTVSV scheme by filing an application on 23rd December, 2020 in Forms 1 and 2 of the DTVSV Act and Rules thereunder. However, the status of the application filed by him under the DTVSV scheme showed that the application had been rejected for the reason that he had not filed any appeal against the order in respect of which he wished to avail benefit (an assessee has to file an appeal on or before 31st January, 2020) and since the appeal had not been filed, it did not fulfil the criteria prescribed under the DTVSV Act.

According to the petitioner, while the time limit to file appeal is 30 days from the date of communication of notice of demand u/s 249(2)(b), the benefit of the scheme under the DTVSV Act, 2020 would be available to him as the time limit to file an appeal had not expired because he had not received the assessment order despite repeated requests.

The respondents contended that the petitioner had been given an intimation letter through the e-proceedings on 22nd December, 2019 and, thus, it has to be presumed that the assessment order has been issued and served. It was submitted that the petitioner’s claim of non-receipt of assessment order through the on-line filing portal is difficult to be appreciated as there is no such grievance by any other assessee. Ordinarily, the assessment order is sent alongside. As such, non-receipt of assessment order through on-line filing portal is not probable; therefore, it cannot be said that the order was not issued to the assessee.

On verification, the respondents informed the Court that it does not appear that attachment of assessment order had accompanied the intimation.

In this context, the Court referred to section 282 which refers to service of notice. On perusal of the same, the Court observed that it is clear that the service of an order ought to have been made by delivering or transmitting a copy thereof in the manner contained in section 282, which admittedly had not been done until 15th December, 2020.

The Court observed that this was a peculiar case where the assessment order of 22nd December, 2019 had not been served upon the petitioner till he obtained a copy on 15th December, 2020 and as can be seen from the aforesaid discussion, the petitioner was handicapped from lodging an appeal before the specified date, i.e., 31st January, 2020 for no fault of his. In the circumstances, it would emerge that the petitioner would be able to avail benefit of the term ‘appellant’ under section 2(1)(a)(ii) of the DTVSV Act.

The Court also noted that in Circular No. 9 of 2020 dated 22nd April, 2020 in its reply to Question Nos. 1 and 23, it has been stated that where any order has been passed under the Act and the time limit to file an appeal has not expired on 31st January, 2020, then the assessee can very well opt for the said scheme. The purpose and object behind bringing in the DTVSV Act is to provide resolution of disputed tax matters and to put an end to litigation and unlock revenue detained under litigation.

The respondents were directed to consider the petitioner’s application in accordance with the provisions of the DTVSV Act and Rules. The petition was allowed.

Writ – Notice u/s 148 – Writ petition against notice – Court holding notice invalid – Directions could not be issued once reassessment held to be without jurisdiction

50 T. Stanes and Company Ltd. vs. Dy. CIT [2021] 435 ITR 539 (Mad) A.Ys.: 2010-11, 2011-12; Date of order: 9th October, 2020 Ss. 147, 148 of ITA, 1961; and Art. 226 of Constitution of India

Writ – Notice u/s 148 – Writ petition against notice – Court holding notice invalid – Directions could not be issued once reassessment held to be without jurisdiction

Writ petitions were filed by the assessee contending that the notices issued u/s 148 to reopen the assessment u/s 147 for the A.Ys. 2010-11 and 2011-12 were without jurisdiction being based on change of opinion. The single judge held that the reassessment was without jurisdiction but observed that the A.O. could proceed on other grounds.

The Division Bench of the Madras High Court allowed the appeals filed by the assessee and held as under:

‘The findings rendered by the single judge and his order to the extent of holding that the reassessment proceedings u/s 147 were without jurisdiction, were to be confirmed but his directions / observations were set aside. Having held that the reassessment proceedings were without jurisdiction, to make any further observation / direction was not sustainable.’

Special deduction u/s 80JJAA – Employment of new employees – Return of income – Delay in filing revised return claiming benefit u/s 80JJAA – Submission of audit report along with return – Substantive benefit cannot be denied on ground of procedural formality – Assessee entitled to benefit u/s 80JJAA

49 Craftsman Automation P. Ltd. vs. CIT [2021] 435 ITR 558 (Mad) A.Y.: 2004-05; Date of order: 6th February, 2020 Ss. 80JJAA, 139(5), 264 of ITA, 1961

Special deduction u/s 80JJAA – Employment of new employees – Return of income – Delay in filing revised return claiming benefit u/s 80JJAA – Submission of audit report along with return – Substantive benefit cannot be denied on ground of procedural formality – Assessee entitled to benefit u/s 80JJAA

The assessee was entitled to deduction u/s 80JJAA. For the A.Y. 2004-05, the assessee had not claimed deduction u/s 80JJAA in the return of income. The assessee filed a revised return making a claim for deduction u/s 80JJAA and claimed refund. The A.O. refused to act on the revised return.

The Commissioner rejected the revision application u/s 264 on the grounds that according to sub-section (2) of section 80JJAA, deduction could not be allowed unless the assessee furnished with the return of income the report of the accountant, as defined in the Explanation below sub-section (2) of section 288 giving such particulars, and that the revised return was filed beyond the period of limitation prescribed u/s 139(5). The assessee filed this writ petition and challenged the order u/s 264. The Madras High Court allowed the writ petition and held as under:

‘i) If an assessee is entitled to a benefit, a technical failure on the part of the assessee to claim the benefit in time should not come in the way of grant of the substantial benefit that was otherwise available under the Income-tax Act, 1961 but for such technical failure. The legislative intent is not to whittle down or deny benefits which are legitimately available to an assessee. The A.O. is duty-bound to extend substantive benefits which are available and arrive at just tax to be paid.

ii) The failure to file a return within the period u/s 139 for the purpose of claiming benefit of deduction u/s 80JJAA was a procedural formality. The assessee was entitled to benefit u/s 80JJAA.

iii) Denial of substantive benefit could not be justified. It was precisely for dealing with such situations that powers had been vested with superior officers like the Commissioner u/s 264. The Commissioner ought to have allowed the revision application filed by the assessee u/s 264 and the assessee was entitled to partial relief.

Accordingly, the order of the Commissioner was set aside and the Assistant Commissioner directed to pass appropriate orders on the merits ignoring the delay on the part of the assessee in filing the revised return u/s 139(5) and failure to furnish the audit report.’

Recovery of tax – Set-off of refund – Stay of demand – Pending appeal against assessment order for A.Y. 2013-14 – Set-off of demand of A.Y. 2013-14 against refund of A.Ys. 2014-15 to 2016-17 – Effect of circulars, instructions and guidelines issued by CBDT – Excess amount recovered over and above according to such circulars, instructions and guidelines to be refunded with interest – A.O. restrained from recovering balance tax due till disposal of pending appeal

48 Vrinda Sharad Bal vs. ITO [2021] 435 ITR 129 (Bom) A.Ys.: 2012-13 to 2019-20; Date of order: 25th March, 2021 Ss. 220(6), 237, 244A, 245 of ITA, 1961

Recovery of tax – Set-off of refund – Stay of demand – Pending appeal against assessment order for A.Y. 2013-14 – Set-off of demand of A.Y. 2013-14 against refund of A.Ys. 2014-15 to 2016-17 – Effect of circulars, instructions and guidelines issued by CBDT – Excess amount recovered over and above according to such circulars, instructions and guidelines to be refunded with interest – A.O. restrained from recovering balance tax due till disposal of pending appeal

The assessee was a developer. For the A.Y. 2013-14, a demand notice was issued, that during the pendency of his appeal against the assessment order an amount of Rs. 1,38,34,925 was collected by the Department adjusting the refunds pertaining to the A.Ys. 2014-15, 2015-16 and 2016-17. On an application for stay of recovery of demand, the A.O. passed an order of stay for the recovery of balance of tax due for the A.Y. 2013-14, reserving the right to adjust the refund that arose against the demand.

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

‘i) The Centralised Processing of Return of Income Scheme, 2011 was introduced under Notification dated 4th January, 2012 ([2012] 340 ITR (St.) 45] in exercise of the powers u/s 143(1A) with a view to process a return of income expeditiously. Clause 10 of the scheme states that set-off of refund arising from the processing of return against tax remaining payable will be done by using details of the outstanding demand as uploaded on to the system by the A.O. Sub-section 143(1B) provides that for the purpose of giving effect to the scheme made under sub-section (1A), a notification with respect to application or non-application of any provisions relating to processing of the return may be issued. Having regard to the context of sections 143(1A) and 143(1B), it does not appear that clause 10 under the scheme is intended to be read out of the context isolatedly (sic). The scheme pursuant to section 143(1A) will have to be taken into account along with the other provisions of the Act and would take within its fold instructions issued by the CBDT from time to time. It does not appear that the clause is in derogation of operation of the provisions and instructions or would render the provisions and the instructions insignificant and redundant. Clause 10 will have to be read in the context of the provisions in the Act governing refund and orders, circulars, instructions issued from time to time.

ii) Set-off of refund under the clause is to be done by using details of the Income-tax demand against the person uploaded on to the system. The exercise of power to have set-off or adjustment of refund is regulated by legislative provisions and instructions. The details referred to in the clause would have to correspond to the provisions and instructions operating. Function under the clause would be circumscribed by them and it would be incongruous to consider that uploading referred to in clause 10 would mean all refunds arising are liable to be adjusted against the tax demands irrespective of orders thereon by the authorities and / or subsisting instructions and the provisions applicable.

iii) The amount recovered from the assessee over and above the amount as per instructions, memoranda, circulars towards demand of tax for the A.Y. 2013-14 pending in appeal would be returned to the assessee with interest and the refund of amounts over and above the amount as per circulars, instructions and guidelines issued by the CBDT may not be adjusted towards tax demand for the A.Y. 2013-14 till disposal of the appeal. Having regard to the instructions, circulars and memoranda issued from time to time, which were not disputed by the Department, it would be expedient that the A.O. refrained from recovering tax dues demanded for the A.Y. 2013-14 and a restraint was called for.’

Penalty – Concealment of income or furnishing of inaccurate particulars – Method of accounting – Claim of deduction in return filed in response to notice u/s 153A in accordance with change in accounting method and prevailing law – New claim made because of change in accounting policy – Not a case of concealment of income or furnishing of inaccurate particulars – Findings of fact – Tribunal justified in upholding order of Commissioner (Appeals) that penalty was not imposable

47 Principal CIT vs. Taneja Developers and Infrastructure Ltd. [2021] 435 ITR 122 (Del) A.Y.: 2007-08; Date of order: 24th March, 2021 Ss. 132, 145, 153A, 271(1)(c) of ITA, 1961

Penalty – Concealment of income or furnishing of inaccurate particulars – Method of accounting – Claim of deduction in return filed in response to notice u/s 153A in accordance with change in accounting method and prevailing law – New claim made because of change in accounting policy – Not a case of concealment of income or furnishing of inaccurate particulars – Findings of fact – Tribunal justified in upholding order of Commissioner (Appeals) that penalty was not imposable

The search in the TP group led to the proceedings u/s 153A against the assessee for the A.Y. 2007-08. The assessee filed a fresh return in which a cumulative expenditure comprising interest paid on borrowings, brokerage and other expenses was claimed on an accrual basis. The A.O. found that such expenses were not claimed in the original return filed by the assessee u/s 139 and disallowed the claim in his order u/s 153A / 143(3). The Commissioner (Appeals) sustained the addition made by the A.O. Thereafter, the A.O. initiated penalty proceedings and levied penalty u/s 271(1)(c). Before the Tribunal, the assessee gave up its challenge to the disallowance of its claimed expenses by the A.O. and accordingly, the disallowance of the expenses ordered by the A.O. and sustained by the Commissioner (Appeals) remained.

The Commissioner (Appeals) set aside the penalty order passed by the A.O. The Tribunal held that the assessee had made a fresh claim in its return filed u/s 153A of the proportionate expenditure, which was originally claimed, partly in the original return and the balance in the return u/s 153A, that such balance was already shown in the project expenditure for that year at the close of the year which was carried forward in the next year as opening project work-in-progress, that therefore, in the subsequent year it was also claimed as expenditure and that there was no infirmity in the order of the A.O. with respect to that finding. However, the Tribunal rejected the Department’s appeal with respect to the levy of penalty.

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

‘i) Where the basic facts were disclosed or where a new claim was made because of a change in the accounting policy, albeit in a fresh return, and given up because the law, as declared, did not permit such a claim, in such circumstances initiation of penalty proceedings u/s 271(1)(c) against the assessee was not mandated in law. The assessee had brought about a change in the accounting policy vis-a-vis borrowings, brokerage and other expenses in line with Accounting Standard 7 which permitted the assessee to make a new claim for deduction of such expenses, on an accrual basis, in the A.Y. 2007-08. However, the assessee had, in its original return, claimed deduction of a portion of such expenses based on an accounting policy (i. e., a percentage of completion method) which was prevalent at that point in time. Those facts were in the knowledge of the Department and such expenses which were sought to be claimed, on an accrual basis, constituted a fresh claim which was embedded in the fresh return filed u/s 153A.

ii) In the quantum appeal, the assessee had given up its claim of the expenses, for the reason that it was a new claim which was sought to be incorporated in the fresh return, which was made on an accrual basis as the assessment was completed and the fresh return filed by the assessee, pursuant to the proceedings taken out u/s 132 read with section 153A, did not give the assessee the leeway to sustain such claim, since no incriminating material was found during the search. The assessment for the A.Y. 2007-08 stood completed before the search. The assessee had neither concealed the particulars of its income nor furnished inaccurate particulars of income which were the prerequisites for imposition of penalty.

The conclusion reached by the Tribunal that the penalty imposed by the A.O. was correctly cancelled by the Commissioner (Appeals) need not be interfered with. No question of law arose.’

Export – Exemption u/s 10B – Scope – Meaning of ‘computer software’ – Engineering and design included in computer software – Assessee engaged in export of customised electronic data relating to engineering and design – Entitled to exemption u/s 10B

46 Marmon Food and Beverage Technologies India (P) Ltd. vs. ITO [2021] 435 ITR 327 (Karn) A.Y.: 2009-10; Date of order: 9th April, 2021 S. 10B of ITA, 1961

Export – Exemption u/s 10B – Scope – Meaning of ‘computer software’ – Engineering and design included in computer software – Assessee engaged in export of customised electronic data relating to engineering and design – Entitled to exemption u/s 10B

The assesse (appellant) is a 100% export-oriented undertaking engaged in the business of export of customised electronic data according to the requirements of its customers. The requirement is received in electronic format and it is again delivered in electronic format pertaining to various activities in the field of engineering and design. For the A.Y. 2009-10 the assessee filed its return of income declaring ‘Nil’ income after claiming deduction of Rs. 1,80,27,563 u/s 10B. The A.O. denied the claim for deduction u/s10B.

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) Under section 10B, newly-established 100% export-oriented undertakings are entitled to 100% deduction of export profits. Prior to its substitution, section 10B has been operative from 1st April, 1989. With a view to enlarging the scope of the tax holiday to 100% export-oriented undertakings approved by the prescribed authority, an Explanation for the term “produce” had been inserted in section 10B to include production of computer programmes by the Finance Act, 1994.

ii) A tax holiday was given to certain assessees importing and exporting electronic data and as it was a new subject under the Act, the Central Board of Direct Taxes (CBDT) was empowered to notify certain services of customised electronic data or any products or services to mean “computer software” eligible for deduction. The CBDT, in exercise of powers conferred under Explanation 2(i)(b) to section 10B, has notified certain information technology-enabled products or services by Notification dated 26th September, 2000 ([2000] 245 ITR (St.) 102]. The Notification… is a clarificatory Circular and it has been issued in exercise of the powers conferred under Explanation 2(i)(b) to section 10B of the Income-tax Act. The CBDT has notified certain services of customised electronic data or products or services to mean the computer software eligible for deduction. The intention of the Notification was not to constrain or restrict, but to enable the Board to include several services or products within the ambit of the provisions of section 10B and this is precisely what has been done by the Board.

iii) The term “computer software” means: (a) a set of instructions expressed in words, codes, schemes or in any other form capable of causing a computer to perform a particular task or achieve a particular result; (b) a sequence of instructions written to perform a specified task for a computer. The same programme in its human-readable source code form, from which executable programmes are derived, enables a programmer to study and develop its algorithms; (c) a set of ordered instructions that enable a computer to carry out a specific task; (d) written programmes or procedures or rules and associated documentation pertaining to the operation of a computer system. Engineering and design finds place in the CBDT Notification dated 26th September, 2000. The Act nowhere provides for a definition of “engineering and design” and the requirement for availing of the benefit of deduction as reflected from section 10B read with the Notification… is fulfilled when the assessee has finally developed a computer programme only. Under section 10B no certificate is required under any regulatory authority.

It is a settled proposition of law that a co-ordinate bench of the Tribunal is required to follow the earlier decisions and in case there is a difference of opinion, the matter may be referred to a larger bench.

From the documents on record, it could be safely gathered that the assessee was engaged in the activity of engineering designs, redesigns, testing, modifying, prototyping and validation of concept. The assessee was also engaged in the activity of providing manufacturing support and computer-aided design support to its group companies. The assessee captured the resultant research of the activity in a customised data both in computer-aided design and other software platforms and for the purposes of carrying (out) these activities, the assessee employed engineers and other technical staff for various research projects undertaken by them. The assessee exported the software data. The activities carried out by the assessee like analysing or duplicating the reported problems, developing and building, testing products, carrying out tests, design and development had to be treated as falling within the scope of section 10B with or without the aid of section 10BB. Thus, the assessee was certainly eligible for deduction u/s 10B.

Another important aspect of the case was that in respect of the eligibility of claim of deduction u/s 10B, in respect of the same assessee it had been accepted by the Department for the A.Ys. 2006-07 to 2008-09. The assessee was entitled to the deduction u/s 10B for the A.Y. 2009-10.’

Business expenditure – Clearing and forwarding business – Payment of speed money to port labourers through gang leaders to expedite completion of work – Acceptance of books of accounts and payments supported by documentary evidence – Payment of speed money accepted as trade practice – Restriction of disallowance on the ground vouchers for cash payments were self-made – Unjustified

45 Ganesh Shipping Agency vs. ACIT [2021] 435 ITR 143 (Karn) A.Ys.: 2007-08 to 2009-10; Date of order: 6th February, 2021 S. 37 of ITA, 1961

Business expenditure – Clearing and forwarding business – Payment of speed money to port labourers through gang leaders to expedite completion of work – Acceptance of books of accounts and payments supported by documentary evidence – Payment of speed money accepted as trade practice – Restriction of disallowance on the ground vouchers for cash payments were self-made – Unjustified

The assessee was a firm which carried on business as a clearing and forwarding and steamer agent. For the A.Ys. 2007-08, 2008-09 and 2009-10, the A.O. disallowed, u/s 37, 20% of the expenses incurred by the assessee as speed money which was paid to the workers for speedy completion of their work on the grounds that (a) the assessee produced self-made cash vouchers for the cash payments to each gang leader, (b) the identity of the gang leader was not verifiable, and (c) the recipients were not the assessee’s employees.

The Commissioner (Appeals) restricted the disallowance to 10% which was confirmed by the Tribunal.

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

‘i) The authorities had accepted the books of accounts produced by the assessee. The A.O., in his order, had admitted that the payment of speed money was a trade practice which was followed by the assessee and similar business concerns functioning for speedy completion of their work. However, the disallowance of 20% of the expenses was made solely on the ground that the assessee had produced self-made cash vouchers and the finding had been affirmed by the Commissioner (Appeals) and the Tribunal.

ii) However, the books of accounts had not been doubted by any of the authorities. The Tribunal was not justified in sustaining the disallowance of expenses at 10% of the expenses paid to port workers as incentive by the assessee in relation to the A.Ys. 2007-08, 2008-09 and 2009-10.

iii) In the result, the impugned order of the Tribunal dated 29th May, 2015 insofar as it contains the findings to the extent of disallowance of 10% of the expenses incurred by the assessee in relation to the A.Ys. 2007-08, 2008-09 and 2009-10 is hereby quashed. Accordingly, the appeal is allowed.’

Assessment – Limitation – Computation of period of limitation – Exclusion of time taken to comply with direction of Court – Meaning of ‘direction’ in section 153(3) – Court remitting matter to A.O. asking him to give assessee opportunity to be heard – Not a direction within meaning of section 153(3) – No exclusion of any time in computing limitation

44 Principal CIT vs. Tally India Pvt. Ltd. [2021] 434 ITR 137 (Karn) A.Y.: 2008-09; Date of order: 6th April, 2021 S. 153 of ITA, 1961

Assessment – Limitation – Computation of period of limitation – Exclusion of time taken to comply with direction of Court – Meaning of ‘direction’ in section 153(3) – Court remitting matter to A.O. asking him to give assessee opportunity to be heard – Not a direction within meaning of section 153(3) – No exclusion of any time in computing limitation

For the A.Y. 2008-09, the case of the assessee was referred to the Transfer Pricing Officer (TPO) for computation of the arm’s length price u/s 92C. The Court by an order restrained the TPO from proceeding to pass a draft assessment order for a period up to 7th March, 2012, i.e., approximately three months. The writ petition was disposed of by the Court by order dated 7th March, 2012 remitting the matter to the A.O. and directing the assessee to appear before the A.O. on 21st March, 2012. The TPO, by an order dated 13th June, 2012 after affording an opportunity to the assessee, passed a draft order of assessment on 5th July, 2012 and forwarded it to the assessee on 11th July, 2012. The assessee filed objections before the Dispute Resolution Panel which passed an order on 22nd April, 2013. The A.O. passed a final order on 31st May, 2013.

The Tribunal held that the draft assessment was completed by the A.O. on 5th July, 2012, beyond the period of limitation.

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

‘i) Section 153 lays down the period of limitation for assessment. Section 153(3) states that in computing the period of limitation, the time taken to comply with a direction of the court is to be excluded. Section 153(3)(ii) applies to cases where any direction is issued either by the appellate authority, revisional authority or any other authority to decide an issue. The Supreme Court in Rajinder Nath vs. CIT and ITO vs. Murlidhar Bhagwan Das has held that a finding given in an appeal, revision or reference arising out of an assessment must be a finding necessary for disposal of a particular case. Similarly, a direction must be an expressed direction necessary for disposal of the case before the authority or court and must also be a direction which the authority or court is empowered to give while deciding a case before it. A direction issued to remit the matter and asking the assessee to appear before the A.O. on a particular date does not amount to either issuing a direction or finding within the meaning of section 153(3)(ii).

ii) It was evident that the order dated 7th March, 2012 passed by the Court neither contained any finding nor any direction. The Tribunal was right in holding that the draft assessment was completed by the A.O. on 5th July, 2012, which was beyond the period of limitation.’

Appeal to Appellate Tribunal – Appeal to Commissioner (A) – Powers of Commissioner (A) – Commissioner (A) can call for and examine fresh material – Power of Tribunal to remand matter – Power must be exercised judiciously – A.O. rejecting claim for deduction – Commissioner (A) considering fresh documents and allowing deduction – Tribunal not justified in remanding matter to A.O.

43 International Tractors Ltd. vs. Dy. CIT(LTU) [2021] 435 ITR 85 (Del) A.Y.: 2007-08; Date of order: 7th April, 2021 Ss. 80JJAA, 250(4) of ITA, 1961

Appeal to Appellate Tribunal – Appeal to Commissioner (A) – Powers of Commissioner (A) – Commissioner (A) can call for and examine fresh material – Power of Tribunal to remand matter – Power must be exercised judiciously – A.O. rejecting claim for deduction – Commissioner (A) considering fresh documents and allowing deduction – Tribunal not justified in remanding matter to A.O.

In the return filed for the A.Y. 2007-08, the assessee had failed to claim the deductions both u/s 80JJAA and qua prior period expenses. The deduction u/s 80JJAA was at Rs. 1,07,33,164 and the prior period expenses were quantified at Rs. 51,21,024. These deductions were claimed by the assessee before the A.O. by way of a communication dated 14th December, 2009 filed with him. This statement, admittedly, was accompanied by a Chartered Accountant’s report in the prescribed form (i.e., form 10DA). Furthermore, the details concerning prior period expenses were also provided by the assessee. The A.O., however, declined to entertain the two deductions claimed by the assessee.

The Commissioner (Appeals) allowed the appeal of the assessee. The Tribunal remanded the matter to the A.O.

On appeal by the assessee, the Delhi High Court set aside the order of the Tribunal and held as under:

‘If a claim is otherwise sustainable in law, the appellate authorities are empowered to entertain it. The Commissioner (Appeals) in the exercise of his powers u/s 250(4) is entitled to call for production of documents or material to satisfy himself as to whether or not the deductions claimed were sustainable and viable in law.

Insofar as the deduction claimed u/s 80JJAA was concerned, the Commissioner (Appeals) not only had before him the Chartered Accountant’s report in the prescribed form, i.e., form 10DA, but also examined the details concerning the new regular workmen, numbering 543, produced before him. In this context, the Commissioner (Appeals) examined the details concerning the dates when the workmen had joined the service, the period during which they had worked, relatable to the assessment year at issue, as also the details concerning the bank accounts in which remuneration was remitted. Based on this material, the Commissioner (Appeals) concluded that the deduction u/s 80JJAA was correctly claimed by the assessee. Likewise, insofar as prior period expenses were concerned, out of a total amount of Rs. 51,21,024 claimed by the assessee, a sum of Rs. 24,78,391 was not allowed for the reason that withholding tax had not been deducted by the assessee. The assessee had disclosed the same in its communication dated 14th December, 2009 placed before the A.O.

All that the Tribunal was required to examine was whether the Commissioner (Appeals) had scrupulously verified the material placed before him before allowing the deductions claimed by the assessee. The Tribunal, however, instead of examining this aspect of the matter, observed, incorrectly, that because an opportunity was not given to the A.O. to examine the material, the matter needed to be remanded to the A.O. for a fresh verification. The judgment of the Tribunal deserved to be set aside. The fresh claims made by the assessee, as allowed by the Commissioner (Appeals), were to be sustained.’

Provisions of section 68 would not apply in case where shares are allotted in lieu of self-generated goodwill wherein there is no movement of actual sum of money

39 ITO vs. Zexus Air Services (P) Ltd. [(2021) 88 ITR(T) 1 (Del-Trib)] IT Appeal No. 2608 (Del) of 2018 A.Y.: 2014-15; Date of order: 23rd April, 2021

Provisions of section 68 would not apply in case where shares are allotted in lieu of self-generated goodwill wherein there is no movement of actual sum of money

FACTS
The assessee company wanted to establish itself in the aviation industry for which an aviation license from the Ministry of Civil Aviation was required. A precondition for procuring this license was that the company must have authorised share capital of at least Rs. 20 crores. One of the directors of the assessee company who had expertise and experience of the industry, helped it to procure the said aviation license. The assessee company allotted shares of Rs. 20 crores to this director by recognising the efforts made by him in the form of ‘goodwill’. Accordingly, Rs. 20 crores was credited to the share capital and a corresponding debit entry was made in the form of self-generated ‘goodwill’. There was no actual flow of money and this was merely a book entry. Documents filed by the assessee company before the ROC in relation to increase in the authorised capital also mentioned that the said shares were allotted in lieu of the ‘blessings and efforts’ of the said director.

But the A.O. held that the assessee company could not substantiate the basis or provide any evidence to justify the value of the goodwill. It was contended that the company had adopted a colourable device to evade taxes. Accordingly, an addition of Rs. 20 crores u/s 68 was made.

The assessee company argued that the provisions of section 68 would not apply in the present facts of the case because there was no actual movement of money and hence it was a tax-neutral transaction. Reliance was placed on the decision of the Delhi High Court in the case of Maruti Insurance Distribution Services Ltd. vs. CIT [2014] 47 taxmann.com 140 (Delhi) wherein it was held that it was the decision of the businessmen to decide and value its goodwill. Concurring with this contention, the CIT(A) deleted the addition made u/s 68.

HELD
It was an undisputed fact that there was no actual receipt of any money by the assessee company; and when the cash did not pass at any stage and when the respective parties did not receive cash nor did they pay any cash, there was no real credit of cash in the cash book and, therefore, the provisions of section 68 would not be attracted. Reliance was placed on the following decisions:

a) ITO vs. V.R. Global Energy (P) Ltd. [2020] 407 ITR 145 (Madras High Court), and
b) ACIT vs. Suren Goel [ITA No. 1767 (Delhi) of 2011].

Reference was also made to the decision in the case of ACIT vs. Mahendra Kumar Agrawal [2012] 23 taxmann.com 285 (Jaipur-Trib) wherein it was held that the term ‘any sum’ used in section 68 cannot be taken as parallel to ‘any entry’.

An identical matter had come up before the Kolkata Tribunal in the case of ITO vs. Anand Enterprises Ltd. [ITA No. 1614 (Kol) of 2016] wherein, referring to the decision of the Supreme Court in the case of Shri H.H. Rama Varma vs. CIT 187 ITR 308 (SC), the Tribunal held that the term ‘any sum’ means ‘sum of money’; accordingly, in the absence of any cash / monetary inflow, addition u/s 68 cannot be made.

Section 2(47) r/w/s 50C – If there is a gap between the date of execution of sale agreement and the sale deed and if the guidance value changes, the guidance value as on the date of agreement has to be considered as the full consideration

38 Prakash Chand Bethala vs. Dy. CIT [(2021) 88 ITR(T) 290 (Bang-Trib)] IT Appeal No. 999 (Bang) of 2019 A.Y.: 2007-08; Date of order: 28th January, 2021

Section 2(47) r/w/s 50C – If there is a gap between the date of execution of sale agreement and the sale deed and if the guidance value changes, the guidance value as on the date of agreement has to be considered as the full consideration

FACTS
The assessee was an HUF that had acquired a property by participating in a BDA auction. The agreement for acquisition of the property took place on 24th July, 1984 and the assessee had acquired possession on 29th August, 1984.

One R.K. Sipani (RKS) acquired the aforesaid property from the assessee through M/s K. Prakashchand Bethala Properties Pvt. Ltd. (KPCBBL) through an oral agreement in the month of September, 1989 for the consideration of Rs. 9.80 lakhs. The assessee gave the possession of the property to RKS on 24th October, 1989. Thereafter, on 8th March, 1993, an unregistered sale agreement was made between the assessee and RKS to bring clarity on the aforementioned transaction. Then, on 9th March, 2007, a sale deed was executed in which the aforesaid site was sold to M/s Suraj Properties (a proprietary concern of RKS’s wife) for the consideration of Rs. 9.80 lakhs.

The A.O. noticed that the guidance value of the property as per the executed sale deed on 9th March, 2007 was Rs. 2.77 crores and the sale consideration was less than the guidance value; thus, the provisions of section 50C were attracted. On appeal, the CIT(A) also confirmed the action of the A.O. Aggrieved by the order, the assessee filed an appeal before the Tribunal.

HELD
The question before the Tribunal was what could be the full value of such consideration, i.e., whether the value on which the stamp duty was paid at the time of the sale deed or the value declared in the sale agreement.

The Tribunal observed that the assessee had entered into the sale agreement on 8th March, 1993 and a major portion of the agreed consideration had been received by the assessee through account payee cheque and possession of the property was also handed over to RKS on 24th October, 1989. There is no dispute regarding these facts. The only action pending was actual registration of the sale deed.

The Tribunal observed that section 50C(1) provides that if there is a gap between the date of execution of the sale agreement and the sale deed and if the guidance value changes, the guidance value as on the date of the agreement has to be considered as the full consideration of the capital asset. In the present case,
1) the enforceable agreement was entered into on 8th March, 1993 by payment of a major portion of the sale consideration,
2) the possession of the property had already been handed over on 24th October, 1989,
3) only the formal sale deed was executed on 9th March, 2007.

Therefore, the Tribunal held that the transfer had taken place vide the sale agreement dated 8th March, 1993 and full value of consideration for the purpose of computing long-term capital gain in the hands of the assessee has to be adopted only on the basis of the guidance value of the property as on the date of the sale agreement, i.e., 8th March, 1993, and not on the date of the sale deed of 9th March, 2007. Accordingly, there was no applicability of section 50C in the year 2007-08.

Business income – Proviso to S. 43CA(1) and the subsequent amendment thereto relates back to the date on which the said section was made effective, i.e., 1st April, 2014

37 Stalwart Impex Pvt. Ltd. vs. ITO [(2021) TS-615-ITAT-2021 (Mum)] A.Y.: 2016-17; Date of order: 2nd July, 2021 Section 43CA

Business income – Proviso to S. 43CA(1) and the subsequent amendment thereto relates back to the date on which the said section was made effective, i.e., 1st April, 2014

FACTS
During the previous year relevant to the assessment year under consideration, the assessee, engaged in the construction of commercial and residential housing projects, sold flats to various buyers. In respect of three flats the A.O. held that the stamp duty value (SDV) is more than their agreement value. The total agreement value of the said three flats was Rs. 97,11,500 whereas their SDV was Rs. 1,09,83,000. Upon an objection being raised by the assessee, the A.O. made a reference to the Department Valuation Officer (DVO) for determining the market value of the said flats. The DVO determined the market value of the three flats to be Rs. 1,03,93,000. However, before receipt of the report of the DVO, the A.O. made the addition of the difference between the SDV and the agreement value of the said three flats, i.e., Rs. 12,71,500, u/s 43CA.

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 difference between the agreement value and the value determined by the DVO is approximately 7%. On behalf of the assessee it was contended that since the difference is less than 10%, no addition should be made. The Tribunal noted that a similar issue had come up before the Tribunal in the case of Radhika Sales Corporation vs. Addl. CIT [ITA No. 1474/Pune/2016, A.Y. 2011-12, order dated 16th November, 2018 and the Tribunal while deciding the issue deleted the addition made and observed that ‘since difference between the value declared by the assessee and the value determined by the DVO is less than 10%, no addition in respect of long-term capital gain is warranted.’ The Tribunal observed that while the said decision was rendered in the context of section 50C and the addition in the instant case is u/s 43CA, both the provisions are pari materia and therefore the decision rendered u/s 50C would hold good for interpreting section 43CA as well. The Tribunal held that where the difference between the sale consideration declared by the assessee and the SDV of an asset (other than capital asset), being land or building, or both, is less than 10%, no addition u/s 43CA is warranted.

The Tribunal observed that the Finance Act, 2018 inserted a proviso to section 43CA(1) providing 5% tolerance limit in variation between declared sale consideration vis-à-vis SDV for making no addition. A similar proviso was inserted by the Finance Act, 2018 to section 50C(1). The said tolerance band was enhanced from 5% to 10% by the Finance Act, 2020 w.e.f. 1st April, 2021. The Tribunal in the case of Maria Fernandes Cheryl vs. ITO (International Taxation) 123 taxmann.com 252 (Mum) after considering various decisions and the CBDT Circular No. 8 of 2018 dated 26th December, 2018 held that the amendment is retrospective in nature and relates back to the date of insertion of the statutory section to the Act.

The Tribunal held that both sections are similarly worded except that both the sections have application on different sets of assessees. The proviso has been inserted and subsequently the tolerance band limit has been enhanced to mitigate the hardship of genuine transactions in the real estate sector. Considering the reasoning given for insertion of the proviso and exposition by the Tribunal for retrospective application of the same, the Tribunal held that the proviso to section 43CA(1) and the subsequent amendment thereto relates back to the date on which the said section was made effective, i.e., 1st April, 2014.

The Tribunal allowed the appeal filed by the assessee.

Business Expenditure – Swap charges paid to convert a floating rate loan to a fixed rate loan are allowable as deduction – Since interest was allowed when loan carried floating rate the character of transaction does not change by swapping from floating to fixed rate

36 Owens-Corning (India) Pvt. Ltd. vs. ITO [(2021) TS-517_ITAT-2021 (Mum)] A.Y.: 2003-04; Date of order: 25th June, 2021 Section 37

Business Expenditure – Swap charges paid to convert a floating rate loan to a fixed rate loan are allowable as deduction – Since interest was allowed when loan carried floating rate the character of transaction does not change by swapping from floating to fixed rate

FACTS
The assessee company availed a loan from a US bank on floating rate of interest. During the previous year relevant to the assessment year under consideration, the assessee chose to convert the said loan carrying floating rate of interest into fixed rate of interest. The assessee was asked to pay certain swap charges for the said conversion from floating to fixed rate. The swap charges liability had been duly incurred by the assessee during the year. The assessee characterised the swap charges as being in the nature of interest.

But the A.O. while assessing the total income disallowed the swap charges claimed on the ground that the said expenditure is capital in nature.

Aggrieved, the assessee preferred an appeal to the CIT(A) who held that the assessee converting the loan from floating rate of interest to fixed rate of interest has derived enduring benefit and hence the expenditure incurred by the assessee falls in the capital field warranting capitalisation thereon and hence cannot be allowed u/s 37(1).

HELD
The Tribunal noted the calculation of swap charges and observed that the swap charges incurred by the assessee for conversion from floating to fixed rate of interest would necessarily partake the character of interest. The interest paid by the assessee when the loan was in floating rate was duly allowed by the A.O. Hence, the character of the transaction does not change pursuant to this swap from floating to fixed rate. The utilisation of the loan for the purposes of business has not been disputed, hence there is no question of disallowance of any interest whatever the nomenclature, interest or swap charges. The nomenclature of the transaction is absolutely irrelevant to the substance of the transaction.

The Tribunal, following the decision of the Jurisdictional High Court in the case of CIT vs. D. Chetan & Co. 390 ITR 36 (Bom) held that the assessee is entitled to deduction of swap charges. This ground of appeal filed by the assessee was allowed.

DEDUCTION OF MAINTENANCE CHARGES IN COMPUTING INCOME FROM HOUSE PROPERTY

ISSUE FOR CONSIDERATION
Section 22 of the Income-tax Act creates a charge over the annual value of the house property being a building or lands appurtenant to the building of which the assessee is the owner and which has not been used for the purpose of any business or profession carried on by the assessee. The annual value of the house property is required to be computed in the manner laid down in section 23. It deems the sum for which the property might reasonably be expected to be let from year to year as its annual value subject to the exception where the property is let, in which case the amount of rent received or receivable is considered to be its annual value if it is higher. Section 24 provides for the deductions which can be claimed in computing the Income from House Property, namely, (i) a sum equal to 30% of the annual value (referred to as ‘standard deduction’), and (ii) interest payable on capital borrowed for acquisition, construction, repairs, etc., of the property subject to further conditions as provided in clause (b).

Quite often, an issue arises as to whether the assessee can claim a deduction of expenses like maintenance charges, etc., which it had to incur in relation to the property which is let out while computing its annual value for the purposes of section 23. The fact that the annual value is required to be computed on the basis of rent received or receivable in case of let-out property and no specific deduction has been provided for any expenses other than interest u/s 24, makes the issue more complex. Numerous decisions are available dealing with this issue in the context of different kind of expenses, such as maintenance charges, brokerage, non-occupancy charges, etc. For the purpose of this article, we have analysed two decisions of the Mumbai bench of the Tribunal taking contrary views in relation to deductibility of maintenance charges while computing annual value u/s 23.

SHARMILA TAGORE’S CASE
The issue had earlier come up for consideration of the Mumbai bench of the Tribunal in the case of Sharmila Tagore vs. JCIT (2005) 93 TTJ 483.

In this case, for the assessment year 1997-98, the assessee had claimed deduction for the maintenance charges of Rs. 48,785 and non-occupancy charges of Rs. 1,17,832 levied by the society from the total rent received of Rs. 3,95,000 while computing her income under the head Income from House Property. The A.O. disallowed the claim for deduction of both the payments on the ground that the expenses were not listed for allowance in section 24. On appeal, the disallowance made by the A.O. was confirmed by the Commissioner (Appeals).

The Tribunal, on appeal by the assessee, held that the maintenance charges have to be deducted while determining the annual letting value of the property u/s 23 following the ratio of the decisions in the cases of –
• Bombay Oil Industries Ltd. vs. Dy. CIT [2002] 82 ITD 626 (Mum),
• Neelam Cables Mfg. Co. vs. Asstt. CIT [1997] 63 ITD 1 (Del),
• Lekh Raj Channa vs. ITO [1990] 37 TTJ (Del) 297,
• Blue Mellow Investment & Finance (P) Ltd. [IT Appeal No. 1757 (Bom), dated 6th May, 1993].

The claim of the assessee for the deduction of maintenance charges while computing the annual value on the basis of rent received was upheld by the Tribunal. As regards the non-occupancy charges, the Tribunal noted that the expenditure had to be incurred for letting out the property. Therefore, while estimating the annual letting value of the property, which was the sum for which the property might reasonably be expected to be let from year to year, the non-occupancy charges could not be ignored and should be deducted from the annual value. Thus, the Tribunal directed the A.O. to re-compute the annual value after reducing the maintenance charges as well as non-occupancy charges from the rent received.

In the case of Neelam Cables Mfg. Co. (Supra), the assessee had claimed deduction for building repairs and security service charges. Insofar as building repair charges were concerned, the Tribunal held that no separate deduction could be allowed in respect of repairs as the assessee was already allowed the deduction of 1/6th for repairs as provided in section 24 (as it was prevailing at that time). However, in respect of security service charges, the Tribunal held that the charges would be deductible while computing the annual value u/s 23, though no such deduction was specifically provided for in section 24. Since the gross rent received by the assessee should be considered as inclusive of security service charges, the Tribunal held that such charges which were paid in respect of letting out of the property should be deducted while determining the annual value.

In the case of Lekh Raj Channa (Supra), the Tribunal allowed the deduction of salaries paid to persons for the maintenance of the building, security of the building and attending to the requirements of the tenants while computing the annual letting value.

The Tribunal in the case of Bombay Oil Industries Ltd. (Supra), following the above referred decisions of the Delhi bench and in the case of Blue Mellow Investment & Finance (P) Ltd. (Supra), had held that the expenditure by way of municipal taxes, maintenance of the building, security, common electricity charges, upkeep of lifts, water pump, fire-fighting equipment, staff salary and wages, etc., should be taken into account while arriving at the annual letting value u/s 23.

A similar view has been taken in the following cases about deductibility of expenses, mainly maintenance charges, while arriving at the annual letting value of the let-out property –
• Realty Finance & Leasing (P) Ltd. vs. ITO [2006] 5 SOT 348 (Mum),
• J.B. Patel & Co. vs. DCIT [2009] 118 ITD 556 (Ahm),
• ITO vs. Farouque D. Vevania [2008] 26 SOT 556 (Mum),
• ACIT vs. Sunil Kumar Agarwal (2011) 139 TTJ 49 (UO),
• Asha Ashar vs. ITO [2017] 81 taxmann.com 441 (Mum-Trib),
• Neela Exports Pvt. Ltd. vs. ITO (ITA No. 2829/Mum/2011 dated 27th February, 2013),
• Krishna N. Bhojwani vs. ACIT (ITA No. 1463/Mum/2012 dated 3rd July, 2017),
• Saif Ali Khan vs. CIT (ITA No. 1653/Mum/2009 dated 23rd June, 2011).

ROCKCASTLE PROPERTY (P) LTD.’S CASE
The issue again came up for consideration recently before the Mumbai bench of the Tribunal in the case of Rockcastle Property (P) Ltd. vs. ITO [2021] 127 taxmann.com 381.

In this case, for the assessment year 2012-13, the assessee had earned rental income from a commercial property which was situated in a condominium. The assessee credited an amount of Rs. 91.42 lakhs as rental income in its Profit & Loss account as against gross receipts of Rs. 93.65 lakhs after deducting Rs. 2.23 lakhs paid towards the ‘society maintenance charges’. The A.O. held that the charges were not allowable as a deduction since the assessee was already allowed deduction of 30% u/s 24(a). The CIT(A) confirmed the disallowance by relying upon several decisions, including the decisions of the Delhi High Court in the case of H.G. Gupta & Sons, 149 ITR 253 and of the Punjab & Haryana High Court in Aravali Engineers P. Ltd. 200 Taxman 81.

On appeal to the Tribunal, it was contended on behalf of the assessee that under the terms of letting out, the assessee was required to bear the expenses on society maintenance and the gross rent received by the assessee included the society maintenance charges that were paid by the assessee. Therefore, in computing the annual value, the amount of rent which actually came to the hands of the owner should alone be taken into consideration in view of the provisions of section 23(1)(b) that provide for adoption of the ‘actual rent received or receivable by the owner’. Reliance was also placed on various decisions of the Tribunal taking a view that such maintenance charges should be deducted while computing the annual letting value of the let-out property. As against this, the Revenue submitted that the assessee’s claim was not admissible as per the statutory provisions.

The Tribunal perused the Leave & License agreement and noted that the payment of municipal taxes and other outgoings was the liability of the assessee. Any increase was also to be borne by the assessee. The licensee was required to pay a fixed monthly lump sum to the assessee as license fees irrespective of the assessee’s outgoings. On the above findings, the Tribunal noted that it was incorrect for the assessee to plead that the actual rent received by the assessee was net of ‘society maintenance charges’ as per the terms of the agreement.

The Tribunal further noted that section 23 provided for deduction of only specified items, i.e., taxes paid to the local authority and the amount of rent which could not be realised by the assessee, from the ‘actual rent received or receivable’. No other deductions were permissible. Allowing any other deduction would amount to distortion of the statutory provisions and such a view could not be countenanced. It observed that accepting the plea that the rent which actually went into the hands of the assessee was only to be considered, would enable the assessee to claim any expenditure from rent actually received or receivable which was not the intention of the Legislature.

As far as the decision of the co-ordinate bench in the case of Sharmila Tagore (Supra) was concerned, the Tribunal relied upon its earlier decision in the case of Township Real Estate Developers (India) (P) Ltd. vs. ACIT [2012] 21 taxmann.com 63 (Mum) wherein it was held that –
• the decision of the Delhi High Court in the case of H.G. Gupta & Sons (Supra) had not been considered in the Sharmila Tagore case;
• the decision of the Punjab & Haryana High Court in the case of Aravali Engineers (P) Ltd. (Supra) was the latest decision on the subject that held that the deduction was not allowable.

Apart from the cases of Rockcastle Property (P) Ltd. (Supra) and Township Real Estate Developers (India) (P) Ltd. (Supra), a similar view has been taken in the following cases whereby the expenses in the nature of maintenance of the property have not been allowed to be reduced from the gross amount of the rent for the purpose of determining the annual value of the property –
Sterling & Wilson Property Developers Pvt. Ltd. vs. ITO (ITA No. 1085/Mum/2015 dated 11th November, 2016),
• Ranjeet D. Vaswani vs. ACIT [2017] 81 taxmann.com 259 (Mum-Trib), and
• ITO vs. Barodawala Properties Ltd. (2002) 83 ITD 467 (Mum).

OBSERVATIONS
What is chargeable to tax in the case of house property is its ‘annual value’ after reducing the same by the deductions allowed u/s 24. The annual value is required to be determined in accordance with the provisions of section 23. Sub-section (1) of section 23 which is relevant for the purpose of the subject matter of controversy reads as under –

For the purposes of section 22, the annual value of any property shall be deemed to be –
(a) the sum for which the property might reasonably be expected to let from year to year; or
(b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or
(c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable:
Provided that the taxes levied by any local authority in respect of the property shall be deducted (irrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to the method of accounting regularly employed by him) in determining the annual value of the property of that previous year in which such taxes are actually paid by him.
Explanation. – For the purposes of clause (b) or clause (c) of this sub-section, the amount of actual rent received or receivable by the owner shall not include, subject to such rules as may be made in this behalf, the amount of rent which the owner cannot realise.

The limited issue for consideration, where the property is let, is whether ‘the actual rent received or receivable’ referred to in clause (b) in respect of letting of the property or part thereof can be said to have included the cost of maintaining that property and, if so, whether the actual rent received or receivable can be reduced, by the amount of the cost of maintaining the property, for the purposes of clause (b) of section 23(1).

One possible view of the matter is that the ‘actual rent received or receivable’ should be the amount of consideration which the tenant has agreed to pay for usage of the property and merely because the owner of the property has to incur some expenses in relation to that property, the amount of ‘actual rent received or receivable’ cannot be altered on that basis; the proviso to section 23(1) permits the deduction for taxes levied by the local authority, which is also the obligation of the owner of the property, is indicative of the intent of the Legislature that no other obligations of the owner of the property can be reduced from the amount of actual rent received or receivable; any payment or other than the taxes so specified shall not be deductible from the annual value; section 24 limits the deduction to those payments that have been expressly listed in the said section and any deduction outside the list is not allowable, as has been explained in the Circular No. 14/2001 dated 9th November, 2001 explaining the objective of the amendment of 2001 in section 24 to substitute some eight deductions like cost of repairs, collection charges, insurance premium, annual charge, ground rent, interest, land revenue, etc., with only two, namely, standard deduction and interest; any deduction other than the ones specified by the proviso to section 23(1) and section 24, i.e., municipal taxes, interest and standard deduction, is not permissible.

The other equally possible view is that the amount of ‘actual rent received or receivable’ is dependent on the fact that the let-out property in question necessarily requires the owner to bear the expenses in relation to the property as a condition for letting, expressly or otherwise, and considering this correlation, the amount of ‘actual rent received or receivable’ should be adjusted taking into consideration the cost of maintaining the property or any other such expenses in relation to the property which the owner is required to incur; the express permission to deduct the municipal taxes under the proviso should not be a bar from claiming such other payments and expenses which have the effect of reducing the net annual rent in the hands of the owner and should be allowed to be reduced form the annual value as long as there is no express prohibition in the law to do so; section 24 lists the permissible deductions in computing the income under the head ‘income from house property’ and is unrelated to the determination of annual value and should not have any role in determination thereof; the expenses that go to reduce the annual value should nonetheless be allowed as they remain unaffected by the provisions of section 24.

The obligation of the owner to incur the expenses in question is directly linked to the earning of the income and has the effect of determining the fair rental value. The value shall stand reduced where such obligations are not assumed by the owner. Needless to say, an express agreement by the parties for passing on the obligation to pay such expenses to the tenant and reducing the rent payable would achieve the desired objective without any litigation; this in itself should indicate that the fair rental value is directly linked to the assuming of the obligations by the owner to pay the expenses in question and that such expenses should be reduced from the annual value. The case for deduction is well supported on the principle of diversion of obligation by overriding covenant. The concept has been well explained by the Supreme Court in the case of CIT vs. Sitaldas Tirathdas [(1961) 41 ITR 367] the relevant extract from which is reproduced below –

In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assesse as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation, cannot be said to be a part of the income of the assesse. Where by the obligation income is diverted before it reaches the assesse, it is deductible; but where the income is required to be applied to discharge an obligation after the income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one’s own income, which has been received and is since applied. The first is a case where income never reaches the assessee, who even if he were to collect it does so, not as part of his income, but for and on behalf of the person to whom it is payable.

Further reference can also be made to the case of CIT vs. Sunil J. Kinariwala [2003] 259 ITR 10 wherein the Supreme Court has, after referring to various precedents on the subject, explained the concept of diversion of income by overriding title in the following manner:

When a third person becomes entitled to receive the amount under an obligation of an assessee even before he could lay a claim to receive it as his income, there would be diversion of income by overriding title; but when after receipt of the income by the assessee, the same is passed on to a third person in discharge of the obligation of the assessee, it will be a case of application of income by the assessee and not of diversion of income by overriding title.

It is possible to canvass two views when the issue under consideration is examined in light of this principle; it can be said that there is no diversion of income by the owner of the property when he incurs the expenses for maintenance of the property, or it can be held that there is a diversion. The better view is to favour an interpretation that permits the reduction than the one that defeats the claim. It is also possible to support the claim for reduction from annual value on the basis of real income theory.

In the cases of Sharmila Tagore and others, the Tribunal has taken a view that allowed the reduction of maintenance charges from the annual value on the basis that to that extent the amount of rent never reached the owner or the owner was not benefited to that extent.

Capital Gains – Amount received on sale of additional benefit derived by the assessee by way of getting vested with additional FSI on the land and building owned by the assessee is only a windfall gain by operation of law and which had not cost the assessee any money is a capital receipt Book Profits – A particular receipt which is in the capital field cannot be brought to tax u/s 115JB merely on the ground that the assessee has voluntarily offered it in the return of income

35 Batliboi Ltd. vs. ITO [(2021) TS-410-ITAT-2021 (Mum)] A.Y.: 2013-14; Date of order: 21st May, 2021 Sections 4, 45, 115JB

Capital Gains – Amount received on sale of additional benefit derived by the assessee by way of getting vested with additional FSI on the land and building owned by the assessee is only a windfall gain by operation of law and which had not cost the assessee any money is a capital receipt

Book Profits – A particular receipt which is in the capital field cannot be brought to tax u/s 115JB merely on the ground that the assessee has voluntarily offered it in the return of income

FACTS
The assessee company owned land along with super structure which was acquired by it vide a sale deed dated 15th April, 1967. During the financial year relevant to the assessment year under consideration, the assessee company proposed to sell the said land along with its super structure. In the course of negotiations it became aware that post acquisition of land and constructed building, the Development Control Regulations (DCR) in the city of Coimbatore had undergone a change resulting in the company obtaining an additional benefit by way of additional FSI of 0.8.

The company sold the said land along with super structure vide a deed of sale on 23rd January, 2013 for a consideration of Rs. 11,14,00,000. Taking the help of the valuer, Rs. 4,76,25,000 out of this composite consideration was attributed to the additional FSI obtained as a result of the amendment in the DCR. In the return of income filed, the assessee regarded the sum of Rs. 4,76,25,000 received towards additional FSI as a capital receipt. However, while computing the book profit u/s 115JB, the said sum of Rs. 4,76,25,000 was included in the book profit.

The A.O. brought this sum of Rs. 4,76,25,000 to tax as long-term capital gains. This amount was also treated as part of book profits u/s 115JB since it was already offered to tax voluntarily by the assessee.

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

The aggrieved assessee preferred an appeal to the Tribunal where it also raised an additional ground, viz., that the sum of Rs. 4,76,25,000 being a capital receipt is not part of the operating results of the assessee and therefore is not includible in computing its book profits u/s 115JB.

HELD
The Tribunal observed that the total sale consideration of Rs. 11,14,00,000 has not been doubted by the Revenue. The break-up of consideration, as done by the assessee, by relying on the independent valuer’s report was also not doubted by the Revenue. The only dispute was whether the said sum of Rs. 4,76,25,000 could be treated as a capital receipt thereby making it non-exigible to tax both under normal provisions as well as in the computation of book profits u/s 115JB.

The Tribunal held that the assessee could not have pre-empted any change in the DCR in the city of Coimbatore at the time of purchase or before sale. Admittedly, no cost was incurred by the assessee for getting such benefit by way of additional FSI. Hence, it could be safely concluded that the additional benefit derived by the assessee by way of additional FSI on the land and building owned by him is only a windfall gain by operation of law and which had not cost him any money. The Tribunal found that the entire issue in dispute is squarely covered by the decision of the Jurisdictional High Court in the case of Kailash Jyoti No. 2 CHS Ltd. and others dated 24th April, 2015. Following this decision, the Tribunal held that the sum of Rs. 4,76,25,000 received by the assessee on the sale of additional FSI is not exigible for long-term capital gains. It directed that the same be excluded under the normal provisions of the Act.

While deciding the additional ground, the Tribunal observed that there is absolutely no dispute that the receipt of Rs. 4,76,25,000 is indeed a capital receipt and the same does not form part of the operational working results of the assessee company. Even according to the Revenue, the said receipt is only inseparable from the land and building and accordingly it only partakes the character of a capital receipt. The Tribunal held that merely because a particular receipt, which is in the capital field, has been offered to tax by the assessee voluntarily in the return of income while computing book profits u/s 115JB it cannot be brought to tax merely on that ground. It is very well settled that there is no estoppel against the statute. It noted that the dispute is covered by the Tribunal in the assessee’s own case in ITA No. 5428/Mum/2015 for A.Y. 2011-12, order dated 17th December, 2021.

Following this decision, the Tribunal held that the sum of Rs. 4,76,25,000 being a capital receipt from its inception is to be excluded while computing book profits u/s 115JB and also on the ground that it does not form part of the operational working results of the company.

The Tribunal allowed both the grounds of appeal filed by the assessee.

Alleged on-money received cannot be taxed in the hands of assessee, a power of attorney holder – Assessee being power of attorney holder, cannot be treated as rightful owner of the income which has arisen on sale of a particular property as his action was only in a representative capacityAlleged on-money received cannot be taxed in the hands of assessee, a power of attorney holder – Assessee being power of attorney holder, cannot be treated as rightful owner of the income which has arisen on sale of a particular property as his action was only in a representative capacity

34 Bankimbhai D. Patel vs. ITO [(2021) TS-403-ITAT-2021 (Ahd)] A.Ys.: 2003-04 and 2004-05; Date of order: 19th May, 2021 Section 4

Alleged on-money received cannot be taxed in the hands of assessee, a power of attorney holder – Assessee being power of attorney holder, cannot be treated as rightful owner of the income which has arisen on sale of a particular property as his action was only in a representative capacity

FACTS
In this case, the original assessment for A.Y. 2003-04 was completed u/s 143(3) r/w/s 147 assessing total income at Rs. 29,86,640 against a returned income of Rs. 47,120. The case of the A.O. was that the assessee was a power of attorney (PoA) holder of certain pieces of land on which construction was done and these were sold. He received on-money and that on-money has not been accounted for by the assessee. The A.O. recorded the statement of one Rasikbhai Patel who confessed that he paid Rs. 8,71,695 but documents were executed only for Rs. 1,32,500. On the basis of this statement, the A.O. harboured the belief that the difference of these two amounts, i.e., Rs. 7,39,195, was collected by way of on-money. He applied this rate to all the plots sold during the year and believed that the assessee has retained on-money which deserves to be assessed in the hands of the assessee. A similar exercise was done for the A.Y. 2004-05.

When the matter reached the Tribunal, it restored the matter back to the file of the A.O. with a direction to find out as to what was the arrangement between the landowners and the PoA holder and who has received the sale consideration; and whether the recipient of sale consideration has offered capital gains; after examining all these aspects and also after finding out what has happened in the hands of the owners, the A.O. should decide the issue afresh and pass necessary orders.

In the set-aside proceedings from which this appeal has arisen, the A.O. made reference to evidence collected in the first round of the assessment proceedings and added the undisclosed and unrecorded income by way of on-money to the total income of the assessee on the ground that the landowners have not filed their return of income for A.Y. 2003-04.

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

HELD
The Tribunal observed that both the authorities have failed to analytically examine the issue as per the direction of the ITAT in the first round. The A.O. was specifically directed to examine the understanding between the landowners and the assessee; whether it has been agreed that the landowners would receive only the amount mentioned in the sale deed. It noted that the A.O. has not recorded the statement of any of the landowners though he was given all the details. He recorded the statement of one of the purchasers in the first round but that is not a relevant evidence as that evidence can be taken for determination of quantum but cannot be used to determine who received that quantum. The Tribunal found the action of the A.O. in holding that since the landowners have not paid capital gains, on-money is to be taxed as income of the assessee to be illogical.

The Tribunal held that the law contemplates that the A.O. has to first determine in whose hand the income has to be assessed and who is the rightful owner. The assessee being a PoA holder, cannot be treated as the rightful owner of the income which has arisen on the sale of a particular property. His action was only in a representative capacity. It observed that it could have appreciated the stand of the A.O. if he had been able to bring on record the terms of agreement between the assessee as well as landowners specifying the distribution of amount between the assessee in his capacity as PoA holder vis-à-vis the actual owner. No such steps were taken in spite of the specific direction of the Tribunal in the first round. Considering all these aspects, the Tribunal held that there is no justification for sustaining addition in both the assessment years in the hands of the assessee. The appeal filed by the assessee was allowed.

Section 68 – Where purchases were accepted as genuine, addition of credit balance at the end of the year which was entirely out of purchases for the year, could not be made

30 IKEA Trading (India) (P) Ltd. vs. DCIT [2020] 83 ITR(T) 415 (Del-Trib) IT(SS) Appeal Nos. 5568 and 5877 (Del) of 2011 A.Y.: 2004-05; Date of order: 30th June, 2020

Section 68 – Where purchases were accepted as genuine, addition of credit balance at the end of the year which was entirely out of purchases for the year, could not be made

FACTS I
In the course of assessment proceedings, the A.O. asked the assessee to explain certain amounts of sundry creditors. Notices u/s 133(6) were issued, but many of them were not complied with. Consequently, the A.O. made addition for the amount of sundry creditors. On further appeal by the assessee, the Commissioner (Appeals) confirmed the additions only in respect of two parties and deleted the entire balance addition. This was done considering the details filed by the assessee before him. The additions that were sustained were on account of failure of the assessee to furnish account details and relevant pay-out details.

Aggrieved, the assessee as well as Revenue preferred appeals before the ITAT.

HELD I
The Tribunal took into consideration the fact that the A.O. simply added the balance as on 31st March, 2004 without realising that the entire credit balance was out of the purchases made during the year, which were accepted as genuine and no adverse inference was drawn in respect thereof. Further, the assessee had paid all the outstanding amounts in the immediately succeeding years. Therefore, the ITAT allowed the assessee’s appeal and dismissed the Revenue’s ground of appeal. In reaching this conclusion, apart from the facts stated above, it also placed heavy reliance on the decision of the Delhi ITAT Special Bench in the case of Manoj Aggarwal vs. Dy. CIT (2008) 113 ITD 377. The principle upheld in that case was that once a certain amount was accepted as genuine, the same cannot be questioned later on. (The case was in respect of amount offered to tax under a Voluntary Disclosure of Income Scheme, which was credited in the books of accounts as per the requirement of the respective law on the scheme. It was held that once the amount is taxed under the scheme, the same could not be taxed again u/s 68.)

Therefore, by the same rationale, once purchases were accepted as genuine in the instant case, addition of credit balance which was entirely out of purchases for the year could not be made.

Section 40A(2)(b): Where the A.O. had not brought any comparable case to demonstrate that payments made by assessee to directors were excessive / unreasonable, no disallowance could be made

FACTS II
The assessee claimed certain amount expended towards directors’ remuneration. On asking for an explanation in respect of the same, the assessee furnished the details of remuneration paid to the directors and claimed that the same was as per industry norms and was not in excess of either the limits prescribed under the Act, or the industry norms for the particular class of industry. However, the A.O. was of the opinion that the assessee failed to justify the nature of services rendered by the directors so as to command such a huge remuneration. Therefore, the A.O. disallowed a part of the remuneration on the basis that it was excessive.

Before the Commissioner (Appeals), the assessee contended that the A.O. did not give any cogent reasons to justify the disallowance and that he grossly failed to show that such expenditure was excessive and / or unreasonable. Thus, the Commissioner (Appeals) deleted the disallowance made.

The Revenue filed a further appeal before the ITAT.

HELD II
The ITAT observed that the A.O. did not bring any comparable case to demonstrate that the payments made by the assessee were excessive / unreasonable, which is an onus cast upon him by the mandate of section 40A(2)(b).

A further observation was that the payees were also assessed to tax at the same rate of tax. The CBDT Circular No. 6-P dated 6th July, 1968 states that no disallowance is to be made u/s 40A(2) in respect of the payments made to the relatives and sister concerns where there is no attempt to evade tax. Considering the totality of the facts in light of the CBDT Circular (Supra), the ITAT dismissed the ground of appeal raised by the Revenue, thereby allowing the assessee’s claim of remuneration.

Offences and prosecution – Sections 276C, 277 and 278 – Wilful attempt to evade tax – False verification in return – Abetment of false returns – Condition precedent for application of sections 276C and 277 – Incriminating material or evidence of wilful attempt to evade tax must emanate from assessee – Evidence unearthed during search and survey operations of third persons – No evidence of connection between such material and assessee – Mere denial of allegation will not amount to incriminating evidence – Abetment denotes instigation to file false return – Complaint filed by Director of Income-tax – Not justified – Prosecution not valid

8. (1) Karti P. Chidambaram and (2) Srinidhi Karti Chidambaram vs. Dy. DIT (Investigation) [2021] 431 ITR 261 (Mad) Date of order: 11th December, 2020 A.Ys.: 2014-15 and 2015-16

Offences and prosecution – Sections 276C, 277 and 278 – Wilful attempt to evade tax – False verification in return – Abetment of false returns – Condition precedent for application of sections 276C and 277 – Incriminating material or evidence of wilful attempt to evade tax must emanate from assessee – Evidence unearthed during search and survey operations of third persons – No evidence of connection between such material and assessee – Mere denial of allegation will not amount to incriminating evidence – Abetment denotes instigation to file false return – Complaint filed by Director of Income-tax – Not justified – Prosecution not valid

The assessees were husband and wife. For the A.Y. 2014-15, K filed his return on 29th July, 2014 declaring profit from the sale of immovable property as long-term capital gains. His wife filed her return for the A.Y. 2015-16 and disclosed long-term capital gains. Neither K nor his wife disclosed cash payments received as part of the consideration. These facts came to light in a survey u/s 133A carried out in the case of a company A Ltd. and other entities on 1st December, 2015 by the Income-tax Department and the Enforcement Directorate. In the course of the search several hard disks were retrieved by the Department and the ED. Further search and seizure were also conducted in the case of another company AE Ltd. in the year 2018 and certain notebooks were seized from the cashier of the purchaser company and their statements also recorded. A private complaint was filed by the Deputy Director of the Income-tax Department against K for the offences u/s 276C and 277. Similarly, another complaint was filed against his wife under sections 276C(1), 277 and 278.

After the Court had taken cognizance of the complaint, the assessees filed petitions to discharge them from the prosecution mainly on the ground that the documents alleged to have been seized during the search conducted in the two companies were inadmissible and the alleged cloning of the electronic records was not done by any experts and those documents also were not admissible due to non-compliance with section 65B of the Indian Evidence Act, 1872. Similarly, the person who was said to have given a statement as to the cash transaction had not been examined by the Court while taking cognizance. Hence, without any evidence in this regard there were no materials to proceed against the assessees. It was further submitted that the Deputy Director of the Income-tax Department was not a competent person to file a complaint for the false declaration. Only the A.O. before whom the returns were filed was competent to file any complaint for false returns or evidence. The trial court dismissed the petition.

The Madras High Court allowed the revision petitions filed by the assessees and held as under:

‘i) Section 276C deals with wilful attempt to evade tax. In order to attract the provisions of section 276C the following ingredients must be available: the person (a) wilfully attempts to evade any tax; or (b) wilfully attempts to evade any penalty; or (c) wilfully attempts to evade any interest chargeable or imposable under this Act; or (d) under-reports his income. The Explanation further indicates that the expression “wilfully attempts” employed in the provision is an inclusive one. The Explanation makes it very clear that to maintain the prosecution, the false entry or statement containing the books of accounts or other documents ought to have been in the possession or control of such person and such person should have made any false entry or statement in such books of accounts or other documents or wilfully omitted or caused to be omitted any relevant entry or statement in such books of accounts or other documents, or caused any other circumstance to exist which will have the effect of enabling such person to evade any tax, penalty or interest chargeable or imposable under this Act.

ii) The essential ingredients of the sections make it clear that any statements or incriminating materials either should come from the accused or very strong material unearthed during search or survey is required to maintain prosecution u/s 276C or 277. The very Explanation provided u/s 276C makes it clear that incriminating materials and documents ought to have been seized from the accused. Unless strong materials are seized from the accused or any incriminating statement recorded from the accused, the prosecution has to wait till the finding recorded by the A.O. Reassessment or assessment order has to be passed only based on the materials seized during the search. On such assessment, when the A.O. comes to the conclusion that there is a wilful suppression to evade tax or under-reporting, etc., the complaint is maintainable. Though the offences u/s 276, 277 and 278 are distinct offences and the Deputy Director can launch the prosecution as per section 279, merely because the power was conferred to the Deputy Director to launch a complaint or sanction merely on the basis of some materials said to have been collected from third parties, the prosecution will not be maintainable.

iii) The intention of the Legislature is to prosecute only where concrete materials are unearthed during the search or survey. It is stated in Circular No. 24 of 2019 [2019] 417 ITR (St.) 5 that the prosecution u/s 276C(1) shall be launched only after the confirmation of the order imposing penalty by the Appellate Tribunal. The object of the statute discernible u/s 276 is that to maintain a complaint by the Deputy Director, the material seized or collected during search should unerringly point towards the accused.

iv) All the proceedings before the Income-tax Officer, particularly assessment proceedings, are deemed to be civil proceedings in terms of section 136. When all the proceedings before the A.O. under the Act are deemed to be judicial proceedings and the officer is deemed to be a civil court, if any false declaration or false return is filed before the A.O. such act of the assessee is certainly punishable u/s 193 of the Indian Penal Code, 1860. In such a case the fact that the statement given by the assessee during the assessment proceedings was false has to be recorded by the officer concerned. Without such a finding recorded, the prosecution cannot be launched merely on the basis of some statements said to have been recorded from third parties.

v) The Income-tax search proceedings have also been held to be judicial proceedings and such authority is deemed to be a judicial authority within the meaning of sections 193 and 196 of the Indian Penal Code, 1860. Even the raiding officer is deemed to be a civil court and the proceedings before him are judicial proceedings and if any offence is committed before such authority, the complaint can be lodged only following the procedure u/s 195 of the Code of Criminal Procedure, 1973.

vi) The entire reading of the complaint made it clear that the assessees never incriminated themselves in the statements recorded by the raiding officers at any point of time. The search was said to have been carried out in AE Ltd., the so-called purchaser of the property. The complaint was silent about whether the assessee, i. e., the accused, were either directors or had control over the firms. Mere denial of the prosecution version could not by any stretch of imagination be construed as incriminating evidence.

vii) Admittedly, returns were filed before the A.O. by the assessees and the verification was also done by them while filing the returns. Whether such verification was false or not had to be decided by the A.O. before whom such verification was filed. Neither the false return nor any false statement or verification was done before the Deputy Director of Income-tax to invoke section 195 of the Code of Criminal Procedure, 1973. Prosecution was launched for the alleged offence under sections 276C and 277. There must be material to show that there was wilful attempt to evade tax, penalty, interest or under-report, etc. Merely because search had been conducted and some third parties’ statements were recorded, and further they had also not been examined, and there was no finding recorded by the A.O. as to a wilful attempt to evade tax or filing of false verification, the complaint filed by the Deputy Director was not maintainable.

viii) Showing of ignorance by one of the assessees by maintaining that only her husband was aware of the return… such conduct could not be construed as abetment to attract the offence u/s 278. The prosecution of K and his wife was not sustainable.’

Non-resident – Taxability in India – Royalty – Consideration received for sale of software products under contract with customers in India – Assessee opting to be governed by provisions of DTAA – Meaning of royalty in agreement not amended to correspond with amended definition in Act – Receipts not royalty – Not liable to tax – Section 9(1)(vi), Explanation 4 – Articles 3(2), 13 of DTAA between India and UK

7. CIT (International Taxation) vs. Micro Focus Ltd. [2021] 431 ITR 136 (Del) Date of order: 24th November, 2020 A.Ys.: 2010-11 and 2013-14

Non-resident – Taxability in India – Royalty – Consideration received for sale of software products under contract with customers in India – Assessee opting to be governed by provisions of DTAA – Meaning of royalty in agreement not amended to correspond with amended definition in Act – Receipts not royalty – Not liable to tax – Section 9(1)(vi), Explanation 4 – Articles 3(2), 13 of DTAA between India and UK

The assessee, a company incorporated in the United Kingdom, developed and distributed software products. It sold software products in India either through its distributors or directly to customers. The assessee entered into contracts with its customers on principal-to-principal basis and sale of software licences was concluded outside India (off-shore supplies). For the A.Ys. 2010-11 and 2013-14 the A.O. passed final orders u/s 144C(3) holding that the receipts of income from the sale of software products in India were taxable under the head ‘royalty’ under the provisions of section 9(1)(vi) read with article 13 of the DTAA between India and the United Kingdom and, accordingly, brought the receipts of the assessee as royalty income at 10%.

The Tribunal held that the consideration received by the assessee from various entities on account of sale of software was not royalty within the meaning of article 13 of the DTAA and that there was no corresponding amendment to the definition of the term ‘royalty’ in article 13(3) of the DTAA as carried out in the definition of royalty u/s 9(1)(vi).

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

‘i) The Tribunal did not err in holding that the receipts of the assessee from the sale of software were not taxable as royalty under the DTAA. The payment made by the reseller for the purchase of software for sale in Indian market could not be considered as royalty.

ii) The Tribunal was right in holding that Explanation 4 to section 9(1)(vi) would not apply to the DTAA between India and United Kingdom.

iii) The Tribunal did not err in holding that the receipt of the assessee was not royalty though u/s 14(b)(ii) of the Indian Copyright Act, 1957 selling or giving on commercial rent any copy of computer programme was copyright.’

Income from other sources – Section 56(2)(vii) – Property received without consideration or for consideration less than its fair market value – Scope of section 56(2)(vii) – Bonus shares – Fair market value of bonus shares not normally assessable as income from other sources

6. Principal CIT vs. Dr. Ranjan Pai [2021] 431 ITR 250 (Karn) Date of order: 15th December, 2020 A.Y.: 2012-13


 

Income from other sources – Section 56(2)(vii) – Property received without consideration or for consideration less than its fair market value – Scope of section 56(2)(vii) – Bonus shares – Fair market value of bonus shares not normally assessable as income from other sources

 

The assessee was an individual engaged in the medical profession. For the A.Y. 2012-13, the A.O. found that the assessee had received 1,00,00,000 bonus shares issued by M Ltd. The A.O. invoked section 56(2)(vii) and treated the receipt of bonus shares as income from other sources and assessed the fair market value of the bonus shares as income of the year.

 

The Tribunal held that the provisions of section 56(2)(vii) were not attracted to the fact situation of the case and deleted the addition.

 

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

 

‘i) A careful scrutiny of section 56(2)(vii) contemplates two contingencies; firstly, where the property is received without consideration, and secondly, where it is received for consideration less than the fair market value. The issue of bonus shares by capitalisation of reserves is merely a reallocation of the company’s funds. There is no inflow of fresh funds or increase in the capital employed, which remains the same. The total funds available with the company remain the same and the issue of bonus shares does not result in any change in respect of the capital structure of the company. In substance, when a shareholder gets bonus shares, the value of the original shares held by him goes down and the market value as well as the intrinsic value of the two shares put together will be the same or nearly the same as per the value of the original share before the issue of bonus shares. Thus, any profit derived by the assessee on account of receipt of bonus shares is adjusted by depreciation in the value of equity shares held by him. Hence, the fair market value of bonus shares is not normally assessable as income from other sources.

 

ii) There was no material on record to infer that bonus shares had been transferred with an intention to evade tax. The provisions of section 56(2)(vii)(c) were not attracted to the fact situation of the case.

 

iii)   In view of the preceding analysis, the substantial question of law framed by a Bench of this Court is answered against the Revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed.’