BCAJ | Bombay Chartered Accountant Journal

Capital gains – Computation of capital gains – Cost of acquisition – Section 115AC – Conversion of foreign currency convertible bonds into equity shares – Subsequent sale of such shares – Cost of acquisition of shares to be calculated in terms of Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993

25. DIT (International Taxation) vs. Intel Capital (Cayman) Corporation [2020]
429 ITR 45 (Kar.) Date
of order: 6^thOctober, 2020 A.Y.: 2008-09

Capital
gains – Computation of capital gains – Cost of acquisition – Section 115AC –
Conversion of foreign currency convertible bonds into equity shares –
Subsequent sale of such shares – Cost of acquisition of shares to be calculated
in terms of Issue of Foreign Currency Convertible Bonds and Ordinary Shares
(through Depository Receipt Mechanism) Scheme, 1993

The
assessee was a non-resident company. It filed its return of income for the A.Y.
2008-09. The A.O. held that the assessee had acquired foreign currency
convertible bonds and after conversion thereof into shares, sold the shares
during the previous year relevant to the A.Y. 2009-10 and disclosed short-term
capital gains from the transaction and paid tax thereon at the prescribed rate.
He further held that the cost of acquisition of equity shares on conversion of
foreign currency convertible bonds was shown to be at Rs. 873.83 and Rs. 858.08
per share whereas in fact the assessee converted the bonds into shares at Rs.
200 per share. The A.O. therefore concluded that the cost of acquisition of
shares had to be assessed at Rs. 200 per share and not at Rs.873.83 and Rs.
858.08 per share as claimed by the assessee and completed the assessment.

This was
upheld by the Commissioner (Appeals). The Tribunal held that u/s 115AC the
Central Government had formed the Issue of Foreign Currency Convertible Bonds
and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993
permitting some companies to issue foreign currency convertible bonds which
could at any point of time be converted into equity shares. It further held
that the subscription agreement was approved by the Reserve Bank of India, the
regulatory body, and under the terms and conditions for the issuance of foreign
currency convertible bonds between the NIIT and the assessee, the bonds were to
be initially converted into shares at Rs. 200 per share subject to adjustments
under clause 6(c) of the agreement. Therefore, the assessee was rightly
allotted 21,28,000 shares at the rate of Rs. 200 in accordance with the bond
agreement at the prevalent convertible foreign currency rate. Accordingly, the
orders passed by the Commissioner (Appeals) and the A.O. were set aside and the
appeal preferred by the assessee was allowed.

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

‘i) The Central Government made the Issue of
Foreign Currency Convertible Bonds and Ordinary Shares (through Depository
Receipt Mechanism) Scheme, 1993 applicable for the assessment year 2002-03
onwards by Notification dated 10^th September, 2002 ([1994] 208 ITR [St.] 82). Clause
2(f) of the Scheme provides that the words and expressions not defined in the
Scheme but defined in the Income-tax Act, 1961 or the Companies Act, 1956 or
the Securities and Exchange Board of India Act, 1992 or the Rules and
Regulations framed under these Acts, shall have the meanings respectively
assigned to them, as the case may be, in those Acts. Clause 7 of the Scheme
deals with transfer and detention. Thus, the cost of acquisition has to be
determined in accordance with the provisions of clause 7(4) of the Scheme for
computation of capital gains. Clause (xa) of section 47 of the Income-tax Act,
1961, which refers to transfer by way of conversion of bonds, was inserted with
effect from 1^stApril, 2008 and is applicable to the A.Y. 2009-10
onwards. There is no conflict between the provisions of the Scheme and the
Income-tax Act or the Income-tax Rules.

ii) The bonds were issued under the 1993 Scheme
and the conversion price was determined on the basis of the price of shares at
the Bombay Stock Exchange or the National Stock Exchange on the date of
conversion of the foreign currency convertible bonds into shares. The
computation of capital gains by the assessee was right.’

shailesh.kwebmaker

Business expenditure – Service charges paid to employees in terms of agreement entered into under Industrial Disputes Act – Evidence of payment furnished – Amount deductible

24. New Woodlands Hotel Pvt. Ltd. vs. ACIT [2020]
428 ITR 492 (Mad.) Date
of order: 4^th September, 2020 A.Ys.:
2013-14 and 2014-15

Business
expenditure – Service charges paid to employees in terms of agreement entered
into under Industrial Disputes Act – Evidence of payment furnished – Amount
deductible

The
assessee is in the hotel business. For the A.Ys. 2013-14 and 2014-15 it claimed
deduction of amounts paid as service charges to its employees. The explanation
was that tips were being given to the room boys and they alone were benefited
and the other employees and workers raised objections; the matter was discussed
in several meetings and ultimately a settlement was arrived at between the
employees’ union and the assessee’s management. The A.O. rejected this claim.

The
Commissioner (Appeals) allowed it partially. The Tribunal dismissed the appeals
filed by the assessee and allowed the appeals filed by the Revenue.

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

‘i) The A.O. while rejecting the assessee’s
contention had not disbelieved any of the documents submitted by the assessee.
The payments effected in cash were sought to be substantiated by the assessee
by producing vouchers. Due credence should be given to the memorandum of
settlement dated 2^nd August, 2012 recorded in the presence of the
Labour Officer. The settlement could not have been brushed aside. The register
of wages of persons employed was a statutory form under the Payment of Wages
Act and there was a presumption to its validity. The bulk of the materials
produced by the assessee before the A.O. could not have been rejected.

ii) The A.O., going merely by the statements of
a few employees, could not have disbelieved statutory registers and forms as
there was a presumption to their validity and the onus was on the person who
disputed their validity or genuineness to prove that the documents were bogus.

iii) The Tribunal ought not to have interfered
with the relief granted by the Commissioner (Appeals) and the Commissioner
(Appeals) ought to have interfered with the orders passed by the A.O. in their
entirety and not restricted the same to a partial relief.’

shailesh.kwebmaker

Section 50 – Expenditure incurred on account of stamp duty, registration charges and society transfer fees, as per the contractual terms, is an allowable expenditure u/s 50(1)(i)

11. DCIT vs. B.E. Billimoria & Co. Ltd. Saktijit Dey (J.M.) and Manoj Kumar
Aggarwal (A.M.) ITA No.: 3019/Mum/2019 A.Y.: 2015-16 Date of order: 11^th November,
2020 Counsel for Assessee / Revenue: Satish Modi / Oommen Tharian

Section
50 – Expenditure incurred on account of stamp duty, registration charges and
society transfer fees, as per the contractual terms, is an allowable
expenditure u/s 50(1)(i)

FACTS

For the assessment year under consideration, in the course
of assessment proceedings the A.O. noticed that the assessee sold an office
premises vide agreement dated 31^st March, 2015 for a consideration of Rs.
19 crores and offered short-term capital gains of Rs. 11.49 crores. However,
since the stamp duty value of the premises was Rs. 20.59 crores, the A.O.,
invoking the provisions of section 50C, added the differential amount of Rs.
1.59 crores to the income of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A)
where, in the course of the appellate proceedings, the assessee drew the
attention of the CIT(A) to the fact that it incurred aggregate expenditure of
Rs. 160.26 lakhs on account of stamp duty, registration charges and society
transfer fees as per the contractual terms which was an allowable expenditure
u/s 50(1)(i). The said claim was restricted to Rs. 159.23 lakhs, i.e., to the
extent of difference in stamp duty value and actual sale consideration.
Therefore,it was submitted that there was no justification for the addition of
Rs. 159.23 lakhs. The CIT(A), concurring with this, directed the A.O. to delete
this addition.

HELD

The
Tribunal upon due consideration of the issue found no reason to interfere in
the impugned order in any manner. It held that the expenditure incurred by the
assessee on transfer of property was an allowable expenditure while computing
short-term capital gains and the same has rightly been allowed by the CIT(A).
The appeal filed by the assessee was allowed.

shailesh.kwebmaker

Section 244A – Refund is to be adjusted against the correct amount of interest payable thereof to be computed as per the directions of the CIT(A) and only the balance amount is to be adjusted against tax paid. Accordingly, unpaid amount is the tax component and therefore the assessee would be entitled for claiming interest on the tax component remaining unpaid. This would not amount to granting interest on interest

10. Grasim Industries Ltd. vs. DCIT and DCIT
vs. Grasim Industries Ltd. C.N. Prasad (J.M.) and M. Balaganesh
(A.M.) ITA Nos.: 473/Mum/2016 and 474/Mum/2016;
1120/Mum/2016; and 1121/Mum/2016 A.Ys.: 2007-08 and 2008-09 Date of order: 11^th November,
2020 Counsel for Assessee / Revenue: Yogesh Thar / V. Vinodkumar

Section
244A – Refund is to be adjusted against the correct amount of interest payable
thereof to be computed as per the directions of the CIT(A) and only the balance
amount is to be adjusted against tax paid. Accordingly, unpaid amount is the
tax component and therefore the assessee would be entitled for claiming
interest on the tax component remaining unpaid. This would not amount to
granting interest on interest

FACTS

The
only issue to be decided in this set of cross-appeals filed by the assessee and
the Revenue was about calculation of interest u/s 244A. The Tribunal, vide its common order for the A.Ys. 2006-07,
2007-08 and 2008-09 dated 19^th June, 2013, passed an order granting
relief to the assessee with a direction to reduce certain items from the value
of fringe benefits chargeable to tax.

Subsequently,
the A.O on 14^th August, 2013 passed an order giving effect to the
Tribunal’s order for the A.Y. 2006-07 wherein he correctly allowed interest on
advance tax u/s 244A from the first day of the assessment year till the date of
payment of the refund as per law.

However,
the A.O. on 16^th September, 2013 while passing the order giving
effect to the Tribunal’s order for the A.Ys. 2007-08 and 2008-09 did not grant
interest u/s 244A(1)(a) from the first day of the assessment year till the date
of receipt of the Tribunal order (i.e., 23^rd July, 2013) but granted
interest on advance tax only from the date of receipt of the Tribunal order
till the passing of the refund order. In this order dated 6^th
September, 2013, the A.O. did not even grant any interest on self-assessment
tax paid by the assessee u/s 244A(1)(b).

Aggrieved
by the action of the A.O. in granting interest on advance tax from the date of
the Tribunal order till the passing of the refund order, and also by non-grant
of interest on self-assessment tax paid, the assessee preferred an appeal to
the CIT(A) for the A.Ys. 2007-08 and 2008-09. The assessee also took the ground
that the amount of refund received be adjusted first towards the correct amount
of interest and the balance towards tax, and that on the amount of refund of
tax not received, the assessee be granted interest.

The CIT(A), vide his order dated 11^th December, 2016, allowed
interest u/s 244A on advance tax and self-assessment tax paid by the assessee
from the first day of the assessment year and the date of payment of the
self-assessment tax, respectively, for both the years till the date of the
grant of refund. However, the CIT(A) dismissed the assessee’s ground for
allowing interest on the said amount for the period of delay on the alleged
ground that it amounts to compensation by way of interest on interest.

Aggrieved,
the assessee preferred an appeal to the Tribunal seeking correct allowance of
interest u/s 244A.

The
Revenue preferred an appeal challenging the order of the CIT(A) directing the
A.O. to grant interest on self-assessment tax u/s 244A(1)(b) on the ground that
the delay was attributable on the part of the assessee.

HELD

The
Tribunal observed that since the Revenue has not preferred any appeal
challenging the direction of the CIT(A) to grant interest on advance tax from
the first day of the assessment year u/s 244A(1)(a), hence this matter has
attained finality.

The
assessee had raised the ground stating that refund granted to the assessee is
to be first adjusted against the correct amount of interest due on that date
and, thereafter, the left over portion should be adjusted with the balance tax.
The Tribunal found that in the instant case refund was granted to the assessee vide a refund order in October, 2013 and it was
pleaded by the assessee that the said refund is to be adjusted against the
correct amount of interest payable thereof to be computed as per the directions
of the CIT(A) and only the balance amount is to be adjusted against tax paid.
Accordingly, unpaid amount is the tax component and, therefore, the assessee
would be entitled to claim interest on the tax component remaining unpaid. The
Tribunal held that in its considered opinion the same would not tantamount to
interest on interest as alleged by the CIT(A) in his order. The Tribunal
observed that this issue is already settled in favour of the assessee by the
following decisions of this Tribunal:

a. Union
Bank of India vs. ACIT reported in 162 ITD 142 dated 11^th August,
2016;

b.
Bank
of Baroda vs. DCIT in ITA No.646/Mum/2017 dated 20^th December, 2018.

The
Tribunal directed the A.O. to compute the correct amount of interest allowable
to the assessee as directed by the CIT(A) as on the date of giving effect to
the Tribunal’s order, i.e., 6^th September, 2013. It further held
that the refund granted on 6^th September, 2013 be first appropriated
or adjusted against such correct amount of interest and, consequently, the
shortfall of refund is to be regarded as shortfall of tax and that shortfall
should then be considered for the purpose of computing further interest payable
to the assessee u/s 244A till the date of grant of such refund.

The
grounds raised by the assessee for both the years were allowed.

The Revenue was in appeal against the direction of the
CIT(A) granting interest on self- assessment tax paid u/s 244A(1)(b).The Revenue alleged that interest
on self-assessment tax is not payable as the delay is attributable to the
assessee because the assessee did not claim refund in the return of income. The
Tribunal found merit in the submission made on behalf of the assessee that the
delay was not attributable to the assessee as the assessee while filing its
return for A.Ys. 2007-08 and 2008-09 had indeed made a claim in the return of
income by way of notes to the return of income and had also clarified in the
said note that tax has been paid on certain fringe benefits only out of
abundant caution. The Tribunal held that the notes forming part of the return
should be read together with the return. Hence, it cannot be said that the
assessee never made such a claim of interest in the return of income for the
respective years. The Tribunal held that no delay could be attributable on the
part of the assessee in this regard.

Both the
appeals filed by the assessee were allowed and both the appeals filed by the
Revenue were dismissed.

shailesh.kwebmaker

Section 80JJAA – Assessee cannot be denied deduction u/s 80JJAA, provided that such employees fulfil the condition of being employed for 300 days for the year under consideration, even though such employees do not fulfil the condition of being employed for 300 days in the immediately preceding assessment year

9. Tata Elxsi Ltd. vs. JCIT B.R. Baskaran (A.M.) and Beena Pillai (J.M.) ITA
No.3445/Bang/2018 A.Y.: 2014-15 Date of order: 29^th October, 2020
Counsel for Assessee / Revenue: Padamchand Khincha / Muzaffar Hussain

Section 80JJAA
– Assessee cannot be denied deduction u/s 80JJAA, provided that such employees
fulfil the condition of being employed for 300 days for the year under
consideration, even though such employees do not fulfil the condition of being
employed for 300 days in the immediately preceding assessment year

FACTS

The assessee, a
company engaged in the business of distributed systems, design and development
of hardware and software and digital content creation, filed its return of
income for the assessment year under consideration declaring total income of
Rs. 98,28,88,380. In the return of income, the assessee claimed deduction of
Rs. 10,51,99,796 u/s 80JJAA.

The A.O. rejected the claim of the assessee for non-fulfilment of the
following two conditions:

i) that the assessee is
not engaged in the manufacture or production of an article or thing as per the
conditions laid down u/s 80JJAA; and

ii) the condition of 300
days to be fulfilled by the regular workmen as per the provisions does not
stand fulfilled.

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 where it was submitted that
this was the third year of such a claim by the assessee and that the employees
against whose wages the deduction has been claimed satisfy the necessary conditions.
Reliance was placed on the observations of the coordinate bench of the Tribunal
in Texas Instruments (India) Pvt. Ltd. vs. ACIT (2020) 115 Taxmann.com
154 regarding allowability of the claim to the assessee.

HELD

The Tribunal noted that the A.O. denied benefit to the assessee on the
reasoning that the assessee was denied benefit against the employees in the
first year of their employment and that the assessee being a software
development company was not eligible for deduction.

The Tribunal noted the view of the Tribunal in the case of Texas
Instruments (India) Pvt. Ltd. vs. ACIT (Supra)so far as the first
objection of the A.O. regarding non-satisfaction with respect to additional
wages paid to new employees in the first year of employment is concerned. The
Tribunal held that from the observations of the Tribunal in that case, there is
no doubt that the assessee cannot be denied deduction u/s 80JJAA provided that
such employees fulfil the condition of being employed for 300 days for the year
under consideration even though such employees do not fulfil the condition of
being employed for 300 days in the immediately preceding assessment year.

However, since
the details of fulfilment of the number of days of such employees, on whose salary
deduction has been claimed by the assessee, was not available on record, the
Tribunal was unable to verify whether the necessary condition of 300 days stood
fulfilled. It agreed with the DR that nothing on record placed before the bench
reveals that this is the third year of claim by the assessee as has been
submitted at page 223 of the paper book. The Tribunal, therefore, remanded the
issue to the A.O. to verify these details in terms of new employees having
satisfied the 300 days’ criterion during the year. It directed the assessee to
provide all details regarding number of regular workmen / employees, number of
new workmen / employees added for each of the immediately three preceding
assessment years to the A.O. who shall then analyse fulfilment of the condition
in respect of new employees / workmen against whom the claim has been made by
the assessee u/s 80JJAA and allow deduction under that section.

This ground of
appeal filed by the assessee was allowed.

Contributors’ comments: The Finance Act, 2018 has
added a second proviso to the definition of additional employee in
Explanation (ii) to section 80JJAA. So, the ratio of the above decision
would be relevant for the period prior to the amendment by the Finance Act,
2018.

shailesh.kwebmaker

TAX EXEMPTION FOR A REWARD

ISSUE FOR CONSIDERATION

A reward by the Central
Government or a State Government for purposes approved by the Central Government
in the public interest, is exempted from taxation under clause (ii) of section
10(17A) of the Income-tax Act, 1961. Likewise, a receipt of an award instituted
in the public interest by the Central Government or any State Government or by
any other body and approved by the Central Government, is exempt from taxation
as per clause (i) of section 10(17A) of the Act.

Section 10(17A) reads as under;

‘Any payment made, whether in cash or in kind –

(i) in pursuance of any award instituted in the public interest by
the Central Government or any State Government or instituted by any other body
and approved by the Central Government in this behalf; or

(ii) as a reward by the Central Government or any State Government
for such purposes as may be approved by the Central Government in this behalf in
the public interest’.

A controversy has arisen in the context of the eligibility of a
reward by the Central Government or a State Government for the purposes of
exemption from tax under clause (ii) of section 10(17A) where the reward so
conferred is not expressly approved by the Central Government. The issue is
whether such approval can be construed to be implied in a reward so
conferred.

The Patna and Delhi High Courts in the past had held that the awards
instituted by the Government required approval by the Central Government, while
recently the Madras High Court, following an earlier decision, has held that
express approval is not required for the awards so instituted by such Government
and the approval can be implied also and can be gathered from the facts in the
public domain or can be read into a reward.

S.N. SINGH’S CASE

The issue before the Patna High Court first arose in the case of
S.N. Singh, 192 ITR 306 followed by a case before the Delhi High Court in the case of
J.C. Malhotra, 230 ITR
361.

In this case, the assessee, an individual,
was working as an ITO at the material time.. In
appreciation of the meritorious work done by the Income-tax personnel for the
success of the Voluntary Disclosure Scheme, 1975 the Government of India decided
to grant a reward of an amount equal to one month’s basic pay (vide Notification dated 16^th January, 1976). In pursuance of
the Notification, the assessee received a sum by way
of a reward during the assessment year 1976-77. The assessee claimed exemption from income-tax of this amount
under the then section 10(17B). The ITO rejected that claim.

On appeal, the AAC upheld the contention advanced on behalf of the
assessee that the amount of reward could not be
included in computing his total income in view of the provisions of then section
10(17B). On further appeal, the Tribunal agreed with the finding of the AAC and
dismissed the appeal. Aggrieved by the order passed by the Tribunal, the Revenue
sought reference and it was at the instance of the Revenue that the following
question of law had been referred to the Patna High Court for its
opinion:

‘Whether, on the facts and in the circumstances of the case, the
Tribunal has rightly held that the award of Rs. 1,150
received by the assessee is exempt from income-tax u/s
10(17B) of the Income-tax Act, 1961?’

At the time of hearing, no one appeared on behalf of the assessee. From a perusal of the provision it was clear to
the Court that a payment made as reward by the State or Central Government was
not includible in computing the total income only when the reward was for such
purposes as might be approved by the Central Government in that behalf in the
public interest. The Court found that there was no material on record for
holding that the purpose for which the reward in question had been given had
been approved by the Central Government in public interest for the applicability
of clause (17B) of section 10. The Court noted that it was no doubt true that
the payment had been made by the Central Government to the assessee as a reward and that the said payment was also in
the public interest. However, unless and until it was shown by the assessee that such reward had been approved by the Central
Government for purposes of exemption u/s 10(17B), the Court held that such
reward would not qualify for exemption under that section and that the Tribunal, therefore, was
not right in holding that the reward received by the assessee was exempt from income-tax u/s 10(17B).

In the case of CIT vs. J.C. Malhotra, 230 ITR 361
(Delhi) the assessee, who was an ITO at the
relevant time, had been given a reward by the Central Government directly in
connection with the Voluntary Disclosure Scheme. The Tribunal had upheld the
claim of exemption holding that the cash award was exempt from taxation u/s
10(17B). On further appeal by the Revenue, the Delhi High Court observed that a
separate approval of the Central Government for the purpose of exemption u/s
10(17B) was not given and that that being the position, the reward was not
eligible for exemption from Income-tax by relying upon the decision in the case
of CIT vs. S.N. Singh, ITO (Supra).

THE K. VIJAYA KUMAR CASE

Recently, the issue again arose in the case of K. Vijaya Kumar, 422 ITR
304.

In this case, the petitioner in the Indian Police Service had been
appointed as Chief of the Special Task Force (STF) leading ‘Operation Cocoon’
against forest brigand Veerapan, leading to the
latter’s fatal encounter on 18^th October, 2004. In recognition of the
special and commendable services of the STF, the Government of Tamil Nadu had
issued G.O.Ms. No. 364, Housing and Urban Development Department dated
28^th October, 2004 instituting an award in national interest to
personnel of the STF for the valuable services rendered by them as part of the
team. In consequence thereof, G.O.Ms. No. 16, Housing
and Urban Development Department dated 12^th January, 2006 was issued
sanctioning a sum of Rs. 54,29,88,200 towards the cost of 773 plots to be allotted to
STF personnel, including the petitioner. A specific
G.O.Ms. 368, Housing and Urban Development dated 29^th October,
2004 read with G.O.Ms. No. 763 was issued for first allotting an HIG Plot
bearing No. 1A-642 at Thiruvanmiyur Scheme to the
petitioner, subsequently modified to Plot No. 1 adjacent to Andaman Guest House
at Anna Nagar West Extension. A registered deed of sale had been executed on
27^th November, 2009 in consideration of Rs.
1,08,43,000 paid by the Government of Tamil Nadu on his
behalf to the Tamil Nadu Housing Board.

It appears that the assessee had sold the
plot of land and had offered the capital gains for taxation, computed after
deducting the cost of the land that was paid by the Government. The assessment
was completed u/s 143(3) r.w.s. 147 and the capital
gain as computed by the assessee was accepted by the
A.O.

The order of the A.O. was sought to be revised by the Commissioner
u/s 263. In the said order u/s 263, the exemption granted u/s 10(17A) in respect
of the reward of land was questioned by the Commissioner.

At paragraph 8 of the order, the Assessing Authority was directed to
allow the claim of exemption u/s 10(17A) only if the assessee was able to produce an order granting approval of
exemption by the Government of India u/s 10(17A)(ii).

Admitting the writ petition challenging the order, the single judge
of the Madras High Court noted that the question that arose related to whether
the reference to ‘approval’ in section 10(17A) included an implied approval or
whether such approval had to be express.

The Court, referring to the legislative history of the provision,
observed that the erstwhile clause (17A) contained a proviso that required that the ‘effective date’ from which the approval was
granted was to be specified in the order of the Central Government granting such
approval. Noting that the proviso had been omitted in the substituted provision, effective
1^st April, 1989 onwards, it appeared to the Court that while
enlarging the clauses generally, by obviating specific reference to the purposes
for which the awards could be given, the Legislature had also done away with the
specification of a written approval from the Central Government with effect from
1^st April, 1989.

The Madras High Court, approving the decision of the Division Bench
of the Court in the case of CIT vs. J.G. Gopinath, 231 ITR
229 held that the amount of reward received by the assessee was not taxable and was exempt from tax. The single
judge of the Court noted with approval the following part of the decision in the
case of CIT vs. J.G. Gopinath
(Supra):

‘To quote the Ministry of Finance letter F. No. 1-11015/1/76 Ad. IX,
dated January 16, 1976, the first paragraph itself explains the circumstances
under which it is granted, “I am directed to state that in appreciation of the
meritorious work done by the Income-tax personnel for the success of the
voluntary disclosure schemes, the Government have decided to grant them reward
of an amount equal to one month’s basic pay.”

The above extract makes it clear that such reward was granted in
public interest. It would be surprising if the Government were to grant rewards
for reasons other than public interest. It is, therefore, evident that the terms
of section 10(17B) are completely satisfied in the present case as the circular
gives the circumstances under which the rewards are granted. The voluntary
disclosure scheme could only have been conceived in public interest as we do not
see any other reason for this scheme coming into existence. If any person
rendered sincere work to make this scheme a success, and if he is rewarded for
it, such grant of reward cannot but be in public interest. There is no specific
mode of approval indicated in the statute. No further approval is necessary or
called for. The section is clear in its language and does not raise any problem
of construction. Therefore, we do not find that any question of law arises out
of the Tribunal’s order. Even assuming that a question of law arises, the answer
is self-evident and, therefore, the reference shall be wholly academic and
unnecessary. The petition is accordingly dismissed.’

The Court also took note of the contrary view expressed by the Patna
High Court in CIT vs. S.N. Singh (Supra) and the Delhi High Court in CIT vs. J.C. Malhotra (Supra).
The Court observed that the Division Bench of the Patna High Court
took a view directly opposed to the view expressed by the Madras High Court in
the J.G. Gopinath case and the said order delivered prior to the decision of this
Court in the J.G. Gopinath case had not been taken into consideration by the Madras High Court.
It was noted that the Patna High Court had proceeded on a strict interpretation
of the provision rejecting the claim of exemption on the ground that though the
reward by the Central Government to the assessee was
indisputably in public interest, approval by the Central Government was
mandatory for the purpose of exemption u/s 10(17B).

The single judge of the Court observed that sitting in Madras, he was
bound by the view taken by the jurisdictional High Court to the effect that
‘approval’ of the Centre might either be express or implied, and in the latter
case, gleaned from surrounding circumstances and events. Thus, that was the
perspective from which the eligibility of the petitioner u/s 10(17A) to
exemption or otherwise should be tested and decided.

On a reading of section 321 of the Criminal Procedure Code and the
judgment of a three-Judge Bench in the case of Abdul Karim vs. State of Karnataka [2000] 8
SCC 710, the issue faced by the country because of the operations carried on
by Veerapan and his associates was found to be grave
and enormous by the single judge of the Madras High Court. The categorical
assertion of the Apex Court that Veerapan was acting
in consultation with secessionist organisations with the object of splitting
India, in the Court’s view, was a vital consideration to decide the present
lis.

The object of section 10(17A), the Court noted, was to reward an
individual who had been recognised by the Centre or the State for rendition of
services in public interest. The Court noted that no specification or
prescription had been set out in terms of how the approval was to be styled or
even as to whether a formal written approval was required and nowhere in the
Rules / Forms was there reference to a format of approval to be issued in this
regard.

One should, in the Court’s view, interpret the provision and its
application in a purposive manner bearing in mind the spirit and object for
which it had been enacted. It was clear that the object of such a reward was by
way of recognition by the State of an individual’s efforts in protecting public
interest and serving society in a significant manner. Thus, in the Court’s
considered view, the reference to ‘approval’ in section 10(17A) did not only
connote a paper conveying approval and bearing the stamp and seal of the Central
Government, but any material available in public domain indicating recognition
for such services, rendered in public interest.

Allowing the petition of the assessee, the
Court in the concluding paragraph held as under: ‘The petitioner has been recognised by the Central Government on
several occasions for meritorious and distinguished services and from the
information available in public domain, it is seen that he was awarded the Jammu
& Kashmir Medal, Counter Insurgency Medal, Police Medal for Meritorious
Service (1993) and the President’s Police Medal for Distinguished Service
(1999). Specifically for his role in nabbing Veerapan,
he was awarded the President’s Police Medal for Gallantry on the eve of
Independence Day, 2005. What more! If this does not constitute recognition by
the Centre of service in public interest, for the same purposes for which the
State Government has rewarded him, I fail to understand what is. The reward
under section 10(17A)(ii) is specific to certain “purposes” as may be approved
by the Central Government in public interest and the “purpose” of the reward by
the State Government has been echoed and reiterated by the Centre with the
presentation of the Gallantry Award to the petitioner in 2005. This aspect of
the matter is also validated by the Supreme Court in Abdul Karim (Supra) as can be seen from the judgment extracted earlier, where the Bench
makes observations on the notoriety of Veerapan and
the threat that he posed to the country as a whole.

Seen in the context of the recognition by the Centre of the
petitioners’ gallantry as well as the observations of the Supreme Court in
Abdul Karim (Supra) and the ratio of the decision in J.G. Gopinath (Supra), the approval of the Centre in this case, is rendered a
fait accompli.’

OBSERVATIONS

At the outset, for the record it is noted that in the original scheme
of the Act of 1961, section 10(17A) [inserted by the Direct Taxes (Amendment)
Act, 1974] provided for tax exemption for an award w.r.e.f. 1^st April, 1973 and a separate provision
in the form of section 10(17B) [inserted by the Direct Taxes (Amendment) Act,
1974] provided for tax exemption for a reward w.r.e.f.
1^stApril, 1973. The two reliefs are now conferred under a new
provision of section 10(17A) made effective from 1^st April, 1989.
Clause (i) of the said new section provides for exemption for an award, while
clause (ii) provides for exemption for a reward. While both the clauses provide
for some approval by the Central Government, the issue for the present
discussion is limited to whether such approval should be specifically obtained
or such approval should be presumed to have been granted when a reward is
conferred, especially by the Central Government.

The issue under consideration moves in a very narrow compass. There
is no dispute that a reward, to qualify for exemption from tax, should be one
that is approved by the Central Government. The debate is about whether such an
approval should necessarily be in writing and express under a written order or
whether such an order of approval can be gathered by implication, and whether
implied approval can be gathered by referring to the facts of the services of
the recipient available in public domain. In other words, by the very fact that
a person has been rewarded for his services to the public, it should be
construed that it was in public interest to do so and the availability of
information of his services in public domain should be a fact good enough to
imply a tacit approval by the Central Government of such a reward, and no
insistence should be pressed for a written approval.

It is possible to hold that the requirement of a written order has
been done away with by the deletion of the proviso w.e.f. 1^st April, 1989 in the then prevailing 10(17A), which
removed the requirement of referring to the purpose and the assessment year in
the order, implying that the Legislature has done away with the specification of
written approval from that date.

The legislative intent behind the exemption, no doubt, is not to tax
a person in receipt of a reward from the Central or State Government. The
approval for the purpose is incidental to the main intention of exempting such
receipts. The need for such approval in writing is at the most a procedural or
technical requirement, the non-compliance of which should not result in total
denial of the exemption, defeating the legislative intent.

The very fact that the reward is conferred by the Government along
with the fact that the facts of the rewards are in the public domain, should be
sufficient to determine the grant of exemption from tax in public
interest.

A purposive and liberal interpretation here advances the cause
of justice and public good.

Writing is
the process by which you realize that you do not
understand what you are
talking about

— Shane Parrish

There is no
austerity equal to a balanced mind, and there is no happiness equal
to
contentment; there is no disease like covetousness, and no virtue like
mercy

— Chanakya

shailesh.kwebmaker

Proceedings under the Income-tax Act cannot be continued during the moratorium period declared under the Insolvency and Bankruptcy Code, 2016

21. [2020] 78 ITR(T) 214 (Del.)(Trib.) Shamken Multifab Ltd. vs. DCIT ITA (SS) Nos. 149, 150, 3549, 3550 &
3551 (Delhi) of 2007 A.Y.: 2003-04 Date of order: 22^nd October,
2019

Proceedings
under the Income-tax Act cannot be continued during the moratorium period
declared under the Insolvency and Bankruptcy Code, 2016

FACTS

A petition
to initiate Corporate Insolvency Resolution Process (CIRP) in accordance with
provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) against the
assessee was admitted by the National Company Law Tribunal and the CIRP had
commenced w.e.f. 29^th May, 2018; accordingly, a moratorium period
was declared.

The
assessee contended that the appeals filed by the Income-tax Department against
the company cannot continue in view of the provisions of section 14 of the IBC.

Revenue
argued that the expression ‘proceeding’ envisaged in section 14 of the IBC will
not include Income-tax proceedings and hence it can be continued even during
the moratorium period. Citing Rule 26 of the Income-tax Appellate Tribunal
Rules, 1963 it was contended that the proceedings before the ITAT can continue
even after the declaration of insolvency.

The
question before the Tribunal was whether Income-tax proceedings can be
continued during the moratorium period declared under the IBC.

HELD

Considering
section 14 of the IBC, the Tribunal held that the institution of suits or
continuation of pending suits or proceedings against the corporate debtor
(i.e., the assessee), including execution of any judgment or decree or order in
any court of law, tribunal, arbitration panel or other authority,is prohibited
during the moratorium period.

Reliance
was placed on the decision of the Supreme Court in the case of Alchemist Asset Reconstruction Co. Ltd. vs. Hotel Gaudavan (P)
Ltd. [2017] 88
taxmann.com 202 wherein it was held that even
arbitration proceedings cannot be initiated after imposition of the moratorium
period.

The
Tribunal held that the Apex Court in the case of Pr.
CIT vs. Monnet Ispat & Energy Ltd. [SLP (C) No. 6487 of 2018, dated 10^th
August, 2018] had upheld the overriding nature
and supremacy of the provisions of the IBC over any other enactment in case of
conflicting provisions, by virtue of a non-obstante
clause contained in section 238 of the IBC; and hence even proceedings under
the Income-tax Act cannot be continued during the period of moratorium.

Reference
was also made to a recent amendment in the IBC according to which any
resolution plan or liquidation order as decided by the competent authority will
be binding on all stakeholders, including the Government. This amendment
prevents even the Direct & Indirect Tax Departments from questioning the
Resolution Plan or liquidation order as well as the jurisdiction of Tribunals
with regard to IBC. Accordingly, all the appeals filed by the Revenue were
dismissed by the Tribunal.

It was
also held that even appeals filed by the assessee cannot be sustained as the
assessee did not furnish any permission from the National Company Law Tribunal
in this regard. [Reliance was placed on the decision of the Madras High Court
in the case of Mrs. Jai Rajkumar vs. Standic Bank Ghana
Ltd. [2019] 101
taxmann.com 329 (Mad.).].

Accordingly,
all the appeals of the Revenue as well as of the assessee were dismissed.

shailesh.kwebmaker

Non-furnishing of Form 15G/15H before CIT by the deductor is merely procedural defect and cannot lead to disallowance u/s 40(a)(ia)

20. [2020] 79 ITR(T) 207 (Bang.)(Trib.) JCIT
vs. Karnataka Vikas Grameena Bank ITA Nos.: 1391 & 1392 (Bang.) of 2016
A.Ys.: 2012-13 and 2013-14 Date of order: 23^rd January, 2020

Non-furnishing
of Form 15G/15H before CIT by the deductor is merely procedural defect and
cannot lead to disallowance u/s 40(a)(ia)

FACTS

The assessee
was engaged in the business of banking. As per the provisions of section 194A,
the assesse was liable to deduct tax at source on interest paid in excess of
Rs. 10,000 to its depositors. However, some depositors had provided Form
15G/15H to the assesse and hence tax was not deducted from interest paid to
such depositors. The A.O. contended that the assessee ought to have furnished
those Forms 15G/15H to the Commissioner of Income-tax within the prescribed
time which the assessee failed to do and hence the interest paid to such
depositors was subject to disallowance u/s 40(a)(ia) on account of failure to
deduct tax at source.

The CIT(A)
deleted the disallowance made by the A.O. by holding that there was no breach
committed by the assessee by not filing Form No. 15G/H before the Commissioner
of Income-tax.

HELD

The issue was covered by the decision of the Tribunal in the assessee’s
own case for A.Y. 2010-11 in ITA Nos.: 673 & 674/Bang/2014.
In this case, the Tribunal had relied upon the decision of the Karnataka High
Court in CIT vs. Sri Marikamba Transport Co. [ITA No. 553/2015; order
dated 13^th April, 2015] wherein, in the context of section
194C, it was held that once the conditions of section 194C(3) were satisfied,
the liability of the deductor to deduct tax at source would cease and,
accordingly, disallowance u/s 40(a)(ia) would also not arise; filing of Form
No. 15-I/J was held as directory and not mandatory.

Accordingly,the Tribunal held that no disallowance can be made u/s
40(a)(ia) merely because the assessee did not furnish Form 15G/15H to the
Commissioner. The requirement of filing of such forms before the prescribed
authority is only procedural and that cannot result in a disallowance u/s
40(a)(ia). Accordingly, disallowance u/s 40(a)(ia) was held unsustainable.

shailesh.kwebmaker

Section 56(2)(viia) – Where share in profits of a firm during its subsistence and share in assets after its dissolution were consideration for capital contribution, such ‘consideration’ was ‘indeterminate’ – The provisions of section 56(2)(viia) could not be applicable to determine inadequacy or otherwise of such consideration and also to capital contribution of a partner made in the firm

19. [2020] 121 taxmann.com 150 (Hyd.)(Trib.) ITO vs. Shrilekha Business Consultancy
(P) Ltd. A.Ys.: 2014-15 and 2015-16 Date of order: 4^thNovember, 2020

Section
56(2)(viia) – Where share in profits of a firm during its subsistence and share
in assets after its dissolution were consideration for capital contribution,
such ‘consideration’ was ‘indeterminate’ – The provisions of section
56(2)(viia) could not be applicable to determine inadequacy or otherwise of
such consideration and also to capital contribution of a partner made in the
firm

FACTS

The
assessee, a partnership firm later converted into a private company, was
engaged in financing and holding investments. Certain capital contribution was
made by Piramal Enterprise Ltd. (PEL) during A.Y. 2015-16. PEL had decided to
acquire 20% stake in Shriram Capital Ltd. (SCL) through investment in the
assessee (Rs. 6.22 crores recorded as partner’s capital and Rs. 2,111.23 crores
as capital reserve representing 75% share). This capital contribution was then
utilised to make investment in the shares of Novus (a group company of SCL)
which in turn invested in SCL through private placement and got ultimately
merged with SCL in 2014.

The A.O.
observed that the assessee’s Group as a whole was supposed to pay tax on the
aggregate consideration received of Rs. 2,100 crores from PEL and that in order
to avoid tax liability on the same, SCL and the assessee firm had devised a new
method to avoid tax liability. The A.O. made an addition of amounts credited in
capital reserve, treating the same as income u/s 56.

Aggrieved,
the assessee preferred an appeal to the CIT(A) who deleted the said addition.

HELD

The
Tribunal held that even though the assessee firm had acted as an intermediate
entity, it could not be construed as a conduit between PEL and SCL and the
entire transactions are to be understood in a holistic manner and cannot be
construed as a colourable device or a sham transaction as admittedly there is
no element of any income within the meaning of section 2(24) in the entire
gamut of the transaction.

As far as the applicability of section 56(2)(viia) was concerned, it was
observed that when a partner retires from the firm, he does not walk away with
the credit balance in his capital account alone, instead, he would be entitled
to the share of the profits / losses, besides the assets of the firm. The
provisions of the section 56(2)(viia) deal with transaction / contract between
the existing ‘firm’ and ‘any person’ which are not in the nature of capital
contribution. The term ‘person’ mentioned in section 56(2)(viia) does not cover
‘partner’ in respect of capital contribution and, accordingly, section
56(2)(viia) cannot be made applicable in the case of capital contribution made
by a partner to the firm. The provisions of section 56(2)(viia) could not be
made applicable at all in the case of capital contribution made by a partner in
kind.

The appeal
of the Revenue was dismissed.

shailesh.kwebmaker

Section 56(2)(vii)(b)(ii) – The provisions of section 56(2)(vii)(b)(ii) will apply if they were on the statute as on the date of entering into the agreement

18. [2020] 118 taxmann.com 463
(Visak.)(Trib.) ACIT vs. Anala Anjibabu A.Y.: 2014-15 Date of order: 17^thAugust, 2020

Section
56(2)(vii)(b)(ii) – The provisions of section 56(2)(vii)(b)(ii) will apply if
they were on the statute as on the date of entering into the agreement

FACTS

In the course of assessment
proceedings, the A.O. found that the assessee has purchased an immovable
property at Srivalli Nagar from Smt. Simhadri Sunitha for a consideration of
Rs. 5 crores and the transaction was registered on 28^th October,
2013. The value of the said property for registration purpose was fixed at Rs.
12,67,82,500. The A.O. invoked the provisions of section 56(2)(vii)(b) and
taxed the difference between the consideration paid and the SRO value as on the
date of agreement and completed the assessment.

Aggrieved, the assessee
preferred an appeal to the CIT(A) who allowed the appeal following the ratio of the decision of the
Visakhapatnam Bench of the Tribunal in the case of M. Siva Parvathi vs. ITO [2010] 129 TTJ 463 (Visakhapatnam),
rendered in the context of section 50C. He held that since the agreement for
sale was entered into by the assessee for the purpose of purchase of the
property in August, 2012 related to the F.Y. 2012-13, relevant to the A.Y.
2013-14, which is prior to insertion of section 56(2)(vii)(b), section
56(2)(vii)(b) has no application in the assessee’s case.

Aggrieved, the Revenue
preferred an appeal to the Tribunal contending that section 50C and section
56(2)(vii)(b) are independent provisions related to different situations and
the case law decided for the application of section 50C cannot be applied for
deciding the issue relating to the provisions of section 56(2)(vii)(b).

HELD

The Tribunal observed –

(i) that the question to be decided is whether or
not, in the facts and circumstances of the case, the provisions of section
56(2)(vii)(b)(ii) are applicable;

(ii) that the provisions of section
56(2)(vii)(b)(ii) came into the statute by the Finance Act, 2013 w.e.f. 1^stApril, 2014, i.e., A.Y. 2014-15. In the instant case, the assessee had
entered into the agreement for the purchase of the property on 13^th
August, 2012 for a consideration of Rs. 5 crores and paid part of the sale
consideration by cheque. In the assessment order, the A.O. acknowledged the
fact that the assessee had entered into an agreement for purchase of the
property and paid the advance of Rs. 5 crores on 13^th August, 2012.
There is no dispute with regard to the existence of the agreement;

(iii) from
the order of the CIT(A) it became clear that the property was in dispute due to
a bank loan and the original title deeds were not available for complying with
the sale formalities. Therefore, there was a delay in obtaining the title deeds
for completing the registration. Thus, there is a genuine cause for delay in
getting the property registered;

(iv) As
per the provisions of the Act, from the A.Y. 2014-15, sub clause (ii) has been
introduced so as to enable the A.O. to tax the difference in consideration if
the consideration paid is less than the stamp duty value. The A.O. is not
permitted to invoke the provisions of section 56(2)(vii)(b)(ii) in the absence
of sub-clause (ii) in the
Act as on the date of agreement.

The
Tribunal held that in this case the agreement was entered into on 13^th
August, 2012 for purchase of the property and part consideration was paid.
Hence, the provisions existing as on the date of entering into the agreement
required to be applied for deciding the taxable income. The Tribunal in the
case of D.S.N. Malleswara Rao has held
that the law as applicable as on the date of agreement required to be applied
for taxing the income. The Department has not made out any case for application
of 56(2)(vii)(b) and since the provisions of section 56(2)(vii)(b)(ii) were not
available in the statute as on the date of entering into the agreement,
following the reasoning given in the case of M.
Siva Parvathi (Supra), the same cannot be made
applicable to the assessee. The Department has not brought any evidence to show
that there was extra consideration paid by the assessee over and above the sale
agreement or sale deed.

It held that the CIT(A) has rightly applied the
decision of this Tribunal in the assessee’s case and deleted the addition

shailesh.kwebmaker

Section 56(2)(viia), Rule 11UA – Valuation report prepared under DCF method should be scrutinised by the A.O. and if necessary he can carry out a fresh valuation either by himself or by calling for a determination from an independent valuer to confront the assessee – However, he cannot change the method of valuation but has to follow the DCF method only

17. [2020] 120 taxmann.com 238
(Bang.)(Trib.) Valencia Nutrition Ltd. vs. DCIT A.Y.: 2015-16 Date of order: 9^thOctober, 2020

Section
56(2)(viia), Rule 11UA – Valuation report prepared under DCF method should be
scrutinised by the A.O. and if necessary he can carry out a fresh valuation
either by himself or by calling for a determination from an independent valuer
to confront the assessee – However, he cannot change the method of valuation
but has to follow the DCF method only

FACTS

During the financial year
relevant to A.Y. 2015-16, the assessee company, engaged in the business of
manufacturing of energy drinks with the brand name ‘Bounce & Vita-Me’,
collected share capital along with share premium to the tune of Rs. 1.55 crores
by issue of 24,538 shares having a face value of Rs. 10 each at a share premium
of Rs. 622 per share.

The A.O. noticed that the
assessee has followed the ‘Discounted Cash Flow’ method (DCF method) for
determining the share price. As per the valuation report prepared under the DCF
method, the value of one share was determined at Rs. 634. Accordingly, the
assessee had issued shares @ Rs. 632 per share, which included share premium of
Rs. 622. The A.O. held that the value of the share @ Rs. 632 was an inflated
value since the share valuation under the DCF method has been carried out on
the basis of projections and estimations given by the management. He held that
the value of the share should be based on ‘Net Asset Method’ mentioned in Rule
11UA of the Income-tax Rules. Accordingly, the A.O. worked out the value of the
shares at Rs. 75 per share under the Net Asset Method. Since the par value of
the share is
Rs. 10, the A.O. took the view that the assessee should have collected a
maximum share premium of Rs. 65 per share. He held that the share premium
collected in excess of Rs. 65, i.e., Rs. 557 per share, is excess share premium
and he assessed Rs. 1,36,67,666 being the total amount of excess share premium
u/s 56(2)(viib).

Aggrieved, the assessee
preferred an appeal to the CIT(A) who confirmed the addition made by the A.O.

Aggrieved, the assessee
preferred an appeal to the Tribunal and prayed that this issue may be restored
to the file of the A.O. with a direction to examine the valuation report furnished
by the assessee under the DCF method.

HELD

The Tribunal noticed that
the coordinate bench has examined the issue of valuation of shares under the
DCF method in the case of Innoviti Payment Solutions
(P) Ltd. [ITA No. 1278/Bang/2018 dated 9^th January, 2019]
and has followed the decision rendered by the Bombay High Court in the case of Vodafone M Pesa Ltd. vs. PCIT 164 DTR 257
and has held that the A.O. should scrutinise the valuation report prepared
under the DCF method and, if necessary, he can carry out fresh valuation either
by himself or by calling for a final determination from an independent valuer
to confront the assessee. The A.O. cannot change the method of valuation and he
has follow only the DCF method.

The decision rendered in
the case of Innoviti Payment Solutions (P) Ltd.
(Supra) was followed by another coordinate bench in the case of Futura Business Solutions (P) Ltd. [ITA No. 3404 (Bang.) 2018].

The Tribunal noted that in
the case of this assessee,too, the A.O. has proceeded to determine the value of
shares in both the years by adopting different methods without scrutinising the
valuation report furnished by the assessee under the DCF method. Accordingly,
following the decisions rendered by the coordinate benches, the Tribunal set
aside the order passed by the CIT(A) and restored the impugned issue to the
file of the A.O. with the direction to examine it afresh as per the directions
given by the coordinate bench in the case of Innoviti
Payment Solutions (P) Ltd. (Supra).

shailesh.kwebmaker

Section 56(2)(vii)(b)(ii) – Even if there is no separate agreement between the parties in writing, but the agreement which is registered itself shows that the terms and conditions as contained in the said agreement were agreed between the parties at the time of booking of the flat

16. [2020] 120 taxmann.com 216 (Jai.)(Trib.) Radha Kishan Kungwani vs. ITO A.Y.: 2015-16 Date of order: 19^th August, 2020

Section
56(2)(vii)(b)(ii) – Even if there is no separate agreement between the parties
in writing, but the agreement which is registered itself shows that the terms
and conditions as contained in the said agreement were agreed between the
parties at the time of booking of the flat

FACTS

The assessee, vide sale agreement dated 16^th
September, 2014 purchased a flat from HDIL for a consideration of Rs.
1,38,03,550. The stamp duty value of the flat at the time of the registration
of the sale agreement was Rs. 1,53,43,036. The A.O. invoked the provisions of
section 56(2)(vii) for making an addition of the differential amount between
the stamp duty valuation and purchase consideration paid by the assessee.

The
assessee claimed that he booked the flat on 6^thSeptember, 2010 and
made advance payments of Rs. 2,51,000 on 10^th October, 2010 and Rs.
9,87,090 on 14^th October, 2010, the total amounting to Rs. 12,38,090,
and contended that the stamp duty value as on the date of agreement be
considered instead of the stamp duty value as on the date of registration. The
A.O. rejected this contention and made an addition of Rs. 15,39,486, being the
difference between the stamp duty value on the date of registration of the agreement and the amount of
consideration paid by the assessee u/s 56(2)(vii).

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

The assessee then preferred
an appeal to the Tribunal.

HELD

The
Tribunal noted that vide letter dated 16^th October, 2017, the builder
has specifically confirmed that the cost of the flat is Rs. 1,38,03,550 and the
booking was done by payment of Rs. 2,51,000 by cheque dated 10^th
October, 2010 drawn on Andhra Bank. This fact was not disputed by the A.O. This
payment is even reflected in the final sale agreement which is registered. The
terms and conditions which are reduced in writing in the agreement registered
on 16^th September, 2014 relate to the performance of both the
parties right from the beginning, i.e., the date of booking of the flat. All
these facts are duly acknowledged by the parties in the registered agreement,
that earlier there was a booking of the flat and the assessee made part payment
of the consideration.

The Tribunal held that all
these facts clearly established that at the time of booking there was an
agreement between the parties regarding the sale and purchase of the flat and
payment of the purchase consideration as per the agreed schedule. Thus, even if
there is no separate agreement between the parties in writing but the agreement
which is registered itself shows that the terms and conditions as contained in
the said agreement were agreed between the parties at the time of the booking.
On this basis, part payment was made by the assessee on 10^th
October, 2010 and subsequently on 14^th October, both through cheque.

In view of the above, the
Tribunal held that the first and second provisos
to section 56(2)(vii) would be applicable in this case and the stamp duty
valuation or the fair market value of the property shall be considered as on
the date of booking and payment made by the assessee towards the booking.

The Tribunal set aside the
order passed by the CIT(A) and remanded the matter to the record of the A.O. to
apply the stamp duty valuation as on 10^th October, 2010 when the
assessee booked the flat and made the part payment. Consequently, if there is
any difference on account of the stamp duty valuation being higher than the
purchase consideration paid by the assessee, the same would be added to the
income of the assessee under the provisions of section 56(2)(vii)(b).

shailesh.kwebmaker

Section 56(2)(vii)(c) – The provisions of section 56(2)(vii)(c) get attracted only when a higher than proportionate allotment of fresh shares issued by a company is received by a shareholder

15. [2020] 119 taxmann.com 362 (Jai.)(Trib.)
DCIT vs. Smt. Veena Goyal A.Y.: 2013-14 Date of order: 15^thSeptember,
2020

Section 56(2)(vii)(c) – The provisions of section
56(2)(vii)(c) get attracted only when a higher than proportionate allotment of
fresh shares issued by a company is received by a shareholder

FACTS

The assessee was allotted 11,20,000 shares @ Rs. 10
per share, whereas the A.O. determined the fair market value of each share to
be Rs. 20.37. He made an addition of Rs. 1,16,14,400 being the difference
calculated between fair market value and face value u/s 56(2)(vii)(c).

The aggrieved assessee preferred an appeal to the
CIT(A) who, observing that the shareholding percentage of the appellant in the
company was the same both before and after the allotment, allowed the appeal.

Aggrieved, Revenue preferred an appeal to the
Tribunal.

HELD

The Tribunal observed that the issue was the
subject matter of dispute before the ITAT, Mumbai bench in the case of Sudhir
Menon HUF vs. ACIT [2014] 148 ITD 260 wherein the Tribunal held that as
long as there is no disproportional allotment of shares, there was no scope for
any property being received by the taxpayer as there was only an apportionment
of the value of the existing shareholder over a larger number of shares,
consequently no addition u/s 56(2)(vii)(c) would arise.

The Tribunal also noted
that in the case of ACIT vs. Subhodh Menon [2019] 175 ITD 449
(Mum.-Trib.) it has held that only when a higher than proportionate
allotment of fresh shares issued by a company is received by a shareholder do
the provisions of section 56(2)(vii) get attracted.

In the present case, since
the percentage of shareholding before and after the allotment of new shares
thereof remained the same, the Tribunal upheld the order passed by the CIT(A)
and dismissed the appeal filed by the Revenue.

shailesh.kwebmaker

Section 22 – Assessee is builder / developer – Rental income derived is taxable as Business Income and section 22 is not applicable – In respect of unsold flats held as stock-in-trade, Annual Lettable Value cannot be determined u/s 22 since rental income, if any, is taxable as Business Income

8. Osho Developers vs. ACIT (Mumbai) Shamim Yahya (A.M.) and Ravish Sood
(J.M.) ITA Nos. 2372 & 1860/Mum/2019 A.Ys.: 2014-15 & 2015-16 Date of order: 3^rdNovember,
2020 Counsel for Assessee / Revenue: Dr. K.
Shivram and Neelam Jadhav / Uodal Raj Singh

Section
22 – Assessee is builder / developer – Rental income derived is taxable as
Business Income and section 22 is not applicable – In respect of unsold flats
held as stock-in-trade, Annual Lettable Value cannot be determined u/s 22 since
rental income, if any, is taxable as Business Income

FACTS

The
assessee firm was a builder / developer. It had filed its return of income
declaring Nil income. During the course of the assessment proceedings, the A.O.
noticed that the assessee had shown unsold flats in its closing stock.
Following the judgment of the Delhi High Court in the case of CIT vs.
Ansal Housing Finance and Leasing Company Ltd. (2013) 354 ITR 180, the
A.O. assessed to tax the Annual Lettable Value (ALV) of the aforesaid flats u/s
22 as Income from House Property. The assessee tried to distinguish the facts
involved in the case of Ansal. It also contended that the income on the sale of
the unsold flats was liable to be assessed as its Business Income and not as
Income from House Property, therefore, the ALV of the said flats was not
exigible to tax.

Being
aggrieved, the assessee appealed before the CIT(A). Relying on the judgment of
the Bombay High Court in the case of CIT vs. Gundecha Builders (2019) 102
taxman.com 27, where the Court had held that the rental income derived
from the property held as stock-in-trade was taxable as Income from House
Property, the CIT(A) found no infirmity in the A.O.’s action of assessing the
ALV of the unsold flats as Income from House Property.

HELD

The
Tribunal noted that in the case before the Bombay High Court, the assessee had,
in fact, let out the flats. And the issue was as to under which head of rental
income was it to be taxed, as ‘business income’ or as ‘income from house
property’. But in the present appeal filed by the assessee the flats were not
let out and there was no rental income earned by the assessee. Therefore,
according to the Tribunal the decision in the case of Gundecha Builders
would not assist the Revenue.

Referring
to the decision of the Delhi High Court in the case of CIT vs. Ansal
Housing Finance and Leasing Company Ltd. relied on by the Revenue, the
Tribunal noted that the Delhi High Court was of the view that the levy of
income tax in the case of an assessee holding house property was premised not
on whether the assessee carries on business as landlord, but on the ownership.
And on that basis, the ALV of the flats held as stock-in-trade by the assessee
was brought to tax under the head ‘house property’ by the Delhi High Court.
However, the Tribunal noted the contrary decision of the Gujarat High Court in
the case of CIT vs. Neha Builders (2008) 296 ITR 661 where it was
held that rental income derived by an assessee from the property which was held
as stock-in-trade is assessable as Business Income and cannot be assessed under
the head ‘Income from House Property’. According to the Gujarat High Court, any
income derived from the stock would be income from the business and not income
from the property.

In view of the
conflicting decisions of the non-jurisdictional High Courts, the Tribunal
relied on the decision of the Bombay High Court in the case of K.
Subramanian and Anr. vs. Siemens India Ltd. and Anr. (1985) 156 ITR 11
where it was held that where there are conflicting decisions of the
non-jurisdictional High Courts, the view which is in favour of the assessee
should be followed. Accordingly, the Tribunal followed the view taken by the
Gujarat High Court in the case of Neha Builders and allowed the
appeal of the assessee. The Tribunal also noted that a similar view was taken
by the SMC bench of the Mumbai Tribunal in the case of Rajendra
Godshalwar vs. ITO-21(3)(1), Mumbai [ITA No. 7470/Mum/2017, dated 31^st
January, 2019]. Accordingly, the Tribunal held that the ALV of the
flats held by the assessee as part of the stock-in-trade of its business as
that of a builder and developer could not have been determined and thus brought
to tax under the head ‘Income from House Property’.

shailesh.kwebmaker

Assessee being mere trader of scrap would not be liable to collect tax at source u/s 206C when such scrap was not a result of manufacture or mechanical working of materials

14. [2020] 78 ITR (Trib.) 451
(Luck.)(Trib.) Lala Bharat Lal & Sons vs. ITO ITA No. 14, 15 & 16/LKW/2019 A.Ys.: 2014-15 to 2016-17 Date of order: 19^th February,
2020

Assessee
being mere trader of scrap would not be liable to collect tax at source u/s
206C when such scrap was not a result of manufacture or mechanical working of
materials

FACTS

The assessee was in the
business of dealing / trading in metal scrap. For the relevant assessment years
the A.O. held that the assessee was liable to collect tax at source @ 1% of the
sale amount as per the provisions of section 206C(1). The assessee contended
that the sale / trading done by him did not tantamount to sale of scrap as defined
in Explanation (b) to section 206C, as the same had not been generated from
manufacture or mechanical work. This contention was rejected by the CIT(A). The
assessee then filed an appeal before the Tribunal.

The assessee relied on the
decision of the Ahmedabad Tribunal in Navine Fluorine International Ltd.
vs. ACIT [2011] 45 SOT 86 wherein it was held that for invoking the
provisions of Explanation (b) to section 206C, it was necessary that waste and
scrap sold by the assessee should arise from the manufacturing or mechanical
working done by the assessee. Reliance was also placed on Nathulal P.
Lavti vs. ITO [2011] 48 SOT 83 (URO) (Rajkot).

On the other hand, Revenue
placed reliance on the decision of the special bench of the Tribunal in the
case of Bharti Auto Products vs. CIT [2013] 145 ITD 1 (Rajkot)(SB)
which held that all the traders in scrap were also liable to collect tax at
source under the provisions of section 206C.

Against the arguments of
the Revenue, the assessee relied on the decision of the Gujarat High Court in CIT
vs. Priya Blue Industries (P) Ltd. [2016] 381 ITR 210 (Gujarat) wherein
the plea of the Revenue to consider the decision of the special bench in case
of Bharti Auto Products vs. CIT (Supra) was dismissed. Reliance
was also placed on the decision of the Ahmedabad Tribunal in the case of Azizbhai
A. Lada vs. ITO [ITA 765/Ahd/2015] and Dhasawal Traders vs. ITO
[2016] 161 ITD 142 wherein the judgment of the Gujarat High Court in
the case of Priya Blue Industries (P) Ltd. (Supra) was considered
and relief was granted to the assessee.

HELD

The Tribunal held that it
was an undisputed fact that the assessee was not a manufacturer and was only a
dealer in scrap.

In the case of Navine
Fluorine International Ltd. (Supra), it was held that to fall under the
definition of scrap as given in the Explanation to section 206C, the term
‘waste’ and ‘scrap’ are one and it should arise from manufacture and if the
scrap is not coming out of manufacture, then the items do not fall under the
definition of scrap and thus are not liable to TCS.

Further, in the case of ITO
(TDS) vs. Priya Blue Industries (P) Ltd. [ITA No. 2207/ADH/2011], the
Tribunal had held that the words ‘waste’ and ‘scrap’ should have nexus with
manufacturing or mechanical working of materials.

The Tribunal relied upon
the decision of the Gujarat High Court in CIT vs. Priya Blue Industries
(P) Ltd. (Supra), which held that the expression ‘scrap’ defined in
clause (b) of the Explanation to section 206C means ‘waste’ and ‘scrap’ from manufacture
of mechanical working of materials, which is not useable as such and the
expression ‘scrap’ contained in clause (b) of the Explanation to section 206C
shows that any material which is useable as such would not fall within the
ambit of ‘scrap’.

Next, the Tribunal referred
to the decision in the case of Dhasawal Traders vs. ITO (Supra)
which held that when the assessee had not generated any scrap in manufacturing
activity and he was only a trader having sold products which were re-useable as
such, hence he was not supposed to collect tax at source.

It was also held that the
Gujarat High Court had duly considered the decision of the special bench.
Accordingly, the Tribunal, following the decision in CIT vs. Priya Blue
Industries (P) Ltd. (Supra) held that the assessee being a trader of
scrap not involved in manufacturing activity, cannot be fastened with the
provisions of section 206C(1).

shailesh.kwebmaker

CIT(E) cannot pass an order denying registration u/s 12AA (without following the procedure of cancellation provided in the Act) from a particular assessment year by taking the ground that lease rental income exceeding Rs. 25 lakhs received from properties held by the trust violated provisions of section 2(15) when such registration was granted in the same order for prior assessment years

13. [2020] 77 ITR (Trib.) 407
(Cuttack)(Trib.) Orissa Olympic Association vs. CIT(E) ITA No.: 323/CTK/2017 A.Y.: 2009-10 Date of order: 6^th December,
2019

CIT(E)
cannot pass an order denying registration u/s 12AA (without following the
procedure of cancellation provided in the Act) from a particular assessment
year by taking the ground that lease rental income exceeding Rs. 25 lakhs
received from properties held by the trust violated provisions of section 2(15)
when such registration was granted in the same order for prior assessment years

FACTS

The assessee was an
association registered under the Societies Registration Act, 1860 since 1961.
It had made an application for registration u/s 12A in the year 1997 which was
pending disposal. On appeal against the order of assessment for A.Ys. 2002-03
to 2007-08, the Tribunal set aside the assessment pending the disposal of the
petition filed by the assessee u/s 12A by the Income-tax authority.
Accordingly, following the directions of the Tribunal, the CIT(E) called for
information from the assessee society and after considering the submissions,
rejected the application of the association. Aggrieved by this order, the
assessee approached the Tribunal which, vide order in ITA
334/CTK/2011 directed the CIT(E) to look into the matter of
registration afresh, considering the second proviso to section 2(15) as
prospective from 1^stApril, 2009.

Accordingly, after
considering the objects of the assessee, the CIT(E) passed an order stating
that the objects of the assessee were charitable in nature and the activities
were not carried out with the object to earn profits. Registration was granted
from A.Ys. 1998-99 to 2008-09. However, from A.Y. 2009-10 onwards, registration
was denied on the ground that income received by the assessee as commercial
lease rent was in the nature of trade, commerce, or business and it exceeded
Rs. 25 lakhs in all the previous years, thereby violating the provisions of
section 2(15) as amended w.e.f. 1^st April, 2009. The assessee filed
an appeal against this order before the Tribunal.

HELD

The Tribunal noted that it
was an undisputed fact that the CIT(E) had granted registration from A.Y.
1998-99 to 2008-09 after noting that the objects of the assessee were
charitable in nature and were not carried out with an object to earn profits.
It was held that the lease rent incomes received from the property held under
the trust was wholly for charitable or religious purposes and were applied for
charitable purposes, hence the same was not exempt in the hands of the
assessee. Except lease rent incomes, there was no allegation of the CIT(E) to
support that the incomes received by the assessee as commercial lease rent were
in the nature of trade or commerce or trade. It was held that the income earned
by the assessee from commercial lease rent, which was the only ground of
denying the continuance of registration from A.Y. 2009-10 was not sustainable
for denying the registration already granted.

It was observed that
registration was granted for limited period but was denied thereafter without
affording an opportunity to the assessee which was contrary to the mandate of
section 12AA(3) and hence denial of registration was unsustainable.

Reliance was placed on the
following:

1. Dahisar Sports Foundation vs. ITO [2017]
167 ITD 710 (Mum.)(Trib.) wherein it was held that if the objects of
the trust are charitable, the fact that it collected certain charges or
receipts (or income) does not alter the character of the trust.

2. DIT (Exemptions) vs. Khar Gymkhana [2016]
385 ITR 162 (Bom. HC) wherein it was held that where there is no change
in the nature of activities of the trust and the registration is already
granted u/s12A, then the same cannot be disqualified without examination where
receipts from commercial activities exceed Rs. 25 lakhs as per CBDT Circular
No. 21 of 2016 dated 27^th May, 2016.

3. Mumbai Port Trust vs. DIT (Exemptions)
[IT Appeal No. 262 (Mum.) of 2012] wherein it was held that the process
of cancellation of registration has to be done in accordance with the
provisions of sections 12AA(3) and (4) after carefully examining the
applicability of these provisions.

Accordingly, it was held
that once the registration is granted, then the same is required to be
continued till it is cancelled by following the procedure provided in
sub-sections (3) and (4) of section 12AA; without following such procedure, the
registration cannot be restricted and cannot be discontinued by way of
cancelling the same for a subsequent period in the same order.

shailesh.kwebmaker

Section 23, Rule 4 – Amount of rent, as per leave and license agreement, which is not received cannot be considered as forming part of annual value merely on the ground that the assessee has not taken legal steps to recover the rent or that the licensee has deducted tax at source thereon

12. TS-577-ITAT-2020-(Mum.) Vishwaroop Infotech Pvt. Ltd. vs. ACIT,
LTU A.Y.: 2012-13 Date of order: 6^th November,
2020

Section
23, Rule 4 – Amount of rent, as per leave and license agreement, which is not
received cannot be considered as forming part of annual value merely on the
ground that the assessee has not taken legal steps to recover the rent or that
the licensee has deducted tax at source thereon

FACTS

The assessee gave four
floors of its property at Vashi, Navi Mumbai on leave and license basis to
Spanco Telesystems and Solutions Ltd. Subsequently, the licensee company
informed the assessee about slump sale of its business to Spanco BPO Services
Ltd. and Spanco Respondez BPO Pvt. Ltd. and requested the assessee to
substitute the names of these new companies as licensee in its place w.e.f. 1^stApril, 2008.

Due to financial problems
in the new companies, the new companies stopped paying rent from financial year
2010-11 relevant to assessment year 2011-12. As on 31^stMarch, 2011,
the total outstanding dues receivable by the assessee from these two companies
amounted to Rs. 15.60 crores.

During the previous year
relevant to the assessment year under consideration, the assessee did not
receive anything from the licensee and therefore did not offer the license fee
to the extent of Rs. 3,85,85,341 for taxation. The licensees had, however,
deducted TDS on this amount and had reflected this amount in the TDS statement
filed by them. While the assessee did not offer the sum of Rs. 3,85,85,341 for
taxation, it did claim credit of TDS to the extent of Rs. 38.58 lakhs.

Of the sum of Rs. 15.60
crores receivable by the assessee from the licensee, the assessee, after a lot
of negotiation and persuasion, managed to get Rs 10.51 crores during the
previous year relevant to the assessment year under consideration. Since the
assessee could not recover rent for the period under consideration, it did not
declare rental income for the assessment year under consideration.

The A.O. brought to tax
this sum of Rs. 3,85,85,341 on the ground that the assessee did not satisfy the
fourth condition of Rule 4, i.e., the assessee has neither furnished any
documentary evidence for instituting legal proceedings against the tenant for
recovery of outstanding rent, nor proved that the institution of legal
proceedings would be useless and that the licensees had deducted TDS on
unrealised rent which TDS is reflected in the ITS Data.

Aggrieved, the assessee
preferred an appeal to the CIT(A) who upheld the action of the A.O. on the
ground that the licensee has deducted TDS on unrealised rent.

Aggrieved, the assessee
preferred an appeal to the Tribunal challenging the addition of unrealised rent
receivable from the licensees. It was also contended that the assessee did not
initiate legal proceedings against the licensees because the licensees were in
possession of the premises which were worth more than Rs. 200 crores. Civil
litigation would have taken decades for the assessee during which period the
assessee would have been deprived of the possession of the premises. Civil
litigation would have also involved huge litigation and opportunity costs. It
was in these circumstances that the assessee agreed with the licensees, on 20^th
November, 2011, to give up all its claims in lieu of possession
of the premises.

HELD

The Tribunal observed that
considering the fact that the assessee has to safeguard its interest and
initiating litigation against the big business house that, too, having
financial problems will be fruitless and it will be at huge cost. It is also in
the interest of the assessee if it could recover the rent, for it will be
beneficial to the assessee first. No one leaves any money unrecovered. The
reasons disclosed by the assessee to close the dispute amicably and recovering
the amount of Rs. 10.51 crores from the company, which was having a financial
problem, itself was a huge task.

The Tribunal held that in
its view the situation in the present case amply displays that institution of
legal proceedings would be useless and the A.O. has failed to understand the
situation and failed to appreciate the settlement reached by the assessee. The
Tribunal observed that the A.O. has also not brought on record whether the
assessee is likely to receive the rent in near future; rather, he accepted the
fact that it is irrecoverable. The Tribunal held that the rental income can be
brought to tax only when the assessee has actually received or is likely to
receive or there is certainty of receiving it in the near future. In the given
case, since the assessee has no certainty of receipt of any rent, as and when
the assessee reaches an agreement to settle the dispute it is equal to
satisfying the fourth condition of Rule 4 of the Income-tax Rules, 1962.

The Tribunal said that the
addition of rent was unjustified and directed the A.O. to delete the addition.

The Tribunal noticed that
the assessee has taken TDS credit to the extent of Rs. 38.58 lakhs. It held
that the A.O. can treat the amount of Rs. 38.58 lakhs as income under the head
`Income from House Property’.

shailesh.kwebmaker

Section 45, Rule 115 – Foreign exchange gain realised on remittance of amount received on redemption of shares, at par, in foreign subsidiary is a capital receipt not liable to tax

11. TS-580-ITAT-2020-(Del.) Havells India Ltd. vs. ACIT, LTU A.Y.: 2008-09 Date of order: 10^th November,
2020

Section
45, Rule 115 – Foreign exchange gain realised on remittance of amount received
on redemption of shares, at par, in foreign subsidiary is a capital receipt not
liable to tax

FACTS

During the previous year
relevant to assessment year 2008-09, the assessee invested in 3,55,22,067
shares of one of its subsidiary companies, M/s Havells Holdings Ltd., out of
which 1,54,23,053 shares were redeemed at par value in the same year. Upon remittance
of the consideration of shares redeemed the assessee realised foreign exchange
gain of Rs. 2,55,82,186.

Since this gain was not on
account of increase in value of the shares, as the shares were redeemed at par
value but merely on account of repatriation of proceeds received on exchange
fluctuation, the gain was treated as a capital receipt in the return of income.

The A.O. held that the
assessee had purchased shares in a foreign company for which purchase
consideration was remitted from India and further, on redemption, the sale /
redemption proceeds so received in foreign currency were remitted back to India
which resulted in gain which is taxable as capital gains in terms of section
45.

Aggrieved, the assessee
preferred an appeal to the CIT(A) which upheld the action of the A.O. The
assessee then preferred an appeal to the Tribunal.

HELD

The
Tribunal noted the undisputed fact that investment made by the assessee in the
shares of Havells Holdings Ltd. was made in Euros and redemption of such shares
was also made in Euros. It held that the actual profit or loss on sale /
redemption of such shares therefore has to necessarily be computed in Euros
and, thereafter, converted to INR for the purposes of section 45. In other
words, the cost of acquisition of shares and consideration received thereon
should necessarily be converted into Euros and the resultant gain / loss
thereon should thereafter be converted into INR at the prevailing rate. In the
present case, the net gain / loss on redemption of shares was Nil since the
shares were redeemed at par value and thereby there was no capital gain taxable u/s 45.

From a perusal of section
45 it can be seen that for taxation of any profits or gains arising from the
transfer of a capital asset, only gains accruing as a result of transfer of the
asset can be taxed. In the present case, there was no ‘gain’ on transfer /
redemption of the shares insofar as the shares were redeemed at par value.
Thus, there was no gain which accrued to the assessee as a result of redemption
of such shares, since the shares were redeemed at par value. The said
contention is supported by Rule 115 of the Income-tax Rules, 1962 which
provides the rate of exchange for conversion of income expressed in foreign
currency. Clause (f) of Explanation 2 to Rule 115(1) clearly provides that ‘in
respect of the income chargeable under the head “capital gains……”.’ rate of
exchange is to be applied. In the present case, since capital gain in GBP /
Euro was Nil, the resultant gain in Indian rupees is Nil. The exchange gain of
Rs. 2,55,82,186 was only a consequence of repatriation of the consideration
received (in Euros) in Indian rupees and cannot be construed to be part of
consideration received on redemption of shares. Thus, the applicability of
section 45 does not come into the picture in the present case.

The Tribunal held that the
A.O. was not right in applying section 45 for making the addition. This ground
of appeal filed by the assessee was allowed.

shailesh.kwebmaker

Sections 50, 112 – Capital gains computed u/s 50 on transfer of buildings which were held for more than three years are taxable @ 21.63% u/s 112 and not @ 32.45%, the normal rate

10. TS-566-ITAT-2020-(Mum.) Voltas Ltd. vs. DCIT A.Y.: 2013-14 Date of order: 6^thOctober,
2020

Sections
50, 112 – Capital gains computed u/s 50 on transfer of buildings which were
held for more than three years are taxable @ 21.63% u/s 112 and not @ 32.45%,
the normal rate

FACTS

For the assessment year
2013-14, the assessee company in the course of an appeal before the Tribunal
raised an additional ground contending that the capital gains computed u/s 50
on sale of buildings should be taxed @ 21.63% u/s 112 instead of @ 32.45%, as
the said buildings were held for more than three years.

HELD

The Tribunal, after
referring to the provisions of section 50 and having noted that the Bombay High
Court in the case of CIT vs. V.S. Dempo Company Ltd. [387 ITR 354] has
observed that section 50 which is a special provision for computing the capital
gains in the case of depreciable assets, is restricted for the purposes of
section 48 or section 49 as specifically stated therein and the said fiction
created in sub-sections (1) and (2) of section 50 has limited application only
in the context of the mode of computation of capital gains contained in
sections 48 and 49 and would have nothing to do with the exemption that is
provided in a totally different provision, i.e. section 54E. Section 48 deals
with the mode of computation and section 49 relates to cost with reference to
certain modes of acquisition.

The Tribunal also noted
that the Supreme Court in the case of CIT vs. Manali Investment [ITA No.
1658 of 2012] has held that the assessee is entitled to set-off u/s 74
in respect of capital gains arising out of transfer of capital assets on which
depreciation has been allowed in the first year itself and which is deemed as
short-term capital gains u/s 50.

The Tribunal held that the
deeming fiction of section 50 is limited and cannot be extended beyond the
method of computation of gain and that the distinction between short-term and
long-term capital gain is not obliterated by this section. Following the ratio
of these decisions, the Tribunal allowed the additional ground of appeal filed
by the assessee and directed the A.O. to re-examine the detailed facts and
allow the claim.

shailesh.kwebmaker

[Income Tax Appellate Tribunal, ‘C’ Bench, Chennai, dated 20th April, 2017 made in ITA Nos. 1871/Mds/2016, 2759/Mds/2016 and 1870/Mds/2016; A.Ys. 2007-2008 and 2008-2009] Reassessment – Reopening beyond four years – Original assessment 143(3) – TDS not deducted – Auditor responsibility vis-a-vis audit report – failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment

4. Pr. CIT vs. M/s Bharathi Constructions Pr. CIT vs. M/s URC Construction (P) Ltd. [Tax Case (Appeal) Nos. 772 to 774 of 2017;
Date of order: 11^th September, 2020] (Madras High Court)

[Income Tax Appellate Tribunal, ‘C’ Bench,
Chennai, dated 20^th April, 2017 made in ITA Nos. 1871/Mds/2016,
2759/Mds/2016 and 1870/Mds/2016; A.Ys. 2007-2008 and 2008-2009]

Reassessment – Reopening beyond four years
– Original assessment 143(3) – TDS not deducted – Auditor responsibility vis-a-vis
audit report – failure on the part of the assessee to disclose fully and truly
all material facts necessary for assessment

The Revenue stated
that there was failure on the part of the assessee to disclose truly and fully
the machine hire charges on which TDS u/s 194-I was required to be done by the
assessee company which utilised the plants and equipment of the contractors
during the construction works carried out by it; therefore on such payment of
rent made by the assessee to such contractors for use of such plant and
equipment, TDS u/s 194-I was required to be done by the assessee. In the absence
of the same, the amounts in question paid to the contractors were liable to be
added back as income of the assessee u/s 40(a)(ia). An audit objection was also
raised for those A.Ys. by the Audit Team of the Department and in the
subsequent A.Ys. 2010-11 and 2011-12, the assessee himself deducted tax at
source on such machine hire charges u/s 194-I and deposited the same; in the
year 2015, the Assessing Authority had ‘reason to believe’ that for A.Ys.
2007-2008 and 2008-2009 it was liable to reopen and reassessment was required
to be done for those A.Ys.

The appeals
preferred by the assessee were dismissed by the CIT(Appeals) but in the appeal
before the Tribunal the assessee succeeded when it held that reassessment was
bad in law as the notice u/s 147/148 was issued after the expiry of four years
after the relevant assessment year and there was no failure on the part of the
assessee; therefore, the extended period of limitation cannot be invoked by the
Authority concerned and the reassessment order was set aside.

The assessee
submitted that during the course of the original assessment proceedings itself
it had made true and full disclosure of the tax deducted and amount paid by it
to various contractors vide letter dated 7^th December, 2009,
filed before the Deputy Commissioner of Income Tax, Circle-I, Erode through the
Chartered Accountant M. Chinnayan & Associates, and in reply to the Deputy
Commissioner of Income Tax for the Audit Objection, the said Chartered Accountant,
vide its communication for the A.Y. 2007-2008, it was contended before
the Assessing Authority that such amounts paid to the contractors did not
amount to payment of rentals as there was no lease agreement, and therefore
section 194-I could not apply to such payments. He further submitted that the
Assessing Authority had disallowed a part of the said amounts towards machine
hire charges u/s 40a(ia) and the Tax Deducted at Source during the course of
the original assessment proceedings itself and therefore there was no reason
for the Assessing Authority to reopen the original assessment order on a mere
‘change of opinion’ subsequently in the year 2015 and the reassessment
proceedings could not be undertaken. In particular, attention was drawn to the
order sheet entry drawn on 30^th December, 2009 passed by the Deputy
Commissioner, the Assessing Authority.

The Court held that
no substantial question of law arises in the present appeal filed by the
Revenue as the law is well settled in this regard and unless, as a matter of
fact, the Revenue Authority can establish a failure on the part of the assessee
to truly and fully disclose the relevant materials during the course of the
original assessment proceedings, the reassessment proceedings, on mere change
of opinion, cannot be initiated, much less beyond the period of four years
after the expiry of the assessment years in terms of the first proviso
to section 147 of the Act.

In the present
case, the machine hire charges paid by the assessee to various contractors or
sub-contractors were fully disclosed not only in the Books of Accounts and
Audit Reports furnished by the Tax Auditor, but by way of replies to the notice
issued by the Assessing Authority, particularly vide letter dated 7^th
December, 2009 of the assessee during the course of the original assessment
proceedings, and it was also contended while replying to the audit objection
that the payments, having been made as machine hire charges, do not amount to
rentals and thereby do not attract section 194-I. But despite that the
Assessing Authority appears to have made additions to the extent of Rs.
44,45,185 in A.Y. 2007-2008 u/s 40(a)(ia) in case of one of the assessees,
viz., URC Construction (Private) Limited.

The facts in both the assessees’ cases are said to be almost similar and
they were represented by the same Chartered Accountant, M/s Chinnayan &
Associates, Erode.

Thus, there is no
failure on the part of the assessee to truly and fully disclose the relevant
materials before the Assessing Authority during the course of the original
assessment proceedings. Therefore, the extended period of limitation beyond
four years after the end of the relevant assessment years cannot be invoked for
the reassessment proceedings under sections 147/148 in view of the first proviso
to section 147.

However, the Court
disagreed with the observations made by the Tribunal in paragraph 11 of its
order to the extent where the Tribunal has stated that if there is negligence
or omission on the part of the auditor to disclose correct facts in the Audit
Report prepared u/s 44AB, the assessee cannot be faulted.

The Court opined
that even if the relevant facts are not placed before the auditors by the
assessee himself, they may qualify their Audit Report u/s 44AB. If the
Auditor’s Report does not specifically disclose any relevant facts, or if there
is any omission or non-disclosure, it has to be attributed to the assessee only
rather than to the Auditor. The observations made in paragraph 11 of the
order are not sustainable though they do not affect the conclusion that has
been arrived at on the basis of the other facts placed, that there was really a
disclosure of full and complete facts by the assessee before the Assessing
Authority during the course of the original assessment proceedings itself u/s
143(3); and therefore, even if anything is not highlighted in the Audit Report,
the assessee has shown that this aspect, viz., non-deduction of TDS on the
machine hire charges attracting section 194-I was very much discussed by the
Assessing Authority during the original assessment proceedings.

Therefore, on a
mere change of opinion, the Assessing Authority could not have invoked the
reassessment proceedings u/s 147/148 beyond the period of four years after the
end of the relevant A.Ys.

Thus, the appeals filed by the Revenue were dismissed.

shailesh.kwebmaker

[ITAT, Chennai ‘B’ Bench, dated 20th March, 2008 in ITA Nos. 1179/Mds/2007, 1180/Mds/2007 and 1181/Mds/2007; Chennai ‘B’ Bench, dated 18th May, 2009 in ITA No. 998/Mds/2008 for the A.Ys. 1999-2000, 2000-2001, 2001-2002 and 2005-2006, respectively] Letting of immovable property – Business asset – Rental income – ‘Income from Business’ or ‘Income from House Property’

3. M/s PSTS Heavy Lift and Shift Ltd. vs. The
Dy. CIT Company Circle – V(2) Chennai M/s CeeDeeYes IT
Parks Pvt. Ltd. vs. The Asst. CIT Company Circle I(3) [Tax Case Appeal
Nos. 2193 to 2195 of 2008 & 979 of 2009; Date of order: 30^th
January, 2020] (Madras High Court)

[ITAT, Chennai ‘B’
Bench, dated 20^th March, 2008 in ITA Nos. 1179/Mds/2007,
1180/Mds/2007 and 1181/Mds/2007; Chennai ‘B’ Bench, dated 18^th May,
2009 in ITA No. 998/Mds/2008 for the A.Ys. 1999-2000, 2000-2001, 2001-2002 and
2005-2006, respectively]

Letting of
immovable property – Business asset – Rental income – ‘Income from Business’ or
‘Income from House Property’

There were two
different appeals before High Court for different A.Ys. In both cases the
substantial question of law raised was as under:

Whether the
income earned by the assessees during the A.Ys. in question from letting out of
their warehouses or property to lessees is taxable under the head ‘Income from
Business’ or ‘Income from House Property’?

M/s PSTS Heavy Lift and Shift Limited –
For the A.Y. 1999-2000, the Assessing Authority held that the assessee owned
two warehouses situated near SIPCOT, Tuticorin with a total land area of 3.09
acres and built-up area of approximately 32,000 sq.ft. each. The assessee
earned income of Rs. 21.12 lakhs during A.Y.
2000-2001 by letting out the warehouses to two companies, M/s W.
Hogewoning Dried Flower Limited and M/s Ramesh Flowers Limited, and out of the
total rental income of Rs. 21.12 lakhs it claimed depreciation of Rs. 6.02
lakhs on the said business asset in the form of warehouses. The assessee
claimed that warehousing was included in the main objects of the company’s
Memorandum of Association and not only warehouses were utilised for storing
their clients’ cargo, but other areas were used to park their equipment such as
trucks, cranes, etc., and amenities like handling equipment like pulleys,
grabs, weighing machines were fixed in the corners and such facilities were
also provided to the clients. The assessee claimed it to be business income and
said such income ought to be taxed as ‘Income from Business’. But the Assessing
Authority as well as the Appellate Authority held that the said income would be
taxable under the head ‘Income from House Property’. The Assessing Authority
also inter alia relied upon the judgment in the case of CIT vs.
Indian Warehousing Industries Limited [258 ITR 93].

M/s CeeDeeYes IT Parks Pvt. Ltd. – As
per the assessment order passed in the said case, the assessee company was
incorporated to carry out the business of providing infrastructure amenities
and work space for IT companies; it constructed the property in question and
let it out to one such IT company, M/s Cognizant Technology Solutions India
Ltd. The assessee claimed the rental income to be taxable as its ‘Business
Income’ and not as ‘Income from House Property’, but the Assessing Authority as
well as the Appellate Authorities held against the assessee and held such
income to be ‘Income from House Property’.

The assessee
contended that it will depend upon the facts of each case and if earning of
rental income by letting out of a business asset or the properties of the
assessee is the sole business of the assessee, then the income from such
rentals or lease money cannot be taxed as ‘Income from House Property’ but can
be taxed only as ‘Income from Business’. He submitted that the Assessing
Authorities below, in order to deny deductions or depreciation and other
expenditure incurred by the assessee to earn such business income, deliberately
held that such rental income was taxable under the head ‘Income from House
Property’ so that only limited deductions under that head of ‘Income from House
Property’ could be allowed to the assessee and a higher taxable income could be
brought to tax.

The assessee relied
upon the following case laws:

(a) Chennai Properties Investments Limited
vs. CIT [(2015) 373 ITR 673 (SC)];

(b) Rayala Corporation Private Limited
vs. Asst. CIT [(2013) 386 ITR 500 (SC)]; and

The Revenue, apart
from relying on the Tribunal decision, also submitted that as far as the
separate income earned by the assessee from the amenities provided to the
clients in the warehouses or the property of the assessee was concerned, such
portion of income deserved to be taxed under the head ‘Income from Other
Sources’ u/s 56 and not as ‘Income from Business’.

But the High Court
observed that the Tribunal as well as the authorities below were under the
misconceived notion that income from letting out of property, which was the
business asset of the assessee company and the sole and exclusive business of
the assessee, was to earn income out of such house property in the form of
business asset, was still taxable only as ‘Income from House Property’. Such
misconception emanated from the judgment in the case of CIT vs. Chennai
Properties and Investment Pvt. Ltd. [(2004) 266 ITR 685], which was
reversed by the Hon’ble Supreme Court in Chennai Properties Investments
Limited vs. Commissioner of Income Tax (Supra), wherein it is held that
where the assessee is a company whose main object of business is to acquire
properties and to let out those properties, the rental income received was
taxable as ‘Income from Business’ and not ‘Income from House Property’,
following the ratio of the Constitution Bench judgment of the Supreme
Court in Sultans Brothers (P) Ltd. vs. Commissioner of Income Tax [(1964)
51 ITR 353 (SC)]; therein, it was held that each case has to be looked
at from the businessman’s point of view to find out whether the letting was
doing of a business or the exploitation of the property by the owner.

The said decision
subsequently was followed by the Supreme Court in the cases of Rayala
Corporation (Supra) and Raj Dadarkar & Associates (Supra).

The Court further
observed that once the property in question is used as a business asset and the
exclusive business of the assessee company or firm is to earn income by way of
rental or lease money, then such rental income can be treated only as the
‘Business Income’ of the assessee and not as ‘Income from House Property’. The
heads of income are divided in six heads, including ‘Income from House
Property’, which defines the specific source of earning such income. The income
from house property is intended to be taxed under that head mainly if such
income is earned out of idle property, which could earn the rental income from
the lessees. But where the income from the same property in the form of lease
rentals is the main source of business of the assessee, which has its business
exclusively or substantially in the form of earning of rentals only from the
business assets in the form of such landed properties, then the more
appropriate head of income applicable in such cases would be ‘Income from
Business’.

A bare perusal of
the scheme of the Income Tax Act, 1961 would reveal that while computing the
taxable income under the Head ‘Income from Business or Profession’, the various
deductions, including the actual expenditure incurred and notional deductions
like depreciation, etc., are allowed vis-a-vis incentives in the form of
deductions under Chapter VIA. But the deductions under the Head ‘Income from
House Property’ are restricted to those specified in section 24 of the Act,
like 1/6^th of the annual income towards repairs and maintenance to
be undertaken by landlords, interest on capital employed to construct the
property, etc. Therefore, in all cases such income from property cannot be
taxed only under the head ‘Income from House Property’. It will depend upon the
facts of each case and where such income is earned by the assessee by way of
utilisation of its business assets in the form of property in question or as an
idle property which could yield rental income for its user, from the lessees.
In the earlier provisions of income from house properties, even the notional
income under the head ‘Income from House Property’ was taxable in the case of
self-occupied properties by landlords, is a pointer towards that.

The Court observed
that in both the present cases it is not even in dispute that the exclusive and
main source of income of the assessee was only the rentals and lease money
received from the lessees; the Assessing Authority took a different and
contrary view mainly to deny the claim of depreciation out of such business
income in the form of rentals without assigning any proper and cogent reason.
Merely because the lease income or rental income earned from the lessees could
be taxed as ‘Income from House Property’, ignoring the fact that such rentals
were the only source of ‘Business Income’ of the assessee, the authorities
below have fallen into the error in holding that the income was taxable under
the head ‘Income from House Property’. The said application of the head of
income by the authorities below was not only against the facts and evidence
available on record, but also against common sense.

The amended
definition u/s 22 now defines ‘Income from House Property’ as the annual value
of property as determined u/s 23 consisting of buildings or lands appurtenant
thereto of which the assessee is the owner, other than such portions of such
property as he may occupy for the purposes of any business or profession
carried on by him, the profits of which are chargeable to income tax, shall be
chargeable to income tax under the head ‘Income from House Property’. Thus,
even the amended definition intends to tax the notional income of the
self-occupied portion of the property to run the assessee’s own business
therein as business income. Therefore, the other rental income earned from
letting out of the property, which is the business of the assessee itself,
cannot be taxed as ‘Income from House Property’.

The Court also observed that the heads of income, as defined in section
14 do not exist in silos or in watertight compartments under the scheme of tax
and, thus, these heads of income, as noted above, are fields and heads of
sources of income depending upon the nature of business of the assessee. Therefore,
in cases where the earning of the rental income is the exclusive or predominant
business of the assessee, the income earned by way of lease money or rentals by
letting out of the property cannot be taxed under the head ‘Income from House
Property’ but can only be taxed under the head ‘Income from Business income’.

In view of the
aforesaid, both the assessees in the present case carry on the business of
earning rental income as per the memoranda of association only and the fact is
that they were not carrying on any other business; therefore, the appeals of
both the assessees were allowed. The question of law framed above was answered
in favour of the assessees and against the Revenue.

shailesh.kwebmaker

Settlement of cases – Section 245D – Powers of Settlement Commission – Difference between sub-sections (2C) and (4) of section 245D – Procedure under sub-section (2C) summary – Issues raised in application for settlement, requiring adjudication – Application cannot be rejected under sub-section (2C) of section 245D

23. Dy.
CIT (International Taxation) vs. Hitachi Power Europe GMBH [2020] 428 ITR 208 (Mad.) Date of order: 4^th September,
2020 A.Ys.: 2015-16 to 2018-19

Settlement of cases – Section 245D – Powers
of Settlement Commission – Difference between sub-sections (2C) and (4) of
section 245D – Procedure under sub-section (2C) summary – Issues raised in
application for settlement, requiring adjudication – Application cannot be
rejected under sub-section (2C) of section 245D

An application for
settlement of the case was rejected u/s 245D(2C). On a writ petition
challenging the order, a Single Judge Bench of the Madras High Court set aside
the rejection order. On appeal by the Revenue, the Division Bench upheld the
decision of the Single Judge Bench and held as under:

‘i) It is important to take note of the
legislative intent and scope of power vested with the Settlement Commission
under sub-section (2C) and sub-section (4) of section 245D. The power to be
exercised by the Commission under sub-section (2C) of section 245D is within a
period of fifteen days from the date of receipt of the report of the
Commissioner. The marked distinction with regard to the exercise of power of
the Settlement Commission at the sub-section (2C) stage and sub-section (4)
stage is amply clear from the wording in the statute. The Commission can
declare an application to be invalid at the sub-section (2C) stage. Such
invalidation cannot be by a long-drawn reasoning akin to a decision to be taken
at the stage of section 245D(4). This is so because sub-section (4) of section
245D gives ample power to the Commission to examine the records, the report of
the Commissioner received under sub-section (2B) or sub-section (3) or the
provisions of sub-section (1), as they stood immediately before their
amendments by the Finance Act, 2007. However, if on the material the Settlement
Commission arrived at a conclusion prima facie that there was no true
and full disclosure, it had the right to declare the application invalid.

ii) There were four issues which the assessee
wanted settled by the Commission; the first among the issues was with regard to
the income earned from offshore supply of goods. The Commission was largely
guided by the report of the Commissioner, who reported that the composite
contracts for offshore and onshore services were artificially bifurcated. The
Settlement Commission held that the contention of the assessee that it was
separate and that this was done by the NTPC was held to be not fully true. In
other words, the Settlement Commission had accepted the fact that the contracts
were bifurcated by the NTPC, the entity which invited the tender, but the
Commission stated that the bifurcation done by the NTPC was only for financial
reasons.

iii) The question was whether such a finding could
lead to an application being declared as invalid u/s 245D(2C) on the ground
that the assessee had failed to make full and true disclosure of income. This
issue could not have been decided without adjudication. In order to decide
whether a contract was a composite contract or separate contracts, a deeper
probe into the factual scenario as well as the legal position was required. If
such was the fact situation in the case on hand, the application of the
assessee could not have been declared invalid on account of failure to fully
and truly disclose its income. Thus, what was required to be done by the
Commission was to allow the application to be proceeded with u/s 245D(2C) and
take up the matter for consideration u/s 245D(4) and take a decision after
adjudicating the claim.

iv) The issues which were
requested to be settled by the assessee before the Commission, qua the
report of the Commissioner, could not obviously be an issue for a prima
facie decision at the sub-section (2C) stage. The rejection of the
application for settlement of case was not justified.

v) Decision of the Single Judge Bench affirmed.

shailesh.kwebmaker

Revision – Condition precedent – Sections 54F, 263 – Assessment order should be erroneous and prejudicial to Revenue – Capital gains – Exemption u/s 54F – Assessee purchasing three units in same building out of consideration received on account of joint development – A.O. allowing exemption taking one of plausible views based on inquiry of claim and law prevalent – Revision to withdraw exemption – Tribunal holding Commissioner failed to record finding that order of assessment erroneous and prejudicial to Revenue – Tribunal order not erroneous

22. Principal CIT vs. Minal Nayan Shah [2020] 428 ITR 23 (Guj.) Date of order: 1^st September,
2020 A.Y.: 2014-15

Revision – Condition precedent – Sections
54F, 263 – Assessment order should be erroneous and prejudicial to Revenue –
Capital gains – Exemption u/s 54F – Assessee purchasing three units in same
building out of consideration received on account of joint development – A.O.
allowing exemption taking one of plausible views based on inquiry of claim and
law prevalent – Revision to withdraw exemption – Tribunal holding Commissioner
failed to record finding that order of assessment erroneous and prejudicial to
Revenue – Tribunal order not erroneous

The assessee, with
the co-owner of a piece of land, entered into a development agreement and
received consideration for the land. The assessee disclosed long-term capital
gains and claimed exemption under sections 54F and 54EC. The return filed by
the assessee was accepted and an order u/s 143(3) was passed. Thereafter, the
Principal Commissioner in proceedings u/s 263 found that the assessee had
purchased the entire block of the residential project which comprised three
independent units on different floors with different entrances and kitchens,
and directed the A.O. to pass a fresh order in respect of the claim of the
assessee u/s 54F.

The Tribunal found
that the three units were located on different floors of the same structure and
were purchased by the assessee by a common deed of conveyance. The Tribunal
held that the two prerequisites that the order was erroneous and prejudicial to
the interests of the Revenue, that an erroneous order did not necessarily mean
an order with which the Principal Commissioner was unable to agree when there
were two plausible views on the issue and one legally plausible view was
adopted by the A.O. The Tribunal quashed the revision order passed by the
Principal Commissioner u/s 263.

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

‘i) It is an essential condition for the
exercise of power u/s 263 that the Commissioner must find an error in the
assessment order of the A.O. prejudicial to the interests of the Revenue and
the conclusion of the Commissioner that the order is erroneous and prejudicial
to the Revenue must be based on materials and contentions raised by the
assessee on an opportunity of hearing being afforded to the assessee.

ii) On the facts the order of the Tribunal
quashing the revisional order passed by the Principal Commissioner u/s 263 was
not erroneous. The findings of facts recorded by the Tribunal was that one of
the requisite conditions for the exercise of power u/s 263 the Commissioner
should consider the assessment order to be erroneous and prejudicial to the interests
of the Revenue was not satisfied and in arriving at such conclusion the
Tribunal had assigned cogent reasons. No question of law arose.’

shailesh.kwebmaker

Reassessment – Death of assessee – Validity of notice of reassessment – Sections 147, 148, 159, 292BB – Notice issued to deceased person is not valid – Not a defect curable by section 292BB – Representative assessee – Legal representative – Scope of section 159 – No legal requirement that legal representatives should report death of assessee to income-tax department

21. Savita Kapila vs. ACIT [2020] 426 ITR 502 (Del.) Date of order: 16^th July, 2020 A.Y.: 2012-13

Reassessment – Death of assessee – Validity
of notice of reassessment – Sections 147, 148, 159, 292BB – Notice issued to
deceased person is not valid – Not a defect curable by section 292BB –
Representative assessee – Legal representative – Scope of section 159 – No
legal requirement that legal representatives should report death of assessee to
income-tax department

The assessee,
‘MPK’, expired on 21^st December, 2018. A notice dated 31^st
March, 2019 u/s 148 was issued in his name. The notice could not be served on
‘MPK’. Nor was it served on his legal representatives. An assessment order was
passed in the name of one of his legal representatives on 27^th
December, 2019.

The Delhi High
Court allowed the writ petition filed by the legal representative to challenge
the notice and the order and held as under:

‘i) The issuance of a notice u/s 148 is the
foundation for reopening of an assessment. Consequently, the sine qua
non for acquiring jurisdiction to reopen an assessment is that such notice
should be issued in the name of the correct person. This requirement of issuing
notice to the correct person and not to a dead person is not merely a
procedural requirement but a condition precedent to the notice being valid in
law.

ii) Section 159 applies to a situation where
proceedings are initiated or are pending against the assessee when he is alive,
and after his death the legal representative steps into the shoes of the
deceased-assessee. There is no statutory requirement imposing an obligation
upon the legal heirs to intimate the death of the assessee.

iii) Issuance of notice upon a dead person and
non-service of notice does not come under the ambit of mistake, defect or
omission. Consequently, section 292B does not apply. Section 292BB is
applicable to an assessee and not to the legal representatives.

iv) The notice dated 31^st March, 2019
u/s 148 was issued to the deceased-assessee after the date of his death, 21^st
December, 2018, and thus inevitably the notice could never have been served
upon him. Consequently, the jurisdictional requirement u/s 148 of service of
notice was not fulfilled.

v) No notice u/s 148 was ever issued to the
petitioner during the period of limitation and proceedings were transferred to
the permanent account number of the petitioner, who happened to be one of the
four legal heirs of the deceased-assessee by letter dated 27^th
December, 2019. Therefore, the assumption of jurisdiction qua the
petitioner for the relevant assessment year was beyond the period prescribed
and, consequently, the proceedings against the petitioner were barred by
limitation in accordance with section 149(1)(b)’.

shailesh.kwebmaker

Offences and prosecution – Wilful attempt to evade tax – Section 276C(2) – Delay in payment of tax – Admission of liability in return and subsequent payment of tax – Criminal proceedings quashed

20. Bejan
Singh Eye Hospital Pvt. Ltd. vs. I.T. Department [2020] 428 ITR 206 (Mad.) Date of order: 12^th March, 2020 A.Ys.: 2012-13 to 2015-16

Offences and prosecution – Wilful attempt
to evade tax – Section 276C(2) – Delay in payment of tax – Admission of
liability in return and subsequent payment of tax – Criminal proceedings
quashed

The assessees filed
their returns of income in time for the A.Ys. 2012-13 to 2015-16 and admitted
their liability. There was delay in remittance of the tax for which they were
prosecuted u/s 276C(2) on the ground of wilful evasion of tax.

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

‘The assessees had
since cleared the dues and as on date no tax dues were payable in respect of
the years in question. Inasmuch as the liability had been admitted in the
counter-affidavit and inasmuch as the tax had been subsequently paid,
continuance of the criminal prosecution would only amount to an abuse of legal
process. The criminal proceedings were to be quashed.’

shailesh.kwebmaker

Offences and prosecution – Wilful attempt to evade tax – Sections 132, 153A, 276C(2), 276CC – Ingredients of offence – Failure to furnish returns and pay self-assessment tax as required in notice – Delayed payment of tax pursuant to coercive steps cannot be construed as an attempt to evade tax – Only act closely connected with intended crime can be construed as an act in attempt of intended offence – Presumption would not establish ingredients of offence – Prosecution quashed

19. Vyalikaval House Building Co-operative
Society Ltd. vs. IT Department [2020] 428 ITR 89 (Kar.) Date of order: 14^th June, 2019 A.Ys.: 2010-11 & 2011-12

Offences and prosecution – Wilful attempt
to evade tax – Sections 132, 153A, 276C(2), 276CC – Ingredients of offence –
Failure to furnish returns and pay self-assessment tax as required in notice –
Delayed payment of tax pursuant to coercive steps cannot be construed as an
attempt to evade tax – Only act closely connected with intended crime can be
construed as an act in attempt of intended offence – Presumption would not
establish ingredients of offence – Prosecution quashed

The assessee, a co-operative society, did not comply with the notice issued
u/s 153A by the A.O. to file returns of income for the A.Ys. 2006-07 to
2011-12. Thereafter, the A.O. issued a notice for prosecution u/s 276CC. The
assessee filed returns of income for the A.Ys. 2010-11 and 2011-12 but failed
to pay the self-assessment tax along with the returns u/s 140A. In the
meanwhile, the property owned by the assessee was attached u/s 281B but the
attachment was lifted on condition that the sale proceeds of the attached
property would be directly remitted to the Department. The assessee issued a
cheque towards self-assessment tax due for the A.Ys. 2010-11 and 2011-12 with
instructions at the back of the cheque that the ‘cheque to be presented at the
time of registration of the property’ but the cheque was not encashed. The Department
initiated criminal prosecution u/s 276C(2) against the assessee, its secretary
and ex-vice-president on the ground of wilful and deliberate attempt to evade
tax.

The assessee filed
petitions u/s 482 of the Code of Criminal Procedure, 1973 challenging the
criminal action. The Karnataka High Court allowed the petition and held as
under:

‘i) The gist of the offence u/s 276C(2) is the
wilful attempt to evade any tax, penalty or interest chargeable or imposable
under the Act. What is made punishable under this section is an “attempt to
evade tax, penalty or interest” and not the actual evasion of tax. “Attempt” is
nowhere defined in the Act or in the Indian Penal Code, 1860. In legal echelons
“attempt” is understood as a “movement towards the commission of the intended
crime”. It is doing “something in the direction of commission of offence”.
Therefore, in order to render the accused guilty of “attempt to evade tax” it
must be shown that he has done some positive act with an intention to evade
tax.

ii) The conduct of the assessee in making the
payments in terms of the returns filed, though delayed and after coercive steps
were taken by the Department, did not lead to the inference that the payments
were made in an attempt to evade tax. The delayed payments, under the
provisions of the Act, might call for imposition of penalty or interest, but
could not be construed as an attempt to evade tax so as to entail prosecution
u/s 276C(2).

iii) Even if the only circumstance relied on by
the Department in support of the charge levelled against the assessee, its
secretary and ex-vice-president, that though the assessee had filed its
returns, it had failed to pay the self-assessment tax along with the returns
was accepted as true, it did not constitute an offence u/s 276C(2). Therefore,
the prosecution initiated against the assessee, its secretary and
ex-vice-president was illegal and amounted to abuse of process of court and was
to be quashed.

iv) The act of filing the returns was not
connected with evasion of tax and by itself could not be construed as an
attempt to evade tax. Rather, the filing of returns suggested that the assessee
had voluntarily declared its intention to pay the tax. It was only an act which
was closely connected with the intended crime that could be construed as an act
in attempt of the intended offence.’

shailesh.kwebmaker

Company – Book profits – Capital gains – Sections 45, 48, 115JB – Computation of book profits u/s 115JB – Scope of section 115JB – Indexed cost of acquisition to be taken into account in calculating capital gains

18. Best Trading and Agencies Ltd. vs. Dy.
CIT [2020] 428 ITR 52 (Kar.) Date of order: 26^thAugust, 2020 A.Ys.: 2005-06 & 2006-07

Company – Book profits – Capital gains –
Sections 45, 48, 115JB – Computation of book profits u/s 115JB – Scope of
section 115JB – Indexed cost of acquisition to be taken into account in
calculating capital gains

The assessee
company was utilised as a special purpose vehicle (SPV) for restructuring of
‘K’. Under an arrangement approved by the court, the surplus on
non-manufacturing and liquid assets including real estate had been transferred
to the SPV for disbursement of the liabilities. In the relevant years the A.O.
invoked the provisions of section 115JB and assessed the assessee on book
profits without giving the benefit of indexation on the cost of the capital
asset sold during the year.

The Tribunal upheld
the order of the A.O.

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

‘i) Section 115JB deals with computation of book
profits of companies. By virtue of sub-section (5) of section 115JB, the
application of other provisions of the Act is open, except if specifically
barred by the section itself. The indexed cost of acquisition is a claim
allowed by section 48 to arrive at the income taxable as capital gains. The
difference between the sale consideration and the indexed cost of acquisition represents
the actual cost of the assessee, which is taxable u/s 45 at the rates provided
u/s 112. There is no provision in the Act to prevent the assessee from claiming
the indexed cost of acquisition on the sale of the asset in a case where the
assessee is subjected to section 115JB.

ii) Since the indexed cost of acquisition was
subjected to tax under a specific provision, viz., section 112, the provisions
of section 115JB which is a general provision, could not be made applicable to
the case of the assessee. Also, considering the profits on sale of land without
giving the benefit of indexed cost of acquisition results in taxing the income
other than actual or real income. In other words, a mere book-keeping entry
cannot be treated as income. The assessee had to be given the benefit of
indexed cost of acquisition.’

shailesh.kwebmaker

Capital gains – Assessability – Slump sale – Section 2(42C) – Assets transferred to subsidiary company in accordance with scheme u/s 394 of the Companies Act – Assessee allotted shares – Scheme approved by High Court – No slump sale for purposes of capital gains tax

17. Areva T&D India Ltd. vs. CIT [2020] 428 ITR 1 (Mad.) Date of order: 8^th September,
2020 A.Y.: 2006-07

Capital gains – Assessability – Slump sale
– Section 2(42C) – Assets transferred to subsidiary company in accordance with
scheme u/s 394 of the Companies Act – Assessee allotted shares – Scheme
approved by High Court – No slump sale for purposes of capital gains tax

The assessee filed
its return for the A.Y. 2006-07. During the course of scrutiny assessment, a
questionnaire was issued to the assessee calling for certain clarifications.
The assessee stated that it had transferred its non-transmission and
distribution business to its subsidiary company. The assessee further stated
that the transfer of the non-transmission and distribution business was by way
of a scheme of arrangement under sections 391 and 394 of the Companies Act,
1956 and could not be considered a ‘sale of business’ and that any transfer of
an undertaking otherwise than as a result of a sale would not qualify as a
slump sale and thus, the provisions of section 50B could not be applied to its
case. The A.O. held that the assessee had agreed that the transfer of the non-transmission
and distribution business to its subsidiary was a transfer in terms of the
provisions of section 50B and that the assessee had approached the relevant
bond-issuing authorities for the purpose of section 54EC in order to claim
deduction on it. Thus, the A.O. concluded that the assessee itself having
agreed that the transfer fell under the provisions of section 50B, the claim of
the assessee that it should not be regarded as transfer could not be accepted.

This was confirmed
by the Commissioner (Appeals) and the Tribunal.

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

‘i) The fundamental legal principle is that
there is no estoppel in taxation law. An alternative plea can be raised
and it can even be a plea which is contradictory to the earlier plea.

ii) Section 2(42C) defines the
expression “slump sale” to mean the transfer of one or more undertakings as a
result of sale for a lump sum consideration without values being assigned to
the individual assets and liabilities in such sale. Admittedly, the word “sale”
is not defined under the Act. Therefore, necessarily one has to rely upon the
definitions in the other statutes which define the word “sale”. Section 54 of
the Transfer of Property Act, 1882 defines the word “sale” to mean a transfer
of ownership in exchange for a price paid or promised or part paid and part
promised. The word “price” is not defined either under the Income-tax Act, 1961
or under the Transfer of Property Act, 1882, but is defined u/s 2(10) of the
Sale of Goods Act, 1930 to mean money consideration for the sale of goods.
Therefore, to bring the transaction within the definition of section 2(42C) as
a slump sale there should be a transfer of an undertaking as a result of the
sale for lump sum consideration. The sale should be by way of transfer of
ownership in exchange for a price paid or promised or part paid and part
promised and the price should be money consideration. If no monetary
consideration is involved in the transaction, it would not be possible for the
Revenue to bring the transaction done by the assessee within the definition of
the term “slump sale” as defined u/s 2(42C). Section 118 of the Transfer of
Property Act, 1882 defines the term “exchange” by stating that when two persons
mutually transfer the ownership of one thing for the ownership of another,
neither thing nor both things being money only, the transaction is called an
“exchange”.

iii) The assessee was non-suited primarily on the
ground that it had accepted the transfer to be a sale falling within the
provisions of section 50B and approached the bond-issuing authorities for
investment in certain bonds in terms of section 54EC to avoid payment of
capital gains tax. The A.O., the Commissioner (Appeals) and the Tribunal had committed
a fundamental error in shutting out the contention raised by the assessee
solely on the ground that the assessee approached the bond-issuing authorities
for availing of the benefit u/s 54EC. In the assessee’s case, all the relevant
facts were available even before the A.O. while the scrutiny assessment was in
progress. Therefore, there was no estoppel on the part of the assessee
to pursue its claim.

iv) The Tribunal had committed a factual mistake
in referring to a valuation report not concerning the transaction, which was
the subject matter of assessment. The explanation given by the assessee was
satisfactory because the net asset value of the non-transmission and
distribution business was determined at Rs. 31.30 crores as on 31^st
December, 2005. But the parties agreed to have a joint valuation by using a
combination of three methods, namely, (a) price earnings capitalisation, (b)
net assets, and (c) market values reflected in actual dealings on the stock
exchanges during the relevant period. After following such a procedure, the
fair value was computed at Rs. 41.3 crores and this had been clearly set down
in the statement filed u/s 393 of the Companies Act before the High Court. In
the scheme of arrangement there was no monetary consideration, which was passed
on from the transferee-company to the assessee but there was only allotment of
shares. There was no suggestion on behalf of the Revenue of bad faith on the
part of the assessee-company nor was it alleged that a particular form of the
transaction was adopted as a cloak to conceal a different transaction. The mere
use of the expression “consideration for transfer” was not sufficient to
describe the transaction as a sale. The transfer, pursuant to approval of a
scheme of arrangement, was not a contractual transfer, but a statutorily
approved transfer and could not be brought within the definition of the word
“sale”.’

shailesh.kwebmaker

Capital gains – Exemption u/s 54(1) – Sale of capital asset and acquisition of ‘a residential house’ – Meaning of ‘a residential house’ in section 54(1) – Includes the plural – Purchase of two residential properties – Assessee entitled to benefit of exemption – Amendment substituting ‘a’ by ‘one’ – Applies prospectively

16. Arun K. Thiagarajan vs. CIT(A) [2020] 427 ITR 190 (Kar.) Date of order: 18^th June, 2020 A.Y.: 2003-04

Capital gains – Exemption u/s 54(1) – Sale
of capital asset and acquisition of ‘a residential house’ – Meaning of ‘a
residential house’ in section 54(1) – Includes the plural – Purchase of two
residential properties – Assessee entitled to benefit of exemption – Amendment
substituting ‘a’ by ‘one’ – Applies prospectively

For the A.Y.
2003-04, the assessee declared long-term capital gains from sale of a house
property. Against this, the assessee had claimed deduction u/s 54 in respect of
two house properties purchased in different locations. The A.O. restricted the
deduction to acquisition of one residential building and accordingly allowed
deduction in respect of the higher value of investment in respect of such
property.

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) To give a definite meaning to the expression
“a residential house”, the provisions of section 54(1) were amended with effect
from 25^th April, 2015 by substituting the word “a residential house”
with the word “one residential house”. The amendment specifically applied only
prospectively with effect from the A.Y. 2015-16. The subsequent amendment of
section 54(1) fortifies the need felt by the Legislature to give a definite
meaning to the expression “a residential house”, which was interpreted as
plural by various courts taking into account the context in which the
expression was used.

ii) The assessee was entitled to the benefit of
exemption u/s 54(1). The courts had interpreted the expression “a residential
house” and the interpretation that it included the plural was binding.

iii) The substantial question of law framed by
this court is answered in favour of the assessee and against the Revenue. In
the result, the orders passed by the A.O., the Commissioner of Income-tax
(Appeals) and the Income-tax Appellate Tribunal insofar as they deprive the
assessee of the benefit of exemption u/s 54(1) are hereby quashed and the
assessee is held entitled to benefit of exemption u/s 54(1).’

shailesh.kwebmaker

TAXABILITY OF INTEREST ON ENHANCED COMPENSATION OR CONSIDERATION

ISSUE FOR CONSIDERATION

Section 45(5) of
the Income-tax Act provides for taxability of the capital gains arising from
(i) the transfer of a capital asset by way of compulsory acquisition under any
law, or (ii) on a transfer the consideration for which was determined or
approved by the Central Government or the Reserve Bank of India, or (iii)
compensation or consideration which is enhanced or further enhanced by any
court, tribunal or other authority. Inter alia, clause (b) of section
45(5) provides for the taxability of the enhanced compensation or consideration
as awarded by a court, tribunal or other authority as deemed capital gains in
the previous year in which such enhanced compensation or consideration is
received by the assessee.

Section 10(37)
exempts the capital gains arising to an individual or an HUF from the transfer
of agricultural land by way of compulsory acquisition where the compensation or
consideration or the enhanced compensation or consideration is received on or
after 1^st April, 2004 subject to fulfilment of other conditions as
specified therein. Further, section 96 of the Right to Fair Compensation and
Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013
exempts the compensation received for compulsory acquisition of land under
defined circumstances (except those made u/s 46 of that Act) from the levy of
income tax. This exemption provided under the RFCTLARR Act is available
irrespective of whether the land acquired compulsorily is agricultural or
non-agricultural land.

In the case of land
acquired under the Land Acquisition Act, 1894 the person whose land has been acquired,
if aggrieved by the amount of compensation originally granted to him, may
require the matter to be referred to the Court u/s 18 of the 1894 Act for the
re-determination of the amount of the compensation. The Court may enhance the
amount of compensation payable to the claimant and also direct the authority
concerned to pay interest on the enhanced amount of compensation and also
interest for the delay caused in payment of the compensation otherwise ordered.
Section 28 of the 1894 Act empowers the Court to award interest at its
discretion on the excess amount of compensation awarded by it over the amount
originally awarded. Section 34 of that Act also provides for the liability of
the land acquisition authority concerned to pay interest, which is, however,
totally different from the interest referred to in section 28. The interest
payable u/s 34 is for the delay in paying the awarded compensation and it is
mandatorily payable.

A controversy had
arisen with respect to the nature of the interest received by the assessee on
the amount of enhanced compensation as per the directions of the Court in
accordance with the provisions of section 28 of the 1894 Act and the year of
taxation thereof which was settled by the Supreme Court in the case of CIT
vs. Ghanshyam (HUF) [2009 315 ITR 1] by holding that the interest
granted u/s 28 of the 1894 Act was an accretion to the value and, hence, it was
a part of the enhanced compensation which was taxable as capital gains u/s
45(5). Subsequent to the decision, the Finance (No. 2) Act, 2009 inserted
clause (viii) in section 56(2) and clause (iv) in section 57 and section 145A/B
to specifically provide for taxability of interest received on compensation or
enhanced compensation as income from other sources and for deduction of 50% of
the interest amount.

This set of
amendments in sections 56(2), 57, 145A and later in 154B has given a rise to a
fresh controversy about the head of taxation under which the interest in
question awarded u/s 28 of the 1894 Act is taxable: whether such interest was
taxable under the head ‘capital gains’ or ‘income from other sources’ and
whether what is termed as interest under the said Act be treated differently
under the Income-tax Act.

The Gujarat High
Court has taken a view that the interest granted u/s 28 of the 1894 Act
continues to be taxable as capital gains in accordance with the decision of the
Supreme Court in the case of Ghanshyam (HUF) (Supra) even after
the set of amendments to tax ‘interest’ as income from other sources. As a
corollary, tax ought not to have been deducted on that amount of interest u/s
194A. As against this, the Punjab & Haryana High Court has held that
interest granted u/s 28 of the 1894 Act needs to be taxed as income from other
sources in view of the specific provision contained in section 56(2)(viii) in
this regard and, therefore, the assessee was not entitled to the exemption from
tax under provisions of section 10(37) of the Act.

THE MOVALIYA BHIKHUBHAI BALABHAI CASE

The issue first
came up for consideration of the Gujarat High Court in the case of Movaliya
Bhikhubhai Balabhai vs. ITO (2016) 388 ITR 343.

In this case, the
assessee was awarded additional compensation in respect of his land along with
the other benefits under the 1894 Act. Pursuant to this award passed by the
Reference Court, the authorities concerned inter alia determined the
amount of Rs. 20,74,157 as interest payable u/s 28 of that Act. Against this
interest, the amount of TDS to be deducted as per section 194A was also shown
in the relevant statement issued to the assessee. The assessee made an
application in Form No. 13 u/s 197(1) for issuing a certificate for Nil tax
liability. But the application was rejected on the ground that the interest
amount on the delayed payment of compensation and enhanced value of
compensation was taxable as per the provisions of section 56(2)(viii) read with
sections 57(iv) and 145A(b). The assessee approached the High Court by filing a
petition against the rejection of his application.

Before the High
Court, the assessee relied upon the decision of the Supreme Court in the case
of Ghanshyam (HUF) (Supra) and claimed that interest u/s 28 was,
unlike interest u/s 34 of the 1894 Act, an accretion in value and regarded as a
part of the compensation itself which was not the case with interest u/s 34.
Therefore, when the interest u/s 28 of the 1894 Act was to be treated as part
of compensation and was liable to capital gains u/s 45(5), such amount could
not be treated as income from other sources and, hence, no tax could be
deducted at source by considering the same to be interest. Reliance was also
placed on the decisions of the Punjab & Haryana High Court in the cases of Jagmal
Singh vs. State of Haryana rendered in Civil Revision No. 7740 of
2012 on 18^th July, 2013 and Haryana State Industrial
Development Corpn. Ltd. vs. Savitri rendered in Civil Revision
No. 2509 of 2012 on 29^th November, 2013, wherein it was held
that there was no requirement of deducting tax at source from the amount of
interest determined to be payable u/s 28 of the Land Acquisition Act.

It was argued on
behalf of the Revenue that the A.O. was justified in rejecting the application
of the assessee in view of the specific provision contained in sub-clause
(viii) of section 56(2) providing that income by way of interest received on
compensation or on enhanced compensation referred to in clause (b) of section
145A was chargeable to income tax under the head ‘income from other sources’.
It was submitted that the interest on enhanced compensation u/s 28 of the 1894
Act being in the nature of enhanced compensation, was deemed to be the income
of the assessee in the year in which it was received as provided in section
145A and had to be taxed as per the provisions of section 56(2)(viii) as income
from other sources. As regards the decision of the Supreme Court in the case of
Ghanshyam (HUF), it was submitted that it was rendered prior to
the amendment in the I.T. Act whereby clause (b), which provided that interest
received by an assessee on compensation or on enhanced compensation, as the
case may be, shall be deemed to be income in the year in which it is received,
came to be inserted in section 145A of the Act and, hence, would not have any
applicability in the facts of the present case.

The Revenue relied
upon the decisions of the Punjab & Haryana High Court in the case of CIT
vs. Bir Singh (HUF) ITA No. 209 of 2004 dated 27^th October, 2010
which was later followed in the case of Hari Kishan vs. Union of India
[CWP No. 2290 of 2001 dated 30^th January, 2014]; Manjet Singh (HUF)
Karta Manjeet Singh vs. Union of India [2016] 65 taxmann.com 160; and
of the Delhi High Court in the case of CIT vs. Sharda Kochhar [2014] 49
taxmann.com 120.

The High Court
extensively referred to the decision of the Supreme Court in the case of Ghanshyam
(HUF) wherein various provisions of the 1894 Act were analysed vis-à-vis
the provisions of the Income-tax Act. On the basis of this decision, the High
Court reiterated that there was a vital difference between the interest payable
u/s 28 and the interest payable u/s 34 of the 1894 Act. Section 28 applies when
the amount originally awarded has been paid or deposited and when the court
awards excess amount. In such cases, interest on that excess alone is payable.
Section 28 empowers the court to award interest on the excess amount of
compensation awarded by it over the amount awarded by the Collector. This award
of interest is not mandatory but is left to the discretion of the court. It was
further held that section 28 is applicable only in respect of the excess amount
which is determined by the court and it does not apply to cases of undue delay
in making award for compensation. The interest u/s 34 is only for delay in
making payment after the compensation amount is determined. Accordingly, the
Supreme Court had held that interest u/s 28 of the 1894 Act was an accretion to
compensation and formed part of the compensation and was, therefore, exigible
to tax u/s 45(5). The decision in the case of Ghanshyam (HUF) was
followed by the Supreme Court in a later case, that of CIT vs. Govindbhai
Mamaiya [2014] 367 ITR 498.

Insofar as the provisions of section 57(iv) read with section
56(2)(viii) and section 145A(b) were concerned, the High Court held that the
interest received u/s 28 of the 1894 Act would not fall within the ambit of the
expression ‘interest’ as envisaged u/s 145A(b) inasmuch as the Supreme Court in
the case of Ghanshyam (HUF) had held that interest u/s 28 of the
1894 Act was not in the nature of interest but was an accretion to the
compensation and, therefore, formed part of the compensation. Further, a
reference was made to CBDT Circular No. 5/2010 dated 3^rd June, 2010
wherein the scope and effect of the amendment made to section 56(2) and also to
section 145A were explained. It was clarified in the said circular that undue
hardship had been caused to the taxpayers as a result of the Supreme Court’s
decision in the case of Smt. Rama Bai vs. CIT (1990) 181 ITR 400
wherein it was held that arrears of interest computed on delayed or enhanced
compensation shall be taxable on accrual basis. It was to mitigate this
hardship that section 145A was amended to provide that the interest received by
an assessee on compensation or enhanced compensation shall be deemed to be his
income for the year in which it was received, irrespective of the method of
accounting followed by the assessee. By relying upon this clarification, the
High Court held that the amendment by the Finance (No. 2) Act, 2009 was not in
connection with the decision of the Supreme Court in the Ghanshyam (HUF)
case but was brought in to mitigate the hardship caused to the assessee on
account of the decision of the Supreme Court in the case of Rama Bai
(Supra).

The High Court did
not agree with the view adopted by the other High Courts in the cases which
were relied upon by the Revenue as it was contrary to what had been held in the
decision of the Supreme Court in Ghanshyam (HUF). The High Court
held that the deduction of tax at source u/s 194A from the amount of interest
granted u/s 28 of the 1894 Act was not justified.

MAHENDER PAL NARANG’S CASE

The issue recently
came up for consideration before the Punjab & Haryana High Court in the
case of Mahender Pal Narang vs. CBDT (2020) 423 ITR 13.

In this case, land
of the assessee was acquired during the previous years relevant to the
assessment years 2007-08 and 2008-09 for the compensation determined by the
acquisition authorities which was challenged by the assessee and the
corresponding enhanced compensation was received on 21^st March,
2016. The assessee filed his income-tax return for the assessment year 2016-17
treating the interest received u/s 28 of the 1894 Act as income from other
sources and claimed deduction of 50% as per section 57(iv). Thereafter, the
assessee filed an application u/s 264 claiming that the interest was wrongly
offered as income from other sources, whereas the same was required to be
treated as part of the enhanced compensation under the head capital gains and
the gains were to be exempted from taxation u/s 10(37). However, the revisional
authority rejected the application. The assessee then filed a writ petition
before the High Court against the said rejection order passed u/s 264.

The assessee
contended before the High Court that the interest received as part of the
additional compensation was in the nature of compensation that was not taxable
u/s 10(37) and further argued that the provisions of section 10(37) have
remained unchanged, though sections 56(2)(viii) and 57(iv) had been inserted by
the Finance (No. 2) Act, 2009 with effect from 1^stApril, 2010. The
amendments were brought in to remove the hardships created by the decision of
the Supreme Court in the case of Rama Bai (Supra) as explained by
Circular No. 5 of 2010. It was contended that the nature of interest u/s 28 of
the 1894 Act would remain that of compensation even after the amendments. The
assessee also relied upon the decision of the Supreme Court in CIT vs.
Ghanshyam (HUF) as well as of the Gujarat High Court in Movaliya
Bhikhubhai Balabhai vs. ITO (Supra).

The High Court
referred to the provisions of sections 45(5), 56(2)(viii) and 57(iv) as well as
the decision of the Supreme Court in CIT vs. Ghanshyam (HUF).
After dealing with them, it was held that the scheme with regard to
chargeability of interest received on compensation and enhanced compensation
had undergone a sea change with the insertion of sections 56(2)(viii) and
57(iv) in the Act. In view of the amendments, according to the Punjab &
Haryana High Court, the decision of the Apex Court in the Ghanshyam
case did not come to the rescue of the assessee to claim that interest received
u/s 28 of the 1894 Act was to be treated as compensation and to be dealt with
under ‘capital gains’. The argument raised that there was no amendment in
section 10(37) was considered to be ill-founded, on the ground that it dealt
with capital gains arising from transfer of agricultural land and it nowhere
provided as to what was to be included under the head ‘capital gains’.

The High Court did
not agree with the view taken by the Gujarat High Court in the Movaliya
Bhikhubhai Balabhai case that amendment by the Finance (No. 2) Act,
2009 was not in connection with the decision of the Supreme Court in the Ghanshyam
case but to mitigate the hardship caused by the decision of the Supreme Court
in the Rama Bai case. The interpretation based on Circular No. 5
of 2010 did not influence the Punjab & Haryana High Court and it was held
that there was no scope of taking outside aid for giving such an interpretation
to newly-inserted provisions when their language was plain, simple and
unambiguous. Accordingly, it was held that the interest received on compensation
or enhanced compensation was to be treated as ‘income from other sources’ and
not under the head ‘capital gains’.

In deciding the
issue in favour of the Revenue, the High Court chose to follow its own
decisions in the cases of CIT vs. Bir Singh (HUF) in ITA No. 209 of 2004
dated 27^th October, 2010 which was later on followed in the
case of Hari Kishan vs. Union of India [CWP No. 2290 of 2001 dated 30^th
January, 2014]; Manjet Singh (HUF) Karta Manjeet Singh vs. Union of India
[2016] 65 taxmann.com 160; and the decision of the Delhi High Court in the case of CIT
vs. Sharda Kochhar [2014] 49 taxmann.com 120. The Court overlooked its
own decisions, delivered in the context of TDS, in the cases of Jagmal
Singh vs. State of Haryana rendered in Civil Revision No. 7740 of
2012 on 18^th July, 2013 and Haryana State Industrial
Development Corpn. Ltd. vs. Savitri rendered in Civil Revision
No. 2509 of 2012 on 29^thNovember, 2013, wherein it was held
that there was no requirement of deducting tax at source from the amount of
interest determined to be payable u/s 28 of the Land Acquisition Act, 1894.

OBSERVATIONS

There can be three
different components of amount received or to be received by a person whose
land has been compulsorily acquired under any law for the time being in force:
the initial compensation which is awarded by the competent authority, the
enhanced compensation which is awarded by the court, and interest, on
compensation or the enhanced compensation which becomes payable due to the
direction of the court or due to the statutory provision of the relevant law.

Sub-section (5) of
section 45 is a charging provision and it creates a charge on the capital gains
on transfer of a capital asset, being a transfer by way of compulsory
acquisition under any law, or a transfer where the consideration for which is
determined or approved by the Central Government or the Reserve Bank of India.
The relevant portion of the sub-section (5) of section 45 is reproduced below:

Notwithstanding
anything contained in sub-section (1), where the capital gain arises from the
transfer of a capital asset, being a transfer by way of compulsory acquisition
under any law, or a transfer the consideration for which was determined or
approved by the Central Government or the Reserve Bank of India, and the
compensation or the consideration for such transfer is enhanced or further
enhanced by any court, Tribunal or other authority, the capital gain shall be
dealt with in the following manner, namely…

It can be noticed
that an accrual or a receipt which can be considered as ‘the compensation or
the consideration’ in the circumstances specified in section 45(5) gets covered
within the ambit of this provision and needs to be taxed as ‘capital gains’ in
the manner provided therein. In particular, sub-clause (b) of section 45(5)
deals with the taxability of the enhanced amount of compensation or
consideration and it provides as under:

(b) the amount
by which the compensation or consideration is enhanced or further enhanced by
the court, Tribunal or other authority shall be deemed to be income chargeable
under the head ‘Capital gains’ of the previous year in which such amount is
received by the assessee.

Therefore, the
whole of the amount by which the compensation or consideration is enhanced by
the court is deemed to be the income chargeable under the head capital gains
irrespective of the manner in which such enhanced amount of the compensation or
consideration has been determined or how that amount has been referred to in
the relevant governing law under which it has been determined. What is relevant
is that the compensation or the enhanced amount needs to be brought to tax
under the head ‘capital gains’ by virtue of the deeming fiction created under
the aforesaid provisions.

There are no
separate or specific provisions dealing with the taxability of the interest
received on compensation or enhanced compensation which is being taxed as per
the general provisions of the Act, particularly sections 56 to 59. The
confusion about the year of taxation was addressed by the Apex Court in the
case of Smt. Ramabai. A set of the specific provisions was
inserted in the Act by the Finance (No. 2) Act, 2009 with effect from 1^st
April, 2010 to provide that such interest shall be taxable in the year of
receipt nullifying the ratio of the Supreme Court decision. The issue of
taxation of such interest was dealt with extensively by the Supreme Court in
the case of Ghanshyam (HUF) while dealing with the taxation of
capital gains u/s 45(5). The issue before the Supreme Court was about the year
in which the enhanced compensation and interest thereon, received by the
assessee, were taxable. The assessee contended that those amounts could not be
held to have accrued to him during the year of receipt, as the entire amount
received was in dispute in appeal before the High Court, which appeal stood
filed by the State against the order of the reference Court granting enhanced
compensation; and that the amount of enhanced compensation and the interest
thereon were received by him in terms of the interim order of the High Court
against his furnishing of security to the satisfaction of the executing Court.
As against this, the Revenue pleaded that those amounts in question were
taxable in the concerned year of receipt in which they were received by relying
upon section 45(5).

For deciding this
issue, of the year in which the enhanced compensation as well as interest
thereon were taxable, the Supreme Court in that case, of Ghanshyam (HUF),
had to first decide as to what fell within the meaning of the term
‘compensation’ as used in section 45(5). It was for the obvious reason that if
any of the components of the receipt could not be regarded as ‘compensation’,
then such component would not be governed by the provisions of section 45(5) so
as to deem it to be income chargeable under the head ‘capital gains’. Apart
from dealing with the nature of different amounts which were awarded under
different sub-sections of section 23 of the Land Acquisition Act, 1894 as part
of the enhanced compensation, the Supreme Court also determined the true nature
of receipt of ‘interest’ granted under two different provisions of that Act,
i.e., sections 28 and 34. These two provisions dealing with the interest to be
paid to the person whose land has been acquired are as follows:

28. Collector
may be directed to pay interest on excess compensation

If the sum
which, in the opinion of the Court, the Collector ought to have awarded as
compensation is in excess of the sum which the Collector did award as
compensation, the award of the Court may direct that the Collector shall pay
interest on such excess at the rate of nine per centum per annum from the date
on which he took possession of the land to the date of payment of such excess
into Court

34. Payment of
interest

When the amount
of such compensation is not paid or deposited on or before taking possession of
the land, the Collector shall pay the amount awarded with interest thereon at
the rate of nine per centum per annum from the time of so taking possession
until it shall have been so paid or deposited.

The Supreme Court,
explaining the distinction between the interest that became payable under both
the above provisions of the 1894 Act held that the interest u/s 28 only was
needed to be considered as part of the compensation itself. The relevant
extracts from the Supreme Court’s decision in this regard are reproduced below:

Section 28
applies when the amount originally awarded has been paid or deposited and when
the Court awards excess amount. In such cases interest on that excess alone is
payable. Section 28 empowers the Court to award interest on the excess amount
of compensation awarded by it over the amount awarded by the Collector…

This award of
interest is not mandatory but is left to the discretion of the Court. Section
28 is applicable only in respect of the excess amount, which is determined by
the Court after a reference under section 18 of the 1894 Act. Section 28 does
not apply to cases of undue delay in making award for compensation [See: Ram
Chand vs. Union of India (1994) 1 SCC 44]. In the case of Shree Vijay
Cotton & Oil Mills Ltd. vs. State of Gujarat [1991] 1 SCC 262, this
Court has held that interest is different from compensation.

To sum up,
interest is different from compensation. However, interest paid on the excess
amount under section 28 of the 1894 Act depends upon a claim by the person
whose land is acquired whereas interest under section 34 is for delay in making
payment. This vital difference needs to be kept in mind in deciding this
matter. Interest under section 28 is part of the amount of compensation whereas
interest under section 34 is only for delay in making payment after the
compensation amount is determined. Interest under section 28 is a part of
enhanced value of the land which is not the case in the matter of payment of
interest under section 34.

The issue to be
decided before us – what is the meaning of the words ‘enhanced compensation /
consideration’ in section 45(5)(b) of the 1961 Act? Will it cover ‘interest’?
These questions also bring in the concept of the year of taxability.

Section 28 of
the 1894 Act applies only in respect of the excess amount determined by the
Court after reference under section 18 of the 1894 Act. It depends upon the
claim, unlike interest under section 34 which depends on undue delay in making
the award. It is true that ‘interest’ is not compensation. It is equally true
that section 45(5) of the 1961 Act refers to compensation. But as discussed
hereinabove, we have to go by the provisions of the 1894 Act, which awards
‘interest’ both as an accretion in the value of the lands acquired and interest
for undue delay. Interest under section 28 unlike interest under section 34 is
an accretion to the value, hence it is a part of enhanced compensation or
consideration which is not the case with interest under section 34 of the 1894
Act.

Thus, though a
component of the amount received was referred to as the ‘interest’ in section
28 of the 1894 Act, such part was to be considered to be part of the
‘compensation’ insofar as section 45(5) of the Income-tax Act was concerned.
When it came to the ‘interest’ referred to in section 34 of the 1894 Act, it
was to be treated as interest simpliciter and not as the ‘compensation’
for tax purposes and such interest was to be brought to tax as per the general
provisions of the law. This was because of the Court’s understanding that
interest u/s 28 was in the nature of damages awarded for granting insufficient
compensation in the first instance. The Court held that the interest under the
latter section 34 was to make up the loss due to delay in making the payment of
the compensation, the former section 28 interest being at the discretion of the
court and the latter section 34 interest being mandatory.

Later, this
decision in the case of Ghanshyam (HUF) was followed by the
Supreme Court in the cases of CIT vs. Govindbhai Mamaiya (2014) 367 ITR
498 and CIT vs. Chet Ram (HUF) (2018) 400 ITR 23.

Now the question
arises as to whether the amendments made by the Finance (No. 2) Act, 2009 with
effect from 1^st April, 2010 have altered the position. The relevant
amendments are narrated below:

Section 145A as existing then was substituted
whereby a sub-clause (b) was added to it to provide as under:

(b) interest
received by an assessee on compensation or on enhanced compensation, as the
case may be, shall be deemed to be the income of the year in which it is
received.

Sub-clause (viii) was inserted in sub-section
(2) of section 56 to provide as under:

(viii) income by
way of interest received on compensation or on enhanced compensation referred
to in clause (b) of section 145A.

Sub-clause (iv) was inserted in section 57 to
provide as under:

(iv) in the case
of income of the nature referred to in clause (viii) of sub-section (2) of
section 56, a deduction of a sum equal to fifty per cent of such income and no
deduction shall be allowed under any other clause of this section.

These amendments,
in our considered opinion, will apply only if the receipt concerned, like in
section 34 of the 1894 Act, can be regarded as ‘interest’ in the first place
and not otherwise. If the amount concerned has already been considered to be a
part of the compensation and, hence, governed by section 45(5), it cannot be
recharacterised as ‘interest’ merely by relying on the aforesaid amended
provisions. The characterisation of a particular receipt either as
‘compensation’ or ‘interest’ needs to be done independent of these provisions
and one needs to apply these amended provisions only if it has been
characterised as ‘interest’. Therefore, the basis on which the interest payable
u/s 28 of the 1894 Act has been regarded as part of the compensation by the
Supreme Court still prevails and does not get overruled by the aforesaid
amendments.

Recently, in the
context of a motor accident claim made under the Motor Vehicles Act, the Bombay
High Court in the case of Rupesh Rashmikant Shah vs. UOI (2019) 417 ITR
169, after considering the amended provisions of the Income-tax Act,
has held that interest awarded under the said Act as a part of the claim did
not become chargeable to tax merely because of the provision contained in
clause (viii) of section 56(2) of the Income-tax Act. Please see BCAJ Volume
51-A Part 3, page 51 for a detailed analysis of the nature of interest
awarded under the Motor Vehicles Act and the implications of section 56(2)
r/w/s 145A/B thereon. The relevant portion from this decision is reproduced
below:

We, therefore, hold that the interest awarded in
the motor accident claim cases from the date of the Claim Petition till the
passing of the award or in case of Appeal, till the judgment of the High Court
in such Appeal, would not be exigible to tax, not being an income. This
position would not change on account of clause (b) of section 145A of the Act
as it stood at the relevant time amended by Finance Act, 2009 which provision
now finds place in sub-section (1) of section 145B of the Act. Neither clause
(b) of section 145A, as it stood at the relevant time, nor clause (viii) of
sub-section (2) of section 56 of the Act, make the interest chargeable to tax
whether such interest is income of the recipient or not.

Further, section
2(28A) defines the term ‘interest’ in a manner that includes the interest
payable in any manner in respect of any moneys borrowed or debt incurred. In a
case of compulsory acquisition of land, there is obviously no borrowing of
monies. Is there any debt incurred? The ‘incurring’ of the debt, if at all,
arises only on grant of the award for enhanced compensation. Before the award
for the enhanced compensation, there is really no debt that can be said to have
been incurred in favour of the person receiving compensation. In fact, till
such time as the enhanced compensation is awarded there is no certainty about
the eligibility to it, leave alone the quantum of the compensation. This is
also one of the reasons in support of the argument that the amount so awarded
u/s 28 of the 1894 Act cannot be construed as ‘interest’ even when it is
referred to as ‘interest’ therein.

It is important to
appreciate the objective for the introduction of the amendments in sections
56(2), 57(iv) and 145A/B which was to provide for the year in which interest
otherwise taxable is to be taxed. This objective is explained in clear terms by
Circular No. 5/2010 dated 3^rd June, 2010 issued by the CBDT for
explaining the objective behind the introduction. The relevant paragraph of the
Circular reads as under:

‘The existing provisions
of Income Tax Act, 1961, provide that income chargeable under the head
“Profits and gains of business or profession” or “Income from
other sources”, shall be computed in accordance with either cash or
mercantile system of accounting regularly employed by the assessee. Further the
Hon’ble Supreme Court in the case of Smt. Rama
Bai vs. CIT (1990) 84 CTR (SC) 164 : (1990) 181 ITR 400 (SC) has held that arrears of interest computed on delayed or enhanced
compensation shall be taxable on accrual basis. This has caused undue hardship
to the taxpayers. With a view to mitigate the hardship, section 145A is amended
to provide that the interest received by an assessee on compensation or
enhanced compensation shall be deemed to be his income for the year in which it
was received, irrespective of the method of accounting followed by the
assessee.

Further, clause
(viii) is inserted in sub-section (2) of the section 56 so as to provide that
income by way of interest received on compensation or enhanced compensation
referred to in clause (b) of section 145A shall be assessed as “income
from other sources” in the year in which it is received.’

In the
circumstances, it is clear that the provisions of clause (viii) of section 56
and clause (iv) of section 57 and section 145A/B are not the charging sections
in respect of interest under consideration and their scope is limited to
defining the year of taxation of a receipt which is otherwise characterised as
interest.

The amendment as noted by the Gujarat High Court was brought about by the
Legislature to alleviate the difficulty that arose due to the decision of the
Apex Court in the case of Smt. Rama Bai vs. CIT, 181 ITR 400
wherein it was held that arrears of interest computed on delayed or enhanced
compensation should be taxable on accrual basis in the respective years of
accrual. It was to mitigate this hardship that section 145A was amended to
provide that the interest received by an assessee on compensation or enhanced
compensation shall be deemed to be his income for the year in which it was
received, irrespective of the method of accounting followed by the assessee. By
relying upon this clarification, the Gujarat High Court held that the concerned
amendments by the Finance (No. 2) Act, 2009 were not in connection with the
decision of the Supreme Court in the Ghanshyam (HUF) case but was
brought in to mitigate the hardship caused to the assessee on account of the
decision of the Supreme Court in the Rama Bai case.

Summing up, it is appropriate to not decide
the taxability or otherwise and also the head of taxation simply on the basis
of the nomenclature used in the relevant law under which the payment is made,
of compensation or enhanced compensation or interest, whatever the case may be.
The receipt for it to be classified as ‘interest’ or ‘compensation’ should be
tested on the touchstone of the provisions of the Income-tax Act. The better
view, in our considered opinion, is the view expressed by the Gujarat High
Court that the interest received u/s 28 of the Land Acquisition Act, 1894
should be taxed as capital gains in accordance with the provisions of section
45(5), subject to the exemption provided in section 10(37), and not as
interest, and no tax at source should be deducted therefrom u/s 194A.

shailesh.kwebmaker

Revision – Limited scrutiny case – CIT cannot exercise the power of revision u/s 263 to look into any other issue which the A.O. himself could not look at

2. CIT vs. Smt. Padmavathi
[dated 6^th October, 2020; TCA/350/2020] [Income Tax Appellate Tribunal, Madras
‘C’ Bench, Chennai in ITA No. 1306/Chny/2019; Date of order: 2^nd
December, 2019 for A.Y.: 2014-2015] (Madras
High Court)

Revision
– Limited scrutiny case – CIT cannot exercise the power of revision u/s 263 to
look into any other issue which the A.O. himself could not look at

The assessee is an
individual and a partner in a firm under the name and style of Sri Ram
Associates. She filed her return of income declaring a total income of Rs.
2,58,110. The return was processed u/s 143(1). Subsequently, the case was
selected under Computer Aided Scrutiny Selection for ‘Limited Scrutiny’ with
regard to purchase of a property by the assessee. The A.O., after hearing the
assessee, verifying the source of funds, completed the assessment by an order
dated 28^th December, 2016 u/s 143(3) and made an addition of Rs.
8,00,000.

The PCIT issued a show
cause notice u/s 263 dated 26^th October, 2018 to the assessee for
the reason that the assessee had purchased the immovable property by a sale
deed registered for a consideration of Rs. 41,50,000, whereas the guideline
value fixed by the State Government was Rs. 77,19,000 and there was a
difference of Rs. 35,69,000 which was not properly inquired into by the A.O.
and also not considered during the course of assessment. For this reason, the
PCIT proposed to invoke his powers u/s 263.

The assessee submitted her
reply dated 11^th January, 2019. The PCIT considered the explanation
and held that in the first place a request has to be made by the assessee for
valuation of the property and nothing is discernible from the records that the
assessee made any request, which leads to an inference that the A.O. did not
apply his mind to the fair market value and the consequential taxability of the
investment as ‘unexplained investment’ u/s 56(2)(vii)(b)(ii). The PCIT further
held that though the A.O. verified the source of funds, he failed to apply the
said provision, namely, section 56(2)(vii)(b)(ii). Thus, the PCIT rejected the
explanation given by the assessee and set aside the assessment and referred
back the same to the A.O. to re-do the assessment.

The assessee challenged the
revision order dated 18^th March, 2019 passed u/s 263 by filing an
appeal before the Tribunal. The Tribunal held that the value adopted for stamp
duty purposes is taken as ‘deemed consideration’ u/s 56(2)(vii)(b) and this is
only a deeming provision and there is no occasion for the assessee to explain
the source for deemed consideration. Further, the Tribunal held that since the
assessment was under limited scrutiny, it would be beyond the powers of the
A.O. to look into any other issue which has come to his notice during the
course of assessment and also faulted the PCIT for invoking his power u/s 263.
The Revenue filed an appeal before the High Court.

The High Court considered
the issue as regards the power of the PCIT u/s 263 and whether he could have
set aside the assessment on the ground that the A.O. did not invoke section
56(2)(vii)(b).

Further, the Court observed
that the assessment order shows that the case was selected for limited scrutiny
only on the aspect regarding the sale consideration paid by the assessee for
purchase of the immovable property and the source of funds. The A.O. has noted
that the sale consideration paid by the assessee was Rs. 41,50,000 and she has
paid stamp duty and incurred other expenses of Rs. 5,75,000. The source of
funds was verified and the A.O. was satisfied with the same. The PCIT, while
invoking his power u/s 263, faults the A.O. on the ground that he did not make
proper inquiry. It is not clear as to what in the opinion of the PCIT is
‘proper inquiry’. By using such an expression, it presupposes that the A.O. did
conduct an inquiry. However, in the opinion of the PCIT, the inquiry was not
proper. In the absence of not clearly stating as to why, in the opinion of the
PCIT, the inquiry was not proper, the Court held that the invocation of the
power u/s 263 was not justified.

The Court further observed
that the only reason for setting aside the scrutiny assessment was on the
ground that the guideline value of the property, at the relevant time, was
higher than the sale consideration reflected in the registered document. The
question would be as to what is the effect of the guideline value fixed by the
State Government. There is a long list of decisions of the Supreme Court
holding that guideline value is only an indicator and the same is fixed by the
State Government for the purposes of calculating stamp duty on a deal of
conveyance. Therefore, merely because the guideline value was higher than the
sale consideration shown in the deed of conveyance, cannot be the sole reason
for holding that the assessment is erroneous and prejudicial to the interest of
Revenue.

The A.O. in his limited
scrutiny has verified the source of funds, noted the sale consideration paid
and the expenses incurred for stamp duty and other charges. Furthermore, the
assessee in her reply dated 11^th January, 2019 to the show cause
notice dated 26^th October, 2018 issued by the PCIT, has specifically
stated that the assessment was getting time-barred; the A.O. took upon himself
the role of a valuation officer u/s 50(C)(2) and found that the guideline value
was not the actual fair market value of the property and the actual
consideration paid was the fair market value and therefore, he did not choose to
make any addition u/s 50(C). The PCIT has not dealt with this specific
objection, but would fault the A.O. for not invoking section 56(2)(vii)(b)(ii)
merely on the ground that the guideline value was higher. The guideline value
is only an indicator and will not always represent the fair market value of the
property and, therefore, the invocation of power u/s 263 by the PCIT was not
sustainable in law.

In the result, the Revenue appeal was
dismissed.

In the morning when thou risest
unwillingly, let this thought be present – I am rising to the work of a human
being

Why then am I dissatisfied if I
am going to do the things for which I exist and for which I was brought into
the world?

— Marcus Aurelius

The sage acts without taking
credit.

She accomplishes without
dwelling on it.

She does not want to display her
worth

— Lao Tzu, Tao Te Ching, Ch.
77

shailesh.kwebmaker

Settlement Commission – Section 245C – Settlement of cases – Condition precedent – Full and true disclosure of undisclosed income – Income offered in application for settlement – Additional income offered during proceedings before Settlement Commission – No new source of income – Offer in order to avoid controversy – Acceptance of offer and passing of order by Settlement Commission – Justified

15. Principal CIT vs.
Shankarlal Nebhumal Uttamchandani [2020] 425 ITR 235 (Guj) Date of order: 7^th January,
2020 A.Ys.: 2012-13 to 2016-17

Settlement
Commission – Section 245C – Settlement of cases – Condition precedent – Full
and true disclosure of undisclosed income – Income offered in application for
settlement – Additional income offered during proceedings before Settlement
Commission – No new source of income – Offer in order to avoid controversy –
Acceptance of offer and passing of order by Settlement Commission – Justified

The
assessee was carrying on the business of purchase and sale of land and trading
in textile items of art silk clothes. A survey u/s 133A was carried out on 3^rd
July, 2015 at the office premises of the assessee. During the course of the
survey operation, various loose documents were found and impounded by the
Department. While assessment proceedings were pending, the assessee filed a
settlement application u/s 245(1) before the Settlement Commission offering
additional income for the A.Ys. 2012-13 to 2016-17. The assessee filed its
statement of facts before the Commission, preparing a statement of sources and
application of unaccounted income to demonstrate that investment, application
and rotation of unaccounted funds was covered by the overall source of
unaccounted funds generated and offered to tax. The assessee disclosed
additional income during the course of the hearing u/s 245D(4) aggregating to
Rs. 12 crores for the five years. The Commission accepted the disclosures made
by the assessee after considering the detailed item-wise explanation submitted
by the assessee and accordingly the case of the assessee was settled on the
terms and conditions stated in the order.

The
Department filed a writ petition and challenged the order on the ground that
there was no full and true disclosure of undisclosed income. The Gujarat High
Court dismissed the writ petition and held as under:

‘i) The disclosure made during the course of the
proceedings before the Commission was not a new disclosure. The Settlement
Commission was right in considering the revised offer made by the assessee
during the course of the proceedings in the spirit of settlement.

ii) On a perusal of the order passed by the
Commission, it was apparent that the application submitted by the assessee had
been dealt with in accordance with the provisions of sections 245C and 245D of
the Act. The Commission had observed the procedure while exercising powers u/s
245D(4) by examining thoroughly the report submitted by the Department under
rule 9 of the Income-tax Settlement Commission (Procedure) Rules, 1997. The
Commission had also provided proper opportunity of hearing to the respective
parties and therefore the amount which had been determined by the Commission
was just and proper.

iii) The Commission was right in considering the revised offer
made by the respondent during the course of the proceedings in the nature of
spirit of settlement. We are therefore of the opinion that the order passed by
the Commission does not call for any interference.’

shailesh.kwebmaker

Securities Transaction Tax Act, 2004 – Stock exchange – Duty only to ensure tax collected, determined in accordance with Act and Rules and that amount collected deposited with Central Government – Stock exchange cannot collect securities transaction tax beyond client code – Addition to income of stock exchange on the ground that higher securities transaction tax ought to have been collected – Not justified

14. Principal CIT vs. National Stock Exchange [2020]
425 ITR 588 (Bom) Date
of order: 3^rd February, 2020 A.Ys.: 2006-07

Securities
Transaction Tax Act, 2004 – Stock exchange – Duty only to ensure tax collected,
determined in accordance with Act and Rules and that amount collected deposited
with Central Government – Stock exchange cannot collect securities transaction
tax beyond client code – Addition to income of stock exchange on the ground
that higher securities transaction tax ought to have been collected – Not
justified

The
assessee is the National Stock Exchange of India Limited. For the A.Y. 2006-07,
the A.O. was of the view that there was a discrepancy between the total amount
of securities transaction tax collected by at least nine brokers from their foreign institutional investors and the amount of securities
transaction tax collected by the assessee. After considering the response of
the assessee, the A.O. passed an assessment order raising securities
transaction tax collectible by the assessee by an additional amount of Rs. 5 crores
over and above the securities transaction tax collected and deposited by the
assessee during the year under consideration. Penalty proceedings were also
initiated.

The
Tribunal deleted the addition made on this count as modified by the first
appellate authority, holding that the assessee had not committed any default
and that under the statute the assessee was not liable for any alleged short
deduction of securities transaction tax. Consequently, the levy of interest and
penalty were also deleted.

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

‘i) Chapter VII of the Finance (No. 2) Act, 2004
deals with securities transaction tax. Securities transaction tax is charged at
a specified rate in accordance with section 98. Securities transaction tax is
payable either by the purchaser or by the seller and not by the stock exchange.
The value of taxable securities transaction has to be determined in accordance
with section 99 and the proviso
thereto. Rule 3 of the Securities Transaction Tax Rules, 2004, including the
Explanation thereto, have been notified prescribing how the value of the
securities transaction tax is to be determined.

ii) The responsibility of the stock exchange is to
ensure firstly that securities transaction tax is collected as per section 98;
secondly, that it has been determined in accordance with section 99 read with
rule 3 and Explanation thereto; and lastly, such securities transaction tax
collected from the purchaser or seller is credited to the Central Government as
provided u/s 100. The stock exchange can only ensure determination of the value
of the taxable securities transaction of purchase and sale through a client
code at the prescribed rate. However, there is no mechanism provided enabling
the stock exchange to collect securities transaction tax beyond the client
code.

iii) The Securities and Exchange Board of India
issued a circular to the stock exchanges for using two client codes, one for
sale and the other for purchase in respect of investors such as foreign
institutional investors whose transactions are to be settled through delivery
mode pursuant to which the stock exchange had issued a circular dated 30^th
September, 2004 to its member brokers to use the two client codes. If a broker
had not taken any separate client code the stock exchange cannot be held
responsible. Such failure cannot be ascribed to the stock exchange because the
client codes are not provided by the stock exchange but by the member brokers.

iv) The Tribunal had returned a finding of fact
that the securities transaction tax collected by the assessee was through and
under the client codes of the member brokers and the collected securities
transaction tax had been credited into the account of the Central Government.
Hence the deletion of the addition and the consequent interest and penalty were
justified.’

shailesh.kwebmaker

Recovery of tax – Section 179 – Attachment and sale of property – Properties settled on trust for grandchildren by ‘S’ – Recovery proceedings against son of ‘S’ u/s 179 – Properties settled on trust cannot be attached

13. Rajesh T. Shah vs. TRO [2020]
425 ITR 443 (Bom) Date
of order: 13^th March, 2020 A.Ys.: 1988-89 to 1990-91

Recovery
of tax – Section 179 – Attachment and sale of property – Properties settled on
trust for grandchildren by ‘S’ – Recovery proceedings against son of ‘S’ u/s
179 – Properties settled on trust cannot be attached

One ‘S’
during her lifetime settled a private family trust under a trust deed dated 10^th
April, 1978 for the benefit of her grandchildren. By a deed of will dated 5^th
March, 1985, ‘S’ bequeathed all her properties in favour of the trust. ‘S’
expired on 26^th August, 1991. The petitioner ‘H’, who was one of the
trustees, in the year 1986 joined the assessee company as a Managing Director
and resigned from the company in the year 1993. In 1990, the Department carried
out a survey action in the case of the company. Orders of assessment were
passed for the A.Ys. 1988-89, 1989-90 and 1990-91. The liability of the M.D.
was quantified. For realisation of the liability, by separate attachment
orders, the Tax Recovery Officer attached three properties belonging to the
trust on the premise that the three properties belonged to the petitioner in
his individual capacity.

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

‘i) The
properties belonged to the trust which was settled by will by ‘S’ before
initiation of recovery proceedings by the Revenue against the petitioner. The
properties did not belong to the petitioner in his individual capacity or his
legal heirs or representatives. The trust had been formed in the year 1978 and
the will of ‘S’ was made in 1985, much before initiation of recovery proceedings.
There was no question of the properties being diverted to the trust to evade
payment of due tax.

ii) That being the
position, we set aside and quash the attachment orders.’

shailesh.kwebmaker

Non-resident – Taxability in India – Article 5(1) of DTAA between Mauritius and India – Meaning of ‘permanent establishment’ – Company in Mauritius engaged in telecasting sports events – Agreement with Indian company for exhibition of telecasts in India – Finding that agreement was on principal-to-principal basis – Indian company did not constitute permanent establishment of foreign company – Income earned not assessable in India

12. CIT (International Taxation) vs. Taj TV Ltd. [2020]
425 ITR 141 (Bom) Date
of order: 6^th February, 2020 A.Ys.: 2004-05 and 2005-06

Non-resident
– Taxability in India – Article 5(1) of DTAA between Mauritius and India –
Meaning of ‘permanent establishment’ – Company in Mauritius engaged in telecasting
sports events – Agreement with Indian company for exhibition of telecasts in
India – Finding that agreement was on principal-to-principal basis – Indian
company did not constitute permanent establishment of foreign company – Income
earned not assessable in India

The assessee was a company
registered in Mauritius and was a tax resident of that country. The assessee
was engaged in telecasting a sports channel. The assessee had appointed ‘T’ as
its distributor to distribute the channel to cable systems for exhibition to
subscribers in India. In this connection, an agreement dated 1^st
March, 2002 was entered into between the assessee and ‘T’. The A.O. held that
the income earned in terms of the agreement was assessable in India.

The Commissioner (Appeals)
found that ‘T’ was not acting as an agent of the assessee but had obtained the
right of distribution of the channel for itself and, subsequently, had entered
into contracts with other parties in its own name in which the assessee was not
a party, that the distribution of the revenue between the assessee and ‘T’ was
in the ratio of 60:40 and the entire relationship was on principal–to-principal
basis. The Commissioner (Appeals) reversed the order of the A.O. The Tribunal
noted that this finding of the first appellate authority was corroborated by
the terms and conditions of the distribution agreement as well as the
sub-distributor agreement. The Tribunal held that none of the conditions as
stipulated in article 5(4) of the Double Taxation Avoidance Agreement was
applicable to constitute agency permanent establishment, because ‘T’ was acting
independently qua its
distribution rights and the entire agreement was on principal-to-principal
basis. Therefore, it held that the distribution income earned by the assessee
could not be taxed in India because ‘T’ did not constitute an agency permanent
establishment under the terms of article 5(4) of the DTAA.

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

‘i) Article 5 of the Double Taxation Avoidance
Agreement entered into between India and
Mauritius defines “permanent establishment”. The sum and substance of paragraph
(4) of Article 5 is that a person acting in a Contracting State on behalf of an
enterprise of the other Contracting State shall be deemed to be a permanent
establishment of that enterprise in the first-mentioned Contracting State if he
habitually exercises in the first Contracting State an authority to conclude
contracts in the name of the enterprise and habitually maintains in the first
Contracting State a stock of goods or merchandise belonging to the enterprise
from which he regularly fulfils orders on behalf of the enterprise.

ii) There was a concurrent finding of fact by the
Commissioner (Appeals) and the Tribunal. There was no evidence that the finding
of fact was perverse. Hence the income from distribution earned by the assessee
was not taxable in India.’

shailesh.kwebmaker

Cash credits – Section 68 – Assessee entry provider to customers making deposits in cash in lieu of cheques for lower amounts – Cash deposits accounted for in assessment orders of beneficiaries – Restriction of addition to difference between amounts deposited and cheques issued only as commission income as disclosed by assessee – Provisions of section 68 not attracted

11. Principal CIT vs. Alag Securities Pvt. Ltd. [2020]
425 ITR 658 (Bom) Date
of order: 12^th June, 2020 A.Y.:
2003-04

Cash credits – Section 68 – Assessee entry
provider to customers making deposits in cash in lieu of cheques for lower amounts – Cash deposits accounted for in
assessment orders of beneficiaries – Restriction of addition to difference
between amounts deposited and cheques issued only as commission income as
disclosed by assessee – Provisions of section 68 not attracted

The assessee
provided accommodation entries to entry seekers. For the A.Y. 2003-04, the A.O.
held that the identity of the parties involved and the genuineness of the
transactions were not proved by the assessee and added the amount of cash
deposits to the income u/s 68.

The Commissioner
(Appeals) held that only 0.15% of the total deposits were to be treated as
income and restricted the addition to 0.15% of the total deposits as commission
in the hands of the assessee. The Tribunal upheld the order passed by the
Commissioner (Appeals) and dismissed the appeal of the Department.

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

‘i) The provisions of section 68 would not be
attracted. The assessee had admitted that its business was to provide
accommodation entries. In return for the cash credits it issued cheques to its
customers and beneficiaries for smaller amounts, the balance being its
commission. Moreover, the cash credits had been accounted for in the respective
assessment of the beneficiaries.

ii) Section 68 would be attracted only when any
sum was found credited in the books of the assessee and no explanation was
offered about the nature and source thereof or the explanation offered was not
in the opinion of the A.O. satisfactory. But it had been the consistent stand
of the assessee which had been accepted by the Commissioner (Appeals) and the
Tribunal that the business of the assessee centred around the customers and
beneficiaries who made the deposits in cash amounts and in lieu thereof took cheques from the assessee for amounts slightly lower
than the quantum of deposits, the difference representing the commission
realised by the assessee.

iii) The assessee had never claimed the cash
credits as its income. The cash amounts deposited by the customers, i.e., the
beneficiaries, had been accounted for in the assessment orders of those
beneficiaries. Therefore, the question of adding such cash credits to the
income of the assessee, especially when the assessee was only concerned with
the commission earned on providing accommodation entries, did not arise.

iv) On the issue of the percentage of commission,
the Tribunal had already held 0.1% commission in similar types of transactions to be a reasonable percentage of commission and
therefore had accepted the percentage of commission at 0.15% disclosed by the
assessee itself. This finding was a plausible one and the rate of commission
was not arrived at in an arbitrary manner.

v) The order of the Tribunal did not suffer from
any error or infirmity to warrant interference u/s 260A. No question of law
arose.’

shailesh.kwebmaker

Capital gains or business income – Sections 4 and 45 – Non-banking financial institution – Conversion of shares and securities held as stock-in-trade into investment – Sale of shares – No provision at time of transaction for treating income from sale of shares as business income – Income could not be taxed as business income

10. Kemfin Services Pvt. Ltd. vs. ACIT [2020]
425 ITR 684 (Kar.) Date
of order: 11^th June, 2020 A.Y.: 2005-06

Capital gains or business income – Sections
4 and 45 – Non-banking financial institution – Conversion of shares and
securities held as stock-in-trade into investment – Sale of shares – No
provision at time of transaction for treating income from sale of shares as
business income – Income could not be taxed as business income

The assessee was a
non-banking financial corporation engaged in the activity of investment in
shares. The board of the assessee passed a resolution to stop its trading
activities in shares and securities under the portfolio management scheme and
to convert the stock-in-trade into investment on 1^st April, 2004.
For the A.Y. 2005-06, the A.O. passed an order u/s 143(3) wherein, inter alia, he held that mere interchange of heads in books of account as
investment or stock-in-trade did not alter the nature of transaction, that the
transactions of the assessee fell within the ambit of business income and not
short-term capital gains and treated the transactions as business income.

The Commissioner
(Appeals), inter
alia, held that the shares had to be considered as
stock-in-trade and the income from the sale of shares was to be treated as
business income. The Tribunal, inter alia, held that the
assessee acquired certain shares under the portfolio management scheme and
those shares were treated by the assessee and accepted by the Department as
stock-in-trade for the A.Ys. 2003-04 and 2004-05, that the assessee changed the
character of its asset from stock-in-trade to investments, that a surplus arose
in the course of conversion of those shares and therefore, stock-in-trade was a
business asset and any income that arose on account of stock-in-trade was
business income. It also held that income always arose from an existing source
and not from a potential source and dismissed the appeals filed by the
assessee.

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

‘i) The assessee had converted stock-in-trade into
investments. Prior to introduction of the Finance Bill, 2018 by which
provisions of the Act had been amended to provide for taxability in cases where
stock-in-trade was converted into capital asset, there was no provision to tax
the transaction. In the absence of any provision in the Act, the transaction in
question could not have been subjected to tax.

ii) That statutory
interpretation of a taxing statute has to be strictly construed. The assessee
was not to be taxed without clear words for that purpose and every Act of
Parliament must be read according to the natural construction of its words.

iii) In view of the preceding analysis, the
Tribunal erred in treating the income arising on sale of shares held as capital
asset after conversion from stock-in-trade as business income. The substantial
question of law framed in the appeals is answered in favour of the assessee and
against the Revenue.’

shailesh.kwebmaker

Advance tax – Interest for default in payment of advance tax – Sections 132, 132B, 234B and 234C – Computation of interest – Assessee paying four instalments of advance tax prior to search and seizure and communication sent to adjust advance tax against cash seized during search – Date of communication to be taken as date of payment of advance tax

9. Marble Centre International P. Ltd. vs. ACIT [2020]
425 ITR 654 (Kar.) Date
of order: 11^th June, 2020 A.Y.:
2007-08

Advance tax – Interest for default in
payment of advance tax – Sections 132, 132B, 234B and 234C – Computation of
interest – Assessee paying four instalments of advance tax prior to search and
seizure and communication sent to adjust advance tax against cash seized during
search – Date of communication to be taken as date of payment of advance tax

The assessee was in
the business of trading. A search and seizure action was conducted u/s 132 in
the business premises of the assessee and residential premises of its director
and accountant. During the course of the search, Rs. 4.77 crores in cash was
seized by the Department. Prior to the seizure of the cash, the assessee had
paid advance tax in four instalments on 15^th June, 2006, 14^th
September, 2006, 14^th December, 2006 and 8th March, 2007. The
assessee agreed to disclose Rs. 50 lakhs and stock of Rs. 1.40 crores as
additional income for the A.Y. 2007-08 and sent a communication dated 15^th
March, 2007 in which a request was made to treat Rs. 50 lakhs out of the cash
seized as advance tax payable by the assessee for the A.Y. 2007-08. Notices
under sections 142(1) and 143(2) were issued and the assessee furnished the
details called for. An order dated 31^st December, 2008 was passed
u/s 143(3). The assessee claimed that the date of the request letter, 15^th
March, 2007, should be taken as the date of payment of advance tax of Rs. 50
lakhs out of the seized amount. The claim was not accepted.

The Commissioner
(Appeals), inter
alia, held that the assessee was entitled to relief
in respect of the interest from the date of filing of the return till the date
of the order of assessment and partly allowed the appeal. The Tribunal
dismissed the appeal filed by the assessee.

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

‘i) The date of payment of tax by the assessee
was 15^th March, 2007, i.e., the date on which the request was made
by the assessee to adjust the cash seized against the advance tax payable
towards the tax for the A.Y. 2007-08. The assessee had offered a sum of Rs. 50
lakhs on 15^th March, 2007 towards the advance tax payable for the
A.Y. 2007-08. According to the statement of income prior to the seizure of
cash, the assessee had also paid advance tax in four instalments. However, the
Department did not adjust these amounts even though the cash was available with
it. The date of payment of tax shall be taken as 15^th March, 2007,
i.e., the date on which the request was made by the assessee to adjust the cash
seized against the advance tax payable for the A.Y. 2007- 08.

ii) In view of the preceding analysis, we hold
that the Tribunal ought to have held the date of payment of tax by the assessee
as 15^th March, 2007, i.e., the date on which the request was made by
the assessee to adjust the cash seized against the advance tax payable towards
the tax for the A.Y. 2007-08.’

shailesh.kwebmaker

As per provisions of section 194C(6), the only requirement for non-deduction of tax at source is that the transport contractors have to furnish their PAN details – The Tribunal restored the issue to the file of the A.O. for de novo adjudication

7. M.S. Hipack v. ACIT (Mumbai) C.N. Prasad (J.M.) and Rajesh Kumar
(A.M.) ITA No.: 1032/Mum/2019 A.Y.: 2011-12 Date of order: 29^th
September, 2020 Counsel for Assessee / Revenue: D.J.
Shukla / R. Bhoopathi

As per provisions
of section 194C(6), the only requirement for non-deduction of tax at source is
that the transport contractors have to furnish their PAN details – The Tribunal
restored the issue to the file of the A.O. for de novo adjudication

FACTS

The A.O. while completing the assessment noticed
that the assessee had incurred transportation charges and had not deducted tax
at source. The assessee having not complied with the requirement of filing
Form–26Q, accordingly, disallowance was made by the A.O.

Aggrieved,
the assessee preferred an appeal to the CIT(A) who sustained the disallowance
as he was not convinced with the submissions made by the assessee.

Aggrieved,
the assessee preferred an appeal to the Tribunal where it was contended that
the assessee has complied with the provisions of section 194C(6) as it has
filed revised and corrected Form-26Q giving the details of PAN of transport
contractors and not deducted TDS complying with the provisions of section 194C(6).
It was submitted that as per the provisions of section 194C(6) the only
requirement for non-deduction of tax at source is that the transport
contractors have to furnish their PAN details. The assessee has duly obtained
PAN details of the contractors and incorporated the same in corrected Form-26Q.

HELD

In view of
the submissions of the assessee that it had corrected Form-26Q by furnishing
the PAN details of the transport contractors and complied with the provisions
of section 196C(6), the Tribunal held that this matter has to be examined by
the A.O. in the light of the submissions of the assessee and in the interest of
justice, it restored the issue to the file of the A.O. for de novo
adjudication with a direction that the A.O. shall take note of the fact of the
assessee filing the corrected Form-26Q and also that the assessee is at liberty
to file all necessary information before the A.O.

shailesh.kwebmaker

Section 153C – The date of initiation of search u/s 132 or requisition u/s 132A in the case of other person shall be the date of receiving the books of accounts or documents or assets seized or requisitioned by the A.O. having jurisdiction over such other person. Where the A.O. of the searched person and the other person (the assessee) was the same, the date on which satisfaction is recorded by the A.O. for invoking the provisions of section 153C would be deemed to be the date of receiving documents by the A.O. of the other person

6. Diwakar N. Shetty vs. DCIT (Mumbai) Vikas Awasthy (J.M.) and Rajesh Kumar
(A.M.) ITA No.: 5618/Mum/2016 A.Y.: 2010-11 Date of order: 30^th
September, 2020 Counsel for Assessee / Revenue: Vasudev Ginde / Purushottam Tripure

Section 153C – The date of initiation of search
u/s 132 or requisition u/s 132A in the case of other person shall be the date
of receiving the books of accounts or documents or assets seized or
requisitioned by the A.O. having jurisdiction over such other person. Where the
A.O. of the searched person and the other person (the assessee) was the same,
the date on which satisfaction is recorded by the A.O. for invoking the
provisions of section 153C would be deemed to be the date of receiving documents by the A.O.
of the other person

FACTS

A search and
seizure action u/s 132 was carried out in the case of M/s Om Sai Motors Pvt.
Ltd., a company belonging to the Gangadhar Shetty group on 20^th
August, 2009. In the search action certain documents pertaining to the assessee
were also seized.

The A.O. of
the person searched and the assessee was the same. The satisfaction for
initiating proceedings u/s 153C was recorded on 21^st December, 2010,
i.e., in the financial year 2010-11, relevant to the assessment year 2011-12.

Notice u/s
153C was issued to the assessee on 21^stDecember, 2010. The A.O.
made block assessment for A.Ys. 2004-05 to 2009-10 and for the impugned A.Y.,
i.e., 2010-11, the A.O. considered it as the year of search and made the assessment
under regular provisions.

The A.O.
completed the assessment of the impugned assessment year as a regular
assessment u/s 144.

Aggrieved by
the assessment made, the assessee preferred an appeal to the CIT(A).

Further
aggrieved by the order passed by the CIT(A), the assessee preferred an appeal
to the Tribunal where it raised an additional ground challenging the validity
of the assessment order passed u/s 144 by contending that the ‘relevant date’
for assuming jurisdiction u/s 153A r/w/s 153C in case of the person other than
the searched person (in this case the appellant / assessee) would not be the
date of search, but the date of handing over of the material, etc., belonging
to that other person to his A.O. by the A.O. having jurisdiction over the searched person.

In the
present case, the A.O. of the searched person and the other person (i.e., the
assessee) is the same. Since satisfaction for initiating proceedings u/s 153C
was recorded on 21^st December, 2010, i.e., in financial year
2010-11, relevant to assessment year 2011-12, the year of search would be
assessment year 2011-12 and not 2010-11. Accordingly, the A.Y. 2010-11 under
consideration falls within the block of six assessment years referred to in
section 153C of the Act, therefore, assessment ought to have been made only u/s
153C and not as regular assessment u/s 143(3)/144.

HELD

The Tribunal
observed that the only issue for its consideration is whether the assessment
for A.Y. 2010-11 was required to be framed u/s 153C being part of block
assessment period or the assessment has been rightly made under regular
provisions considering impugned assessment year relevant to the year of search.
The assessment order for the aforesaid block period of six years was passed u/s
144 r/w/s 153C on 30^th December, 2011.

The Tribunal
noted that the assessee challenged the invoking of section 153C jurisdiction
for A.Y. 2004-05 before the Tribunal in ITA No. 7309/Mum/2014 (Supra).
After examining the facts, the Tribunal held that A.Y. 2004-05 is outside the
purview of the block assessment period as the documents relatable to the
assessee found at the place of the searched person were handed over to the A.O.
of the assessee in financial year 2010-11 relevant to A.Y. 2011-12. If that be
so, the A.O. would have no jurisdiction for issuing notice u/s 153A r/w/s 153C
for A.Y. 2004-05. However, for the limited purpose of verification of facts,
the Tribunal restored the issue back to the A.O. Thereafter, the A.O. passed an
order giving effect to the order of the Tribunal wherein the A.O. admitted that
A.Y. 2004-05 does not fall within the block assessment period as the relevant
material was handed over in the period relevant to A.Y. 2011-12.

The Tribunal
observed that since the Revenue has itself admitted the fact that the year of
search would be financial year 2010-11 relevant to A.Y. 2011-12, the block
period of six years for search assessment u/s153C would comprise of assessment
years 2005-06 to 2010-11. Under these facts, the assessment for A.Y. 2010-11
being part of block assessment period should have been u/s 153A r/w/s 153C.

The Tribunal
having noted the ratio of the decision of the Delhi High Court in the
case of CIT vs. Jasjit Singh, Income Tax Appeal No. 337 of 2015 for A.Y.
2009-10, decided on 2^ndJanuary, 2018 by the Delhi High
Court has held that the date of initiation of search u/s 132 or requisition
u/s132A in the case of other person shall be the date of receiving the books of
accounts or documents or assets seized or requisitioned by the A.O. having
jurisdiction over such other person. In the instant case, although the A.O. of
the searched person and the other person (the assessee) was the same,
satisfaction was recorded by the A.O. for invoking the provisions of section
153C on 21^st December, 2010, the said date would be deemed to be the
date of receiving documents by the A.O. Thus, the year of search would be F.Y.
2010-11 relevant to A.Y. 2011-12.

Taking note
of the decision of the Delhi Bench of the Tribunal in the case of EON
Auto Industries Pvt. Ltd. vs. DCIT, ITA No. 3179/Del/2013, A.Y. 2008-09, decided on 28^th
November, 2017, the Tribunal held that for the purpose of determining six
assessment years prior to the date of search, the relevant date for the purpose
of invoking provisions of section 153C in the case of a person other than the
person searched would be the date of recording satisfaction u/s 153C.

The Tribunal
held that since the impugned assessment year forms part of the block of six
assessment years prior to the date of search, the assessment should have been
made u/s 153C and not under the regular provisions as has been done by the A.O.
Therefore, the assessment order for the impugned year suffers from legal
infirmity and hence is liable to be quashed.

The Tribunal
quashed the assessment order and allowed the additional ground of appeal filed
by the assessee.

shailesh.kwebmaker

Sections 14A, 253 – In cross-objections, assessee can raise a ground for the first time, which was not taken up by him even in an appeal before the CIT(A)

5. ITO vs. Centrum Capital Limited
(Mumbai) Shamim Yahya (A.M.) and Pavan Kumar
Gadale (J.M.) ITA No. 497/Mum/2019 and CO arising
out of ITA No. 497/Mum/2019 A.Y.: 2013-14 Date of order: 5^th October,
2020 Counsel for Revenue / Assessee: Lalit Dehiya / Jitendra Jain

Sections
14A, 253 – In cross-objections, assessee can raise a ground for the first time,
which was not taken up by him even in an appeal before the CIT(A)

FACTS

The assessee
in his return of income considered a sum of Rs. 22,82,187 to be disallowable
u/s 14A. The amount of exempt income earned by the assessee was Rs. 44,250. The
A.O., while assessing the total income of the assessee, disallowed a sum of Rs.
10,91,61,614 u/s 14A.

Aggrieved,
the assessee preferred an appeal to the CIT(A) who referred to the decision of
the Delhi High Court in the case of Joint Investment P. Ltd. vs. CIT (59
taxmann.com 295) for the proposition that disallowance u/s 14A cannot
exceed the exempt income. He held that the disallowance in this case will not
exceed the suo motu disallowance done by the assessee which was more
than the exempt income. He held that since the total exempt income earned by
the appellant was only Rs. 44,250, therefore, respectfully following the
judgment of the Mumbai Bench of the Tribunal in
the case of Future Corporate Resources Ltd. (Supra), the
disallowance u/s 14A r/w/r 8D is restricted to Rs. 44,250 only. He, however, held that because while filing the return of
income the appellant had itself disallowed a sum of Rs. 22,82,187 which is more
than the tax-free income earned by the appellant, therefore no further
disallowance can be made. Hence, disallowance of Rs. 10,91,61,614 made by the
A.O. u/s 14A r/w/r 8D is deleted and the appeal of the assessee on this ground
is allowed.

Aggrieved by
the decision of the CIT(A), Revenue preferred an appeal contending that the
CIT(A) erred in restricting the disallowance u/s 14A to Rs. 22,82,187 being the
amount suo motu disallowed by the assessee.

The assessee
filed a cross-objection contending that the CIT(A) ought to have restricted the
disallowance to the exempt income of Rs. 44,250 instead of observing that the
disallowance should be restricted to Rs. 22,82,187 being the suo motu
disallowance done by the assessee.

HELD

The Tribunal held
that there is no infirmity in the order of the CIT appeals which is duly
supported by the order of the Delhi High Court referred above. It observed that
the jurisdictional High Court in the case of CIT vs. Delight Enterprises
(in ITA No. 110/2009) has expounded a similar proposition. The Tribunal
dismissed the appeal filed by the Revenue.

As regards
the CO filed by the assessee, the DR by referring to order 9 rule 13 of the CPC
objected to the ground being taken in the cross-objection which was not even
before the CIT appeals. The Tribunal noted that order 9 rule 13 of the CPC
deals with setting aside decree ex parte and held that such a reference
does not help the case of the Revenue.

The Tribunal
noted that as rightly observed by the ITAT bench in the aforesaid case of Tata
Industries Ltd. vs. ITO (2016) 181 TTJ 600 (Mum.), no tax can be
collected except as per the mandate of the law. If the assessee has erroneously
offered more income for taxation, the same cannot be a bar to the assessee in
seeking remedy before the appellate forum.

The Tribunal
observed that the Supreme Court in the case of

i) Goetze (India) Ltd. vs. CIT (2006) 284
ITR 323 (SC) has held that nothing in that order would prevent the ITAT
in admitting an additional claim which was raised for the first time without a
revised return;

ii) CIT vs. V. MR. P. Firm [1965] 56 ITR
67(SC) has held that if a particular income is not taxable under the
Act, it cannot be taxed on the basis of estoppel or any other equitable
doctrine;

iii) Shelly Products 129 taxman 271 (SC)
supports the proposition that if the assessee has erroneously paid more tax
than he was legally required to do, he is entitled to claim the refund, as
otherwise it would be violative of Article 265 of the Constitution.

The Tribunal
mentioned that the CBDT Circular 14 (XL-35) of 1953 dated 11^th
April, 1955 states that officers of the Department must not take advantage of
the ignorance of the assessee as to his rights.

The Tribunal
held that

i) in the background of the aforesaid Supreme
Court decisions, it does not find any merit whatsoever in the objection of CIT DR in accepting and adjudicating the ground raised by a
cross-objection by the assessee.

ii) as regards the merits of the issue raised in
the cross-objection, the Tribunal held that the same stands covered by the very
decisions relied upon by the CIT (Appeals) himself as referred above, that the
disallowance u/s 14A cannot exceed the exempt income;

iii) the disallowance in this case should not
exceed the exempt income earned as referred above;

iv) in view of the CBDT Circular No. 14 as
referred above, the ground raised by the assessee is cogent.

The Tribunal
directed the A.O. to grant the necessary relief to the assessee and the
cross-objections filed by the assessee were allowed.

shailesh.kwebmaker

Section 144C inserted in the statute by the Finance (No. 2) Act, 2009 with retrospective effect from 1st April, 2009 is prospective in nature and would not apply to A.Y. 2009-10 or earlier assessment years

4. Truetzschler India Pvt. Ltd. vs.
DCIT (Mumbai) Members: Vikas Awasthy (J.M.) and
Manoj Kumar Aggarwal (A.M.) ITA No. 1949/Mum/2015 A.Y.: 2009-10 Date of order: 30^th
September, 2020 Counsel for Assessee / Revenue: Nitesh Joshi / A. Mohan

Section 144C
inserted in the statute by the Finance (No. 2) Act, 2009 with retrospective
effect from 1st April, 2009 is prospective in nature and would not apply to
A.Y. 2009-10 or earlier assessment years

FACTS

In the
present appeal preferred against the order of the CIT(A), the assessee raised
an additional ground challenging the validity of the assessment order dated 13^th
May, 2013 passed u/s 143(3) r/w/s 144C(13). In the additional ground, the assessee
contended that the assessment order ought to be quashed as it has been passed
after the expiry of the time limit prescribed u/s 153.

The Tribunal
noted that the Transfer Pricing Officer (TPO) passed the order u/s 92CA(3) on 9^th
January, 2013. The A.O. passed the draft assessment order on 27^th
March, 2013. Thereafter, the A.O. was required to pass the final assessment
order within the limitation period provided u/s 153(1), i.e., by 31^st
March, 2013, whereas, actually the final assessment order was passed on 13^th
May, 2013, i.e., after the expiry of the limitation period.

On behalf of
the assessee, and relying on the decision of the Madras High Court in the case
of Vedanta Limited vs. ACIT in Writ Petition No. 1729 of 2011 decided on
22^nd October, 2019, it was contended that the time limit for
passing the assessment order in the impugned assessment year does not get
extended by application of section 144C mandating reference to the dispute
resolution panel as the provisions of the said section do not apply to the
impugned assessment year. On the other hand, the Departmental Representative placed reliance on CBDT Circular
No. 5 of 2010 dated 3^rd June, 2010 to counter the argument made on
behalf of the assessee.

HELD

The
additional ground being purely legal in nature and requiring no fresh evidence
was admitted by the Tribunal.

The Tribunal
noted that the Madras High Court has held that where there is a change in the
form of assessment itself, such change is not a mere deviation in procedure but
a substantive shift in the manner of framing an assessment. A substantive right
has enured to the parties by virtue of the introduction of section 144C.
Bearing in mind the settled position that the law applicable on the first day
of the assessment year be reckoned as the applicable law for assessment for
that year, leads one to the inescapable conclusion that the provisions of
section 144C can be held to be applicable only prospectively, that is, from
A.Y. 2011-12. The High Court also made it clear that the Circular issued in
2013 to bring the assessment year 2009-10 in the fold of the newly-inserted
provisions of section 144C would have no application.

The Tribunal
held that

i) the provisions of section 144C would not
apply in the impugned assessment year, and hence the time period for passing
the assessment order would not get enlarged;

ii) the A.O. was under obligation to pass the
assessment order within the time specified under the third proviso to
section 153(1), i.e., on or before 31^st March, 2013;

iii) since the order has been passed beyond the
period of limitation, the same is null and void. The assessee succeeds on the
legal ground raised as additional ground of appeal;

iv) the assessment order is quashed and the appeal
of the assessee is allowed.

shailesh.kwebmaker

Section 37 – Expenditure incurred on cost of adhesive stamps for obtaining conveyance deed for assignment of receivables is allowable as the same is in connection with facilitating recovery of receivables which is a part of current asset and has been incurred for facilitating the business of the assessee

9. [2020] 120 taxmann.com 33 (Mum.)(Trib.) Demag
Delaval Industries Turbomachinery (P) Ltd. A.Y.: 2004-05 Date of order: 16^th September,
2020

Section 37 – Expenditure incurred on cost
of adhesive stamps for obtaining conveyance deed for assignment of receivables
is allowable as the same is in connection with facilitating recovery of
receivables which is a part of current asset and has been incurred for
facilitating the business of the assessee

FACTS

The assessee
acquired an industrial turbine unit of Alstom Project India Limited for a lump
sum consideration. The assessee incurred expenditure of Rs. 59,17,000 being
cost of adhesive stamp affixed on the conveyance deed for assignment of
receivables and claimed it as a deduction on the ground that it was an
expenditure in connection with the acquisition of business and is a revenue
expenditure.

The A.O. and the
CIT(A) denied the claim of the assessee on the ground that it is for
acquisition of industrial turbine unit from Alstom Project India Limited. He
held that the stamp duty is nothing but an expenditure incurred in order to
cure or complete the title to capital. Hence, it is capital expenditure.

Aggrieved, the
assessee preferred an appeal to the Tribunal and contended that the expenditure
in this regard has been incurred in connection with the conveyance deed of
receivables which are part of the current assets, therefore the expenditure
cannot be treated as expenditure for the purpose of acquisition of capital
assets. Expenditure was very much incurred for the purpose of the business of
the assessee and the same should be allowed as such. In this regard, reliance
was placed on the case of CIT vs. Bombay Dyeing and Manufacturing Co.
(219 ITR 521) and India Cement Ltd. vs. CIT (60 ITR 52).

HELD

The Tribunal, after going through the conveyance deed, held that the
deed involving duty of Rs. 59,17,000 was for the purpose of assignment of
receivables and that the CIT(A)’s conclusion that the expenditure is to cure
and complete the title to capital is without appreciating the facts of the
case.

The Tribunal held that this assignment is admittedly for facilitating
the business of the assessee by assigning receivables. The expenditure is in
connection with facilitating recovery of receivables which is a part of the
current assets. Hence, the expenditure in this regard cannot be said to be in
the capital field of acquiring the business. It is in fact for facilitating the
business of the assessee and in this view of the matter expenditure is
allowable as business expenditure. The ratio of the decisions in the
case of Bombay Dyeing Mfg. (Supra) and India Cements Ltd.
(Supra), relied upon on behalf of the assessee, are accordingly germane
and support the case of the assessee. The CIT(A) has been in error in holding
that the case laws are not applicable here.

The Tribunal decided this ground of appeal in favour of the assessee.

shailesh.kwebmaker

Section 115JB – When income which is exempt u/s 10 is credited to Profit & Loss Account, the Book Profit u/s 115JB is to be computed by reducing the amount of such income to which section 10 applies

8. [2020] 120 taxmann.com 31 (Del.)(Trib.) ITO vs. Buniyad Developers (P) Ltd. A.Y.: 2009-10 Date of order: 21^st September,
2020

Section 115JB – When income which is exempt
u/s 10 is credited to Profit & Loss Account, the Book Profit u/s 115JB is to be computed by
reducing the amount of such income to which section 10 applies

FACTS

For the assessment
year 2009-10, the assessee company filed its return of income on 30^th
September, 2009 declaring Nil income but paid tax on book profits u/s 115JB at
Rs. 5,73,70,009. The return was processed u/s 143(1). The A.O., in the course
of assessment proceedings for A.Y. 2010-11, having noticed that the lands were
sold in part and that there has been no income declared in respect of its profits
of Rs. 5,58,61,180 earned on sale of land, issued notice u/s 148 and, after
hearing the assessee, made an addition of Rs. 5,41,38,217 with interest income
of Rs. 21,90,212.

Aggrieved, the
assessee preferred an appeal to the CIT(A) who, taking note of the remand
assessment in A.Y. 2010-11, found that since the village where the land sold
was located was eight km. away from the municipal limits, the very basis of the
A.O. reopening the assessment proceedings for A.Y. 2009-10 has no locus
standi as the A.O. has himself in the remand assessment for A.Y. 2010-11
admitted the said fact. He, therefore, allowed the contention of the assessee
on that ground. He also accepted the contention of the assessee that under the
provisions of section 115JB(2)(k)(ii), the profits derived from sale of
agricultural land, which is exempt u/s 10, has to be reduced from the book
profits and, therefore, the assessee is entitled to relief even in respect of
the amount that was offered to tax. He directed the A.O. to compute the tax in
accordance with law by reducing the amount of income to which provisions of
section 10 of the Act apply, if the said amount is credited to the profit and
loss account.

Aggrieved, the
Revenue preferred an appeal to the Tribunal.

HELD

The Tribunal observed that it is an admitted fact that the land that
was sold was located in village Kishora, which is more than eight km. away from
the municipal limits and the profits earned on the sale of such land are exempt
u/s 10. It noted that in view of the provisions of section 115JB(2)(k)(ii),
the assessee committed a mistake when it computed the book profits including
the sale consideration of agricultural land, which was credited to the profit
and loss account and offered the same to tax.

The Tribunal held that

i) in view of the decision of
the Supreme Court in the case of CIT vs. Shelly Products (2003) 129
Taxman 271, such a mistake has to be rectified by the Revenue
authorities when it is brought to their notice and they are satisfied with the
genuineness of the claim;

ii) when the CIT(A) is satisfied
that the income which is exempt u/s 10 is included in the book profit u/s
115JB, which should not be done, the CIT(A) is justified in directing the A.O.
to follow the law and to compute the tax in accordance with the provisions of
section 115JB by reducing the amount of income to which section 10 applies, if
such amount is credited to the profit and loss account.

iii) the action of the CIT(A) is
perfectly legal and does not suffer any infirmity.

The Tribunal declined to interfere with the findings of the CIT(A) and
found the appeal of the Revenue to be devoid of merit.

shailesh.kwebmaker

I. Section 194H r/w/s 201(1) – Discount on sale of set-top boxes and recharge coupons including festival discount and bonus points to customers cannot be considered as commission and therefore not liable for deduction of tax II. Section 36(1)(iii) – Assessee had filed necessary evidence to prove availability of owned funds to cover investment made in capital WIP. Thus, interest paid on borrowed funds was to be allowed u/s 36(1)(iii)

7. [2020] 119 taxmann.com 424 (Mum.)(Trib.) Tata Sky Ltd. vs. ACIT, Circle 7(3) A.Ys.: 2009-10 and 2010-11 Date of order: 10^th September,
2020

I. Section 194H
r/w/s 201(1) – Discount on sale of set-top boxes and recharge coupons including
festival discount and bonus points to customers cannot be considered as
commission and therefore not liable for deduction of tax

II. Section 36(1)(iii) – Assessee had filed
necessary evidence to prove availability of owned funds to cover investment
made in capital WIP. Thus, interest paid on borrowed funds was to be allowed
u/s 36(1)(iii)

FACTS

I. The assessee was engaged in the business of
providing Direct to Home (DTH) services. The set-top box (STB) installed at the
premises of the subscribers receives television signals through the
broadcasters which are uplinked to the satellite. The main source of income for
the assessee was from the sale of STB’s and sale of recharge coupons to
subscribers. The assessee claimed deduction of discounts offered on sale of
STB’s and recharge coupons. The A.O. contended that the very nature of discount
given by the assessee to distributors is in the nature of commission and
disallowed the expenditure as no tax deduction was made by the assessee. The
CIT(A) upheld the decision of the A.O.

Aggrieved, the
assessee preferred an appeal with the Tribunal.

II. The assessee had certain capital WIP and the
A.O. had observed that no interest expenditure was allocated against it. The
assessee had incurred huge interest expenditure on various loans and the A.O.
disallowed proportionate interest expenditure u/s 36(1)(iii). The CIT(A)
confirmed the disallowance. The assessee preferred an appeal with the Tribunal..

HELD

I. The transactions
between the assessee and its distributors were on principal-to-principal basis
and all the risk, loss and damages are transferred to the distributor on
delivery. Further, the distributors were free to sell the STB’s at any price below
the maximum retail price. The assessee had filed the sample copy of invoices
for sale of STB’s and other recharge coupons to prove that it was a sale and
not services to be covered u/s 194H. Therefore, the assessee was not required
to deduct TDS on discount allowed on the sale of STB’s and hardware, recharge
coupon vouchers and disallowance of bonus or credit provided to subscribers,
including sales promotion expenses. The A.O. was directed to delete the
addition made on account of the disallowances.

II. Based on the facts in the case, it was clear
that the assessee had not borrowed specific loan for acquiring capital assets.
The A.O. had disallowed proportionate interest paid on other loans including
loans borrowed for working capital purpose on the ground that the assessee had
used interest-bearing funds for acquisition of capital asset. The A.O. did not
bring on record any evidence to prove that borrowed funds were used for
acquisition of capital work in progress. The assessee filed evidence to the
effect that capital work in progress had been acquired out of the share capital
raised which was sufficient to cover investment in the capital work in
progress. Therefore, the A.O. erred in disallowing proportionate interest
expenses u/s 36(1)(iii).

shailesh.kwebmaker

Section 54F: Where the genuineness of the transactions is established, to avail exemption u/s 54F it is not mandatory that the agreement must be registered or possession must be obtained

6. [2020] 77 ITR (Trib.) 394 (Pune)(Trib.) Lalitkumar Kesarimal Jain vs. DCIT ITA No. 1345-1347/Pune/2017 A.Y.: 2012-13 Date of order: 24^th September,
2019

Section 54F: Where the genuineness of the
transactions is established, to avail exemption u/s 54F it is not mandatory
that the agreement must be registered or possession must be obtained

FACTS

The assessee earned
long-term capital gains on sale of certain assets and in his return of income
claimed exemption u/s 54F to the tune of Rs. 18.96 crores for purchase of new
residential property. The A.O. rejected the said claim citing the following
reasons: (1) The agreements for purchase were unregistered; (2) The seller had
not given possession of the property; and (3) The assessee was an interested party
in the seller’s concern. The assessee substantiated that he had already paid
Rs. 22.10 crores to the seller before the due date of filing return of income
for the relevant assessment year and the same was not returned. In an
affidavit, the assessee explained the reason for not getting possession from
the seller. However, the CIT(A) upheld the order of the A.O., rejecting the
exemption u/s 54F.

The assessee
therefore filed an appeal before the ITAT.

HELD

(i) Section 54F is incorporated to promote housing
projects and development activities and according to it once a person sells
some assets and earns capital gains, that money should be utilised for
procuring some new assets. The assessee should part with that money or a
substantial amount of it, for procuring a new residential house. What
essentially is looked into in this regard is the bona fide nature of the
assessee and the genuineness of the transaction/s.

(ii) It was an undisputed fact that the assessee
had paid a sum of Rs. 22.10 crores to the seller and the Department had not
brought on record any evidence to prove that the said money came back to the
assessee.

(iii) The entire ambit of the Income-tax Act is based
within the larger framework of welfare legislation. The object of each
provision is ultimately the development of the society as well as the
individual and at the same time taking care of the interests of taxpayers.

(iv) Merely because the assessee had an interest in
the seller concern by itself cannot be reason to deny the benefit of deduction
when the genuineness of the transactions was established and there were several
other persons who were purchasing flats from the same seller and who had
already paid advance amounts.

(v) It was further found that the delay in
completion of the project was absolutely circumstantial and neither the
assessee nor the seller had any mala fide intention for delay of the
project.

(vi) Referring to the decision of the Supreme Court
in the case of Fibre Boards (P) Ltd. vs. CIT [2015] 376 ITR 596 (SC)
and several other decisions of Tribunals, it was held that it is not mandatory
that the agreement must be registered or possession must be obtained. If it is
substantiated that the transaction is genuine, then benefit of deduction u/s
54F should be given to the assessee.

Accordingly, the
assessee was granted the benefit of deduction u/s 54F.

shailesh.kwebmaker

DEEMED GRANT OF REGISTRATION U/S 12A

ISSUE FOR CONSIDERATION

In order
for the income of a charitable or religious institution to be eligible for
exemption u/s 11 of the Income-tax Act, the institution has to be registered
with the Commissioner of Income Tax u/s 12A read with section 12AA. For this
purpose, the institution has to file an application for registration u/s
12A(1)(aa) and the Commissioner on receipt of the application is required to
then follow the procedure laid down in section 12AA by passing an appropriate
order. Section 12AA(2) provides that every such order of the Commissioner
granting or refusing registration has to be passed before the expiry of six months
from the end of the month in which the application was received by him.

But often
it is seen that the Commissioner fails to act on the application within the
prescribed time, leaving the institution without registration. An issue arises
in such cases before the Courts about the status of the institution where the
Commissioner does not pass any order u/s 12AA within the time limit. Is the
institution to be treated as unregistered, which it is, or is it to be deemed
to be registered on failure of the Commissioner to act within the prescribed
time? While the Kerala and the Rajasthan High Courts, following an earlier
decision of the Allahabad High Court upheld on an appeal decided by the Supreme
Court, have held that in such a situation the registration u/s 12AA is deemed
to have been granted on the expiry of the period of six months, the Gujarat
High Court, following a subsequent Full Bench decision of the Allahabad High
Court, has held that the expiry of the period of six months does not result in
a deemed registration of the institution. In deciding the issue, the Gujarat
High Court held that the Supreme Court in the above referred appeal had left
the issue of deemed registration open while the other High Courts followed the
decision of the Apex Court on the understanding that it had held that the
institution was deemed to be registered once the time for rejecting the
application and refusing the registration was over. The added controversy,
therefore, moves in a narrow compass whereunder it is to be examined whether
the Supreme Court really adjudicated the issue as understood by the Kerala and
Rajasthan High Courts or whether the Court had kept the same open as held by
the Gujarat High Court.

TWO INTRICATELY LINKED CASES

The issue
had first come up before the Allahabad High Court in the case of Society for the Promotion of Education, Adventure Sport &
Conservation of Environment vs. CIT 372 ITR 222 and a
little later before the Full Bench of the same High Court in the case of CIT vs. Muzafar Nagar Development Authority 372 ITR 209.
Both these cases are intricately linked and therefore it is thought fit to
consider them at one place.

In the
Society’s case, the assessee was running a school. Till A.Y. 1998-99 it was
claiming exemption u/s 10(22). It had, therefore, not registered itself u/s 12A
to claim exemption u/s 11. Since section 10(22) was omitted by the Finance Act,
1998, the Society applied for registration u/s 12A with retrospective effect,
since the inception of the Society. But because the application was not made
within one year from the date of its establishment as required by the law at
that point of time, the Society sought for condonation of delay in making an
application.

No
decision was taken by the Commissioner on the Society’s application within the
time of six months prescribed u/s 12AA(2) and, in fact, the decision was
pending even after almost five years. Therefore, the Society was treated by the
A.O. as unregistered and was not allowed exemption from tax and was assessed on
its income that resulted in large tax demands. The Society filed a writ
petition before the Allahabad High Court seeking relief, including on the
ground that it was deemed to be registered u/s 12AA and was eligible for
exemption u/s 11.

The
Allahabad High Court observed that what was to be examined in the petition was
the consequence of such a long delay on the part of the Commissioner in not
deciding the Society’s application for registration. It noted that admittedly,
after the statutory limitation, the Commissioner would become functus officio, and could not thereafter pass
any order either allowing or rejecting the registration; it was obvious that
the application could not be allowed to be treated as perpetually undecided,
and under the circumstances, the key question was whether, upon lapse of the
six-month period without any decision, the application for registration should
be treated as rejected or to be treated as allowed.

It was
vehemently argued on behalf of the Society before the High Court that
registration shall be deemed to have been granted after the expiry of the
period prescribed u/s 12AA(2) if no decision had been taken on the application
for registration. Reliance was placed on the decision of the Bangalore bench of
the Tribunal in the case of Karnataka Golf
Association vs. DIT 91 ITD 1, where such a view had
been taken. Reliance was also placed on the decisions of the Allahabad High
Court in the cases of Jan Daood & Co. vs. ITO
113 ITR 772 and CIT
vs. Rohit Organics (P) Ltd. 281 ITR 194, both of
which laid down that when an application for extension of time was moved and
was not decided, it would be deemed to have been allowed. Further reliance was
placed on the decisions of the Allahabad High Court in the case of K.N. Agarwal vs. CIT 189 ITR 769 and of
the Bombay High Court in the case of Bank
of Baroda vs. H.C. Shrivastava 256 ITR 385 for the
proposition that the discipline of quasi-judicial functioning
demanded that the decision of the Tribunal or the High Court must be followed
by all Departmental authorities because not following the same could lead to a
chaotic situation.

The
Society further argued that the absence of any order of the Commissioner should
be taken to mean that he has not found any reason for refusing registration,
notice of which could have been given to the Society by way of an opportunity
of hearing. It was also argued that latches and lapses on the part of the
Department could not be to its own advantage by treating the application for
registration as rejected.

On behalf
of the Revenue reliance was placed on a decision of the Supreme Court in the
case of Chet Ram Vashisht vs. Municipal Corporation of Delhi, 1981 SC 653.
In that case, the Supreme Court, while examining the effect of the failure on
the part of the Delhi Municipal Corporation to decide an application u/s 313(3)
of the Delhi Municipal Corporation Act, 1957 for sanctioning a layout plan
within the specified period, had held that non-consideration of the application
would not amount to a deemed sanction.

The
Allahabad High Court, in the context of the Chet
Ram decision (Supra),
observed that the Supreme Court decision dealt with a different statute. It
further noted that one of the important aspects pointed out by the Supreme
Court for taking the view was the purpose of the provision requiring sanction
to layout plans. There was an element of public interest involved, namely, to
prevent unplanned and haphazard development of construction to the detriment of
the public. Besides, sanction or deemed sanction to a layout plan would entail
constructions being carried out, thereby creating an irreversible situation.
According to the Allahabad High Court, in the case before it there was no such
public element or public interest. Taking a view that non-consideration of the
registration application within the stipulated time would result in a deemed
registration might, at the worst, cause loss of some revenue or income tax
payable by that particular assessee, similar to a situation where an assessment
or reassessment was not completed within the prescribed limitation and the
inaction of the authorities resulted in deemed acceptance of the returned
income.

On the
other hand, according to the Allahabad High Court, taking the contrary view and
holding that not taking a decision within the time fixed by the law was of no
consequence, would leave the assessee totally at the mercy of the income tax
authorities, inasmuch as the assessee had not been provided any remedy under
the Act against such non-decision. Besides, according to the Court, their view
did not create any irreversible situation because the Commissioner had the
power to cancel registration u/s 12AA(3) if he was satisfied that the objects
of such trust were not genuine or the activities were not being carried out in
accordance with its objects. The only adverse consequence likely to flow from
the Court’s view would be that the cancellation would operate only
prospectively, resulting in some loss of revenue from the date of expiry of the
limitation u/s 12AA(3) till the date of cancellation of the registration. In
the view of the Allahabad High Court, the purposive construction adopted by the
Court furthered the object and purpose of the statutory provisions.

By far the
better interpretation according to the Court was to hold that the effect of
non-consideration of the registration application within the stipulated time
was a deemed grant of registration. It accordingly held that the institution
was a registered one and was eligible for the benefit of exemption u/s 11.

The
Income-tax Department challenged the decision of the Allahabad High Court
before the Supreme Court and in a decision reported as CIT vs. Society for the Promotion of Education, Adventure Sports
& Conservation of Environment, 382 ITR 6, the
Supreme Court, confirming the deemed registration, inter
alia addressed the apprehension raised on behalf of the Revenue by
holding that the deemed registration would, however, operate only after six
months from the date of the application, stating that this was the only logical
sense in which the judgment could be understood. In other words, the deemed
registration would not operate from the date of application or before the date
of application, but would operate on and from the date of expiry of six months
from the date of application. The Supreme Court disposed of the appeal by
noting that all other questions of law were kept open. It is not possible to
gather what those other questions of law were before the Court in the appeal as
the order did not record such questions. It is best to believe that the
observations of the Court were for the limited purpose of restricting the
decision to the issue expressly decided by it, which was to confirm the deemed
registration as was held by the Allahabad High Court and, inter alia, clarify that what the Allahabad
High Court meant was that the registration was to be effective from the date of
expiry of six months from the date of application.

The above ratio of the Allahabad High Court’s
decision in the case of the Society for the
Promotion of Education, Adventure Sport & Conservation of Environment vs.
CIT 372 ITR 222 was doubted by another Division
Bench in the case of CIT vs. Muzafar Nagar
Development Authority and the Bench referred the case
before it to a Full Bench of the Allahabad High Court reported in CIT vs. Muzafar Nagar Development Authority 372 ITR 209.
The doubts expressed by the Division Bench were as follows:

1. There was nothing in section 12AA(2) which
provided for a deemed grant of registration if the application was not decided
within six months;

2. In the absence of a statutory provision
stipulating that the consequence of non-consideration would be a deemed grant
of permission, the Court could not hold that the application would be deemed to
be granted after the expiry of the period; and

3. The Legislature had not contemplated that the
authority would not be entitled to pass an order beyond the period of six
months.

4. The decision of the Court in the case of the Society for the Promotion of Education, Adventure Sport &
Conservation of Environment (Supra) did not
lay down a good law.

On behalf
of the assessee, it was argued before the Full Bench of the Allahabad High
Court that the intention of the Legislature was that the decision of the
Commissioner within the period of six months was mandatory and must be strictly
observed. The Legislature had used both expressions ‘may’ and ‘shall’ in
section 12AA(1), which was indicative of the fact that the expression ‘shall’
was regarded as mandatory wherever it had been used. Therefore, the period
prescribed in section 12AA(2) must be regarded as mandatory. If it was not
treated as mandatory, the assessee would be subjected to great prejudice by an
inordinate delay on the part of the Commissioner in disposing of his
application and the period, which had been prescribed otherwise, would be
rendered redundant.

It was
submitted on behalf of the Revenue that the period of six months was clearly
directory and the Legislature had not provided any consequence, such as a
deeming fiction that the application would be treated as being granted if it
was not disposed of within six months. Even if this was regarded as a casus omissis,
it was a well-settled principle of law that the Court had no jurisdiction to supplant
it and it must adopt a plain and literal meaning of the statute.

The Full
Bench of the Allahabad High Court examined the provisions of sections 12A and
12AA. It noted that the Legislature had not imposed a stipulation to the effect
that after the expiry of the period of six months the Commissioner would be
rendered functus officio or that he would be disabled
from exercising his powers. It had also not made any provision to the effect
that the application for registration should be deemed to have been granted if
it was not disposed of within a period of six months with an order either
allowing registration or refusing to grant it. According to the Full Bench,
providing that the application should be disposed of within a period of six
months was distinct from stipulating the consequence of a failure to do so.

The Court
observed that laying down the consequence that the application would be deemed
to be granted upon the expiry of six months could only be by way of reading a
legislative fiction or a deeming definition into the law which the Court, in
its interpretive capacity, could not create. That would amount to rewriting the
law and introduction of a provision which, advisedly, the Legislature had not
adopted. The Full Bench also held that a legislative provision could not be
rewritten by referring to the notes on clauses which, at the highest, would
constitute background material to amplify the meaning and purport of a
legislative provision.

The Full
Bench of the Allahabad High Court placed reliance on two decisions of the
Madras High Court in the cases of CIT
vs. Sheela Christian Charitable Trust 354 ITR 478
and CIT vs. Karimangalam Omriya Pangal Semipur Amaipur Ltd. 354 ITR
483 where it had held that failure to pass an order on an application
u/s 12AA within the stipulated period of six months would not automatically
result in granting registration to the trust.

According
to the Full Bench of the Allahabad High Court, the assessee was not without a
remedy on expiry of the period of six months, as this could be remedied by
recourse to the jurisdiction under Article 226 of the Constitution. Therefore,
the Court held that the judgment of the Division Bench in Society for the Promotion of Education (Supra)
did not lay down the correct position of law and that non-disposal of an
application for registration within the period of six months would not result
in a deemed grant of registration.

THE TBI EDUCATION TRUST CASE

The issue
came up again before the Kerala High Court in the case of CIT vs. TBI Education Trust 257 Taxman 355.

In this
case the assessee trust was constituted on 27^thMay, 2002 and filed
an application for registration u/s 12A on 10^th October, 2006. The
Commissioner called for a report from the Income-tax Officer (ITO) on 12^th
January, 2007 and this report was submitted only on 24^th July, 2007.
Vide this report, the ITO recommended
registration u/s 12AA(2). However, the Joint Commissioner of Income-tax sent an
adverse report dated 31^st July, 2007 to the Commissioner. There were
some adjournments later, and finally the Commissioner passed an order dated 29^thNovember, 2007 rejecting the application for registration.

The
Tribunal allowed the assessee’s appeal, relying on the decision of the Special
Bench of the Tribunal in the case of Bhagwad
Swarup Shri Shri Devraha Baba Memorial Shri Hari Parmarth Dham Trust vs. CIT
111 ITD 175 (Del.)(SB), holding that since the
application was not disposed of within the period of six months, registration
would be deemed to have been granted.

In the appeal filed by the Commissioner against the Tribunal order
before the Kerala High Court, on behalf of the Revenue, attention of the Court
was drawn to the detailed consideration by the Commissioner of the assessee not
being a charitable trust, especially with reference to the clause in the trust
deed which enabled collection of free deposits, contributions, etc., from
students and their parents. It was argued that there was a specific finding
that though the trust was essentially for setting up of an educational institution,
there was no charity involved. There was also considerable delay in filing the
application for registration by the assessee, and sufficient reasons were not
stated for condoning such delay.

It was
further argued that though a period of six months was provided under the
statute, there was no deeming provision as such and under such circumstances
there could not be a deemed registration u/s 12AA. Reliance was also placed by
the Revenue on the decision of the Full Bench of the Allahabad High Court in
the Muzafar Nagar Development Authority case (Supra), for the proposition that there
could be no deemed registration. It was argued that there was no declaration of
law in the decision of the Supreme Court in the case of Society for the Promotion of Education (Supra),
as it was only a concession made by the counsel appearing for the Department.
It was urged that the High Court should be concerned with the interpretation of
the provision to advance the course of law and not a concession by a counsel before
the Supreme Court in a solitary instance.

On behalf
of the assessee, it was submitted that the same Commissioner who had filed the
appeal before the Court had given effect to the order of the Tribunal, and
therefore the appeal was infructuous. Reliance was also placed on the decision
of the special bench of the Tribunal in the case of Bhagwad Swarup Shri Shri Devraha Baba Memorial Shri Hari Parmarth
Dham Trust (Supra) which held the limitation to be
a mandatory provision, failure to comply with which would result in deemed
registration. Attention of the Court was drawn to the CBDT Instruction No.
16/2015 (F No 197/38/2015-ITA-1) dated 6^th November, 2015 which
mandated that the application should be considered and either allowed or
rejected within the period of six months as provided under the section.
Reliance was also placed on the decision of the Supreme Court in the case of Society for the Promotion of Education (Supra).

The Kerala
High Court initially observed that the Full Bench decision of the Allahabad
High Court had a persuasive power and they were inclined to follow the
decision, holding that without a specific deeming provision there could be no
grant of deemed registration u/s 12AA. According to the Kerala High Court,
there could be no fiction created by mere inference in the absence of a specific
exclusion deeming something to be other than what it actually was. The Kerala
High Court therefore observed that the fact assumed significance as to the view
of the Department insofar as the mandatory provision of consideration of
application and an order being issued within a period of six months.

Further,
the Kerala High Court noticed that there was unreasonable delay in complying
with the mandatory provision u/s 12AA(2). It also took note of the CBDT
Instruction Number 16/2015 (F No 197/38/2015-ITA-1) dated 6^th
November, 2015 where the CBDT had noted that the time limit of six months was
not being observed in some cases by the Commissioner. Instructions were
therefore issued that the time limit of six months was to be strictly followed
by the Commissioner of Income-tax (Exemptions) while passing orders u/s 12AA
and the Chief Commissioner (Exemptions) was instructed to monitor adherence to
the prescribed time limit and initiate suitable administrative action in case
any laxity in such adherence was noticed.

The Kerala
High Court observed that the CBDT had thought it fit, obviously from experience
of dealing with delayed applications, that the mandatory provision had to be
complied with in letter and spirit. These directions were binding on the officers
of the Department and were a reiteration of the statutorily prescribed mandate.
According to the Kerala High Court, the CBDT instruction gave a clear picture
of how the CBDT expected the officers to treat the mandatory provision as being
scrupulously relevant and significant.

The Kerala
High Court then considered the decision of the Supreme Court in the case of Society for the Promotion of Education (Supra).
It stated that it was not convinced with the contention of the Revenue that
there was any concession made by the Additional Solicitor-General who appeared
in the matter for the Income-tax Department. It noted that the appeal before
the Supreme Court arose from the judgment of the Allahabad High Court. When the
matter was considered by the Supreme Court, the Full Bench decision of the
Allahabad High Court had already been passed and the said decision had not been
placed before the Supreme Court. According to the Kerala High Court, rather
than a concession, the Additional Solicitor-General specifically informed the
Supreme Court that the only apprehension of the Department was regarding the
date on which the deemed registration would be effected; whether it was on the
date of application or on the expiry of six months.

The Civil
Appeal before the Supreme Court was disposed of expressing the apprehension to
be unfounded, but all the same, clarifying that the registration of the
application u/s 12AA would only take effect from the date of expiry of six
months from the date of application. Considering the effect of disposal of a
Civil Appeal as laid down by the Supreme Court in the case of Kunhayammed vs. State of Kerala 245 ITR 360,
the Kerala High Court was of the view that the judgment of the High Court
merged in the judgment of the Supreme Court, since the Supreme Court approved
the judgment of the Allahabad High Court allowing deemed registration u/s 12AA,
though applicable only from the date of expiry of the six-month period as
mandated in section 12AA(2). According to the Kerala High Court, since the
verdict delivered by the Allahabad High Court regarding deemed registration u/s
12AA for reason of non-consideration of the application within a period of six
months from the date of filing was not differed from by the Supreme Court in
the Civil Appeal, the declaration by the High Court assumed the authority of a
precedent by the Supreme Court on the principles of the doctrine of merger.

Therefore,
the Kerala High Court rejected the appeal of the Department, following the
decision of the Supreme Court in the case of Society
for the Promotion of Education (Supra) holding
that the failure of the Commissioner to deal with the application within the
prescribed time led to the deemed registration.

A similar
view was also taken by the Rajasthan High Court in the case of CIT vs. Sahitya Sadawart Samiti Jaipur 396 ITR 46.

ADDOR FOUNDATION CASE

The issue
again came up before the Gujarat High Court in the case of CIT vs. Addor Foundation 425 ITR 516.

In this
case, the assessee trust made an online application for registration u/s 12AA
on 23^rd January, 2017. The Commissioner called for details of the
various activities actually carried out by the trust vide his letter dated 5^th February,
2018. After considering the details submitted by the trust, the Commissioner rejected
the application for registration.

In the
appeal, the Tribunal noted the fact that while passing the order rejecting the
registration application, the Commissioner wrongly mentioned the date of
receipt of the application for registration as 23^rd January, 2018,
instead of 23^rd January, 2017. Placing reliance on the decision of
the Supreme Court in the case of Society
for the Promotion of Education (Supra), the
Tribunal held the registration as deemed to have been granted and allowed the
appeal of the assessee.

On behalf
of the Revenue it was submitted before the Gujarat High Court that the dictum of law as laid down by the
Supreme Court in the case of Society for the
Promotion of Education (Supra) was of no avail to the
assessee in the facts and circumstances of the case before the Gujarat High
Court. Though the issues were quite similar, the Supreme Court had decided the
issue in favour of the assessee and against the Revenue only on the basis of the
statement made by the Additional Solicitor-General, keeping all the questions
of law open. It was submitted that on a plain reading of the section it could
not be said that merely by the Commissioner not deciding the application within
the stipulated period of six months, deemed registration was to be granted.

On behalf
of the assessee, reliance was placed on the decisions of the Kerala High Court
in the case of TBI Education Trust (Supra)
and of the Rajasthan High Court in the case of Sahitya
Sadawart Samiti Jaipur (Supra). It was argued that
although the Legislature had thought fit not to incorporate the word ‘deemed’
in section 12AA(2), yet, having regard to the language and the intention, it
could be said that a legal fiction had been created.

The Gujarat
High Court observed that the decision of the Division Bench of the Allahabad
High Court in the case of Society for the Promotion of
Education (Supra) was of no avail as the
correctness of that decision had been questioned before the Full Bench of the
Allahabad High Court in the case of Muzafar
Nagar Development Authority (Supra) to hold
that there was no automatic deemed registration on failure of the Commissioner
to deal with the application within the stipulated six months. The Gujarat High
Court was not inclined to accept the line of reasoning which had found favour
with the Division Bench of the Allahabad High Court in the case of Society for the Promotion of Education (Supra).

The
Gujarat High Court reproduced with approval extracts from the Full Bench
decision of the Allahabad High Court in the case of Muzafar Nagar Development Authority (Supra).
The Court analysed various decisions of the Supreme Court, which had examined
the issue whether a legal fiction had been created by use of the word ‘deemed’,
and observed that the principle discernible was that it was the bounden duty of
the Court to ascertain for what purpose the legal fiction had been created. It
was also the duty of the Court to imagine the fiction with all real
consequences and instances unless prohibited from doing so.

The
Gujarat High Court did not agree with the views expressed by the Kerala High
Court in the case of TBI Education Trust (Supra),
stating that the Supreme Court decision in the case of Society for the Promotion of Education (Supra)
did not lay down any principle of law and, on the contrary, kept the questions
of law open to be considered. The Gujarat High Court therefore expressed its
complete agreement with the view taken by the Full Bench of the Allahabad High
Court in the Muzafar Nagar Development Authority
case and held that deemed registration could not be granted on the ground that
the application filed for registration u/s 12AA was not decided within a period
of six months from the date of filing.

OBSERVATIONS

The issue
of deemed registration u/s 12AA in the event of failure to dispose of the
application within the specified time limit of six months has continued to
remain a highly debatable issue, even after the matter had reached the Supreme
Court. The additional and avoidable debate on the issue could have been avoided
had the attention of the Supreme Court been drawn by the Revenue to the fact
that the Full Bench of the Allahabad High Court in a later decision had
disapproved of the Division Bench judgment of the Allahabad High Court, which
was being considered in appeal by the Supreme Court. It could have also been
avoided had the Apex Court not stated in the order that the other issues were
kept open, where perhaps there were none that were involved in the appeal.

The issue
which arises now is whether the issue has been concluded by the Supreme Court
or whether it has been left open! While the Kerala High Court has taken the
view that the issue has been concluded, the Gujarat High Court is of the view
that the issue has not been decided by the Supreme Court.

If one
examines the decision of the Supreme Court, it clearly states that the short
issue was with regard to the deemed registration of an application u/s 12AA and
that the High Court had taken the view that once an application was made under
the said provision and in case the same was not responded to within six months,
it would be taken that the application was registered under the provision. This
was the only issue before the Supreme Court. Thereafter, the Supreme Court
clarified the apprehension raised by the Additional Solicitor-General, which
was addressed by the Supreme Court by holding that the deemed registration
would take effect from the expiry of the six-month period. Then, the Supreme
Court stated that subject to the clarification and leaving all other questions
of law open, the appeal was disposed of.

From this
it is evident that the appeal has been disposed of and not returned unanswered
or sent back to the lower court or appellate authorities. The appeal was on
only one ground – whether registration would be deemed to have taken place when
there was no disposal of the application within six months. The very fact that
the Supreme Court held that deemed registration would take effect on the expiry
of the six-month period clearly showed that it approved the concept of deemed
registration under such circumstances. Had the Supreme Court not approved the
concept of deemed registration, there was no question of clarifying that deemed
registration would take effect on the expiry of the six-month period.
Therefore, in our view, the Supreme Court approved of the decision of the
Division Bench of the Allahabad High Court.

The Kerala
High Court rightly appreciated this aspect of disposal of a Civil Appeal, which
implies approval of the judgment against which the appeal was preferred. In Kunhayammed vs. State of Kerala 245 ITR 360,
the Supreme Court considered the effect of disposal of a Civil Appeal as under:

‘If
leave to appeal is granted, the appellate jurisdiction of the Court stands
invoked; the gate for entry in appellate arena is opened. The petitioner is in
and the respondent may also be called upon to face him, though in an
appropriate case, in spite of having granted leave to appeal, the Court may
dismiss the appeal without noticing the respondent.

……..

The
doctrine of merger and the right of review are concepts which are closely
inter-linked. If the judgment of the High Court has come up to the Supreme
Court by way of a special leave, and special leave is granted and the appeal is
disposed of with or without reasons, by affirmance or otherwise, the judgment
of the High Court merges with that of the Supreme Court. In that event, it is
not permissible to move the High Court for review because the judgment of the
High Court has merged with the judgment of the Supreme Court.

……………………

Once a
special leave petition has been granted, the doors for the exercise of
appellate jurisdiction of the Supreme Court have been let open. The order
impugned before the Supreme Court becomes an order appealed against. Any order
passed thereafter would be an appellate order and would attract the
applicability of the doctrine of merger. It would not make a difference whether
the order is one of reversal or of modification or of dismissal affirming the
order appealed against. It would also not make any difference if the order is a
speaking or non-speaking one. Whenever the Supreme Court has felt inclined to
apply its mind to the merits of the order put in issue before it, though it may
be inclined to affirm the same, it is customary with the Supreme Court to grant
leave to appeal and thereafter dismiss the appeal itself (and not merely the
petition for special leave) though at times the orders granting leave to appeal
and dismissing the appeal are contained in the same order and at times the
orders are quite brief. Nevertheless, the order shows the exercise of appellate
jurisdiction and therein the merits of the order impugned having been subjected
to judicial scrutiny of the Supreme Court.

……..

Once
leave to appeal has been granted and appellate jurisdiction of the Supreme
Court has been invoked, the order passed in appeal would attract the doctrine
of merger; the order may be of reversal, modification or merely affirmation’.

In case
one accepts that the Supreme Court in the case of Society for the Promotion of Education (Supra)
had comprehensively decided the main issue of deemed registration, then in that
case no debate survives on that issue at least. It is only where one holds that
the Court had left the issue open and had delivered the decision on the basis
of a concession by the Revenue that an issue arises. In our considered opinion,
the Court had clearly concluded, though it had not expressed it in so many written
words, that the non-decision by the Commissioner within the stipulated time led
to the deemed registration of the society. It seems that this fact of law and
the finding of the Court were rather accepted by the Revenue which had raised
an apprehension for the first time about the effective date of deemed
registration inasmuch as the order of the High Court was silent on the aspect
of the effective date. In meeting this apprehension of the Revenue, the Court
clarified that there was no case for such an apprehension as in the Court’s
view the effective date was the date of expiry of six months, and again in the
Court’s view such a view was in concurrence with the High Court’s view on such
date. The Kerala and Rajasthan High Courts are right in holding that the Court
had concluded the issue of registration in favour of the deemed registration
and had not left the said issue open and were right in interpreting the
decision of the Apex Court in a manner that confirmed the view expressed.

There was
no concession by the Revenue in the said case before the Apex Court as made out
by the Revenue. The fact is that an apprehension was independently raised for
the first time by the Revenue about the effective date of registration, which
was dismissed by the Court by holding that there was every reason to hold that
the High Court in the decision had held that the registration was effective
only from the date of expiry of six months from the date of the application and
not before the said date. It is this part which has been expressly recorded in
the judgment. What requires to be appreciated is that the clarification was
sought because once the main issue of deemed registration was settled by the
Court, there could not have been a clarification on an effective date of the deemed
registration had the issue of deemed registration been decided against the
assessee or was undecided and, as claimed, kept open.

The issue
in appeal before the Supreme Court was never about the effective date of
registration but was about the registration itself; it could not have been for
the date of registration for the simple reason that the Allahabad High Court
had nowhere in its decision dealt with the issue of the effective date of
registration.

In the
case of the Society for the Promotion of Education
(Supra), the Supreme Court had therefore modified the
order of the Division Bench of the Allahabad High Court, which order had merged
in the order of the Supreme Court. Therefore, the subsequent order of the Full
Bench of the Allahabad High Court would no longer hold good since the Supreme
Court had taken a view contrary to that taken by the Full Bench of the
Allahabad High Court. This aspect does not seem to have been appreciated by the
Gujarat High Court.

The better
view, therefore, is the view taken by the Kerala and Rajasthan High Courts –
that failure to dispose of an application u/s 12A within the period of six
months results in a deemed registration u/s 12AA.

At the
same time note should be taken of the decisions of the Madras High Court in the
cases of CIT vs. Sheela Christian Charitable Trust 354 ITR 478
and CIT vs. Karimangalam Omriya Pangal Semipur Amaipur Ltd. 354 ITR
483. In the said cases the Court held that the non-decision by the
Commissioner within the prescribed time did not result in deemed registration
of the institution. These decisions should be held to be no longer good law in
view of the subsequent decision of the Apex Court.

The law is now amended with effect from 1^st
April, 2021, with registration now required u/s 12AB. Section 12AB(3) also
requires disposal of the application within a period of three months, six
months or one month, depending upon the type of application, from the end of
the month in which the application is filed. The issue would therefore continue
to be relevant even under the amended law.

shailesh.kwebmaker

Explanation 1 to section 37(1): Deduction made by the buyers from the price, on account of damage / variance in the product quality does not attract Explanation 1 to section 37 (1) and same is an allowable deduction even when the assessee classified it as ‘penalty on account of non-fulfilment of contractual requirements’

5. [2020] 77 ITR
(Trib.) 165 (Del.)(Trib.) DCIT vs. Mahavir
Multitrade (P) Ltd. ITA No.:
1139/Del/2017 A.Y.: 2012-13 Date of order: 27^th
November, 2019

Explanation 1 to
section 37(1): Deduction made by the buyers from the price, on account of
damage / variance in the product quality does not attract Explanation 1 to
section 37 (1) and same is an allowable deduction even when the assessee
classified it as ‘penalty on account of non-fulfilment of contractual
requirements’

FACTS

The assessee was
engaged in trading of imported coal. It sold coal as per the specifications and
requirements of the buyer and in the event of failure to comply with the
requirements, the buyer used to make deduction while releasing the payment on
account of variation in quantity and quality; the amount of deduction for A.Y.
2012-13 was Rs. 3,66,68,504 which was claimed as a deduction while computing
the business income. During the course of assessment proceedings, the assessee
categorised such deduction as penalty levied for not complying with the terms
of the contract. But the A.O. made an addition on the ground that such penalty
cannot be regarded as a deductible expenditure as per the Explanation to
section 37(1). It was explained to the A.O. that the nature of the product was
such that there was high possibility of degradation or variance and the
deduction made by the buyers represented compensatory levy for not meeting the
specifications / agreed parameters of coal.

On an appeal before
the CIT(A), considering various judicial precedents it was held that
exigibility of an item to tax or tax deduction cannot be based merely on the
label (nomenclature) given to it by the assessee. It was held that deduction by
buyers represented the expenditure for the damages caused, which is
compensatory payment made by the assessee and it entitled him to claim the
deduction from the income. It could not be equated with infraction of law as
provided in the Explanation to section 37(1). Accordingly, the additions made
by the A.O. were directed to be deleted.

Thereafter, the
Department filed an appeal before the ITAT against the order of the CIT(A).

HELD

1. It was accepted by the A.O. that the assessee
received less payment from the buyers because of the variance in the quality of
coal. The allegation of the A.O. only revealed that there was failure on the
part of the assessee to meet the contractual obligation but it was nowhere
specified as to which provision of law was violated so as to invite the penal
consequences.

2. The A.O. had failed to consider the explanation
given by the assessee wherein it was clearly stated that the contract with the
buyers stipulated the consequence of price reduction / adjustment when there
was variation in the quality or quantity of the coal.

3. The inability to meet the contractual
obligation by the assessee could not be termed as an offence or infraction of
law so as to deny the claim of the assessee by invoking Explanation 1 to
section 37(1) and exigibility of an item to tax or tax deduction cannot be made
merely on the label given to it by the parties. The penalty was levied on the
assessee for not complying with the terms of the contract, which is a civil
consequence for not complying with certain terms of the contract, and has
nothing to do with any offence.

4. The CIT(A) had rightly relied upon the
decisions in Prakash Cotton Mills (P) Ltd. vs. CIT [1993] 201 ITR 684
(SC), Swadeshi Cotton Mills Co. Ltd. vs. CIT [1980] 125 ITR 33 (All.),
Continental Constructions Ltd. vs. CIT [1992] 195 ITR 81 (SC) and also
the decisions of the Kerala and the Andhra Pradesh High Courts in CIT vs.
Catholic Syrian Bank Ltd. [2004] 265 ITR 177 (Ker.) and CIT vs.
Bharat Television (P) Ltd. [1996] 218 ITR 173 (AP).

Accordingly, the
order of the CIT(A) was upheld.

shailesh.kwebmaker

TAXABILITY OF FORFEITURE OF SECURITY DEPOSIT

As we enter the seventh month living with
the coronavirus in India, with each passing day we come across new issues and
manage to find ways to skip / survive them. The virus has not only affected
one’s physical well-being, it has also had an impact on one’s mental, social
and economic health!

Talking of the impact on economic health,
every individual, whether in business or employed, is grappling with liquidity
issues. With the entire payment chain affected, no one in the cycle is left
untouched. Needless to say, the domino effect of salary cuts and layoffs has
only multiplied people’s woes.

This article deals with the consequences
under the Income-tax Act, 1961 (‘the Act’) arising out of one of the many
issues which most people will come across or are already experiencing. It is
now common to hear about people defaulting on their monthly rental payments.
Apart from this, a lot of people are seeking reduction in rent or are prematurely
terminating their existing agreements in order to obtain the benefit of
competitive market rates. Whatever may be the reason, what could ensue, inter
alia, is the forfeiture of the security deposit placed by the licensee with
the licensor.

An attempt will be made in this article to
explain the nature of security deposits and the taxability on their forfeiture
by the licensor and / or waiver by the licensee.

UNDERSTANDING THE NATURE OF SECURITY DEPOSITS

In general terms, a security deposit is

(a) a sum of money

(b) taken from the licensee

(d) to protect the licensor from the damage, if
any, caused to the property.

In a typical leave and license agreement,
the licensor takes a security deposit from the licensee. This is done to ensure
due performance by the licensee of his obligations under the contract and, more
particularly, as the name suggests, the deposit acts as a security to make sure
about the safe return of the property at the end of the license period. It is
usually refundable by the licensor to the licensee upon termination of the
license period. The amount of security deposit is not fixed and is mutually
agreed upon by the parties involved. The amount of security deposit is held in
trust for the licensee and is repayable to him. Therefore, the security deposit
represents the liability of the licensor / owner of the premises which has to
be repaid to the licensee at the end of the license period, provided no damage
is caused to the property.

The Supreme Court in Lakshmainer and
Sons vs. CIT (23 ITR 202) (SC) held that a security deposit is in the
nature of a loan and observed as follows:

‘The fact that one of the conditions is
that it is to be adjusted against a claim arising out of a possible default of
the depositor cannot alter the character of the transaction. Nor can the fact
that the purpose for which the deposit is made is to provide a security for the
due performance of a collateral contract invest the deposit with a different
character. It remains a loan of which the repayment in full is conditioned
by the due fulfilment of the obligations under the collateral contract.’

Generally, in
most leave and license agreements security deposit is refundable upon
termination of the agreement. The question being considered is whether
forfeiture / waiver of security deposit constitutes ‘income’ chargeable to tax
or whether it is a capital receipt not chargeable to tax.

SECURITY DEPOSIT AND ITS FORFEITURE – WHETHER ‘INCOME’
UNDER THE ACT?

Section 4 of the Act deals with the charge
of income tax. As per this section, income tax shall be charged in respect of
the total income of every person.

‘Income’ is defined u/s 2(24). A security
deposit is not specifically covered within any of the specific sub-clauses under
this section. However, since the definition of income is an inclusive
definition, a particular item could still be treated as the income of the
assessee if it partakes the character of income even though it is not expressly
included in the definition of income. The scope of income is therefore not
restricted to the receipts mentioned in the specific sub-clauses of the
definition, but also includes the receipts which could generally be understood
as income.

The term ‘income’ has been judicially
interpreted in the case of Shaw Wallace 6 ITC 178 by the Privy
Council to mean:

‘Income… in this Act connotes a
periodical monetary return “coming in” with some sort of regularity, or
expected regularity from definite sources. The source is not necessarily one which
is expected to be continuously productive but must be one whose object is the
production of a definite return, excluding anything in the nature of a mere
windfall.’

Further, receipts which are generally
capital in nature are not chargeable to tax unless there is a specific
provision in the Act which requires taxing such an item.

There are specific provisions under the Act
to bring certain capital receipts to tax, for example, capital gains u/s 45 and
gifts u/s 56(2); subsidy received from the Central or State Government, though
generally capital in nature, is specifically included in the definition of
income u/s 2(24) and hence chargeable to tax. However, there is no such
specific provision which treats a security deposit or its forfeiture as income in
the hands of the assessee.

Security deposit is a liability and cannot,
therefore, be regarded as income.

However, a question arises as to whether the
security deposit becomes taxable if the same is no longer required to be repaid
to the licensee and is forfeited for breach of the agreed terms of contract
between the licensor and the licensee, or if the licensee defaults in the
payment of rent to the licensor.

Like security deposit, forfeiture of
security deposit is also not specifically covered within the definition of
income. Further, forfeiture of security deposit also cannot be construed as
being a regular activity, nor is it expected to have any regularity and hence
is also out of the scope of income as judicially interpreted by the Privy
Council.

Besides, since security deposit itself does
not constitute income and is not chargeable to tax, its forfeiture also cannot
be brought to tax as income.

BURDEN OF PROOF

If the Department seeks to tax the same as
income, then the burden lies on it to prove that it falls within the taxing
provisions. The Supreme Court in Parimisetti Seetharamamma vs. CIT [1965]
57 ITR 532 (SC) has observed as follows:

‘By
sections 3 and 4 the Act imposes a general liability to tax upon all income.
But the Act does not provide that whatever is received by a person must be
regarded as income liable to tax. In all cases in which a receipt is sought to
be taxed as income, the burden lies upon the Department to prove that it is
within the taxing provision. Where however a
receipt is of the nature of income, the burden of proving that it is not
taxable because it falls within an exemption provided by the Act lies upon the
assessee.’

A similar view has been taken by the Courts
in the following cases:

i) Udhavdas vs. CIT
[1965] 66 ITR 462 (SC);

ii) Dr. K. George Thomas
vs. CIT [1985] 156 ITR 412 (SC);

iii) Amartaara Ltd. vs. CIT
[2003] 262 ITR 598 (Bom.);

iv) CIT vs. Rajkumar Ashok
Pal Singh Ji [1977] 109 ITR 581 (Bom.).

Therefore, if the Revenue authorities seek
to tax the security deposit, the onus will be on them to establish that the
same is covered within the taxing provisions and hence chargeable to tax. The
Department may also, inter alia, look into the terms of the agreement
and the conduct between the parties so as to determine the taxability of the
forfeiture of security deposit.

The following paragraphs deal with the
taxability or otherwise of forfeiture of security deposit under different
scenarios. For the sake of clarity and ease of understanding, the scenarios are
broadly classified depending upon whether the rental income is offered by the
assessee / licensor under the head ‘Profits and Gains of Business or
Profession’, or under the head ‘Income from House Property’.

IF THE ASSESSEE OFFERS RENTAL INCOME UNDER THE HEAD PROFITS
AND GAINS FROM BUSINESS OR PROFESSION

In this case, the licensor would primarily
be regarded as engaged in the business of renting of properties and would,
therefore, be offering the rental income under the head Profits and Gains from
Business or Profession.

Termination of agreement and consequent
forfeiture is a rare exception and can never be contemplated as a method of
profit-making by the assessee. Premature termination of a long-term contract
is not, by any means, a feature of business activity. Upon forfeiture of
security deposit, the amount received by the assessee in the past which
undisputedly was capital in nature at the time of receipt, is now partly not
payable or is waived by the creditor, i.e., the licensee, and the amount
forfeited / waived continues to retain the same character as it held at the
time of receipt.

However, the same may not hold true in a
case where the security deposit is adjusted against dues. Where a person
defaults on payment of rent, the dues are adjusted against the security deposit
placed with the licensor. In such cases, the taxability will differ and the
same is dealt with in later paragraphs.

If the forfeiture of security deposit is
considered to be a revenue receipt chargeable to tax, the same would have to be
taxed u/s 28 which provides for items chargeable to tax under the head ‘Profits
and Gains of Business or Profession’, or u/s 41 which deals with taxing of
expenditure or trading liability upon its remission or cessation.

In CIT vs. Mahindra & Mahindra Ltd.
[2018] 404 ITR 1 (SC), the Apex Court considered the question whether
waiver of loan and interest thereon is a benefit or a perquisite arising from
the business of the assessee so as to be chargeable to tax under clause (iv) of
section 28. On this issue, the Court remarked that for applicability of section
28(iv), the income which can be taxed shall arise from the business or
profession. It also observed that the benefit which is received has to be in
‘some form other than money’. In the said case, the assessee procured equipment
from a US company. The supplier provided the said equipment on loan bearing
interest which was repayable after a period of ten years. Subsequently, another
US entity acquired the supplier company from whom equipment was purchased and
the loan was waived. In these facts, the Supreme Court held that the assessee
had received an amount due to waiver of loan and therefore the very first
condition of section 28(iv) which requires benefit or perquisite in the shape
of any form other than money, was not satisfied and in no circumstances could
it be said that the amount so received could be taxed u/s 28(iv). The Court therefore categorically laid down that waiver of loan is not income.

The ratio laid down by the Court in Mahindra
& Mahindra (Supra) will also apply to a case of forfeiture of
security deposit since it is similar to that of loan and forfeiture of security
deposit, not being a benefit in any form other than money, section 28(iv)
cannot apply.

It is worthwhile to note that in the Mahindra
& Mahindra case, the loan was taken for acquiring a capital asset
and the waiver was considered to be a capital receipt. Therefore, one may argue
that the ratio laid down in this case will apply only in cases where the
licensor holds the property as a capital asset and not where it is held as
stock-in-trade. However, for the purposes of section 28(iv) what is relevant is
that the benefit must be in some form other than money. Now, whether the
property is held as capital asset or stock-in-trade, the condition of section
28(iv) of benefit being in some form other than money still does not get
satisfied and therefore, even if the property is held as stock-in-trade, the
decision of the Supreme Court in this case (Mahindra & Mahindra)
will still apply and the forfeiture of security deposit will not be chargeable
to tax.

In continuation to the question of
taxability of forfeiture of security deposit u/s 28, a question arises as to
whether the same can be brought to tax as a normal business receipt. The
Department may tax forfeiture of security deposit u/s 28(i) rather than u/s
28(iv). For this, reliance may be placed by the Department on the decision of
the Bombay High Court in the case of Solid Containers Ltd. vs. DCIT
[2009] 308 ITR 417 (Bom.) wherein it has been held that loan taken for
business purposes and subsequently waived is ultimately retained in business by
the assessee and since the same is directly arising out of the business
activity, it is liable to be taxed. With utmost respect, this ruling of the
Bombay High Court may not be correct in light of the following decisions
wherein it has been held that the character of the receipt is determined
initially at the time of receipt and if the receipt is not a trading receipt
initially, then subsequent events cannot turn it into a trading receipt. The
Courts, therefore, held that if a loan / security deposit is not repaid, then
it cannot be treated as income.

i) Morely vs. Tattersall
7 IR 316 (CA);

ii) British Mexican
Petroleum Company Ltd. vs. Jackson 16 TC 570 (HL);

iii) CIT vs. P. Ganesh
Chettiar 133 ITR 103 (Madras);

vi) CIT vs. Sesashayee Bros.
(P) Ltd. 222 ITR 818 (Madras).

To contest the abovementioned decisions, the
Department generally resorts to the decision of the Supreme Court in the case
of CIT vs. T.V. Sundaram Iyengar & Sons Ltd. [1996] 222 ITR 112 (SC).
In this case, the assessee received deposits from its customers in the course
of carrying on its business and these were treated as capital receipts. Since
the balances remained to be claimed by the customers, the assessee transferred
the amounts credited in the accounts of the customers to the Profit & Loss
Account. The Court held that though the amounts were not in the nature of
income when they were received, they subsequently became income and the
assessee’s own money since the claim of the customers became barred by
limitation. However, the Supreme Court categorically held that it was not a
case of security deposit and held as follows:

‘We are unable to uphold the decision of
the Tribunal. The amounts were not in the
nature of security deposits held by the assessee for performance of contract by
its constituents…

…The
amounts were not given and retained as security to be retained till the
fulfilment of the contract. There is no finding to that effect. The deposits
were taken in course of the trade and adjustments were made against these
deposits in course of trade. The unclaimed surplus retained by the assessee
will be its trade receipt. The assessee itself treated the amount as its trade
receipt by bringing it to its profit and loss account’ (paras 18 & 19).

In fact, after considering the decision of
the Supreme Court in T.V. Sundaram Iyengar & Sons (Supra),
the Mumbai Tribunal in ACIT vs. Das & Co. [2010] 133 TTJ 542 (Mum.)
held that forfeiture of security deposit on premature termination of agreement
is a capital receipt in the hands of the assessee. The question to be decided
by the Tribunal was regarding the taxability of forfeiture of security deposit.
The relevant facts in the said case were as follows:

i) The assessee was engaged in the business of
leasing of properties, warehouses, etc., and offered the income from leasing of property as its business income;

ii) The assessee had entered into a leave and
license agreement to sub-lease its property. However, the licensee terminated
the agreement prematurely and upon termination of the lease, the assessee
forfeited the security deposit of Rs. 1.5 crores and received an amount towards
compensation. The assessee treated the said forfeiture of security deposit as a
capital receipt.

iii) The A.O. as well as the Commissioner of
Income-tax (Appeals) [CIT(A)] held that the receipts were revenue receipts and
were taxable as income;

iv) The Tribunal allowed the appeal of the
assessee and held as follows:

* Perusal of the terms of agreement showed that
security deposit was capital receipt and was treated as such by the assessee
and the same was accepted by the Department. The deposit was neither in the
nature of advance for goods nor could it be treated as part of the rental
component;

* From the clauses of the termination agreement
it was clear that the forfeiture of security deposit was not in lieu of
the rental payments;

* The quality and nature of receipt is fixed
once and for all when the same is received and its character cannot be changed
subsequently.

In the aforesaid case, the assessee was
engaged in the business of leasing of properties, warehouses, etc., and offered
the income from leasing of property as its business income.

A similar view has been taken by the Mumbai
Tribunal in the case of Samir N. Bhojwani vs. DCIT ITA No. 4212/Mum./2006
which has been relied upon and considered in the aforementioned decision of the
Mumbai Tribunal in the Das & Co. case (Supra).
Even in this case, the assessee was engaged, inter alia, in the business
of renting of its properties and offered rental income from leasing of flats
under the head business income.

However, the Mumbai Tribunal, in Anand
Automotive Systems Ltd. vs. Addl. CIT (ITA No. 1343/Mum./2012)(Mum) order dated
3^rd June, 2013, after considering the decision of the
coordinate bench in Das & Co. (Supra) has, in a subsequent
decision, held that forfeiture of security deposit on termination of lease
agreement was a receipt in lieu of the rents and hence liable to
be taxed as revenue receipt. The facts in the said case were as follows:

(a) The assessee had given premises on rent to one
of its group concerns and received a security deposit of Rs. 10.58 crores for
the same;

(b) Pursuant to sealing of the assessee’s premises,
the lessee requested the assessee to discontinue the agreement;

(c) The matter went into arbitration and the
Arbitrator, inter alia, ordered the lessee to forego the security
deposit to the extent of Rs. 5.8 crores and directed the assessee to refund the
balance security deposit to the assessee;

(d) The assessee regarded the said forfeiture of
security deposit as a capital receipt not chargeable to tax.

(e) The A.O. as well as the CIT(A) held the receipt
to be in the nature of revenue.

(f) The Tribunal held that it was evident from the
order of the Arbitrator that the amount of Rs. 5.8 crores was nothing but
compensation received for loss of rent as a result of early termination of the
agreement. The amount so received by the assessee was on revenue account and
not capital account which constituted the business income of the assessee as
the rental income received from the property earlier was offered to tax as
business income by the assessee.

In the Das & Co. case (Supra),
the assessee had not forfeited the security deposit but was directed to adjust
it against the compensation due to it for loss of rent. The Tribunal
categorically observed that compensation received by the assessee from the
licensor was nothing but a payment in lieu of rent and since the
assessee offered rental income as its business income, the Tribunal held that
the compensation received was also chargeable to tax as business income of the
assessee.

However, the Mumbai Tribunal, in the Anand
Automotive Systems Ltd. case (Supra), while dealing with
the case of the coordinate bench in Das & Co. (Supra), has
relied on the part of the judgment which deals with the taxability of
compensation to hold that the amount of security deposit forfeited was
chargeable to tax in the hands of the assessee. In this case, the security
deposit was forfeited by the assessee pursuant to an order of the Arbitrator
which also required the assessee to adjust the same towards the compensation
for early termination of the license agreement. In the peculiar facts of the
case, it was held by the Tribunal that the forfeiture of deposit was nothing
but compensation for loss of rent and therefore chargeable to tax as business
income of the assessee.

This decision of the Mumbai Tribunal in the
case of Anand Automotive Systems Ltd. vs. Addl. CIT (ITA No.
1343/Mum./2012)(Mum) has been challenged by way of an appeal before the
Bombay High Court which has been admitted and the same is pending till date.
The matter has, therefore, not attained finality.

Insofar as taxability u/s 41(1) is
concerned, it provides for taxing of loss, expenditure or trading liability in
respect of which allowance or deduction has been made in the past and,
subsequently, the assessee obtains any benefit in respect thereof by way of
remission or cessation. Therefore, what is necessary is that loss, expenditure
or trading liability in respect of which the assessee obtains benefit must have
been allowed as a deduction in the past.

When the licensor takes a security deposit,
there is no deduction whatsoever claimed by the licensor in respect thereof and
therefore there is no question of obtaining any benefit by the remission or
cessation and hence the provisions of section 41(1) cannot apply irrespective
of the fact whether the property is held by the licensor as a capital asset or
as a stock-in-trade.

This view also draws support from the
following decisions:

i) CIT vs. Compaq
Electric Ltd. [2019] 261 Taxman 71 (SC), SLP dismissed by the Supreme
Court against the decision of the Karnataka High Court reported in CIT
vs. Compaq Electric Ltd. [2012] 204 Taxman 58 (Kar.);

ii) CIT vs. Gujarat State
Fertilizers & Chemicals Ltd. [2013] 217 ITR 343 (Guj.);

iii) Pr. CIT vs. Gujarat
State Co-op. Bank Ltd. [2017] 85 taxmann.com 259 (Guj.).

The views expressed in the above
paragraphs apply to cases where the security deposit is forfeited.

Where the forfeiture is treated as
compensation for damages or adjusted towards the rent, it no longer remains a
security deposit and its colour changes to rent and will therefore be a revenue
receipt chargeable to tax in the hands of the licensor.

It is, therefore, necessary to determine
from the fine print of the agreement between the licensor and the licensee as
to whether the deposit is compensatory or in lieu of rent
and if that be the case, then the same will be chargeable to tax.

IF THE LICENSOR OFFERS RENTAL INCOME UNDER THE HEAD
INCOME FROM HOUSE PROPERTY

In this scenario, the licensor offers rental
income under the head Income from House Property, i.e., the income of the
licensor is charged u/s 22. As per section 22, the annual value of the property
consisting of any buildings or land appurtenant thereto of which the assessee
is the owner is chargeable to tax. Section 23 provides how the annual value of
any property is determined.

Now, in a case where the licensor offers
income under the head House Property and the licensee makes a default in
payment of rent or prematurely terminates the agreement, the licensor may either:

(a) Adjust the dues from the security deposit and
return the balance to the licensee:

In this situation,
the colour of deposit changes to rent to the extent it is adjusted. It is
nothing but an amount received by the licensor as rent and therefore taxable
under the head Income from House Property. The charge u/s 22 is on the annual
value and for the purpose of computing annual value the rent receivable has to
be considered.

(b) Adjust the dues from the security deposit and
forfeit the balance security deposit:

In this case, the
taxability of the adjusted security deposit remains the same as mentioned at
point (1.) above. However, so far as the forfeited deposit is concerned,
the same cannot be brought to tax. This is based on the reasoning that what is
taxed u/s 22 is the annual value and any receipt other than annual value cannot
be brought to tax under the head Income from House Property.

In such a scenario as well, nothing will be
chargeable to tax in the hands of the licensor since it is only the annual
value which is chargeable to tax.

The Pune Tribunal in Datar & Co.
vs. ITO [2000] 67 TTJ 546 (Pune) held that compensation received by the
owner from the lessee for premature termination of tenancy agreement was a
revenue receipt. However, such compensation was held not taxable as property
income. This was held so on the basis that it is only the annual value which is
assessable under the head Income from House Property and any other receipt
other than annual value cannot be computed as income under this head.

The Tribunal observed that the agreement was
terminated with effect from September, 1988 and there was a loss of future
rents for 20 months which amounted to Rs. 1,50,000. The compensation of Rs.
1,00,000 received by the assessee was nothing but the discounted present value
of the future rent for the unexpired period of the agreement. Plus, the
assessee was free to let out the bungalow to any party. Based on these facts,
the Tribunal held the compensation to be revenue receipt. However, as regards
the taxability of the compensation, the Tribunal held that it is only the
annual value which is assessable under the head Income from House Property as
follows:

‘In the present case, the compensation arises out of the agreement of
letting out immovable property and therefore, assumes the nature of the income
from house property. Therefore, in our opinion, such receipt would fall under
the head “income from house property”. However, it is only annual
value which can be assessed under the head “income from house
property”. Any other receipt other than the annual value cannot be
computed as income under this head. Therefore, following the decision of the
Bombay High Court in the case of T.P. Sidhwa (Supra) and the decision of Supreme
Court in the case of N.A. Mody (Supra), it is held that the compensation received by the assessee cannot
be taxed.’

Further, the Mumbai Tribunal in Addl.
CIT vs. Rama Leasing Co. (P) Ltd. [2008] 20 SOT 505 (Mum.), following
the decision of the Pune Tribunal in the Datar & Co. case
(Supra) held that compensation received by the assessee on premature
termination of the lease agreement is not chargeable to tax though it is a
revenue receipt.

A similar view has also been taken in one
more decision of the Mumbai Tribunal in ITO vs. Nikhil S. Goklaney in ITA
No. 2542/Mum/2017 order dated 6^th September. 2019.

Though the aforementioned decisions of the
Pune and Mumbai Benches of the Tribunal deal with the receipt of compensation
due to premature termination of tenancy agreement and not forfeiture / waiver
of security deposit, the principle laid down by the Tribunal that it is only
the annual value which can be taxed under the head Income from House Property
still applies. In fact, a case of forfeiture of security deposit stands on a
better footing than receipt of compensation.

CONCLUSION

To conclude, forfeiture of security deposit,
to the extent the forfeited amount is adjusted towards rent, in my view, will
be chargeable to tax irrespective of the fact whether rental income is offered
as business income or income under the head House Property. Therefore, it is
essential to determine from the terms of the agreement whether or not the
deposit forfeited is compensatory. To the extent that the forfeited amount is
not adjusted or is not compensatory in nature, forfeiture will not be
chargeable to tax u/s 28(iv) or section 41(1) even if the assessee offers
rental income as business income. If rental income is offered as business income
and the property is held as stock-in-trade, the same could be taxed as regular
business income of the assessee u/s 28(i). If, however, the assessee offers
rental income under the head House Property, forfeiture of security deposit
will be a capital receipt not chargeable to tax. However, even if the same is
held to be a revenue receipt, nothing will be charged to tax as annual value
under sections 22 and 23. In my view, one must first determine from the terms
of the agreement between the parties the exact nature of deposit and then
determine the taxability in view of the provisions contained as well as the
decisions laid down by the Courts.

Twitter is like a Public Sector Bank. Its losses mount
year on year; the organisation is run by pompous individuals; the rules &
regulations are confounding & absurd; the complaints are seldom heard; the
decisions go mostly against your wishes; but everyone who hates it uses it

—
Anand Ranganathan, Author

shailesh.kwebmaker

UNEXPLAINED DEPOSITS IN FOREIGN BANK ACCOUNTS

ISSUE FOR CONSIDERATION

A few years back, around 2011, the Government of France shared certain
information with the Government of India concerning deposits in several bank
accounts with HSBC Bank, Geneva, Switzerland held in the names of Indian
nationals, or where such nationals had a beneficial interest. The information
was received in the form of a document known as ‘Base Note’ wherein various
personal details of account holders such as name, date of birth, place of
birth, sex / gender, residential address, profession, nationality, date of
opening of bank account in HSBC Bank, Geneva and balances in certain years, etc.,
were mentioned.

A number of cases
have since then been reopened on the basis of the ‘Base Note’, leading to
reassessments involving substantial additions and sizable consequential
additions which are being contested in numerous appeals across the country
mainly on the following grounds:

(i) the assessee is a resident of a foreign
country and his income is not taxable in India,

(ii) the source of income of the assessee in India
has no connection with the bank deposits concerned,

(iii) the bank account was not opened or operated by
the assessee,

(iv) the bank account was not in the name of the
assessee,

(v) the bank account was in the name of a private
trust which was a discretionary trust and the assessee had not received any
payment or income from the trust,

(vi) the reopening was bad in law.

In addition to the
above defences, the assessees have also contended that the additions were made
on the basis of unauthentic material (the ‘Base Note’), that copies of the
material relied upon were not provided, or that adequate opportunity of hearing
was not provided, or that the principles of natural justice were violated on
various grounds, and also that the A.O. had failed in establishing his case for
addition and in linking the deposits to an Indian source.

More than 20 cases
have been adjudicated by the Tribunal or the courts on the issue of the
additions, some in favour of the Revenue, some against the Revenue and in
favour of the assessee, either on application of the provisions of the
Income-tax Act, 1961 or on the grounds of natural justice. Most of these
decisions have been rendered on the facts of the case. In a few cases, the
issue involved was about the possibility of taxing an income in India for a
year during which the assessee was a non-resident and was the beneficiary of a
discretionary trust under the Income-tax Act, 1961. In one of the cases, one of
the Mumbai benches of the Tribunal held that no addition could be made on
account of such deposits in the assessment year in the hands of the assessee who
was a non-resident and had not received any money on distribution from the
trust in that year. As against this, recently in another case, another Mumbai
bench of the Tribunal held that the addition was sustainable even when the
assessee in question was not a resident for the purposes of the Act and claimed
to be a beneficiary of a discretionary trust.

THE DEEPAK B. SHAH CASE

The issue came up
for consideration in the case of Deepak B. Shah 174 ITD 237 (Mum).
The assessees in this case had filed income-tax returns which were processed
u/s 143(1). Subsequently, the Government of India received information from the
French Government under DTAA that some Indian nationals and residents had
foreign bank accounts in HSBC Bank, Geneva, Switzerland which were not
disclosed to the Indian Tax Department. This information was received in the
form of a document known as ‘Base Note’ wherein various personal details of
account holders, such as name, date of birth, place of birth, sex / gender,
residential address, profession, nationality, date of opening of bank account
in HSBC Bank, Geneva and balances in certain years, etc., were mentioned. After
receiving the ‘Base Note’ as a part of the Swiss leaks, the Investigation Wing
of the Income Tax Department conducted a survey u/s 133A at the premises of one
Kanu B. Shah & Co. During the course of the survey proceedings, the ‘Base
Note’ was shown to the assessees Deepak B. Shah and Kunal N. Shah and it was
indicated that the Revenue was of the view that both the assessees had a
foreign bank account. The said foreign bank account was opened in 1997 by an
overseas discretionary trust known as ‘B’ Trust, set up by a Settlor, an NRI
since 1979 and a non-resident u/s 6. Both the assessees with Indian residency
were named as discretionary beneficiaries of the said trust.

The A.O. added peak
balance in the hands of both the assessees at Rs. 6,13,09,845 and Rs.
5,99,75,370 for assessment years 2006-07 and 2007-08, respectively. The same
additions were also made in the case of Dipendu Bapalal Shah who created the
private discretionary trust known as Balsun Trust.

On appeal, the
CIT(A) affirmed the addition to the tune of half of the peak balance in the
hands of both the assessees to avoid double taxation. The CIT(A) confirmed the
addition to the tune of Rs. 3,06,54,922 and Rs. 2,74,007 (sic) in
A.Ys. 2006-07 and 2007-08 u/s 69A of the Act in both the cases.

In the appellate
proceedings of Dipendu Bapalal Shah, the CIT(A) set aside the addition on the
basis that as an NRI none of his business monies earned outside India could be
brought to tax in India, unless they were shown to have arisen or accrued in
India. He also held that there was no linkage of the amounts to India and the
Revenue had not discharged its duty on this issue. The said order of the CIT(A)
in the case of Dy. CIT vs. Dipendu Bapalal Shah 171 ITD 602 (Mum.-Trib.)
was upheld by the Tribunal on the ground that the contents of the affidavit
dated 13^th October, 2011 were not denied or proved to be not true by
the A.O. Further, it was held that the bank account with HSBC Bank, Geneva was
outside the purview of the IT Act as Dipendu Bapalal Shah was a non-resident
Indian.

In the second
appeal, the assessees reiterated the undisputed facts about the ‘Base Note’ of
2011, denied knowledge of any such bank account and highlighted that no
incriminating material was found during the course of the survey; the Settlor
had created and constituted an overseas discretionary trust known as ‘Balsun
Trust’ by making a contribution to the said trust from his own funds / sources
with Deepak and Kunal as discretionary beneficiaries of the said trust; during
the years under consideration, they did not receive any distribution of income
from the said trust as no such distribution was done by the trust during those
years; the Settlor was a foreign resident since 1979 and was a non-resident u/s
6 of the Act; the Settlor and both the assessees in their respective assessment
proceedings had filed their sworn-in affidavits; the affidavit of the Settlor was
sworn before the UAE authority, stating on oath that he had settled an offshore
discretionary trust with his initial contribution, none of the discretionary
beneficiaries had contributed any funds to the trust, and none of the
beneficiaries had received any distribution from the trust.

The sworn
affidavits of the assessees stated that they were not aware of the existence of
any of the accounts in HSBC Bank, Geneva, that they never carried out any
transactions in relation to the said account, nor received any benefit from the
said account, and that they had not signed any documents nor operated the said
bank account. A clarificatory letter from HSBC Bank, Geneva was also filed
stating that they had neither visited nor opened or operated the bank accounts
and that no payments had been received from them or made to them in relation to
the said account; the addition was made in three hands but the Commissioner
(Appeals) deleted the addition in the hands of the Settlor, which order of
deletion was also upheld by the coordinate bench of the Tribunal, holding that
the contents of the affidavit of the Settlor were not declined or held to be
not true by the A.O.

It was explained
further that the bank account of HSBC Bank, Geneva was out of the purview of
the IT Act, as the Settlor was a non-resident Indian since 1979; looking to the
decision of the coordinate bench holding that the money belonged to the
Settlor, who was a non-resident, and the income of the non-resident held abroad
was not assessable in India unless it was shown to have arisen or accrued in
India; since it was held by the Tribunal that the amount in the HSBC account in
Geneva was owned by the Settlor who was a non-resident, there was no
justification or reason to sustain the order of the Commissioner (Appeals); the
Revenue had completely failed to show any linkage of the foreign bank account
with Indian money; addition had been made u/s 69A and it was a sine qua non
for invoking section 69A that the assessee must be found to be the owner of
money, bullion, jewellery or other valuable articles. The money was held in the
name of the Settlor, who claimed to be the owner of the said deposits from his
own funds / sources, and the Revenue had failed to bring any cogent and
convincing materials on record which proved that the assessees were owners of
the money in the HSBC account.

It was further
contended that the Settlor was the owner of the HSBC Bank account, Geneva and
the assessees were discretionary beneficiaries which led to the positive
inference that they were not the owners of the said account and hence the
additions u/s 69A could not be sustained; the assessees had not made any
contribution to, nor done any transaction with, the said trust at all; the
income of the trust could not be added in the hands of the beneficiaries and
the trustees, as the representative assessees, were liable to be taxed on the
income of the trust; if the discretionary trust had made some distribution of
income during the year in favour of the discretionary beneficiaries, only then
was the distributed income taxable in the hands of the beneficiaries; but
nothing of the sort had happened nor had the assessees received any money as
distribution of income by the discretionary trust; so long as the money was not
distributed by the discretionary trust, the same could not be taxed in the
hands of the beneficiaries.

It was explained
that as per the provisions of sections 5 and 9 read with sections 160-166 of
the IT Act, qua a trust, the statute clearly prescribed a liability to
tax in the hands of the trustee, and stipulated that a discretionary
beneficiary having received no distribution would not be liable to tax. As
such, the provisions required to be read strictly and no tax liability could be
imputed to the assessees as discretionary beneficiaries when the statute
specifically provided otherwise.

The Revenue
contended that the affidavits filed were self-serving documents without any
corroborative or evidentiary value; in the affidavit of Dipendu Bapalal Shah,
there was no detail of his family members, and, therefore, the said document
was self-serving without any evidentiary value; the confirmation submitted by
HSBC Bank had confirmed the names of Deepak B. Shah and Kunal N. Shah (the
assessees); the names of the assessees had been mentioned in the information
received by the Government of India as a part of Swiss Leaks in relation to
HSBC Bank, Geneva by way of the ‘Base Note’; the assessee had refused to sign
any consent paper, which clearly showed that the said transactions were proved
beyond doubt that these two assessees had a connection with the said bank
account; the assessees did not co-operate at any stage of the proceedings; in
such clandestine operations and transactions, it was impossible to have direct
evidence or demonstrative proof of every move of the assessee and that the
income tax liability was to be assessed on the basis of parameters gathered
from the inquiries, and that the A.O. had no choice but to take recourse to the
material available on record.

The Tribunal, on
due consideration of the contentions of both the parties, vide
paragraphs 14, 15, 17 and 18 of the order held as under:

‘14. Further, the bank account of HSBC Bank, Geneva is out of the
purview of the IT Act, as Mr. Dipendu Bapalal Shah is a non-resident Indian
since 1979. In the case of the two appellants before us, the same amount was
added in AYs 2006-07 and 2007-08 which was reduced by Ld. CIT(A) to one half of
the total additions to avoid any double taxation affirming the additions to
that extent. Looking to the decision of the coordinate bench holding that the
money belonged to Mr. Dipendu B. Shah who is non-resident and the income of the
non-resident held abroad is not assessable in India unless it is shown to have
arisen or accrued in India. Since it is held by the ITAT that the amount in
HSBC Account in Geneva is owned by Mr. Dipendu Bapalal Shah who is non-resident
we do not find any justification or reasons to sustain the order of Ld. CIT(A)
when the Revenue has completely failed to show any linkage with foreign bank
account with Indian money. We find that addition has been made by the A.O. u/s
69A of the Act to justify the addition on account of peak balance. We agree
with the contentions of the Ld. AR that it is sine
qua non for invoking section 69A of the IT Act, the assessee must be found
to be the owner of money, bullion, jewellery or other valuable articles and
whereas in the present case the money is owned and held by Mr. Dipendu Bapalal
Shah a foreign resident in an account (with) HSBC, Geneva and also admitted
that he is the owner of the money in the HSBC Account Geneva.’

‘15. In the present case the money is held in the name of Mr. Dipendu
Bapalal Shah who vehemently claimed to be owner of the said deposits from his
own fund / sources and the Revenue has failed to bring any cogent and
convincing materials on record which proved that the two appellants are owners
of the money in HSBC Account.’

‘17. In the present case, undisputedly Mr. Dipendu Bapalal Shah is owner
of HSBC Bank account, Geneva and the appellants are discretionary beneficiaries
which leads to positive inference that the appellants are not the owners of the
said bank account and hence the additions under section 69A cannot be
sustained. In the present case before us, admittedly both the appellants,
namely Deepak B. Shah and Kunal N. Shah are discretionary beneficiaries of the
“Balsun Trust” created by Mr. Dipendu Bapalal Shah and the two
appellants have not made any contribution nor done any transaction with the
said trust at all. In our opinion in the case of discretionary trust, the
income of the trust could not only be added in the hand of beneficiary but the
trustees are the representative assessees who are liable to be taxed for the
income of the trust. If the discretionary trust has made some distribution of
income during the year in favour of the discretionary beneficiaries only then
the distributed income is taxable in the hands of the beneficiaries but nothing
of the sort has happened nor two appellants have received any money as
distribution of income by the discretionary trust. So long as the money is not
distributed by the discretionary trust, the same cannot be taxed in the hands
of the beneficiaries. Similarly, in the present case before us, the deposits held
in HSBC, Geneva account cannot be taxed in the hand of beneficiaries /
appellants at all.’

‘18. So applying the ratio laid down by the Hon’ble Apex Court in the
abovesaid two decisions, we are of the considered view that the additions
cannot be made and sustained in the hands of the appellants as the Balsun Trust
is a discretionary trust created by Mr. Dipendu Bapalal Shah and said trust has
neither made any distribution of income nor did the two beneficiaries /
appellants receive any money by way of distribution. While the Department has
failed to bring any conclusive evidence to establish nexus between these two
appellants and the bank account in HSBC, Geneva and more so when Mr. Dipendu
Bapalal Shah has owned the balance in the HSBC, Geneva bank account, we are not
in agreement with the conclusions of the CIT(A) in sustaining the additions
equal to fifty percent of the peak balance in the hands of both the appellants.
Considering the facts of the two appellants, in view of various decisions as
discussed hereinabove, we hold that the order of CIT(A) is wrong in assuming
that the said money may belong to these two appellants and such conclusion is
against the facts on record and based on surmises and presumptions.
Accordingly, we set aside the order of Ld. CIT(A) and direct the A.O. to delete
the additions made u/s 69A in respect of HSBC Bank account for assessment years
2006-07 and 2007-08 in the case of both the appellants before us.’

In the result, the
appeals of the assessees were allowed and the additions made in their hands
were deleted.

THE RENU T. THARANI CASE

Recently, the issue
arose in the case of Renu T. Tharani 107 taxmann.com 804 (Mum).
The assessee in the case was an elderly woman in her late eighties. On 29^th
July, 2006 she had filed her income tax return for A.Y. 2006-07 disclosing a
returned income of Rs. 1,70,800 in Ward 9(1), Bangalore. Her case was
transferred to Mumbai under an order dated 20^th December, 2013
passed u/s 127 of the Act. The return was not subjected to any scrutiny and the
assessment thus reached finality as such. The investigation wing of the Income
Tax Department received information that the assessee had a bank account with
HSBC Private Bank (Suisse) SA Geneva. Based on the information, this case was
reopened for fresh assessment on 30^th October, 2014 by issuance of a
notice u/s 148.

She responded by
stating that she had neither been an account holder of HSBC nor a beneficial
owner of any assets deposited in the account with HSBC Private Bank (Suisse)
SA, Switzerland, during the last ten years. It was further stated that HSBC
Private Bank (Suisse) SA had also confirmed that GWU Investments Ltd. was the
holder of account number 1414771 and, according to their records, GWU
Investments Limited used to be an underlying company of Tharani Family Trust,
of which Mrs. Renu Tharani was a discretionary beneficiary, and that the
Tharani Family Trust was terminated and none of the assets deposited with them
were distributed to her. It was further stated that the ‘Base Note’ issued was
inaccurate, as she did not have any account with HSBC Bank Geneva bearing
number BUP_SIFIC_PER_ID_5090178411 or any other number.

It was explained
that the income of a discretionary trust could not be taxed in her hands as per
the decision in the case of Estate of HMM Vikramsinhji of Gondal, 45
taxmann.com 552(SC), wherein it was held that in the hands of the
beneficiary of a discretionary trust income could only be taxed when the income
was actually received, but in her case she had not received any money in the
capacity of beneficiary. It was submitted that in the light of the abovesaid
facts, there was no reason why the A.O. should insist on asking the assessee to
provide the details of the account standing in the name of GWU Investments
Ltd., as she was in no position to provide the details for the reasons
mentioned to the A.O.

However, none of
the submissions impressed the A.O. He rejected the submissions made by the
assessee and proceeded to make an addition of Rs. 196,46,79,146, being an
amount equivalent to US $3,97,38,122 at the relevant point of time, by
observing as follows:

‘12. The
assessee has not provided the bank account statement in which she is the
discretionary beneficiary nor has explained the sources of deposits made in the
said account… not acceptable because of the following reasons:

(a) It is surprising that she does not know about
the Settlor of the Trust as well as the sources of deposits made in the HSBC
account. No bank account statement has been provided nor the source of deposits
made in the account explained by the assessee even after specific queries were
raised on this.

(b) It is also surprising that as a beneficiary
she did not receive any assets when the Tharani Family Trust was terminated and
if that be so, then where all the money went after termination of the Tharani
Family Trust is open to question and the same remains unexplained.

Considering the
facts of this case, the decision of the Hon’ble ITAT, Mumbai in the case of Mohan Manoj Dhupelia in ITA No. 3544/Mum/2011 etc. is
directly applicable to this case.

In absence of
anything contrary, the only logical conclusion that can be inferred is that the
amounts deposited are unaccounted deposits sourced from India and therefore
taxable in India. This presumption is as per the provisions of section 114 of
The Indian Evidence Act, 1872.

Thus, as per the
provisions of section 114 of The Indian Evidence Act, 1872 also, it needs to be
held at this stage that the information / details not furnished were
unfavourable to the assessee and that the source of the money deposited in the
HSBC account is undisclosed and sourced from India.’

Aggrieved, the
assessee carried the matter in appeal but without any success. The CIT(A)
confirmed the conclusions so arrived at by the A.O. He noted as under:

‘21. The focus
of the submission is shifting responsibility on Assessing Officer without
furnishing any supplementary and relevant details. Vital facts (at cost of
repetition) regarding the entities involved / persons are as under:

A. Smt. Renu Tharani is the beneficiary of
Tharani Family Trust.

B. Smt. Renu Tharani is the sole beneficiary.

C. Tharani Family Trust is the sole beneficiary
of GWU Investments Ltd.

D. Smt. Renu Tharani holds interest in GWU
Investments Ltd. through Tharani Family Trust.

E. Income attributable directly or indirectly to
GWU Investments Ltd. or Tharani Family Trust pertains to Smt. Renu Tharani.

F. GWU Investments Ltd. having address in Cayman
Islands has investment manager as Shri Haresh Tharani, son of the appellant.

The holding
pattern of entities concerned and the contents of the base note cement the
issue. The fact that the appellant is sole beneficiary implies that there is
never a case of distribution and all income concerning the asset only belongs
to her, i.e., will accrue or arise only to her from the moment beneficial
rights came to the appellant.’

Coming to the
quantum of additions, however, the CIT(A) upheld the stand of the assessee and
gave certain directions to the A.O.

On second appeal,
the assessee stated that she was admittedly a non-resident assessee, inasmuch
as the impugned assessment was framed on the assessee in her residential status
as ‘non-resident’, and it was thus not at all required of her to disclose her
foreign bank accounts, even if any. It was explained that unlike in the United
States, where global taxation of income of the assessee was on the basis of
citizenship, the basis of taxability of income outside India, in India, was on
the basis of the residential status of the assessee. The fundamental principles
of taxation of global income in India were explained in detail to highlight
that unless someone was resident in India, taxability of such a person was
confined to income accruing or arising in India, income deemed to accrue or
arise in India, income received in India and income deemed to have been
received in India. None of those categories covered the income, even if any, on
account of an unexplained credit outside India.

The assessee
pointed out that since 23^rd March, 2004 she was regularly residing
in the United States of America, and that, post the financial year ended 31^st
March, 2006 onwards, the assessee was a non-resident assessee. In this
backdrop, she was not required to disclose any bank account outside India or
report any income outside India unless it was covered by the specific deeming
fiction which was admittedly not the case for her. It was, therefore, contended
that any sums credited in the bank account in question could not be taxed in
her hands.

Attention was
invited to a coordinate bench decision in the case of Hemant Mansukhlal
Pandya 100 taxmann.com 280, 174 ITD 101 (Mum), wherein it was inter
alia held that where additions were made to the income of an assessee who
was a non-resident since 25 years, since no material was brought on record to
show that funds were diverted by the assessee from India to source deposits
found in a foreign bank account, the impugned additions were unjustified. It
was thus contended that she, too, being a non-resident, such an income in
foreign bank deposits, even if that were so, could not be taxed in the hands of
the assessee.

It was further
contended that when the account did not belong to the assessee, there was no
question of the assessee being in a position to furnish any evidence in respect
of the same; that she did not have information whatsoever about the source of
deposits in this account, and the assets held therein; that the account was
held with GWU Investments Limited with which the assessee had no relationship
whatsoever; she at best was a beneficiary of the discretionary trust, settled
by GWU Investments Limited, but then in such an eventuality the question of
taxability would arise only at the point of time when the assessee actually
received any money from the trust by relying on the judgment in the case of Estate
of HMM Vikramsinhji of Gondal (Supra), in support of the proposition;
that the entire case of the A.O. was based on gross misconception of facts and
ignorance of the well-settled legal position.

It was reiterated
that the assessee did not have any account with the HSBC Private Bank (Suisse)
SA, and yet she was treated as the owner of the account. The account was of the
investments, but was treated as a bank account. The assessee was a
non-resident, taxable in India in respect of her income earned in India, and yet
the assessee was being taxed in respect of an account which undisputedly had no
connection with India. Denying the tax liability in respect of such an account
at all, it was submitted that if at all it had tax implications anywhere in the
world, the liability was in the jurisdiction of which the assessee was a
resident. The assessee was taxable only on disbursement of the benefits to the
beneficiary, but then the beneficiary was being taxed in respect of the corpus
of the trust. The impugned additions were, even on merits, wholly devoid of any
substance.

The Revenue in
response vehemently relied upon, and elaborately justified, the orders of the
authorities below by highlighting that it was a case in which a specific
information had come to the possession of the Government of India, through
official channels, and this information, amongst other things, categorically
indicated that the assessee was a beneficiary and beneficial owner of a
particular account which had peak assets worth US $3,97,38,122 and that the
genuineness of the account was not in doubt and had not even been challenged by
the assessee, which reality could not be wished away. It was contended that the
IT Department had discharged its burden of proof by bringing on record
authentic information received through government channels about the bank
relationships which were unaccounted in India and unaccounted abroad, and
whatever documents the assessee had given were self-serving documents and
hyper-technical explanations, which did not contradict the official information
received by the Government of India through official channels, and it did in
fact corroborate and evidence the existence of the account with the assessee as
beneficiary and, in any case, the documents submitted could not be considered
enough to discharge the burden of the assessee that the evidences produced by
the Department were not genuine or the inescapable conclusions flowing from the
same were not tenable in law.

It was highlighted
by the Revenue that all that the assessee said was that she had no idea as to
who did it, and passed on the blame to a Cayman Island-based company which was
operating the said account, but then the Cayman Island company could not be a
person unconnected with the assessee. It was inconceivable that a rank outsider
would be generous enough to put that kind of huge money at her disposal or for
her benefit but, as a beneficiary, she was expected to know the related facts
which she alone knew. The fact of the Swiss Bank accounts being operated
through conduit companies based in tax havens was common knowledge and, seen in
that light, if the assessee had an account for her benefit in a Swiss Bank,
whether she operated it directly or through a web of proxies, the natural
presumption was that the money was her money which she must account for.

It was also pointed
out that within months of her changing the residential status, the account was
opened and the credits were afforded. Where did this money come from?
Obviously, in such a short span of time that kind of huge wealth of several
millions of dollars could not be earned by her abroad, but then if she had
shown that kind of earning anywhere to any tax authorities, to that extent, the
balance in Swiss account could be treated as explained. The technicalities
sought to be raised were of no use and the judicial precedents, rendered in an
altogether different context, could not be used to defend the unaccounted
wealth stashed away in the assessee’s account with HSBC Private Bank, Geneva.

In a brief
rejoinder, the assessee submitted that the sweeping generalisations by the
Revenue had no relevance to the facts before the Tribunal. The hard reality was
that the account did not belong to the assessee and that there was no direct or
indirect evidence to support that inference. The assessee was only a
beneficiary of a trust but the taxability in her hands must, at best, be
confined to the monies actually received from the trust; that admittedly GWU
Investments Ltd. was owner of the account in which the assessee was neither a
director nor a shareholder; and that, in any case, nothing remained in the
account as the same stood closed now. It was then reiterated that the assessee
was a non-resident and she could not be taxed in respect of monies credited,
even if that be so, in her accounts outside India; that there was no evidence
whatsoever of the assessee having an account abroad, that whatever evidence had
been given to the assessee was successfully controverted by her, that she was a
non-resident and her taxability was confined to the incomes sourced in India,
and that, for the detailed reasons advanced by her, the impugned addition of
Rs. 196,46,79,146 in respect of her alleged and non-existent bank account in
HSBC Private Bank (Suisse) SA Geneva must be deleted.

The Tribunal deemed
it important to recall the backdrop in which the information about the
assessee’s account with the HSBC Private Bank (Suisse) SA was received by the
Government of India to also refresh memories, and certain undisputed facts,
about the ‘HSBC Private Bank Geneva scandal’ as it was often referred to. In
paragraph 23 of the judgment, it detailed the backdrop. In paragraph 24, it
also referred to one more BBC report, which could throw some light on the
backdrop of this case, and found the report worth a look at by reproducing
extensively from it. The Tribunal further noted that those actions of the HSBC
Private Bank (Suisse) SA had not gone unnoticed so far as law enforcement
agencies were concerned, and the bank had to face criminal investigations in
several parts of the globe, and had to pay millions of dollars in settlement
for its lapses. In paragraph 26, it explained that the above press reports were
referred to just to set the backdrop in which the case before them was set out,
and, as they explain the rationale of their decision, the relevance of the
backdrop would be appreciated.

The Tribunal took it upon itself to examine the trust structures
employed by HSBC Private Bank since a lot had been said about the assessee
being a discretionary beneficiary of a trust which was said to have the account
with HSBC Private Bank (Suisse) SA Geneva. The Tribunal found that it would be
of some use to understand the nature of trust services offered by HSBC Private
Bank, as stated on their website even on the date of the decision.

It noted that the
assessee had shifted to the USA just seven days before the beginning of the
relevant previous year, and it would be too unrealistic an assumption that
within those seven days plus the relevant financial year, the assessee could
have earned that huge an amount of around Rs. 200 crores which, at the rate at
which she did earn in India in the last year, would have taken her more than
11,500 years to earn. Even if one went by the basis, though the material on
record at the time of recording reasons did not at all indicate so, that the
assessee was a non-resident for the assessment year, which was, going by the
specific submissions of the assessee, admittedly the first year of her
‘non-resident’ status, it was wholly unrealistic to assume that the money at
her disposal in the Swiss Bank account reflected income earned outside India in
such a short period of one year.

The Tribunal took a
very critical note of the fact that the assessee had, in response to a specific
request from the A.O., declined to sign ‘consent waiver’ so as to enable the IT
Department to obtain all the necessary details from the HSBC Private Bank
(Suisse) SA, Geneva which aspect of the matter was clear from the extracts from
the assessee’s submissions dated 25^th February, 2015 filed by the
A.O. as follows:

‘……..we would
like to submit that the letter from HSBC Private Bank dated 5^th
January, 2015 categorically states that the assessee does not have any account
in HSBC Private Bank (Suisse) SA in Switzerland, hence question of providing
you with CD of HSBC Bank account statement does not arise. Also, the question
of signing the consent waiver does not arise as the assessee does not have any
account in HSBC Private Bank (Suisse) SA.’

The Tribunal
observed that the net effect of not signing the consent waiver form was that
the A.O. was deprived of the opportunity to seek relevant information from the
bank in respect of the assessee’s bank account; if she had nothing to hide,
there was no reason for not signing the consent waiver form; all that the
consent waiver form did was to waive any objection to the furnishing of
information relating to the assessee’s bank account, i.e. HSBC Private Bank
(Suisse) SA Geneva in her case. The Tribunal found it necessary to take note of
the above position so as to understand that the assessee had not come with
clean hands and, quite to the contrary, had made conscious efforts to scuttle
the Department’s endeavours to get at the truth.

Proceeding with the
consent letter aspect, the Tribunal further observed that clearly, therefore,
the consent waiver being furnished by the assessee did not put the assessee to
any disadvantage so far as getting at the actual truth was concerned. Of
course, when the monies so kept in such banks abroad were legal or the
allegations incorrect, the assessee could always, and in many a case assessees
did, co-operate with the investigations by giving the consent waivers. The case
before the Tribunal, however, was in the category of cases in which consent
waiver had been emphatically declined by the assessee, and thus a deeper probe
by the Department had been successfully scuttled.

On the aspect of
the consent, the Tribunal found it useful to refer to a judgment of the
jurisdictional Bombay High Court on materially similar facts, wherein the Court
had disapproved and deprecated the conduct of the assessee in not signing the
consent waiver form, in the judgment reported as Soignee R. Kothari’s
case in 80 taxmann.com 240. The Tribunal noted that it
was also a case in which the assessee, originally a resident in India, had
migrated to the USA and in whose case the information by way of a ‘Base Note’
was received from the French Government under the DTAA mechanism (as in the
assessee’s case), about the existence of her bank account with the same bank,
i.e. HSBC Private Bank (Suisse) SA Geneva; it was a case in which the assessee
had declined to sign the consent waiver form outright, and taken a stand that
the question of signing the consent waiver form did not arise. Neither such a
conduct could be appreciated, nor anyone with such a conduct merited any
leniency, the Court had held in that case.

The Tribunal
observed that on the one hand the assessee had not co-operated with the IT
authorities in obtaining the relevant information from HSBC Private Bank (Suisse)
SA Geneva, or rather obstructed the flow of full, complete and correct
information from the said bank by not waiving her rights to protect privacy for
transactions with the bank, and, on the other hand, the assessee had complained
that the IT authorities had not been able to find relevant information.
Obviously, those two things could not go together.

The Tribunal found
that while the claim of the assessee was that she was a discretionary
beneficiary of the Tharani Family Trust, that fact did not find mention in the
‘Base Note’ which showed that the assessee was the beneficial owner or
beneficiary of GWU Investments Ltd.; that in the remand report filed by the
A.O., there was a reference to some unsigned draft copy of the trust deed
having been filed before him but neither the deed was authentic nor was it
placed before the Tribunal in the paper-book. The assessee had not submitted
the trust deed or any related papers but merely referred to a somewhat
tentative claim made in a letter between one Mahesh Tharani, apparently a
relative of the assessee, and the HSBC Private Bank (Suisse) SA, an
organisation with a globally established track record of hoodwinking tax
authorities worldwide. Nothing was clear, nor did the assessee throw any light
on the same. The letter did not deny, nor show any material to controvert, what
was stated in the ‘Base Note’ i.e. GWU Investments Ltd. and the assessee were
linked as beneficial owners. There was no dispute that the account was in the
nominal name of GSW Investments Ltd., but the question was who was the natural
person / beneficial owner thereof. As for the trust, there was no corroborative
evidence about the statement, but nothing turned thereon as well. The assessee
being the discretionary beneficiary owner of the trust, and beneficial owner of
the underlying company, was not mutually exclusive anyway; but the claim of the
assessee being a discretionary beneficiary of the trust was without even
minimal evidence.

As regards the
reference to the judgment in the case of the estate of HMM Vikramsinhji
of Gondal (Supra), the Tribunal noted that it was important to
understand that it was a case in which a discretionary trust was settled by the
assessee and the limited question for adjudication was taxability of the income
of the trust, after the death of the Settlor and in the hands of the
beneficiary. The observations had no relevance in the context of the case of
the assessee; firstly, neither was there any trust deed before the Tribunal,
nor the question before it pertained to the taxability of the income of the
trust; secondly, beyond a mention in the ‘Base Note’ as a personnes légales
liées (i.e. related legal persons), there was no evidence even about the
existence, leave aside the nature, of the trust; thirdly, the point of
taxability here was beneficial ownership of GWU Investments Ltd., a Cayman
Island-based company, by the assessee; finally, even if there was a dispute
about the alleged trust, the dispute was with respect to taxability of funds
found with the trust and the source thereof. Clearly, therefore, the issue
adjudicated upon in the said decision had no relevance in the present context.
The very reliance on the said decision presupposed that the assessee was
discretionary beneficiary simplicitor of a discretionary family trust,
and nothing more – an assumption which was far from established on the facts of
the case.

As regards the
question of income which could be brought to tax in the hands of the assessee,
being a non-resident, and certain errors in computation on account of duplicity
of entries, etc., the Tribunal had noted that the CIT(A) had given certain
directions which it had reproduced in paragraph 18 of the Order, and those
directions were neither challenged nor any infirmities were shown therein. Obviously,
therefore, there was no occasion, or even prayer, for interference in the same.

In the end, the
Tribunal while confirming the order of the A.O. read with the order of the
CIT(A), nonetheless recorded that their decision could not be an authority for
the proposition that wherever the name of the assessee figured in a ‘Base Note’
from HSBC Private Bank (Suisse) SA Geneva an addition would be justified in
each case. The mere fact of an account in HSBC Private Bank (Suisse) SA Geneva
by itself could not mean that the monies in the account were unaccounted,
illegitimate or illegal. The conduct of the assessee, the actual facts of each
case, and the surrounding circumstances were to be examined on merits, and then
a call was to be taken about whether or not the explanation of the assessee
merited acceptance. There could not be a short-cut and a one-size-fits-all
approach to the exercise.

OBSERVATIONS

The provisions of
the Income-tax Act, 1961 extend to the whole of India vide section 1 of
the Act. Section 4 of the Act provides for the charge of income tax in respect
of the total income of the previous year of a person. The total income so
liable to tax includes, vide section 5 of the Act, the income of a
person who is a non-resident, derived from whatever source which is received or
is deemed to be received in India or has accrued or arisen or is deemed to
accrue or arise to him in India. A receipt by any person on behalf of the
assessee is also subject to tax in India. The scope of the total income subject
to tax in case of a resident is a little wider inasmuch as, besides the income
referred to above, he is also liable to tax in respect of the income that
accrues or arises to him outside India, too, unless the person happens to be
Not Ordinarily Resident in India.

Section 9 expands
the scope of the income that is deemed to have accrued or arisen in India even
where not actually accrued or arisen in India and the income listed therein, in
the circumstances listed in section 9, such income would be ordinarily taxable
in India even where belonging to a non-resident, subject of course to the
provisions of sections 90, 90A and 91 of the Act.

The sum and
substance of the provisions is that the global income of a resident is taxable
in India, irrespective of its place of accrual. In contrast, income in the case
of a non-resident or Not Ordinarily Resident person is taxed in India only
where such an income is received in India or has accrued or arisen in India or
where it is deemed to be so received or accrued or arisen.

In both the cases
under consideration the assessees were non-residents and applying the
principles of taxation explained above, the income could be taxed in their
hands only where such income for the respective assessment years under
consideration was received in India or had accrued or arisen in India or where
it was deemed to be so. In both cases, the deposits were made during the
relevant financial year in the bank account with HSBC Geneva, Switzerland held
in the name of the discretionary trust or its nominee during the period when
the assessees in question were non-residents for the purposes of the Act. In
both the cases, the provisions of section 5 were highlighted before the
authorities to explain that the deposits in question did not represent any
income of the assessee that was received in India or had accrued or arisen in
India or where it was deemed to be so. In both cases, the assessees were the
beneficiaries of discretionary trusts and had not received any money or income
on distribution by the trust and it was explained to the authorities that the
additions could not have been made in the hands of the beneficiaries of such
trusts. In both the cases, the authorities had sought the consent of the
assessees for facilitating the investigation with the Swiss bank and collecting
information and documents from the bank – and in both the cases the consent was
refused.

In the first case
of Deepak B. Shah, the Tribunal found that the assessee was a non-resident for
many years, and the A.O. had failed to establish any connection between the
deposits in the impugned bank account and his Indian income. No addition was
held to be sustainable by the Tribunal in the hands of the non-resident
assessee on account of such deposits which could not be considered to be
received in India or had accrued or arisen in India or was deemed to be so. In
this case, the bank account was in the name of a discretionary trust of which
the assessee was a beneficiary and the Settlor of the trust had admitted the
ownership of the funds in the bank account and these facts weighed heavily with
the Tribunal in deleting the additions. It held that a beneficiary of the
discretionary trust could be taxed only when there was a receipt by him during
the year, on distribution by the trust.

And in the second
case, of Renu T. Tharani, the assessee, aged 83 years, a resident of the USA
for a few years, was a sole beneficiary of a discretionary trust who operated
the HSBC Geneva bank account. The addition was made in the hands of the
beneficiary assessee on account of deposits in a foreign bank account held in
the name of a company, whose shares were held by a discretionary trust, the
Tharani Beneficiary Trust; in the course of reopening and reassessment, and on
appeal to the Tribunal, the addition was sustained in spite of the fact that
not much material was available for linking the deposits to the Indian income
of the assessee for the year under consideration, and the fact that the
assessee was a beneficiary of the discretionary trust from which she had not
received any income on distribution during that year.

In the latter
decision, the assessee had brought to the attention of the Tribunal the
decision in the case of Hemant Mansukhlal Pandya, 100 taxmann.com 280
(Mum) but that did not help her case. The fact that the assessee had
refused to grant the consent, as required under the treaties and agreements,
for facilitating the inquiry and investigation by permitting the authorities to
obtain documents from the foreign bank, had substantially influenced the
adjudication by the Tribunal. That the bank account was closed and the trust
was dissolved with no trail was also a factor that was not very helpful. The
fact that the trust was in a tax haven, Cayman Islands, and was managed by
‘professional trustees’ did not help the case of the assessee. The Tribunal
gave due importance to the international reports on the clandestine movement of
funds to go to the root of the source. It was also not very happy with the
genuineness of the evidences produced or their authenticity and also with the
withholding of information by the assessee, as also with the limited
co-operation extended by her.

The fact that the
assessee in the latter case had ceased to be a resident only a few years in the
past and had left India just a year before the year of deposit, and that the
quantum of deposits was very huge, might have influenced the outcome in the
case, though in our opinion these factors were not determinative of the
outcome. It is true that the deposits were made during the year under
consideration, but it is equally true that during the year under consideration
the assessee was a non-resident and therefore the addition to the income could
have been sustained only if it was found to have been received in India or was
linked to Indian operations. The fact that the assessee was a beneficiary of a
discretionary trust and the bank account was not in her name but in the name of
the company that belonged to the trust, coupled with the fact that the assessee
had not received any money on distribution from the trust during the year, are
the factors which weighed in favour of not taxing the assessee, but although
considered, these did not inspire the Tribunal to delete the addition.

The decisions of
the Apex Court relating to the taxation of a discretionary trust were held by
the Tribunal to be delivered in the context of the facts of the cases before
the Court and not applicable to the facts and the issue before it. In case of a
discretionary trust, the beneficiaries could be taxed only on receipt from the
trust on distribution of income by the trust. Please see Estate of HMM
Vikramsinhji of Gondal 45 taxamnn.com 552 (SC); and Smt. Kamalini
Khatau 209 ITR 101 (SC).

The Tribunal in the
first case of Deepak B. Shah approved the contention of the assessee that the
addition in his hands was not sustainable in a case where the bank account was
in the name of the discretionary trust and the assessee was only the
beneficiary. It also upheld that the addition could not have been sustained
when no income of the trust was distributed amongst the beneficiaries. Its
decision was also influenced by the fact that the Settlor of the trust had
admitted the ownership of the account and the addition made in the Settlor’s
hands was deleted vide an order of the ITAT, reported in 171 ITD
602 (Mum) in the name of Dipendu B. Shah on the ground that the
Settlor was a non-resident during the year under consideration.

As against that, in
the latter case of Renu T. Tharani, all the three facts that influenced the
Tribunal in the Deepak B. Shah case were claimed to be present. But those facts
did not deter the Tribunal from sustaining the addition, perhaps for the lack
of evidence acceptable to it to satisfy itself and delete the addition on the
basis of the evidence available on record. Had proper evidence in support of
the existence of a discretionary trust or in support of the non-resident source
of the funds been available, it could have strengthened the case of the
assessee.

There was no
finding of the A.O. to the effect that there was, nor had the A.O. established,
any Indian connection to the deposits. If the deposits were considered to be
made out of her income while she was in India, then such income should have
been taxed in that year alone, and not in the year of deposit.

A receipt in the
hands of a non-resident in a foreign country is not taxable under the Indian
tax laws unless such a receipt is found to be connected to an Indian activity
giving rise to accrual or arising of income in India. Please see Finlay
Corporation Ltd. 86 ITD 626 (Delhi); Suresh Nanda 352 ITR 611 (Delhi);
and Smt. Sushila Ramaswamy 37 SOT 146; Saraswati Holding Corporation 111
TTJ Delhi 334; and Vodafone International Holding B.V. 17
taxmann.com 202 (SC).

Besides various
unreported case laws, the issue of addition based on the said ‘Base Note’
concerning the deposits in HSBC Bank account Geneva, Switzerland arose in the
following reported cases:

1. Mohan M. Dhupelia, 67 SOT 12 (URO) (Mum)

2. Ambrish Manoj Dhupelia, 87 taxmann.com 195
(Mum)

3. Hemant Mansukhlal Pandya, 100 Taxmann.com 280
(Mum)

4. Shravan Gupta, 81 taxmann.com 123 (Delhi)

5. Shyam Sunder Jindal, 164 ITD 470 (Delhi)

6. Soignee R. Kothari, 80 taxmann.com 240 (Bom).

The first two cases
were decided by the Tribunal against the assessees, while the later cases were
decided in favour of the assessee mainly on account of the failure of the A.O.
to establish the nexus of the bank deposits to an Indian source of income or to
adhere to the rules of natural justice or to obtain authentic documents.

A deposit in the
foreign bank account of a trust wherein the assessee was a beneficiary of a
trust was held to be taxable in the hands of the assessee for A.Y. 2002-03 for
the inability of the assessee to render satisfactory explanation in the course
of reopening and reassessment which were also held to be valid. Please see Mohan
M. Dhupelia, 67 SOT 12 (URO) (Mum). Also see Ambrish Manoj
Dhupelia, 87 taxmann.com 195 (Mum).

The assessee, a
non-resident since 25 years, was found to have a foreign bank account in HSBC
Bank Geneva in his name for which no explanation was provided by the assessee,
staying in Japan for A.Y. 2006-07 and 2007-08. The addition made by the A.O.
was deleted on the ground that the A.O. had not brought on record any material
to show that the income had accrued or arisen in India and the money was
diverted by the assessee from India. As against that, the assessee had proved
that he was a non-resident for 25 years. Please see Hemant Mansukhlal
Pandya, 100 Taxmann.com 280 (Mum).

In the absence of a
nexus between the deposits found in a foreign bank account and the source of
income derived from India, the addition made for A.Y. 2006-07 and 2007-08 on
account of deposits in HSBC Account Geneva on the basis of a ‘Base Note’ in the
hands of the assessee who was a non-resident since 1990, was deleted. The
assessee was a Belgian resident. Please see Dipendu Bapalal Shah 171 ITD
602 (Mum).

For A.Y. 2006-07,
the A.O. had made additions to the total income on account of deposits in a
foreign bank account with HSBC Geneva. The assessee claimed complete ignorance
of the fact of the bank account. The addition was deleted on the ground that it
was made on the basis of unsubstantiated documents which were not signed by any
bank official and were without any adequate and reliable information. Please
see Shravan Gupta, 81 taxmann.com 123 (Delhi).

The addition was
made by the A.O. to the assessee’s income in respect of undisclosed amount kept
in a foreign bank account HSBC, Geneva, Switzerland. However, the same was set
aside due to non-availability of authentic documents and requisite information
to be relied upon by the A.O. to make the addition. Please see Shyam
Sunder Jindal, 164 ITD 470 (Delhi).

shailesh.kwebmaker

Special deduction u/s 80-IA of ITA, 1961 – Telecommunications services – Computation of profits u/s 80-IA(1) – Change in shareholding of company – Effect of section 79 – Losses which have lapsed cannot be taken into account for purposes of section 80-IA

8. Vodafone Essar
Gujarat Ltd. vs. ACIT [2020] 424 ITR 498
(Guj.) Date of order: 3^rd
March, 2020 A.Ys.: 2005-06 and
2006-07

Special deduction u/s 80-IA of ITA, 1961 –
Telecommunications services – Computation of profits u/s 80-IA(1) – Change in
shareholding of company – Effect of section 79 – Losses which have lapsed
cannot be taken into account for purposes of section 80-IA

The assessee company, established in
1997-98, was in the business of providing cellular telecommunications services
in the State of Gujarat. During the previous year relevant to the A.Y. 2001-02,
there was a change in the shareholding of the assessee, as a result of which the provisions of section 79 of the IT Act, 1961 were made applicable and the accumulated losses from the A.Ys. 1997-98 to 2001-02 lapsed. The assessee made a claim for
deduction u/s 80IA for the first time for the A.Y. 2005-06. In the return of income, the assessee had shown total income of Rs. 191,59,84,008 and claimed the entire
amount as deduction u/s 80IA(4)(ii) of the Act. According to the A.O., the
quantum of deduction available to the assessee u/s 80IA(4)(ii) was to be
computed in accordance with the provisions of section 80IA(5), without the
application of the provisions of section 79.

This was upheld by the Commissioner
(Appeals) and the Tribunal.

On an appeal by the assessee, the Gujarat
High Court reversed the decision of the Tribunal and held as under:

‘i) The application of section 80IA(5) to deny the
effect of provisions of section 79 cannot be sustained. When the loss of
earlier years has already lapsed, it cannot be notionally carried forward and
set off against the profits and gains of the assessee’s business for the year
under consideration in computing the quantum of deduction u/s 80IA(1). The
provisions of section 80IA(5) cannot be invoked to ignore the provisions of
section 79.

ii)
The appeals are allowed. The impugned orders passed by the Tribunal in the
respective tax appeals are quashed and set aside. The substantial question is
answered in favour of the assessee and against the Revenue.’

shailesh.kwebmaker

Reassessment – Notice u/s 148 of ITA, 1961 – Validity – Officer recording reasons and issuing notice must be the jurisdictional A.O. – Reasons recorded by jurisdictional A.O. but notice issued by officer who did not have jurisdiction over assessee – Defect not curable u/s 292B – Notice and consequential proceedings and order invalid

7. Pankajbhai
Jaysukhlal Shah vs. ACIT [2020] 425 ITR 70
(Guj.) Date of order: 9^th
April, 2019 A.Y.: 2011-12

Reassessment – Notice u/s 148 of ITA, 1961
– Validity – Officer recording reasons and issuing notice must be the
jurisdictional A.O. – Reasons recorded by jurisdictional A.O. but notice issued
by officer who did not have jurisdiction over assessee – Defect not curable u/s
292B – Notice and consequential proceedings and order invalid

For the A.Y.
2011-12 an order u/s 143(1) of the Income-tax Act, 1961 was passed against the
assessee. Thereafter, a notice dated 29^th March, 2018 u/s 148 was issued
to reopen the assessment u/s 147 of the Act. In response to the notice, the assessee submitted that the original return filed by him be
treated as the return filed in response to the notice u/s 148 and requested the
A.O. to supply a copy of the reasons recorded for reopening the assessment. The
assessee participated in the assessment proceedings and raised objections
against the initiation of proceedings u/s 147 on the ground that the assumption
of jurisdiction on the part of the A.O. by issuance of notice u/s 148 was
invalid, contending that the notice was issued by the Income-tax Officer, Ward
No. 2(2), whereas the reasons were recorded by the Deputy Commissioner of
Income-tax, Circle 2. The Department contended that issuance of the notice by
the Income-tax Officer was a procedural lapse which had happened on account of
the mandate of the E-assessment scheme and non-migration of the permanent
account number of the assessee in time and that such defect was covered under
the provisions of section 292B and therefore, the notice issued could not be
said to be invalid.

The assessee filed
a writ petition and challenged the validity of the notice. The Gujarat High
Court allowed the writ petition and held as under:

“i) While the reasons for reopening the assessment
had been recorded by the jurisdictional A.O., viz., the Deputy Commissioner,
Circle 2, the notice u/s 148(1) had been issued by the Income-tax Officer, Ward
2(2), who had no jurisdiction over the assessee and, hence, such a notice was
bad on the count of having been issued by an Officer who had no authority to
issue such notice.

ii) It was the Officer recording the reasons who
had to issue the notice u/s 148(1), whereas the reasons had been recorded by
the jurisdictional A.O. and the notice had been issued by an Officer who did
not have jurisdiction over the assessee. The notice u/s 148 being a
jurisdictional notice, any inherent defect therein could not be cured u/s 292B.

iii) It was not possible for the jurisdictional
A.O., viz., the Deputy Commissioner, to issue the notice u/s 148 on or before
31^st March, 2018 as migration of the permanent account number was
not possible within that short period and therefore, the Income-tax Officer had
issued the notice instead of the jurisdictional Assessing Officer. Thus there
was an admission on the part of the Department that the Deputy Commissioner,
Circle 2, who had jurisdiction over the assessee had not issued the notice u/s
148 but it was the Income-tax Officer, Ward 2(2) who did not have any
jurisdiction over the assessee who had issued such notice.

iv) No proceedings could have
been taken u/s 147 in pursuance of such invalid notice. The notice u/s 148(1)
and all the proceedings taken pursuant thereto could not be sustained.’

shailesh.kwebmaker

Reassessment – Notice u/s 148 of ITA, 1961 – Validity – Notice issued in name of dead person – Objection to notice by legal heir and representative – Department intimated about death of assessee in reply to summons issued u/s 131(1A) – Legal heir not submitting to jurisdiction of A.O. in response to notice of reassessment u/s 148 – Provisions of section 292A not attracted – Notice and proceedings invalid

6. Durlabhai
Kanubhai Rajpara vs. ITO [2020] 424 ITR 428
(Guj.) Date of order: 26^th
March, 2019 A.Y.: 2011-12

Reassessment – Notice u/s 148 of ITA, 1961
– Validity – Notice issued in name of dead person – Objection to notice by
legal heir and representative – Department intimated about death of assessee in
reply to summons issued u/s 131(1A) – Legal heir not submitting to jurisdiction
of A.O. in response to notice of reassessment u/s 148 – Provisions of section
292A not attracted – Notice and proceedings invalid

For the A.Y.
2011-12, the A.O. issued a notice in the name of the assessee who was the
father of the petitioner u/s 148 of the Income-tax Act, 1961 dated 28^th
March, 2018 to reopen the assessment u/s 147. Even prior to that, the Deputy
Director (Investigation) had issued a witness summons u/s 131(1A) in the name
of the assessee, the father of the petitioner, to personally attend the office
and the notice was served upon the petitioner. The petitioner furnished the
death certificate of his late father before the authority and submitted that he
had expired on 12^th June, 2015, therefore, the notice was required
to be withdrawn. Thereafter, the notice in question dated 28^th
March, 2018 was issued in the name of the late assessee. The petitioner also
received a notice dated 16^th July, 2018 issued u/s 142(1) on 17^th
July, 2018. The petitioner filed a reply and submitted that his father had
expired on 12^th June, 2015 and a copy of the death certificate was
also annexed. The petitioner also contended in his reply that the fact of the
death of his father was disclosed pursuant to the summons issued by the Deputy
Director (Investigation) u/s 131(1A), that the notice issued u/s 148 was
without any jurisdiction as it was issued against a dead person and prayed that
the proceedings be dropped. The Department rejected the objections.

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

‘i) The petitioner at the first point of time had
objected to the issuance of notice u/s 148 in the name of his deceased father
(assessee) and had not participated or filed any return pursuant to the notice.
Therefore, the legal representatives not having waived the requirement of
notice and not having submitted to the jurisdiction of the A.O. pursuant
thereto, the provisions of section 292A would not be attracted and hence the
notice had to be treated as invalid.

ii) Even prior to the issuance of such notice, the
Department was aware about the death of the petitioner’s father (the assessee)
since in response to the summons issued u/s 131(1A) the petitioner had
intimated the Department about the death of the assessee. Therefore, the
Department could not say that it was not aware of the death of the petitioner’s
father (the assessee) and could have belatedly served the notice u/s 159 upon
the legal representatives of the deceased assessee.

iii)
The notice dated 28^th March, 2018 issued in the name of the deceased
assessee by the A.O. u/s 148 as well as further proceedings thereto were to be
quashed and set aside.’

shailesh.kwebmaker

Reassessment – Notice u/s 148 of ITA, 1961 – Validity – Amalgamation of companies – Notice issued against transferor-company – Amalgamating entity ceases to have its own existence and not amenable to reassessment proceedings – Notice and subsequent proceedings unsustainable

5. Gayatri Microns
Ltd. vs. ACIT [2020] 424 ITR 288
(Guj.) Date of order: 24^th
December, 2019 A.Y.: 2012-13

Reassessment – Notice u/s 148 of ITA, 1961
– Validity – Amalgamation of companies – Notice issued against
transferor-company – Amalgamating entity ceases to have its own existence and
not amenable to reassessment proceedings – Notice and subsequent proceedings
unsustainable

In the return for the A.Y. 2015-16, the
assessee company furnished information regarding amalgamation of three
companies GMCL, GISL and GFL with it. In the return, under the heading ‘holding
status’, further details were provided below the column ‘business
organisation’, that is, the status of those three companies which were
amalgamated with it.

For the A.Y. 2015-16, the A.O. called for
certain information, and the assessee submitted the details categorically
stating that by virtue of the order passed by the High Court dated 18^th
June, 2015, the amalgamation had taken place amongst the three companies. The
Assistant Commissioner issued a notice dated 25^th March, 2019 u/s
148 of the Income-tax Act, 1961 for the A.Y. 2012-13 to GISL.

The assessee filed a writ petition and
challenged the notice. The Gujarat High Court allowed the writ petition and
held as under:

‘i) The notice issued u/s 148 had been issued to
GISL which had been amalgamated with the assessee by order dated 18^th
June, 2015 passed by the court and thus, it had ceased to have its own
existence so as to render it amenable to reassessment proceedings under the
provisions of section 147.

ii) The amalgamation had taken place much prior to
the issuance of the notice dated 25^th March, 2019 for reopening the
assessment. Thereafter, the assessee had informed the Assistant Commissioner
about the amalgamation of all the three companies with it with sufficient
details, viz., (i) the passing of the order dated 18^th June, 2015 by
the court ; (ii) the communication dated 9^th September, 2017
addressed by the assessee to the Income-tax Officer, during the assessment proceedings
for the A.Y. 2015-16 containing the information of amalgamation; and (iii) the
details of amalgamation in the return for the A.Y. 2015-16. Moreover, the
Assistant Commissioner and the Department were duly informed by the assessee
about the amalgamation and despite this a statutory notice u/s 148 (was sent).

iii)
The notice for reopening of the assessment being without jurisdiction, was not
sustainable. The notice and all the proceedings taken pursuant thereto were to
be quashed and set aside.’”

shailesh.kwebmaker

Income – Unexplained money – Section 69A of ITA, 1961 – Condition precedent for application of section 69A – There should be evidence that assessee was the owner of the money – Assessee acting as financial broker – Material on record showing amounts passing through his hands – No evidence that amounts belonged to him – Amounts not assessable in his hands u/s 69A

4. CIT vs.
Anoop Jain [2020] 424 ITR 115
(Del.) Date of order: 22^nd
August, 2019 A.Y.: 1992-93

Income – Unexplained money – Section 69A of
ITA, 1961 – Condition precedent for application of section 69A – There should
be evidence that assessee was the owner of the money – Assessee acting as
financial broker – Material on record showing amounts passing through his hands
– No evidence that amounts belonged to him – Amounts not assessable in his
hands u/s 69A

The assessee
was a financial broker. During the course of assessment for the A.Y. 1992-93,
the A.O. found that the assessee had received 13 pay orders aggregating to Rs.
5,17,45,958 from Standard Chartered Bank, Bombay during the financial years in
question, and mostly between December, 1991 and February, 1992. All these pay
orders were utilised by him for purchasing units and shares from different banks
and mutual funds. The explanation offered by the assessee was that all the pay
orders were received from C, a Bombay broker, and the purchase of units and
shares was done by him on behalf of C and these were then sold back to C after
earning normal brokerage. The A.O. found that all 13 pay orders were actually
tainted pay orders relating to the securities scam of 1992 and that they had
been issued by the Standard Chartered Bank under extraordinary circumstances.
The Standard Chartered Bank had informed the Assistant Commissioner, Circle
7(3) that it had been a victim of a massive fraud perpetrated in 1992 by
certain brokers in collusion with some ex-employees of the Bank to siphon out
funds. It was also conveyed that the Standard Chartered Bank had filed a first
information report with the C.B.I. in which ‘JP’, an ex-employee, was named as
one of the accused and the 13 pay orders were part of a total of 15 pay orders
fraudulently issued by ‘JP’. The A.O. did not accept the explanation and added
an amount of Rs. 5,17,45,958 to the income of the assessee u/s 69A of the
Income-tax Act, 1961.

The Commissioner (Appeals) noted that
certain assets were found by the C.B.I. in the possession of C, who then
surrendered them to the Bureau. The Commissioner (Appeals) also held that there
was no evidence to show that the money in question was utilised by the
assessee. The Commissioner (Appeals) accordingly deleted the addition. This was
upheld by the Tribunal.

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

‘i) The very basis for making the additions was
the inference drawn by the A.O. that the assessee had received pay orders and
spent the monies for purchase of shares and units as a result of some “financial
quid pro quo”. There were certain facts that stood out which showed that
these amounts received by the assessee as pay orders did not belong to him. The
assessee was only a conduit through whom the amounts were floated.

ii) One of the essential conditions in section 69A
of the Act is that the assessee should be the “owner of the money” and it
should not be recorded in his books of account. There was overwhelming evidence
to show the involvement of C acting on behalf of SP for SMI. The C.B.I. also did
not proceed against the assessee and that discounted the case of any collusion
between the assessee and C along with P.

iii)
The assessee was at the highest used as a conduit by the other parties and did
not himself substantially gain from these transactions. In that view of the
matter, the concurrent view of both the Commissioner (Appeals) and the Tribunal
that the addition of the sum to the income of the assessee was not warranted
was justified.’

shailesh.kwebmaker

Income – Business income or income from house property – Sections 22 and 28 of ITA, 1961 – Company formed with object of developing commercial complexes – Setting up of commercial complex and rendering of services to occupants – Income earned assessable as business income

3. Principal CIT vs. City Centre Mall Nashik Pvt. Ltd. [2020] 424 ITR 85
(Bom.) Date of order: 13^th
January, 2020 A.Y.: 2010-11

Income – Business income or income from
house property – Sections 22 and 28 of ITA, 1961 – Company formed with object
of developing commercial complexes – Setting up of commercial complex and
rendering of services to occupants – Income earned assessable as business
income

The assessee was a private limited company
incorporated with the object of construction and running of commercial and
shopping malls. The assessee set up a commercial complex-cum-shopping mall and
the operations commenced during F.Y. 2009-10. The assessee let out various
shops in this commercial complex dealing with various products.

Apart from letting out the premises, the
assessee also provided various services to the occupants such as security
services, housekeeping, maintenance, lighting, repairs to air conditioners,
marketing and promotional activities, advertisement and such other activities.
The premises were let out on leave and licence basis, and the compensation was
based on revenue-sharing basis. For the A.Y. 2010-11, the assessee declared its
income under the head ‘Income from business’. The A.O., however, treated it as
income from house property.

The Tribunal held that the income was
assessable as business income.

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

‘i) The object of
the assessee was clearly to acquire, develop, and let out the commercial
complex. The assessee provided even marketing and promotional activities. The
intention of the assessee was a material circumstance and the objects of
association, and the kind of services rendered, clearly pointed out that the
income was from business.

ii)
All the factors cumulatively taken demonstrated that the assessee had intended
to enter into a business of renting out commercial space to interested parties.
The findings rendered by the Tribunal on assessment of the factual position
before it that the income in question had to be treated as business income was
justified.’

shailesh.kwebmaker

Section 28(iv) – Waiver of loan

1. M/s Essar Shipping Limited vs. Commissioner of
Income-tax, City-III, Mumbai [Income-tax Appeal (IT) No. 201 of 2002 Date of order: 5^th March, 2020 [Order dated 16^th August, 2001
passed by the ITAT ‘A’ Bench, Mumbai in Income-tax Appeal No. 144/Ban/91 for
the A.Y. 1984-85] (Bombay High Court)

Section 28(iv) – Waiver of loan

The appellant company earlier was known as
M/s Karnataka Shipping Corporation Limited and carrying on the business of
shipping. During the relevant previous year, because of certain developments it
was amalgamated with M/s Essar Bulk Carriers Limited, Madras, whereafter it
came to be known as M/s Essar Shipping Limited.

In the assessment proceedings for the A.Y.
1984-85 following amalgamation, it filed a revised return of income wherein an
amount of Rs. 2,52,00,000 was claimed as a deduction being the amount of loan
given by the Government of Karnataka which was subsequently waived. It was
claimed on behalf of the appellant that the Government of Karnataka had written
off the said loan advanced to the appellant as the said amount had become
irrecoverable. The A.O. did not accept the claim of the appellant and observed
that waiver of loan benefited the appellant in carrying on its business and in
terms of the provisions contained in section 28, the said benefit enjoyed by
the appellant should constitute income in its hand. Accordingly, the aforesaid
amount was added to the total income of the assessee.

Aggrieved
by this, the assessee preferred an appeal before the CIT(Appeals)-III,
Bangalore. The first appellate authority considered the requirement of section
28(iv) of the Act and held that waiver of loan could not be treated as a
benefit or perquisite because it was clearly a cash item. The amount would be
includible u/s 28(iv) only if it was a non-cash item and that cash item cannot
be treated as a perquisite. It was further held that what can be assessed u/s
28 are only items of revenue nature and not items of capital nature. Therefore,
waiver of loan cannot partake the character of income to be includible for
assessment. Accordingly, the addition made by the A.O. was deleted.

On further appeal by Revenue, the Tribunal
took the view that writing off of the loan was inseparably connected with the
business of the assessee and therefore this benefit had arisen out of the
business of the assessee. The amount written off was nothing but an incentive
for its business. It was held that the benefit was received by the assessee in
the form of writing off of the liability to the extent of the loan. Therefore,
it could not be said that the assessee received cash benefit. The Tribunal
opined that the A.O. had correctly made the addition considering the waiver of
loan as revenue receipt of the assessee and, therefore, set aside the finding
of the first appellate authority, thereby restoring the order of the A.O.

The appellant contended that to be an income
chargeable to income tax under the head ‘profits and gains of business and
profession’, the value of any benefit or perquisite has to arise from business
or the exercise of a profession and it should not be in cash. He submitted that
this court in Mahindra & Mahindra vs. CIT, 261 ITR 501 has
held that the income which can be taxed u/s 28(iv) must not only be referable
to a benefit or perquisite, but it must be arising from business. Secondly,
section 28(iv) would not apply to benefits in cash or money. The Supreme Court
in CIT vs. Mahindra & Mahindra Ltd., 404 ITR 1 had affirmed
the finding of the Bombay High Court and declared that for applicability of
section 28(iv) of the Act, the income should arise from the business or
profession and that the benefit which is received has to be in some other form
rather than in the shape of money.

On the other hand, the Department contended
that after a loan is waived or written off, it partakes the character of a
subsidy, more particularly an operational subsidy. Emphasis was laid on the
expression ‘operational subsidy’ to contend that the action of the Government
of Karnataka in writing off of the loan provided was an act of providing
operational subsidy to the assessee, thus extending a helping hand to the
assessee to salvage its losses thereby benefiting the assessee to the extent of
the waived loan and it is in this context that he placed reliance on the
decision of Sahney Steel & Press Works Limited (Supra) and
Protos Engineering Company Private Limited vs. CIT, 211 ITR 919.

The Court observed that section 28 deals with profits and gains of
business or profession. It says that the incomes mentioned therein shall be
chargeable to income tax under the head ‘profits and gains of business or
profession’. Clause (iv) refers to the value of any benefit or perquisite
whether or not convertible into money arising from business or the exercise of
a profession. The Court relied on the decision in the case of Mahindra & Mahindra Limited (Supra)
wherein the Supreme Court was examining whether the amount due by Mahindra
& Mahindra to Kaiser Jeep Corporation which was later on waived off by the
lender constituted taxable income of Mahindra & Mahindra or not. The
Supreme Court held as under:

‘On a plain reading of section 28(iv) of
the Income-tax Act, prima facie, it appears that
for the applicability of the said provision, the income which can be taxed
shall arise from the business or profession. Also, in order to invoke the
provisions of section 28(iv) of the Income-tax Act, the benefit which is
received has to be in some other form rather than in the shape of money.’

In the above case, according to the Supreme
Court, for applicability of section 28(iv) of the Act the income which can be taxed has to arise from the business or profession. That apart,
the benefit which is received has to be in some other form rather than in the
shape of money. Therefore, it was held that section 28(iv) was not satisfied
inasmuch as the prime condition of section 28(iv) that any benefit or
perquisite arising from the business or profession shall be in the form of
benefit or perquisite other than in the shape of money, was absent. Therefore,
it was held that the said amount could not be taxed u/s 28(iv) in any circumstances.

The Court observed that the facts and issue
in the present case are identical to those in Mahindra & Mahindra
(Supra). Here also, a loan of Rs. 2.52 cores was given by the Karnataka
Government to the assessee which was subsequently waived off. Therefore, this
amount would be construed to be cash receipt in the hands of the assessee and
cannot be taxed u/s 28(iv). In view of the Supreme Court decision in Mahindra
& Mahindra, the earlier decision of this court in Protos
Engineer Comp. would no longer hold good.

The Court further observed that in the
decision in Sahney Steel & Press Works Limited (Supra) the
issue pertained to subsidy received by the assessee from the Andhra Pradesh
Government. The question was whether or not such subsidy received was taxable
as revenue receipt. In the facts of that case, it was held that such subsidies
were of revenue nature and not of capital nature.

Insofar as the argument of the Department,
that upon waiver of loan the amount covered by such loan would partake the
character of operational subsidy, the Court is unable to accept such a
contention. Conceptually, ‘loan’ and ‘subsidy’ are two different concepts.

In Sahney Steel and Press Works Ltd.
(Supra), the Supreme Court held that the subsidy provided by the Andhra Pradesh Government was basically an endeavour of the state to extend
a helping hand to newly-set up industries to enable them to be viable and
competitive.

Thus, the Court held that there is a
fundamental difference between ‘loan’ and ‘subsidy’ and the two cannot be
equated. While ‘loan’ is a borrowing of money required to the repaid with
interest, ‘subsidy’ being a grant, is not required to be repaid. Such grant is
given as part of a public policy by the state in furtherance of the public
interest. Therefore, even if a ‘loan’ is written off or waived, which may be
for various reasons, it cannot partake the character of a ‘subsidy’.

The substantial question of law therefore is
answered in favour of the assessee by holding that waiver of loan cannot be
brought to tax u/s 28(iv) of the Act. The appeal is accordingly allowed.

BCAJ:
Positive impact of COVID-19 on number of pages

Month

2019

2020

% change

May

112

148

32%

June

124

132

July

136

148

August

116

124

September

140

156

11%

Total

628

708

13%

Do not dwell in the past, do not
dream of the future, concentrate the
mind on the present moment

—
Buddha

God doesn’t dwell in the wooden,
stony or earthen idols.
His abode is in our feelings, our thoughts

—
Chanakya

shailesh.kwebmaker

Charitable institution – Exemption – Sections 2(15) and 11 of ITA, 1961 – Denial of exemption – Activity for profit – Effect of proviso to section 2(15) – Concurrent finding of appellate authorities that the assessee was charitable institution – Event organised to raise money – Amount earned entitled to exemption

2. CIT (Exemption)
vs. United Way of Baroda [2020] 423 ITR 596
(Guj.) Date of order: 25^th
February, 2020 A.Y.: 2014-15

Charitable institution – Exemption –
Sections 2(15) and 11 of ITA, 1961 – Denial of exemption – Activity for profit
– Effect of proviso to section 2(15) – Concurrent finding of appellate
authorities that the assessee was charitable institution – Event organised to
raise money – Amount earned entitled to exemption

The assessee is a
charitable institution registered u/s 12A of the Act. For the A.Y. 2014-15, the assessee filed its return of income declaring total income as Nil after claiming exemption u/s
11. But the A.O. assessed the total income at Rs. 4,53,97,808. He had found
that the assessee had received a total sum of Rs. 5,48,04,054 which included
Rs. 4,37,61,637 as income from organising the event of garba during the
Navratri festival. According to the A.O., the assessee sold passes and gave
food stalls on rent, etc., which constitutes 79.85% of its total income. The
assessee, during the year, had declared gross receipts of Rs. 5,27,40,432 and
showed surplus of Rs. 26,27,243. The assessee thereby claimed Rs. 4,42,59,665
as income from charitable event. The A.O. held that the activities of the
assessee as per the amended provision of section 2(15) could not be said to be
advancement of any other object of general public utility and, therefore, the
assessee was not eligible to claim the benefit under sections 11 and 12,
respectively, more particularly in view of section 13(8) of the Act. The A.O.,
having regard to the gross receipts of Rs. 5,48,04,054, made the addition of
Rs. 58,90,500 on account of the interest on FSF fund and Rs. 1,67,90,118 on
account of anonymous donation.

The Commissioner of
Income-tax (Appeals), allowed the appeal of the assessee, taking the view that
the activities of the assessee could be termed as charitable in nature and the
assessee would be eligible for the benefit under sections 11 and 12. The
Tribunal concurred with the findings of the Commissioner (Appeals) and
dismissed the appeal filed by the Revenue.

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

‘i) Once the activity of the assessee falls within
the ambit of trade, commerce or business, it no longer remains a charitable
activity and the assessee is not entitled to claim any exemption under sections
11 and 12 of the Income-tax Act, 1961. The expression “trade”, “commerce” and
“business” as occurring in the first proviso to section 2(15) must be
read in the context of the intent and purport of section 2(15) and cannot be
interpreted to mean any activity which is carried on in an organised manner.
The purpose and the dominant object for which an institution carries on its
activities is material to determine whether or not it is business.

ii) The object of introducing the first proviso
is to exclude organisations which carry on regular business from the scope of
“charitable purpose”. An activity would be considered “business” if it is
undertaken with a profit motive, but in some cases, this may not be
determinative. Normally, the profit motive test should be satisfied, but in a
given case the activity may be regarded as a business even when the profit
motive cannot be established. In such cases, there should be evidence and
material to show that the activity has continued on sound and recognised
business principles and pursued with reasonable continuity. There should be
facts and other circumstances which justify and show that the activity
undertaken is in fact in the nature of business.

iii) The main object of the
assessee could not be said to be organising the event of garba. The
assessee had been supporting 120 non-government organisations. The assessee was
into health and human services for the purpose of improving the quality of life
in society. All its objects were charitable. The activities like organising the
event of garba, including the sale of tickets and issue of passes, etc.,
cannot be termed as business. The two authorities had taken the view that
profit-making was not the driving force or the objective of the assessee. The
assessee was entitled to exemption under sections 11 and 12.’

shailesh.kwebmaker

Assessment: (i) Effect of electronic proceedings – Possibility of erroneous assessment if transactions and statement of account of assessee not properly understood – A.O. to call for assessee’s explanation in writing to conclude that cash deposits made by assessee post-demonetisation of currency was unusual; (ii) Unexplained money – Sections 69A and 115BBE of ITA, 1961 – Chit company – Tax on income included u/s 69A – Monthly subscriptions / dues – Cash deposits of collection made post-demonetisation of currency by Government – Cash deposits during period in question not in variance with same period during preceding year – Addition of amount as unexplained money – Provisions of section 115BBE cannot be invoked

1. Salem Sree Ramavilas Chit Co. Pvt. Ltd. vs. Dy. CIT [2020] 423 ITR 525
(Mad.) Date of order: 4^th
February, 2020 A.Y.: 2017-18

Assessment: (i) Effect of electronic
proceedings – Possibility of erroneous assessment if transactions and statement
of account of assessee not properly understood – A.O. to call for assessee’s
explanation in writing to conclude that cash deposits made by assessee post-demonetisation
of currency was unusual;

(ii) Unexplained money – Sections 69A and
115BBE of ITA, 1961 – Chit company – Tax on income included u/s 69A – Monthly
subscriptions / dues – Cash deposits of collection made post-demonetisation of
currency by Government – Cash deposits during period in question not in
variance with same period during preceding year – Addition of amount as
unexplained money – Provisions of section 115BBE cannot be invoked

The assessee was in
the chit fund business. For the A.Y. 2017-18, the A.O. added the amounts
received and deposited by it during the period between 9^th November,
2016 and 31^st December, 2016, post-demonetisation of Rs. 500 and Rs.
1,000 notes by the Government on 8^th November, 2016 to the income of
the assessee. The order stated that the assessee did not properly explain the
source and the purpose of cash along with party-wise break-up as required in
the notice issued u/s 142(1) of the Income-tax Act, 1961.

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

‘i) The order making the assessee liable to tax at the maximum marginal
rate of tax by invoking section 115BBE was misplaced. The assessee had prima
facie demonstrated that the assessment proceedings had resulted in
distorted conclusion on the facts that the amount collected by it during the
period was huge and remained unexplained and therefore the amount was liable to
be treated as unaccounted money in the hands of the assessee u/s 69A. The
closing cash on hand during the preceding months of the same year was not at
much variance with the closing cash on hand as on 31^st October,
2016. The demonetisation of Rs. 500 and Rs. 1,000 notes by the Government was
on 8^th November, 2016 and the collection of the assessee between 1^st
November, 2016 and 8^th November, 2016 was not unusual compared to
its collection during the month of November, 2015. The cash deposits made by
the assessee in the year 2016 were not at variance with the cash deposits made
by it in the preceding year. Collection of monthly subscription / dues by the
assessee during the period in question was reasonable as compared to the same
period in the year 2015.

ii) Since the
assessment proceedings no longer involved human interaction and were based on
records alone, such assessment proceedings could lead to erroneous assessment
if officers were not able to understand the transactions and statement of
accounts of the assessee or the nature of the assessee. The assessee was to
explain its stand in writing so that the A.O. could arrive at an objective
conclusion on the facts based on the record.

iii) Under these
circumstances, the impugned order is set aside and the case is remitted back to
the respondent to pass a fresh order within a period of sixty days from the
date of receipt of a copy of this order. The petitioner shall file additional
representation if any by treating the impugned order as the show cause notice
within a period of thirty days from the date of receipt of a copy of this
order. Since the Government of India has done away with the human interaction
during the assessment proceedings, it is expected that the petitioner will
clearly explain its stand in writing so that the respondent-A.O. can come to an
objective conclusion on facts based on the records alone. It is made clear that
the respondent will have to come to an independent conclusion on facts
uninfluenced by any of the observations contained herein.’

shailesh.kwebmaker

Section 40(a)(ia) r/w section 195 – Payments to overseas group companies considered as reimbursement of expense incurred, not liable to deduction of tax at source

3. ACIT vs. APCO Worldwide (India) Pvt. Ltd. (Delhi) Members: Sushma Chowla (V.P.) and Anil Chaturvedi (A.M.) ITA No. 5614/Del./2017 A.Y.: 2013-14 Date of order: 9^th September, 2020 Counsel for Revenue / Assessee: Rakhi Vimal / Ajay Vohra and Gaurav
Jain

Section
40(a)(ia) r/w section 195 – Payments to overseas group companies considered as
reimbursement of expense incurred, not liable to deduction of tax at source

FACTS

The issue was
with respect to disallowance of expenses u/s 40(a)(ia). The assessee had made
payments to its overseas group companies towards recoupment of actual cost
incurred by them on behalf of the assessee for corporate administration,
finance support, information technology support, etc., without deduction of tax
u/s 195. According to the assessee, the payments made cannot be considered as
income of the recipients, as no profit element was involved. However, according
to the A.O., the provisions of section 40(a)(ia) were attracted. He accordingly
disallowed the payment of Rs. 1.49 crores so made. On appeal, the CIT(A)
deleted the addition by holding that the assessee was not required to deduct
tax at source on the reimbursement of the expenses made to overseas entities.

HELD

The Tribunal
noted that the CIT(A) had found that the payments made were on cost-to-cost
basis. Further, the coordinate bench of the Tribunal while deciding an
identical issue in the assessee’s own case in A.Ys. 2010-11, 2011-12 and
2012-13, had held that the provisions of section 195 were not attracted on the
amounts paid by the assessee to its overseas group companies as it was mere
reimbursement. Accordingly, it was held that no disallowance u/s 40(a)(ia) was
required to be made.

shailesh.kwebmaker

Section 199(3) and Rule 37BA – Credit for TDS allowed in the year of deduction even when related revenue was booked in subsequent year(s)

2. HCL Comnet Limited vs. DCIT (Delhi) Members: O.P. Kant (A.M.) and Kuldip Singh (J.M.) ITA No. 1113/Del./2017 A.Y.: 2012-13 Date of order: 4^th September, 2020 Counsel for Assessee / Revenue: Ajay Vohra, Aditya Vohra and Arpit
Goyal / S.N. Meena

Section
199(3) and Rule 37BA – Credit for TDS allowed in the year of deduction even
when related revenue was booked in subsequent year(s)

FACTS

The assessee
was in the business of selling networking equipment and installation and
provision of after-sales services. In respect of after-sales services, the
customers would make payment which covered
a period of three to four years. The assessee would recognise revenue
from such services on a year-to-year basis. However, the customer would deduct
TDS on the entire amount at the time of payment as per the provisions of the
Act. Relying on the decision of the Visakhapatnam bench of the Tribunal in the
case of Asstt. CIT vs. Peddu Srinivasa Rao (ITA No. 324/Vizag./2009, CO
No. 68/Vizag./2009, dated 3^rd March, 2011), the assessee
claimed that it was eligible to claim the entire TDS in the year of deduction
(even when the related revenue was booked in subsequent financial years).
Reliance was also placed on the decision of the Mumbai Tribunal in the case of Toyo Engineering India Limited vs. JCIT (5 SOT 616)
and of the Delhi Tribunal in the case of HCL Comnet Systems and Services
Ltd. vs. DCIT (ITA No. 3221/Del./2017 order dated 31^st December,
2019). However, the A.O. rejected the claim of the assessee.

HELD

The Tribunal,
following the order passed by the coordinate bench of the Tribunal in the case
of HCL
Comnet Systems and Services Ltd., held that the TDS credit is to be
granted irrespective of the fact that related revenue is booked in subsequent financial years. Accordingly, the assessee’s
claim for credit of the TDS in the year of deduction was allowed.

shailesh.kwebmaker

Section 80IC – Income arising from scrap sales is part of business income eligible for deduction u/s 80IC

1. Isolloyd Engineering Technologies Limited vs. DCIT (Delhi) Members: O.P. Kant (A.M.) and Kuldip Singh (J.M.) ITA No. 3936/Del./2017 A.Y.: 2012-13 Date of order: 4^th September, 2020 Counsel for Assessee / Revenue: None / S.N. Meena and M. Barnwal

Section 80IC
– Income arising from scrap sales is part of business income eligible for
deduction u/s 80IC

FACTS

The assessee
had three manufacturing units. It was entitled to claim deduction u/s 80IC @30%
on the first two units and @100% on the third one. During the year under
appeal, the assessee’s claim for deduction u/s 80IC included the sum of Rs.
52.67 lakhs qua the amount of scrap sales aggregating to Rs. 80.13
lakhs. According to the A.O., the same was not related to manufacturing
activity, hence it was disallowed. On appeal, the CIT(A) restricted the
addition to Rs.7.08 lakhs by allowing the deduction to the extent of Rs. 45.59
lakhs claimed u/s 80IC.

HELD

The Tribunal
noted that the scrap consisted of empty drums, off-cuts, trims, coils,
leftovers, packing material, ‘gatta’, scrap rolls, etc., which were generated
in the course of the business. According to it, it was settled principle of law
that scrap generated in the business is part and parcel of the income derived
from the business and as such forms part of the business profit, as held by the
Delhi High Court in the case of CIT vs. Sadu Forgings Ltd. (336 ITR 444).
It further noted that the CIT(A) had duly obtained and analysed unit-wise
details of scrap sold in the year under appeal and found the claim of the
assessee prima facie plausible. However, without giving any reason, the
sum of Rs. 7.08 lakhs was disallowed. According to the Tribunal, the CIT(A) had
erred in disallowing the amount of Rs. 7.08 lakhs out of the total claim of Rs.
52.67 lakhs made u/s 80IC. Accordingly, it allowed the appeal of the assessee.

shailesh.kwebmaker

Section 244A – Interest is payable on refund arising out of payment of self-assessment tax even though refund is less than ten per cent of tax determined

4. [2020] 119 taxmann.com 40 (Del.)(Trib.) Maruti Suzuki India Ltd. vs. CIT ITA Nos. 2553, 2641 (Delhi) of 2013 &
others A.Ys.: 1999-00 to 1994-95 Date of order: 31^st August, 2020

Section 244A – Interest is payable on
refund arising out of payment of self-assessment tax even though refund is less
than ten per cent of tax determined

FACTS

The assessee
claimed refund of Rs. 201,37,93,163 comprising of advance tax, TDS and
self-assessment tax of Rs. 14,59,79,228 and Rs. 186,78,13,935, the tax paid on
different dates. The A.O. did not allow interest u/s 244A(1)(a) on the amount
of Rs. 14.59 crores as the refund was less than 10% of the tax determined u/s
254 r/w/s 143(3).

Aggrieved, the
assessee preferred an appeal to the CIT(A) who confirmed the order on the
ground that to give effect to the provisions of section 244A(3), the assessee
had to mandatorily cross the limitations imposed u/s 244A(1)(a).

Aggrieved, the
assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that the CIT(A) treated the entire amount of Rs.
14.60 crores as prepaid taxes for the purpose of section 244A(1)(a). This, according to the Tribunal, was where the
CIT(A) considered / read the provisions wrong. The Tribunal held that the
prepaid taxes consist of TDS and advance tax. The provisions of self-assessment
tax are governed by section 140A which is not covered by the provisions of
section 244A(1)(a). Self-assessment tax which is payable on the basis of return
does not constitute part of advance tax. For the purpose of embargo of 10% of
tax determined in accordance with the provisions of section 244A(1)(a), it is
clear from the provisions of the section that self-assessment tax does not form
part of the embargo as self-assessment tax falls under clause (b) of section
244A(1). The proviso to clause (a) of sub-section (1) of section 244A is
applicable and has to be considered for the computational purpose of interest
computable for the refund payable u/s 244A(1)(a).

As regards the
question whether or not interest is payable on self-assessment tax paid, the
Tribunal observed that it is trite law that whenever the assessee is entitled
to refund, there is a statutory liability on the Revenue to pay the interest on
such refund on general principles to pay interest on sums wrongfully retained.

Section 244A does
not deny payment of interest in case of refund of amount paid u/s 140A. On the
contrary, clause (b) being a residuary clause, necessarily includes payment
made u/s 140A. Since there is no proviso attached to sub-clause (b), the
embargo of 10% is not applicable for calculation of interest for the refund
arising out of payment of self-assessment tax.

The Tribunal held
that with regard to the self-assessment tax paid, the assessee is eligible for
interest on the total amount of refund in accordance with the provisions of
section 244A(1)(b). This ground of appeal was allowed.

shailesh.kwebmaker

Sections 250 and 271AAA – Ex parte dismissal of appeal by CIT(A), without considering the material on record on the ground that the written submissions were not signed by the assessee, is contrary to the provisions of sub-section (6) of section 250

3. 118 taxmann.com 223 (Raj.)(Trib.) Keshavlal Devkaranbhai Patel vs. ACIT ITA No. 124 /Rajkot/2017 A.Y.: 2012-13 Date of order: 28^th July, 2020

Sections 250 and 271AAA – Ex parte
dismissal of appeal by CIT(A), without considering the material on record on
the ground that the written submissions were not signed by the assessee, is
contrary to the provisions of sub-section (6) of section 250

FACTS

Aggrieved by the
order levying penalty u/s 271AAA, the assessee preferred an appeal to the
CIT(A). The assessee had filed his explanation before the A.O. and also before
the CIT(A). However, the submissions filed before the CIT(A) were not signed by
the assessee.

In view of this,
the CIT(A) dismissed the appeal by recording that the assessee was not
interested in pursuing the appeal.

Aggrieved, the
assessee preferred an appeal to the Tribunal.

HELD

The Tribunal found
the order of the CIT(A) to be very cryptic and not having any discussion on the
material already available on record before him. The Tribunal observed that:

(i) there is no valid and justifiable reason
given by the appellate authority in his order while dismissing the claim of the
assessee;

(ii) the CIT(A) has recorded in his order that the
assessee has filed written submissions in the office on 29^th August,
2017 but without signature, hence the same were not considered by the CIT(A);
and

(iii) the CIT(A) dismissed the appeal for want of
prosecution even when the written submission was on record which did not bear
the signature of the assessee.

The Tribunal held
that the CIT(A) ought to have adjourned the matter and passed a further
direction to file fresh written submissions, duly signed. It is a basic
principle that justice should not only be done, but it must also be seen to be
done. In the absence of that, the Tribunal held, the order impugned is not in
consonance with the spirit and object of sub-section (6) of section 250.

The Tribunal set
aside the issue to the file of the CIT(A) with a direction to adjudicate it
afresh after giving the assessee an opportunity of being heard and to pass a
speaking order thereon keeping in mind, inter alia, the mandate of the
provisions of section 250(6) in order to render true and effective justice.

shailesh.kwebmaker

Section 50C – Provisions of section 50C are not applicable to introduction of development rights as capital contribution in an AOP of which assessee is a member

2. 119 taxmann.com 186 (Mum.)(Trib.) Network Construction Company vs. ACIT ITA No. 2279/Mum./2017 A.Y.: 2012-13 Date of order: 11^th August, 2020

Section 50C – Provisions of section 50C are
not applicable to introduction of development rights as capital contribution in
an AOP of which assessee is a member

FACTS

The assessee firm
acquired development rights in respect of seven buildings of which the assessee
firm developed and sold four on its own and disclosed the profit earned as
business profit in its return of income. The development rights in respect of
the remaining three buildings were shown as investments in the balance sheet as
at 31^st March, 2010.

As per the joint
venture agreement dated 1^st July, 2010, the assessee contributed
development rights in respect of three buildings as ‘capital contribution’ in
an AOP for an agreed consideration of Rs. 5 crores. The assessee contended that
the capital gains were to be computed in accordance with the provisions of
section 45(3).

The A.O. treated
the introduction of the development rights as a transfer and computed capital
gains by applying the provisions of section 50C by adopting Rs. 10,10,47,000,
being stamp duty value of these rights, as the full value of consideration.

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

The assessee
preferred an appeal to the Tribunal.

HELD

The Tribunal
observed that section 45(3) is a charging provision having two limbs joined by
the conjunction ‘AND’. The first limb is a charging provision which levies
capital gains tax on gains arising from the contribution of a capital asset in the
AOP by a member, and the second limb is an essential deeming fiction for
determining the value of consideration without which the charging provision
would fail. The Tribunal also observed that the provisions of section 50C are
also a deeming fiction which deems only the value of consideration for the
purpose of calculating capital gains in the transfer of a capital asset from
one person to another. It held that the provisions of section 50C are not
applicable in the present case and that the provisions of section 45(3) will be
applied.

The Tribunal
reversed the orders of the A.O. and the CIT(A) and allowed this ground of
appeal filed by the assessee.

shailesh.kwebmaker

Section 44AD r/w sections 44AB and 144 – Assessing Officer can resort to estimation of income under the provisions of section 44AD only after rejecting the books of accounts of the assessee, by best judgment assessment u/s 144

1. [118 taxmann.com
347] Saykul Islam vs.
ITO ITA No.
64/Ahd./2018 A.Y.: 2014-15 Date of order: 31^st
July, 2020

Section 44AD r/w sections
44AB and 144 – Assessing Officer can resort to estimation of income under the
provisions of section 44AD only after rejecting the books of accounts of the
assessee, by best judgment assessment u/s 144

FACTS

The assessee is an
individual trading in hardware goods. His business turnover was in excess of
Rs. 1 crore, but he had declared profit at 0.99% of the turnover in his tax
return. The information was provided by the assessee in his return of income
reflecting maintenance of books of accounts, but not audited as required under
the provisions of section 44AB. The A.O. was of the view that as per the
provisions of section 44AD, an assessee may claim lower profits and gains than
the profits and gains specified in sub-section (1) of section 44AD provided
that the assessee keeps and maintains such books of accounts and other
documents as required under sub-section (2) of section 44AA and gets his
accounts audited and furnishes a report of such audit as required u/s 44AB. The
assessee submitted that the net profit percentage was very low in his business
and requested the officer to take the net profit percentage @3% of the
turnover.

The A.O. rejected
this contention and estimated the net profit at 8% of the turnover. On appeal
to the CIT(A), he reduced the estimated profit on turnover from 8% to 5%.
Aggrieved by the order of the CIT(A), the assessee filed an appeal with the
Tribunal.

HELD

The assessee had
produced all books of accounts, bills, vouchers and other documents; however, without
pointing out any mistake or error in the books of accounts, the A.O. made an
addition at 8%. Moreover, the books of accounts were not rejected. The Tribunal
observed that the A.O. could resort to estimation of net profits only after
rejecting the books of accounts u/s 145(3) and thereafter making best judgment
assessment u/s 144. Instead, he estimated net profits only on the basis of
suspicion that the assessee might be inflating expenses and showing a lower net
profit ratio. On the factual position of the case, the Tribunal directed the
A.O. to estimate the income at 2.5% of the turnover.

The appeal of the
assessee was partly allowed.

shailesh.kwebmaker

TAXATION OF RECEIPT BY RETIRING PARTNER

ISSUE FOR CONSIDERATION

On retirement of a
partner from a partnership firm, at times the outgoing partner may be paid an amount
which is in excess of his capital, current account and loan balances with the
firm. Such amount paid to the outgoing partner is often determined on the basis
of an informal valuation of the net assets of the firm, or of the business of
the firm.

Taxation of such
receipts by a partner on retirement from a partnership firm has been an issue
which has been the subject matter of disputes for several decades. As far back
as in September, 1979, the Supreme Court in the case of Malabar Fisheries
Co. vs. CIT 120 ITR 49, held that dissolution of a firm did not amount
to extinguishment of rights in partnership assets and was thus not a ‘transfer’
within the meaning of section 2(47). In 1987, the Supreme Court, in a short
decision in Addl. CIT vs. Mohanbhai Pamabhai 165 ITR 166,
affirmed the view taken by the Gujarat High Court in 1973 in the case of CIT
vs. Mohanbhai Pamabhai 91 ITR 393. In that case, the Gujarat High Court
had held that when a partner retires from a partnership and the amount of his
share in the net partnership assets after deduction of liabilities and prior
charges is determined on taking accounts on footing of notional sale of
partnership assets and given to him, what he receives is his share in the
partnership and not any consideration for transfer of his interest in
partnership to the continuing partners. Therefore, charge of capital gains tax
would not apply on such retirement.

The law is amended
by the Finance Act, 1987 with effect from Assessment Year 1988-89 by insertion
of section 45(4) and simultaneous deletion of section 47(ii). Section 47(ii)
earlier provided that distribution of assets on dissolution of a firm would not
be regarded as a transfer. Section 45(4) now provides as under:

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

Section 45(4), with
its introduction, so far as the firm is concerned, provides for taxing the firm
on distribution of its assets on dissolution or otherwise. However, even
subsequent to these amendments, the taxability of the excess amounts received
by the partner on retirement from the firm, in his hands, has continued to be a
matter of dispute before the Tribunals and the High Courts. While the Pune,
Hyderabad, Mumbai and Bangalore benches have taken the view that such excess
amounts are chargeable to tax as capital gains in the hands of the partner, the
Mumbai, Chennai, Bangalore and Hyderabad benches have taken the view that such
amounts are not taxable in the hands of the retiring partner. Further, while
the Bombay, Andhra Pradesh and Madras High Courts have taken the view that such
amount is not taxable in the hands of the partner, the Delhi High Court has
taken the view that it is taxable in the hands of the partner as capital gains.

THE HEMLATA S. SHETTY CASE

The issue came up
before the Mumbai bench of the Tribunal in the case of Hemlata S. Shetty
vs. ACIT [ITA Nos. 1514/Mum/2010 and 6513/Mum/2011 dated 1st December, 2015].

In this case,
relating to A.Y. 2006-07, the assessee was a partner in a partnership firm of
D.S. Corporation where she had a 20% profit share. The partnership firm had
acquired a plot of land in September, 2005 for Rs. 6.50 crores. At that time,
the original capital contributions of the partners was Rs. 3.20 crores, the
partners being the assessee’s husband (Sudhakar M. Shetty) and another person.
The assessee became a partner in the partnership firm on 16^th
September, 2005, contributing a capital of Rs. 52.50 lakhs. On 26^th
September, 2005 three more partners were admitted to the partnership firm. Most
of the tenants occupying the land were vacated by paying them compensation, and
the Ministry of Tourism’s approval was received for setting up a five-star
hotel on the plot of land.

On 27^th
March, 2006 the assessee and her husband retired from the partnership firm, at
which point of time the land was revalued at Rs. 193.91 crores and the surplus
on revaluation was credited to the partners’ capital accounts. The assessee and
her husband each received an amount of Rs. 30.88 crores on their retirement
from the partnership firm, over and above their capital account balances.

The A.O. noted that
the revaluation of land resulted in a notional profit of Rs. 154.40 crores for
the firm and 20% share therein of the assessee and her husband at Rs. 30.88
crores each was credited to their accounts. No tax was paid on such revalued
profits on the plea that those amounts were exempt u/s 10(2A). The A.O. held
that the excess amount received on retirement from the partnership firm was
liable to tax as short-term capital gains as there was a transfer within the
meaning of section 2(47) on retirement of the partner.

The Commissioner
(Appeals), on appeal, confirmed the order of the A.O.

Before the
Tribunal, on behalf of the assessee, reliance was placed on a decision of the
Bombay High Court in the case of Prashant S. Joshi vs. ITO 324 ITR 154,
where the Bombay High Court had quashed the reassessment proceedings initiated
to tax such excess amount received on retirement of a partner from the
partnership firm, on the ground that the amount was a capital receipt not
chargeable to tax and the reopening of the case was not maintainable.

It was argued on
behalf of the Department that the Tribunal had decided the issue against the
assessee in the case of the assessee’s husband, Sudhakar M. Shetty vs.
ACIT 130 ITD 197, on 9^th September, 2010. In that case, the
Tribunal had referred to the observations of the Bombay High Court in the case
of CIT vs. Tribhuvandas G. Patel 115 ITR 95, where the Court had
held that there were two modes of retirement of a partner from a partnership
firm; in one case, a retiring partner, while going out, might assign his
interest by a deed; and in the other case, he might, instead of assigning his
interest, take the amount due to him from the firm and give a receipt for the
money and acknowledge that he had no more claim on his co-partners. In that
case, the Bombay High Court held that where, instead of quantifying his share
by taking accounts on the footing of a notional sale, the parties agreed to pay
a lump sum in consideration of the retiring partner assigning or relinquishing
his share or right in the partnership and its assets in favour of the
continuing partners, the transaction would amount to transfer within the
meaning of section 2(47). This view was followed by the Bombay High Court in
subsequent decisions in the cases of CIT vs. H.R. Aslot 115 ITR 255
and N.A.Mody vs. CIT 162 ITR 420, and the Delhi High Court in the
case of Bishan Lal Kanodia vs. CIT 257 ITR 449.

In the case of Sudhakar
Shetty (Supra), the Tribunal observed that in deciding the case of Prashant
S. Joshi (Supra), the Bombay High Court had not considered its earlier
decisions in the cases of N.A. Mody (Supra) and H.R. Aslot
(Supra) and the said decision was rendered by the Court in the context
of the validity of the notice u/s 148, and therefore the ratio of the
decision in that case did not apply to the facts of the case before it in the Sudhakar
Shetty case.

On behalf of the
assessee, Hemlata Shetty, it was pointed out to the Tribunal that, after the
Tribunal’s decision in Sudhakar Shetty’s case, the Department had
reopened the assessment of the firm where the assessee and her husband were
partners and assessed the notional profits as income in the hands of the firm
u/s 45(4). It was argued that the Department had realised the mistake that it
could not have assessed the partners on account of receipt on retirement u/s
45(4). It was therefore pointed out that due to subsequent developments, the
facts and circumstances had changed from those prevalent when the Tribunal had
decided the case of Sudhakar Shetty.

It was further
argued on behalf of the assessee that after the judgment in the Sudhakar
Shetty case on 9^thSeptember, 2010, a similar matter had
been decided by the Mumbai bench of the Tribunal in the case of R.F.
Nangrani HUF vs. DCIT [ITA No. 6124/Mum/2012] on 10^th
December, 2014, where the decision in Sudhakar Shetty’s case was
also referred to. The issue in that case was similar to the issue in the case
of Hemlata Shetty. In R.F. Nangrani HUF’s case, the
Tribunal had followed the decision of the Supreme Court in the case of CIT
vs. R. Lingamallu Rajkumar 247 ITR 801, where it had held that the
amount received on retirement by a partner was not liable to capital gains tax,
and the Tribunal in that case had also considered the decision of the Hyderabad
bench in ACIT vs. N. Prasad 153 ITD 257, which had taken a
similar view. It was argued on behalf of the assessee that when there were
conflicting decisions delivered by a bench of equal strength, the later
judgment should be followed, especially when the earlier judgment was referred
to while deciding the matter in the later judgment.

The Tribunal noted
that in the case of CIT vs. Riyaz A. Shaikh 221 Taxman 118, the
Bombay High Court referred to the fact that the Tribunal in that case had
followed the Bombay High Court decision in Prashant S. Joshi’s
case, while noting that Tribuvandas G. Patel’s case, which had
been followed in N.A. Mody’s case, had been reversed by the
Supreme Court. The Bombay High Court further noted in Riyaz Shaikh’s
case that Prashant Joshi’s case had also noted this fact of
reversal, and that it had followed the decision of the Supreme Court in R.
Lingamallu Rajkumar’s case 247 ITR 801.

The Tribunal
therefore followed the decision of the jurisdictional High Court in Riyaz
Shaikh’s case and held that the amount received by the assessee on
retirement from the partnership firm was not taxable under the head ‘Capital
Gains’.

This decision of
the Tribunal in Hemlata Shetty’s case has been approved by the
Bombay High Court in Principal CIT vs. Hemlata S. Shetty 262 Taxman 324.
R.F. Nangrani HUF’s Tribunal decision has also been approved by the
Bombay High Court in Principal CIT vs. R.F. Nangrani HUF 93 taxmann.com
302. A similar view has also been taken by the Andhra Pradesh High
Court in the case of CIT vs. P.H. Patel 171 ITR 128, though this
related to A.Y. 1973-74, a period prior to the deletion of clause (ii) of
section 47. Further, in the case of CIT vs. Legal Representative of N.
Paliniappa Goundar (Decd.) 143 ITR 343, the Madras High Court also
accepted the Gujarat High Court’s view in the case of Mohanbhai Pamabhai
(Supra) and disagreed with the view of the Bombay High Court in the
case of Tribhuvandas G. Patel (Supra), holding that excess amount
received by a partner on retirement was not taxable.

A similar view has
also been taken by the Mumbai bench of the Tribunal in the case of James
P. D’Silva vs. DCIT 175 ITD 533, following the Bombay High Court
decisions in Prashant S. Joshi and Riyaz A. Shaikh’s
cases and by the Bangalore bench in the case of Prabhuraj B. Appa, 6 SOT
419 and by the Chennai bench in the case of P. Sivakumar (HUF),
63 SOT 91.

SAVITRI KADUR’S CASE

The issue again
came up before the Bangalore bench of the Tribunal recently in the case of Savitri
Kadur vs. DCIT 177 ITD 259.

In this case, the
assessee and another person had formed a partnership with effect from 1^st
April, 2004. Yet another person was admitted as a partner with effect from 1^st
April, 2007, and simultaneously the assessee retired from the firm with effect
from that date. The assessee had a capital balance of Rs. 1.64 crores as on 1^st
April, 2006 and her share in the profit for the year of Rs. 46 lakhs was
credited to her account. The land and building held by the firm was revalued
and her share of Rs. 62.51 lakhs in the surplus on revaluation was credited to
her account. Interest on capital of Rs. 18.12 lakhs was also credited to her
account which, after deducting drawings, showed a balance of Rs. 2.78 crores as
on the date of her retirement. The assessee was paid a sum of Rs. 3.40 crores
on her retirement. The assessee had invested an amount of Rs. 50 lakhs in
capital gains bonds.

The difference of
Rs. 62 lakhs between Rs. 3.40 crores and Rs. 2.78 crores was taxed as capital
gains by the A.O. in her hands. According to the A.O., such amount was nothing
but a payment for her giving up her right in the existing goodwill of the firm,
that there was a transfer u/s 2(47) on her retirement, which was therefore
liable to capital gains tax.

The Commissioner
(Appeals) upheld the order of the A.O., placing reliance on the decision of the
Bombay High Court in the case of CIT vs. A.N. Naik Associates 265 ITR 346,
where the High Court had held that there was a charge to capital gains tax u/s
45(4) when the assets of the partnership were distributed even on retirement of
a partner, and the scope of section 45(4) was not restricted to the case of
dissolution of the firm alone.

On appeal, the
Tribunal observed that it was necessary to appreciate how the act of the
formation, introduction, retirement and dissolution of partnership was used by
assessees as a device to evade tax on capital gains; first by converting an
asset held individually into an asset of the firm and later on retiring from
the firm; and likewise by conversion of capital assets of the firm into assets
of the partners by effecting dissolution or retirement. In that direction, the
Tribunal analysed the background and tax implications behind conversion of
individual assets into assets of partnership, distribution of assets on
dissolution, reconstitution of the firm with the firm continuing whereby a
partner retired and the retiring partner was allotted a capital asset of the
firm for relinquishing all his rights and interests in the partnership firm as
partner, and continuation of the firm after reconstitution whereby a partner
retired and the retiring partner was paid a consideration for relinquishing all
his rights and interests in the partnership firm as partner in any of the
following manner:

(a) on the basis of
amount lying in his / her capital account, or

(b) on the basis of
amount lying in his / her capital account plus amount over and above the sum
lying in his / her capital account, or

The Tribunal
thereafter held that the case of the appellant, on the basis of the facts
before it, was a situation falling under (b) above, meaning that the assessee
on her retirement from the firm was paid on the basis of the amount lying in
her capital account plus an amount over and above the sum lying in her capital
account.

The Tribunal
observed that:

(i) there was no
dispute that there could not be any incidence of tax in situation (a) above on
account of the Supreme Court decision in the case of Additional CIT vs.
Mohanbhai Pamabhai (Supra);

(ii) so far as
situations (b) and (c) were concerned, they had been the subject matter of
consideration in several cases, and there had been conflict of opinion between
courts on whether there would be incidence of tax or not;

(iii) the fact that
there was revaluation of assets of the firm with a resultant enhancement of the
capital accounts of the partners was not relevant.

The Tribunal
further observed that:

(1) the share or
interest of a partner in the partnership and its assets would be property and,
therefore, a capital asset within the meaning of the aforesaid definition. To
this extent, there could be no doubt;

(2) the question
was whether it could be said that there was a transfer of capital asset by the
retiring partner in favour of the firm and its continuing partners so as to
attract a charge u/s 45;

(3) the share or
interest of a partner in the partnership and its assets would be property and,
therefore, a capital asset within the meaning of the aforesaid definition. The
next question was whether it could be said that there was a transfer of capital
asset by the retiring partner in favour of the firm and its continuing partners
so as to attract a charge u/s 45;

(4) the question
whether there would be incidence of tax on capital gains on retirement of a
partner from the partnership firm would depend upon the mode in which
retirement was effected. Therefore, taxability in such a situation would depend
on several factors like the intention, as was evidenced by the various clauses
of the instrument evincing retirement or dissolution, the manner in which the
accounts had been settled and whether the same included any amount in excess of
the share of the partner on the revaluation of assets and other relevant
factors which would throw light on the entire scheme of retirement /
reconstitution;

(5) for the
purposes of computation, what was to be seen was the credit in the capital
account of the partner alone.

The Tribunal,
referring to the observations of the Bombay High Court in the case of Tribhuvandas
G. Patel (Supra), held that the terms of the deed of retirement had to
be seen as to whether they constituted a release of any assets of the firm in
favour of the continuing partners; where on retirement an account was taken and
the partner was paid the amount standing to the credit of his capital account,
there would be no transfer and no tax was exigible; however, where the partner
was paid a lump sum consideration for transferring or releasing his interest in
the partnership’s assets to the continuing partners, there would be a transfer,
liable to tax. The Tribunal noted that the Supreme Court, in appeal in that
case, had held that there was no incidence of tax on capital gains on the
transaction only because of the provisions of section 47(ii), which exempted
the distribution of capital assets on dissolution, even though the facts in the
case in appeal before the Supreme Court were concerning the case of a retiring
partner giving up his rights over the properties of the firm.

The Tribunal
referred to the cases of the Pune bench in the case of Shevantibhai C.
Mehta 4 SOT 94 and the Mumbai bench of the Tribunal in the case of Sudhakar
M. Shetty (Supra) and held that the facts in the case before it were
almost identical to the facts in the case of Sudhakar M. Shetty.

It distinguished
the other cases cited before it on behalf of the assessee on the grounds that
some of those cases related to a period prior to the amendment of the law made
effective from A.Y. 1988-89, or were cases where the issue involved was whether
the reassessment proceedings were valid, or were cases involving the
partnership firm and not the partner, or were cases where the retiring partner
was paid a share in the goodwill of the firm. In short, the Tribunal held that
those cases were not applicable to the facts of the assessee’s case.

The Tribunal
finally upheld the action of the A.O. in taxing the excess paid to the retiring
partner over and above the sum standing to the credit of her capital account as
capital gains. However, it modified the computation of the capital gains by
treating the amount lying to the credit of the partner’s account, including the
amount credited towards goodwill in the partner’s capital account, as a cost
and allowing the deduction thereof. It also held the gains to be long-term
capital gains and allowed exemption u/s 54EC to the extent of investment in
capital gains bonds.

A similar view has
been taken by the other benches of the Tribunal in the cases of Shevantibhai
C. Mehta (Supra), Sudhakar M. Shetty (Supra) and Smt. Girija
Reddy vs. ITO 52 SOT 113 (Hyd)(URO). The Delhi High Court also, in a
case relating to A.Y. 1975-76 (before the amendment), Bishan Lal Kanodia
vs. CIT 257 ITR 449, followed the decision of the Bombay High Court in Tribhuvandas
G. Patel (Supra) to hold that the receipt on retirement was liable to
capital gains tax.

OBSERVATIONS

To understand the
root of the controversy, one would have to go back to the decision of the
Gujarat High Court in the case of CIT vs. Mohanbhai Pamabhai 91 ITR 393,
which was affirmed by the Supreme Court, 165 ITR 166, holding
that there was no transfer of capital assets by a partner on his retirement. In
that case, on retirement, the assessee received a certain amount in respect of
his share in the partnership which was worked out by taking the proportionate
value of a share in the partnership assets, after deduction of liabilities and
prior charges, including an amount representing his proportionate share in the
value of the goodwill. It was this proportionate share in the goodwill which
was sought to be taxed as capital gains by the authorities.

In that case, the
Gujarat High Court held that:

(i) what the
retiring partner was entitled to get was not merely a share in the partnership
assets, he has also to bear his share of the debts and liabilities, and it was
only his share in the net partnership assets, after satisfying the debts and
liabilities, that he was entitled to get on retirement;

(ii) Since it was only in the surplus that the
retiring partner was entitled to claim a share, it was not possible to predicate
that a particular amount was received by the retiring partner in respect of his
share in a particular partnership asset, or that a particular amount
represented a consideration received by the retiring partner for extinguishment
of his interest in a particular partnership asset;

(iii) when the
assessee retired from the firm, there was no transfer of interest of the
assessee in the goodwill or any other asset of the firm;

(iv) no
consideration received or accrued as a result of such transfer of such interest
even if there was a transfer; and

(v) no part of the amount received by the assessee
was assessable to capital gains tax u/s 45.

The Gujarat High
Court relied on its earlier decision in the case of CIT vs. R.M. Amin 82
ITR 194, for the proposition that where transfer consisted in
extinguishment of a right in a capital asset, unless there was an element of
consideration for such extinguishment, the transfer would not be liable to
capital gains tax.

It may be noted
that in Mohanbhai Pamabhai, the document pursuant to which
retirement was effected stated that the amount had been decided as payable to
the retiring partners in lieu of all their rights, interest and share in
the partnership firm, and each of them voluntarily gave up their right, title
and interest in the partnership firm. The goodwill had not been recorded or
credited to the capital accounts of the partners, and therefore it was a (b)
type of situation classified by the Bangalore Tribunal. The Bangalore bench of
the Tribunal therefore does not seem to have been justified in stating that
only cases where only balance standing to credit of the capital account is paid
to the retiring partner [situation (a) cases] are not transfers as was held by
the Supreme Court in Mohanbhai Pamabhai. In other words, the
facts of the Mohanbhai Pamabhai case classified with situation
(b) and the Tribunal overlooked this fact; had it done so by appreciating that
the facts in the case before the Supreme Court were akin to situation (b), the
decision could have been different.

The Supreme Court
approved the Gujarat High Court decision on the footing that there was no
transfer within the meaning of section 2(47) on retirement of a partner from a
partnership firm. By implication, the Supreme Court held that such cases of
retirement, where a partner was paid a sum over and above the balance due as
per the books of accounts, was not chargeable to capital gains tax.
Interestingly, in deciding the case the Supreme Court, while holding that the
receipts in question were not taxable, did not distinguish between different
modes of retirement, as some of the Tribunals and High Courts have sought to
do, for taxing some and exempting others.

The Tribhuvandas
G. Patel case (Supra) was one where the retiring partner was paid his
share in the goodwill of the firm and was also paid his share of appreciation
in the assets of the firm. Here, relying on the Commentary of Lindley on
Partnership, the Bombay High Court observed as under:

‘Further, under
section 32, which occurs in Chapter V, retirement of a partner may take any
form as may be agreed upon between the partners and can occur in three
situations contemplated by clauses (a), (b) and (c) of sub-section (1) of
section 32. It may be that upon retirement of a partner his share in the net
partnership assets after deduction of liabilities and prior charges may be
determined on taking accounts on the footing of notional sale of partnership
assets and be paid to him, but the determination and payment of his share may
not invariably be done in that manner and it is quite conceivable that, without
taking accounts on the footing of notional sale, by mutual agreement, a
retiring partner may receive an agreed lump sum for going out as and by way of
consideration for transferring or releasing or assigning or relinquishing his
interest in the partnership assets to the continuing partners and if the
retirement takes this form and the deed in that behalf is executed, it will be
difficult to say that there would be no element of “transfer”
involved in the transaction. In our view, it will depend upon the manner in
which the retirement takes place. What usually happens when a partner retires
from a firm has been clearly stated in the following statement of law, which
occurs in Lindley on Partnership, 13^thedition, at page 474:

“24.
Assignment of share, etc., by retiring partner.—When a partner retires or dies,
and he or his executors are paid what is due in respect of his share, it is
customary for him or them formally to assign and release his interest in the
partnership, and for the continuing or surviving partners to take upon
themselves the payment of the outstanding debts of the firm, and to indemnify
their late partner or his estate from all such debts, and it is useful for the
partnership agreement specifically so to provide.”

At page 475,
under the sub-heading “stamp on assignment by outgoing partner”, the
following statement of law occurs:

“An
assignment by a partner of his share and interest in the firm to his
co-partners, in consideration of the payment by them of what is due to him from
the firm, is regarded as a sale of property within the meaning of the Stamp
Acts; and consequently the deed of assignment, or the agreement for the
assignment, requires an ad valorem stamp. But if
the retiring partner, instead of assigning his interest, takes the amount due
to him from the firm, gives a receipt for the money, and acknowledges that he
has no more claims on his co-partners, they will practically obtain all they
want; but such a transaction, even if carried out by deed, could hardly be held
to amount to a sale; and no ad valorem stamp, it is apprehended, would
be payable.”

A couple of
things emerge clearly from the aforesaid passages. In the first place, a
retiring partner while going out and while receiving what is due to him in
respect of his share, may assign his interest by a deed or he may, instead of
assigning his interest, take the amount due to him from the firm and give a
receipt for the money and acknowledge that he has no more claim on his
co-partners. The former type of transactions will be regarded as sale or
release or assignment of his interest by a deed attracting stamp duty, while
the latter type of transaction would not. In other words, it is clear, the
retirement of a partner can take either of two forms, and apart from the
question of stamp duty, with which we are not concerned, the question whether
the transaction would amount to an assignment or release of his interest in
favour of the continuing partners or not would depend upon what particular mode
of retirement is employed and as indicated earlier, if instead of quantifying
his share by taking accounts on the footing of notional sale, parties agree to
pay a lump sum in consideration of the retiring partner assigning or
relinquishing his share or right in the partnership and its assets in favour of
the continuing partners, the transaction would amount to a transfer within the
meaning of section 2(47) of the Income-tax Act.’

Based on the
language of the Deed of Retirement, the Bombay High Court took the view that
since there was an assignment by the outgoing partner of his share in the
assets of the firm in favour of the continuing partners, there was a transfer
and the gains made on such transfer were exigible to tax.

In the context of
taxation, the Bombay High Court observed:

‘It may be
stated that the Gujarat decision in Mohanbhai
Pamabhai’s case [1973] 91 ITR 393 is the only
decision directly on the point at issue before us but the question is whether
the position of a retiring partner could be equated with that of a partner upon
the general dissolution for capital gains tax purposes? The equating of the two
done by the Supreme Court in Addanki
Narayanappa’s case, AIR 1966 SC 1300, was not
for capital gains tax purposes but for considering the question whether the
instrument executed on such occasion between the partners inter se required registration and could be admitted in evidence
for want of registration. For capital gains tax purposes the question assumes
significance in view of the fact that under section 47(ii) any distribution of
assets upon dissolution of a firm has been expressly excepted from the purview
of section 45 while the case of a retirement of a partner from a firm is not so
excepted and hence the question arises whether the retirement of a partner
stands on the same footing as that upon a dissolution of the firm. In our view,
a clear distinction exists between the two concepts, inasmuch as the
consequences flowing from each are entirely different. In the case of
retirement of a partner from the firm it is only that partner who goes out of
the firm and the remaining partners continue to carry on the business of the
partnership as a firm, while in the latter case the firm as such no more exists
and the dissolution is between all the partners of the firm. In the Indian
Partnership Act the two concepts are separately dealt with.’

This distinction between the dissolution and the retirement, made by
the High Court for taxing the receipt was overruled by the Supreme Court by
holding that the two are the same for the purposes of section 47(ii) of the
Act.

It was therefore
that the Bombay High Court first held that there was a transfer and later that
the receipt of consideration on transfer was not exempt from tax u/s 47(ii) of
the Act. The Supreme Court, however, overruled the Bombay High Court decision,
holding that retirement was also covered by dissolution referred to in section
47(ii), and that such retirement would therefore not be chargeable to capital
gains. It may also be noted that the Bombay High Court’s decision was rendered
prior to the Supreme Court decision in the case of Mohanbhai Pamabhai
(Supra).

Surprisingly, the
Delhi High Court, while deciding the case of Bishanlal Kanodia (Supra),
relied upon the decision of the Bombay High Court in Tribuhuvandas G.
Patel (Supra), overlooking the implications of the decisions of the
Supreme Court in the cases of Mohanbhai Pamabhai and Tribhuvandas
G. Patel wherein the ratio of the decision of the Bombay High
Court was rendered inapplicable. The Delhi High Court sought to distinguish
between dissolution and retirement, even though the Supreme Court had held that
the term ‘dissolution’ for the purpose of section 47(ii) included retirement up
to A.Y. 1987-88; the case before the Delhi High Court concerned itself with
A.Y. 1975-76.

Further, though the
decision of the Madras High Court in the case of the Legal Representatives of
N. Paliniappa Goundar (Supra) was relied upon by the assessee in the
case of Savitri Kadur (Supra), it was not considered by the
Bangalore bench of the Tribunal. The Madras High Court in that case, for A.Y.
1962-63, considering the provisions of section 12B of the 1922 Act, had dealt
with the decisions of the Gujarat High Court in the case of Mohanbhai
Pamabhai and of the Bombay High Court in the case of Tribhuvandas
G. Patel, which had not yet been decided by the Supreme Court. While
disagreeing with the view of the Bombay High Court, the Madras High Court
observed as under:

With respect, we
cannot see why a retirement of a partner from a firm should be treated as
having different kinds of attributes according to the mode of settlement of the
retiring partner’s accounts in the partnership. In our view, whether the
retiring partner receives a lump sum consideration or whether the amount is
paid to him after a general taking of accounts and after ascertainment of his
share in the net assets of the partnership as on the date of retirement, the
result, in terms of the legal character of the payment as well as the
consequences thereof, is precisely the same. For, as observed by the Gujarat
High Court in Mohanbhai‘s case when a partner retires from the firm and receives an amount
in respect of his share in the partnership, what he receives is his own share
in the partnership, and it is that which is worked out and realised. Whatever
he receives cannot be regarded as representing some kind of consideration
received by him as a result of transfer of assignment or extinguishment or
relinquishment of his share in favour of the other partners.

We hold that
even in a case where some kind of a lump sum is received by the retiring
partner, it must be regarded as referable only to the share of the retiring
partner. This being so, no relinquishment at all is involved. What he receives
is what he has already put in by way of his share capital or by way of his
exertions as a partner. In a true sense, therefore, whether it is a dissolution
or a retirement, and whether in the latter case the retirement is on the basis
of a general taking of accounts or on the basis of an ad hoc payment to the retiring partner, what the partner obtains
is nothing more and nothing less than his own share in the partnership. A
transaction of this kind is more fittingly described as a mutual release or a
mutual relinquishment. In the very case dealt by the Bombay High Court, the
particular amount paid by the remaining partners in favour of the retiring
partner was only a payment in consideration of which there was a mutual
release, a release by the retiring partner in favour of the remaining partners
and a release by the remaining partners in favour of the retiring partner. The
idea of mutual release is appropriate to a partnership, because a retired
partner will have no hold over the future profits of the firm and the partners
who remain in the partnership release the retired partner from all future
obligations towards the liabilities of the firm.

We, therefore,
unqualifiedly accept the decision of the Gujarat High Court as based on a
correct view of the law and the legal relations which result on the retirement
of a partner from the partnership. With respect, we do not subscribe to the distinction
sought to be drawn by the learned Judges of the Bombay High Court between an ad hoc payment to a retiring partner and a payment to him after
ascertaining his net share in the partnership.

The Andhra Pradesh High Court in the case of CIT vs. L. Raghu
Kumar 141 ITR 674, also had an occasion to consider this issue for the
A.Y. 1971-72. In this case, the retiring partner received an amount in excess
of the balance lying to the credit of his capital account and his share of
profits. The Andhra Pradesh High Court considered the decisions of the Bombay
High Court in the case of Tribhuvandas G. Patel (Supra) and CIT
vs. H.R. Aslot 115 ITR 255, where the Bombay High Court had held that
whether there was a transfer or not would depend upon the terms of the retirement
deed – whether there is an assignment by the outgoing partner in favour of the
continuing partners, or whether the retiring partner merely receives an amount
for which he acknowledges receipt.

The Andhra Pradesh
High Court observed as under:

‘It is no doubt
true as submitted by the learned counsel for the revenue that the Bombay High
Court did not accept the principle in the Mohanbhai case, that there is no distinction between a case of a retirement
of the partner and dissolution of the partnership firm and that there can never
be a transfer of a capital asset in the case of a retirement of a partner as
there is no relinquishment of a capital asset or extinguishment of rights
therein. With great respect, we are unable to agree with the view of the Bombay
High Court. The rights of a partner are governed by the provisions of the
Partnership Act. Otherwise by a mere description, the nature of the transaction
can be altered. Further, the Gujarat High Court in Mohanbhai’s case (Supra) followed the
decision of the Supreme Court in Narayanappa
(Supra) which laid down the proposition of law
unequivocally.’

This decision of
the Andhra Pradesh High Court has been affirmed by the Supreme Court in CIT
vs. R. Lingmallu Raghukumar 247 ITR 801. Therefore, effectively, the
Supreme Court has approved of the approach taken by the Andhra Pradesh High
Court, to the effect that there can never be a transfer of a capital asset in
the case of retirement of a partner as there is no relinquishment of a capital
asset or extinguishment of rights therein, and that the nature of the
transaction cannot be altered by a mere description, but is governed by the
provisions of the Partnership Act. It is only logical that a transfer cannot
arise merely because a retiring partner is paid an amount in excess of his
capital, or because the retirement deed wording is different.

This fact of law
laid down by the Supreme Court and the overruling of the law laid down by the
Bombay High Court, has been recognised by the Bombay High Court in its later
decision in the case of Prashant S. Joshi (Supra), clearly and
succinctly, where the Bombay High Court observed:

‘The Gujarat
High Court held that there is, in such a situation, no transfer of interest in
the assets of the partnership within the meaning of section 2(47). When a
partner retires from a partnership, what the partner receives is his share in
the partnership which is worked out by taking accounts and this does not amount
to a consideration for the transfer of his interest to the continuing partners.
The rationale for this is explained as follows in the judgment of the Gujarat
High Court (in the Mohanbhai Pamabhai case):

“…What
the retiring partner is entitled to get is not merely a share in the
partnership assets; he has also to bear his share of the debts and liabilities
and it is only his share in the net partnership assets after satisfying the
debts and liabilities that he is entitled to get on retirement. The debts and
liabilities have to be deducted from the value of the partnership assets and it
is only in the surplus that the retiring partner is entitled to claim a share.
It is, therefore, not possible to predicate that a particular amount is
received by the retiring partner in respect of his share in a particular
partnership asset or that a particular amount represents consideration received
by the retiring partner for extinguishment of his interest in a particular
asset.”

14. The appeal
against the judgment of the Gujarat High Court was dismissed by a Bench of
three learned Judges of the Supreme Court in Addl.
CIT vs. Mohanbhai Pamabhai [1987] 165 ITR 166.
The Supreme Court relied upon its judgment in Sunil
Siddharthbhai vs. CIT [1985] 156 ITR 509. The
Supreme Court reiterated the same principle by relying upon the judgment in Addanki Narayanappa vs. Bhaskara Krishnappa AIR 1966 SC 1300. The Supreme Court held that what is envisaged on the retirement of
a partner is merely his right to realise his interest and to receive its value.
What is realised is the interest which the partner enjoys in the assets during
the subsistence of the partnership by virtue of his status as a partner and in
terms of the partnership agreement. Consequently, what the partner gets upon
dissolution or upon retirement is the realisation of a pre-existing right or
interest.

The Supreme
Court held that there was nothing strange in the law that a right or interest
should exist in praesenti but its realisation or
exercise should be postponed. The Supreme Court inter alia cited with
approval the judgment of the Gujarat High Court in Mohanbhai Pamabhai’s
case (Supra) and held that there is no transfer upon the retirement of a
partner upon the distribution of his share in the net assets of the firm. In CIT
vs. R. Lingmallu Raghukumar [2001] 247 ITR 801, the Supreme Court held,
while affirming the principle laid down in Mohanbhai Pamabhai
that when a partner retires from a partnership and the amount of his share in
the net partnership assets after deduction of liabilities and prior charges is
determined on taking accounts, there is no element of transfer of interest in
the partnership assets by the retired partner to the continuing partners.

15. At this
stage, it may be noted that in CIT vs.
Tribhuvandas G. Patel [1978] 115 ITR 95 (Bom.),
which was decided by a Division Bench of this Court, under a deed of
partnership, the assessee retired from the partnership firm and was inter alia paid an amount of Rs. 4,77,941 as his share in the
remaining assets of the firm. The Division Bench of this Court had held that
the transaction would have to be regarded as amounting to a transfer within the
meaning of section 2(47) inasmuch as the assessee had assigned, released and
relinquished his share in the partnership and its assets in favour of the
continuing partners. This part of the judgment was reversed in appeal by the
Supreme Court in Tribhuvandas G. Patel vs. CIT [1999] 236 ITR 515.

Following the
judgment of the Supreme Court in Sunil
Siddharthbhai’s case (Supra), the Supreme Court
held that even when a partner retires and some amount is paid to him towards
his share in the assets, it should be treated as falling under clause (ii) of
section 47. Therefore, the question was answered in favour of the assessee and
against the revenue. Section 47(ii) which held the field at the material time
provided that nothing contained in section 45 was applicable to certain
transactions specified therein and one of the transactions specified in clause
(ii) was distribution of the capital assets on a dissolution of a firm. Section
47(ii) was subsequently omitted by the Finance Act of 1987 with effect from 1^st
April, 1988. Simultaneously, sub-section (4) of section 45 came to be inserted
by the same Finance Act. Sub-section (4) of section 45 provides that profits or
gains arising from the transfer of a capital asset by way of distribution of
capital assets on the dissolution of a firm or other association of persons or
body of individuals (not being a company or a co-operative society) or
otherwise, shall be chargeable to tax as the income of the firm, association or
body, of the previous year in which the said transfer takes place.

The fair market
value of the assets on the date of such transfer shall be deemed to be the full
value of the consideration received or accruing as a result of the transfer for
the purpose of section 48. Ex facie sub-section
(4) of section 45 deals with a situation where there is a transfer of a capital
asset by way of a distribution of capital assets on the dissolution of a firm
or otherwise. Evidently, on the admitted position before the Court, there is no
transfer of a capital asset by way of a distribution of the capital assets on a
dissolution of the firm or otherwise in the facts of this case. What is to be
noted is that even in a situation where sub-section (4) of section 45 applies,
profits or gains arising from the transfer are chargeable to tax as income of
the firm.’

The Bombay High
Court in Prashant Joshi’s case (Supra) also considered the fact
that section 45(4) was brought in simultaneously with the deletion of section
47(ii), providing for taxation in the hands of the firm, in a situation of
transfer of a capital asset on distribution of capital assets on the
dissolution of a firm or otherwise. Clearly, therefore, the intention was to
tax only the firm and that too only in a situation where there was a
distribution of capital assets of a firm on dissolution or otherwise, which
situation would include retirement of a partner as held by the Bombay High
Court in the case of CIT vs. A.N. Naik Associates 265 ITR 346.
This understanding of the law has clearly been brought out by the Bombay High
Court in Hemlata Shetty’s case (Supra), where the Bombay High
Court has observed that amount received by a partner on his retirement from the
partnership firm is not subject to tax in the retiring partners’ hands in view
of section 45(4), and the liability, if any, for tax is on the partnership
firm.

Had the intention
been to also tax a partner on his retirement on the excess amount received over
and above his capital balance in the books of the firm, an amendment would have
been made to cover such a situation involving the receipt of capital asset by a
partner on distribution by the firm simultaneously with the deletion of section
47(ii).

The Bombay High
Court’s decision in the case of Riyaz A. Shaikh (Supra) is a
decision rendered in the context of A.Y. 2002-03, i.e., post-amendment. It was
not a case of a writ petition filed against any reassessment but was an appeal
from the decision of the Tribunal. The Court in that case has considered all
the relevant decisions – the Bombay High Court’s decisions in the cases of Prashant
S. Joshi, N.A. Mody and Tribhuvandas G. Patel, besides
the Supreme Court decisions in the cases of Tribhuvandas G. Patel
and R. Lingamallu Rajkumar – while arriving at the view that the
amounts received on retirement by a partner are not liable to capital gains
tax.

Similarly, Hemlata
Shetty’s case pertained to the post-amendment period and the Court
therein has considered the earlier decisions of the Bombay High Court in the Prashant
S. Joshi and Riyaz A. Sheikh cases and has also
considered the impact of section 45(4). It is indeed baffling that the Bombay
High Court decision delivered on 5^th March, 2019 and the earlier
decision of the Tribunal in the same case have not been considered by the
Bangalore bench of the Tribunal in Savitri Kadur’s case, decided
on 3^rd May, 2019, which chose to follow the decision of Sudhakar
M. Shetty (Supra), where the matter was still pending before the Bombay
High Court, rather than a decision of the Bombay High Court in his wife’s case
on identical facts (retirement from the same partnership firm) for the
immediately preceding assessment year, where the matter had already been
decided on 5^th March, 2019. We are sure that the decision of the
Tribunal could have been different if the development had been in its
knowledge.

One may note that
the Legislature, realising that the receipt in question was not taxable under
the present regime of the Income-tax Act, 1961, had introduced a specific
provision for taxing such receipt in the hands of the partner under the
proposed Direct Tax Code which has yet to see the light of the day.

The better view of
the matter therefore is that retirement of a partner from a partnership firm is
not subject to capital gains tax, irrespective of the mode of retirement of the
partner, as rightly held by the Bombay High Court in various decisions, and the
Mumbai bench of the Tribunal in the cases of Hemlata Shetty and James
P. D’Silva (Supra). It is rather unfortunate that this issue has been
continuing to torture assessees for the last so many decades, even after
several Supreme Court judgments. One hopes that this matter will finally be
laid to rest either through a clarification by the CBDT or by a decision of the
Supreme Court.

The beauty of doing nothing is that you can do it
perfectly. Only when you do something is it almost impossible to do it without
mistakes. Therefore people who are contributing nothing to society, except
their constant criticisms, can feel both intellectually and morally superior.

—
Thomas Sowell

shailesh.kwebmaker

Section 28: Share of profits paid to co-developer based on oral understanding not disallowable as the recipient had offered it to tax and there was no revenue loss and the transaction was tax-neutral

14. HP Associates vs. ITO (Mumbai) Vikas Awasthy (J.M.) and G. Manjunatha (A.M.) ITA No. 5929/Mum/2018 A.Y.: 2011-12 Date of order: 12^th June, 2020 Counsel for Assessee / Revenue: Haridas Bhatt / R. Kavitha

Section 28:
Share of profits paid to co-developer based on oral understanding not
disallowable as the recipient had offered it to tax and there was no revenue
loss and the transaction was tax-neutral

FACTS

The A.O.
disallowed a sum of Rs. 61,800 being share of profit transferred by the
assessee to Lakshmi Construction Co. The disallowance was made on the ground
that there was no formal written agreement to share profit in an equal ratio.

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 where it was contended that the assessee had jointly developed a
project with Lakshmi Construction Co. for which there was a joint development
agreement. Though there was no formal written agreement between the co-developers
for sharing profits in equal ratio, there was, however, an oral understanding
between the parties that the profits will be shared in equal ratio. The
transfer of share of profits by the assessee has not resulted in any loss of
revenue as the recipient has offered the same to tax and paid taxes thereon.

HELD

The Tribunal observed that the contention on
behalf of the assessee that there was no revenue loss has been substantiated by
placing on record the income-tax return of M/s Lakshmi Construction Co. It also
noted that both the firms are assessed at the same marginal rate of tax.
Therefore, the transaction is tax-neutral and no loss is caused to the
Government exchequer. The Tribunal deleted the addition of Rs. 61,800 made by
the A.O. and confirmed by the CIT(A).

shailesh.kwebmaker

Section 35(1)(ii): Deduction claimed by an assessee in respect of donation given by acting upon a valid registration / approval granted to an institution cannot be disallowed if at a later point of time such registration is cancelled with retrospective effect

13. Span Realtors vs. ITO (Mumbai) G. Manjunatha (A.M.) and Ravish Sood (J.M.) ITA No. 6399/Mum/2019 A.Y.: 2014-15 Date of order: 9^th June, 2020 Counsel for Assessee / Revenue: Rashmikant Modi and Ketki Rajeshirke
/ V. Vinod Kumar

Section
35(1)(ii): Deduction claimed by an assessee in respect of donation given by
acting upon a valid registration / approval granted to an institution cannot be
disallowed if at a later point of time such registration is cancelled with
retrospective effect

FACTS

The assessee
firm, engaged in the business of real estate, had made a donation of Rs. 1
crore to a Kolkata-based institution, viz. ‘School of Human Genetics and
Population Health’ (SHG&PH) and claimed deduction of Rs. 1.75 crores u/s
35(1)(ii) @ 175% on Rs. 1 crore. The A.O. called upon the assessee to
substantiate the claim of such deduction. The assessee submitted all the
evidences which were required to substantiate the claim of deduction.

However, the A.O. was not persuaded to subscribe
to the genuineness of the aforesaid claim of deduction by the assessee. He
observed that a survey operation conducted u/s 133A of the Act on 27^th
January, 2015 in the case of SHG&PH had revealed that the said research
institution had indulged in providing accommodation entries of bogus donations
to the donors through a network of brokers. The A.O. gathered that the
secretary had admitted in her statement that was recorded in the course of
survey proceedings u/s 131(1) of the Act that the said institution, in lieu of commission, was
providing accommodation entries of bogus donations through a network of market
brokers. Besides, the accountant of SHG&PH, in the course of survey
proceedings, was found to be in possession of a number of messages from brokers
regarding bogus donations and bogus billings. He also observed that as per the
information shared by DDIT (Inv.), Kolkata, the said institution had filed a
petition before the Settlement Commission, Kolkata Bench, wherein it had
admitted that in consideration of service charge they had indulged in providing
accommodation entries of bogus donations.

Moreover, the
Ministry of Finance vide a Notification dated 15^th September,
2016, had withdrawn its earlier Notification dated 28^th January,
2010. Hence, the A.O. disallowed the claim of deduction of Rs. 1.75 crores.

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 observed that as on the date of
giving of donation, SHG&PH was having a valid approval granted under the
Act. Having regard to the language of the Explanation to section 35(1)(ii), the
Tribunal was of the view that it can safely be gathered that a subsequent
withdrawal of such approval cannot form a reason to deny the deduction claimed
by the donor. By way of analogy, the Tribunal observed that the Supreme Court in
the case of CIT vs. Chotatingrai Tea [(2003) 126 Taxman 399 (SC)]
while dealing with section 35CCA of the Act, had concluded that a retrospective
withdrawal of an approval granted by a prescribed authority would not
invalidate the assessee’s claim of deduction. The Tribunal also observed that
on a similar footing the Bombay High Court has in the case of National
Leather Cloth Mfg. Co. vs. Indian Council of Agricultural Research [(2000) 100
Taxman 511 (Bom.)] observed that such retrospective cancellation of
registration will have no effect upon the deduction claimed by the donor since
such donation was given acting upon the registration when it was valid and
operative.

The Tribunal
held that if the assessee acting upon a valid registration / approval granted
to an institution had donated the amount for which deduction is claimed, such
deduction cannot be disallowed if at a later point of time such registration is
cancelled with retrospective effect. It also observed that the co-ordinate
Mumbai bench of the Tribunal in Pooja Hardware Pvt. Ltd. vs. ACIT [ITA
No. 3712/Mum/2016 dated 28^th October, 2019] has, after
relying on the earlier orders of the co-ordinate benches of the Tribunal on the
issue pertaining to the allowability of deduction u/s 35(1)(ii) of the Act in
respect of a donation given to SHG&PH by the assessee, vacated the
disallowance of the assessee’s claim for deduction u/s 35(1)(ii) of the Act.
The Tribunal observed that the issue is squarely covered by the orders of the
co-ordinate benches of the Tribunal, and therefore it has no justifiable reason
to take a different view. Following the same, the Tribunal set aside the order
of the CIT(A) and vacated the disallowance of the assessee’s claim for
deduction u/s 35(1)(ii) of Rs. 1.75 crores.

shailesh.kwebmaker

Section 254: Non-consideration of decision of jurisdictional High Court, though not cited before the Tribunal at the time of hearing of appeal, constitutes a mistake apparent on record

12. Tata Power Company vs. ACIT (Mumbai) Shamim Yahya (A.M.) and Saktijit Dey (J.M.) M.A. No. 596/Mum/2019 arising out of ITA No. 3036/Mum/2009 A.Y.: 2003-04 Date of order: 22^nd May, 2020 Counsel for Assessee / Revenue: Nitesh Joshi / Micheal Jerald

Section 254:
Non-consideration of decision of jurisdictional High Court, though not cited
before the Tribunal at the time of hearing of appeal, constitutes a mistake
apparent on record

FACTS

In ground No.
3 of ITA No. 3036/Mum/2009, the Revenue challenged the decision of the CIT(A)
in deleting the surplus on buyback on Euro Notes issued by the assessee
earlier. It was the claim of the assessee that since Euro Notes were issued by
the assessee for capital expenditure, the income derived as a surplus on
buyback of Euro Notes would be capital receipt and hence not taxable. Although,
the A.O. treated it as the income of the assessee, the CIT(A), relying upon the
decision of the Tribunal in the assessee’s own case for the assessment year
2000-01, allowed the assessee’s claim and deleted the addition.

Before the
Tribunal, the assessee, apart from relying upon the decision of the Tribunal in
its own case, also relied upon the decision of the Hon’ble Supreme Court in CIT
vs. Mahindra & Mahindra Ltd. [(2018) 302 CTR 201 (SC)] to contend
that foreign exchange fluctuation gain on buyback of Euro Notes cannot be
treated as income chargeable to tax as Euro Notes were raised for incurring
capital expenditure. The Tribunal restored the issue to the A.O. for fresh
adjudication after applying the ratio laid down in Mahindra &
Mahindra Ltd. (Supra).

In the course
of hearing of the Miscellaneous Application, it was submitted that after taking
note of the decisions of the Supreme Court in Mahindra & Mahindra
Ltd. (Supra) and in CIT vs. T.V. Sundaram Iyengar & Sons
[(1996) 222 ITR 344 (SC)], the Jurisdictional High Court has reiterated
the view expressed by the Supreme Court in Mahindra & Mahindra Ltd.
(Supra) and consequently the issue stands settled in favour of the
assessee. Therefore, there is no need for restoring the issue to the A.O.

HELD

The Tribunal
observed that the Jurisdictional High Court in Reliance Industries Ltd.
(ITA No. 993 of 2016, dated 15^th January, 2019), after
taking note of the decisions of the Supreme Court in Mahindra &
Mahindra Ltd. (Supra) and T.V. Sundaram Iyengar & Sons
(Supra) has upheld the decision of the Tribunal in holding that the
gain derived from buyback of foreign currency bonds issued by the assessee
cannot be treated as revenue receipt.

The Tribunal
held that though it may be a fact that the aforesaid decision was not cited
before the Tribunal at the time of hearing of appeal, however, as held by the
Supreme Court in Saurashtra Kutch Stock Exchange Ltd. [(2008) 305 ITR 227
(SC)], non-consideration of a decision of the Supreme Court or the
Jurisdictional High Court, even rendered post disposal of appeal, would
constitute a mistake apparent on the face of record. It held that since the
aforesaid decision of the Hon’ble Jurisdictional High Court will have a crucial
bearing on the disputed issue, non-consideration of the said decision certainly
constitutes a mistake apparent on the face of record as envisaged u/s 254(2) of
the Act.

The Tribunal
recalled the order dated 21^st May, 2019 passed in ITA No.
3036/Mum/2009 and restored the appeal to its original position.

shailesh.kwebmaker

Sections 2(47), 28(i), 45 – Gains arising on transfer of development rights held as a business asset are chargeable to tax as ‘business income’ – Only that part of the consideration which accrued, as per terms of the agreement, would be taxable in the year of receipt

22. [117 taxmann.com 637 (Del.)(Trib.)] ITO vs. Abdul Kayum Ahmed Mohd. Tamboli ITA No. 1408/Del/2011 A.Y.: 2006-07 Date of order: 6^th July, 2020

Sections 2(47), 28(i), 45 – Gains arising
on transfer of development rights held as a business asset are chargeable to
tax as ‘business income’ – Only that part of the consideration which accrued,
as per terms of the agreement, would be taxable in the year of receipt

FACTS

The assessment of the assessee was re-opened because the consideration
received for transfer of development rights was not offered for taxation. Since
the assessee had handed over possession of the land and also transferred the
development rights, the A.O. in the course of reassessment proceedings taxed
the amount received by the assessee on transfer of development rights as
business income. The assessee submitted that under the contract with the
developer, he was to perform work on the basis of receipt of funds from the
developer. Accordingly, the assessee had offered only a part of the receipts as
income to the extent that receipts had accrued. The balance, according to him,
were conditional receipts. The developer, in response to a notice sent u/s
133(6), confirmed the position as stated by the assessee.

But the A.O. opined that the said accounting treatment was not in
consonance with the mercantile system of accounting followed by the assessee. Besides, since the transfer had been
completed, the consideration would be taxable in the year of receipt as
business income.

Aggrieved, the assessee preferred an appeal to the CIT(A) and contended
that the balance amount be considered as capital receipts. The CIT(A)
adjudicated in the assessee’s favour and held that only the part of the amount
accrued as per the agreement would be taxable in the year of receipt. He
estimated an amount of 10% of the gross receipts to be taxable in the year of
receipt. The provisions pertaining to capital gains were also held to be
inapplicable as the development rights were business assets.

Aggrieved, the Revenue filed an appeal to the Tribunal.

HELD

It was evident from
the terms of the joint venture agreement that only part income accrued to the assessee on execution of the project agreement. The balance consideration was a
conditional receipt and was to accrue only in the event of the assessee
performing certain obligations under the agreement. Since the development
rights constituted the business assets of the assessee, the provisions of
capital gains would not be applicable. The order of the CIT(A) taxing 10% of
the gross receipts was justified. The Tribunal upheld the decision of the
CIT(A) and held that only part of the receipts as estimated accrued to the
assessee were taxable.

shailesh.kwebmaker

Sections 28, 36(1)(iii) – In a case where since the date of incorporation the assessee has carried on substantial business activities such as raising loans, purchase of land, which was reflected as stock-in-trade in the books of accounts, and entering into development agreement, the assessee can be said to have not only set up but also commenced the business. Consequently, interest on loan taken from bank for purchase of land which was held as stock-in-trade is allowable as a deduction

21. [117 taxmann.com 419 (Del.)(Trib.)] Jindal Realty (P) Ltd. vs. ACIT ITA No. 1408/Del/2011 A.Y.: 2006-07 Date of order: 22^nd June, 2020

Sections 28, 36(1)(iii) – In a case where
since the date of incorporation the assessee has carried on substantial
business activities such as raising loans, purchase of land, which was
reflected as stock-in-trade in the books of accounts, and entering into
development agreement, the assessee can be said to have not only set up but
also commenced the business. Consequently, interest on loan taken from bank for
purchase of land which was held as stock-in-trade is allowable as a deduction

FACTS

During the previous
year relevant to the assessment year under consideration, the assessee, engaged
in real estate business, borrowed monies from banks and utilised the same to
purchase land for township projects and also for giving as advance to other
associate parties for purchase of land by them. The interest on such monies
borrowed was claimed by the assessee as deduction u/s 36(1)(iii), and the
return of income was filed for the previous year declaring a loss.

The A.O. disallowed
the claim of deduction of interest on the ground that the assessee had not
commenced any business activity and held the same to be pre-operative in
nature.

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 held
that since the date of incorporation, the assessee carried on substantial
business activities such as raising loans, purchase of land which was reflected
as stock-in-trade in the books of accounts and entering into development
agreements. The Tribunal relied on the decision of the Delhi High Court in the
case of CIT vs. Arcane Developers (P) Ltd. 368 ITR 627 (Del.)
wherein it is held that in case of real estate business, the setting up of
business was complete when the first steps were taken by the
respondent-assessee to look around and negotiate with parties.

Thus, the assessee
had not only set up the business but also commenced the business in the
previous year and therefore was eligible to claim deduction of interest
expenditure u/s 36(1)(iii).

The appeal filed by
the assessee was allowed.

shailesh.kwebmaker

Section 50B read with sections 2(19), 2(42C) and 50 – Windmills of an assessee, engaged in the business of aqua culture, export of frozen shrimp, sale of hatchery seed and wind-power generation, along with all the assets and liabilities, constitute an ‘undertaking’ for the purpose of slump sale

20. [117
taxmann.com 440 (Vish.)(Trib.)] ACIT vs. Devi Sea
Foods Ltd. ITA No.
497/Vish./2019 A.Y.: 2013-2014 Date of order: 19^th
June, 2020

Section 50B read
with sections 2(19), 2(42C) and 50 – Windmills of an assessee, engaged in the
business of aqua culture, export of frozen shrimp, sale of hatchery seed and
wind-power generation, along with all the assets and liabilities, constitute an
‘undertaking’ for the purpose of slump sale

FACTS

The assessee sold
three windmills, declared the gains arising on such sale as a slump sale and
computed the long-term capital gains as per section 50B. The assessee had not
furnished separate financial statements for the windmill business activity;
however, it was claiming deduction u/s 80-IA on the income from the windmill as
a separate business which was allowed by the A.O. from A.Y. 2009-10 onwards.
But at the time of the sale, the A.O. denied the applicability of the
provisions related to slump sale by stating that the windmills did not
constitute an ‘undertaking’ and charged the income as short-term capital gains.

Aggrieved, the
assessee preferred an appeal to the CIT(A) who held that each windmill is a
unit of the undertaking and is covered by the definition of slump sale. He also
noted that though the assessee had shown windmills as part of the block of
assets, depreciation claim could not be a factor to deny benefit of slump sale.
He directed the A.O. to compute long-term capital gains u/s 50B.

Aggrieved, the
Revenue filed an appeal to the Tribunal.

HELD

The Tribunal observed that the windmills were part of the assessee’s
business, for which the assessee was claiming deduction since A.Y. 2009-10. The
A.O. had not made any adverse remarks in respect of deduction claimed u/s
80-IA. Though separate books of accounts had not been maintained, the assessee
had demonstrated separate ledger account belonging to the windmill operation,
and income from such activity was independently ascertainable. Further, there
is no requirement in the Act that all assets sold under slump sale should be
together. The Tribunal held that the real test for considering any sale of an asset
as non-slump sale would be any independent asset or liability not forming part
of the business operations. It held that the windmills satisfied all conditions
for being considered as an ‘undertaking’ and the provisions of slump sale would
be applicable.

shailesh.kwebmaker

Reopening – Capital gains arising on conversion of the land into stock-in-trade – Closing stock has to be valued at cost or market price whichever is lower – No reason to believe income had escaped assessment – Reopening bad in law: Sections 45(2) and 147 of the Act

9. M/s. J.S. & M.F. Builders vs. A.K. Chauhan and others [Writ Petition
No. 788 of 2001 A.Ys.: 1992-93, 1993-94, 1994-95 and 1995-96 Date of order: 12^th
June, 2020 (Bombay High Court)

Reopening – Capital gains arising on conversion of the land into
stock-in-trade – Closing stock has to be valued at cost or market price
whichever is lower – No reason to believe income had escaped assessment –
Reopening bad in law: Sections 45(2) and 147 of the Act

The petitioner had challenged the legality and validity of the four
impugned notices, all dated 25^th February, 2000 issued u/s 148 of
the Act, proposing to re-assess the income of the petitioner for the A.Ys.
1992-93, 1993-94, 1994-95 and 1995-96 on the ground that income chargeable to
tax for the said assessment years had escaped assessment.

The case of the petitioner is that it is a partnership firm constituted by
a deed of partnership dated 21^st October, 1977. The object of the
firm is to carry out business as builders and developers.

An agreement was entered into on 8^th November, 1977 between one
Mr. Krishnadas Kalyanji Dasani and the petitioner whereby and whereunder Mr.
Dasani agreed to sell, and the petitioner agreed to purchase, a property
situated at Borivali admeasuring approximately 6,173.20 square metres. The
property consisted of seven structures and two garages. The property was
mortgaged and all the tenements were let out. The aggregate consideration for
the purchase was Rs. 3,00,000 and a further expenditure of Rs. 44,087 was
incurred by way of stamp duty and registration charges. The said property was
purchased subject to all encumbrances. The purchased property was reflected in
the balance sheets of the petitioner drawn up thereafter as a fixed asset. For
almost a decade after purchase, the petitioner entered into various agreements
with the tenants to get the property vacated. In the process, they incurred a
further cost of Rs. 9,92,427.

In the balance sheet as on 30^th September, 1987 the Borivali
property was shown as a fixed asset the value of which was disclosed at Rs.
13,36,514; a detailed break-up of it was furnished. With effect from 1^st
October, 1987, the petitioner converted a portion of the property into
stock-in-trade and continued to retain that part of the property which still
remained tenanted as a fixed asset. The market value of the entire Borivali
property as on 1^st October, 1987 was arrived at Rs. 69,38,000 out of
which the value of the property that was converted into stock-in-trade was
determined at Rs. 66,29,365.

The petitioner thereafter demolished the vacant structures and commenced
construction of a multi-storied building. In the balance sheet as on 31^st
March, 1989, the petitioner reflected the tenanted property as a fixed asset at
a cost of Rs. 2,86,740 and the stock-in-trade at a value of Rs. 66,29,365.. A
revaluation reserve of Rs. 55,58,759 was also credited. In the Note
accompanying the computation of income it was clearly mentioned that the
conversion of a part of the Borivali property was made into stock-in-trade and
the liability to tax u/s 45(2) of the Act would arise as and when the flats
were sold. During the previous year relevant to the A.Y. 1992-93, the
petitioner had entered into 14 agreements for sale of 14 flats, the total area
of which admeasured 10,960 square feet (sq. ft.).

For the A.Y. 1992-93 the petitioner declared income chargeable under the
head ‘profits and gains of business or profession’ at Rs. 9,37,385 and the
income chargeable under the head ‘capital gains’ at Rs. 8,10,993. The ‘capital
gains’ was arrived at by determining the difference between the market value of
the land converted into stock-in-trade as on 1^st October, 1987 and
the cost incurred by the petitioner which came to a figure of Rs. 55,87,591.
Having regard to the total built-up area of 37,411 sq. ft., the ‘capital gains’
per sq. ft. was computed at Rs. 149.36 on a pro-rata basis. Accordingly,
having regard to the area of 10,960 sq. ft. sold, the ‘capital gains’ was
determined at Rs. 16,36,986. Along with the return of income, a computation of
income as well as an audit report in terms of section 44AB of the Act were also
filed. The A.O. completed the assessment u/s 143(3) of the Act assessing the
petitioner at the income of Rs. 17,85,560.

For the A.Y. 1993-94, as in the previous A.Y., income was computed both
under the head ‘profits and gains of business or profession’ as well as under
the head ‘capital gains’ for 12 flats sold during the relevant previous year.
The return was accompanied by the tax audit report as well as the profit and
loss account and balance sheet. The A.O. completed the assessment u/s 143(3)
assessing the petitioner at an income of Rs. 17,30,230. It is stated that in
the assessment order the A.O. specifically noted that income from ‘long-term
capital gains’ was declared in terms of section 45(2) of the Act.

The petitioner’s return of income for the A.Y. 1994-95 was processed u/s
143(1)(a) of the Act and an intimation was issued on 30^th March,
1995.

For the A.Y. 1995-96, the petitioner filed its return declaring income
under both heads, i.e., ‘income from business’ and ‘capital gains’. The income
of the petitioner was computed in a similar manner as in the earlier years with
similar disclosures in the tax audit report, profit and loss account and
balance sheet furnished along with the return. In the course of the assessment
proceedings, the petitioner furnished details of flats sold as well as the
manner of computing profit in terms of section 45(2). The assessment for the
A.Y. 1995-96 was completed u/s 143(3) of the Act determining the taxable income
at Rs. 1,32,930.

According to the petitioner, it received on 8^th March, 2000 four notices, all dated 25^th
February, 2000, issued u/s 148 of the Act for the four assessment years, i.e.,
1992-93 to 1995-96.

The reasons recorded for each of the assessment
years were identical save and except the assessment details and figures. The
A.O. broadly gave four reasons to justify initiation of re-assessment
proceedings. Firstly, the petitioner was not justified in assuming that the
market value of the stock adopted as on 1^st October, 1987 would
continue to remain static in the subsequent years. In other words, the closing
stock of the land should have been valued at the market price as on the date of
closing of accounts for the year concerned. This resulted in undervaluation of
closing stock and consequent reduction of profit.

Secondly, even though the petitioner might have entered into agreements and
sold certain flats, the ownership of the land continued to remain with the
petitioner. The whole of the land under the ownership of the petitioner
constituted its stock-in-trade and it should have been valued at the market
price as on the date of closing of accounts for the year concerned. Thus, the
assessee had suppressed the market price of the closing stock, thereby reducing
the profit.

Thirdly, for the purpose of computing the ‘capital gains’ in terms of
section 45(2) of the Act, the petitioner was not justified in taking the cost
of the entire land; rather, the petitioner ought to have taken only a fraction
of the original cost of Rs. 3,00,000. Thus, there was inflation of cost.
Lastly, in terms of section 45(2), the ‘capital gains’ arising on conversion of
the land into stock-in trade ought to have been assessed only in the year in
which the land was sold or otherwise transferred. As the land was not conveyed
to the co-operative society, the petitioner was not justified in offering to
tax the ‘capital gains’ in terms of section 45(2) of the Act on the basis of
the flats sold during each of the previous years relevant to the four A.Y.s
under consideration.

The Court admitted the writ petition for final hearing.

The petitioner submitted that it had fully complied with the requirement of
section 45(2) of the Act and the capital gains arising on the conversion of the
land into stock-in-trade was offered and rightly assessed to tax in the years
in which the flats were sold on the footing that on the sale of the flat there
was also a proportionate sale of the land. This methodology adopted by the
petitioner is in accordance with law. It was also submitted that it is not
correct to think that any profit arises out of the valuation of the closing
stock. In this connection, reliance was placed on a decision of the Supreme
Court in Chainrup Sampatram vs. CIT, 24 ITR 481.

The Petitioner also referred to a decision of this Court in CIT vs.
Piroja C. Patel, 242 ITR 582 to contend that the expenditure incurred
for having the land vacated would certainly amount to cost of improvement which
is an allowable expenditure.

The case of the Revenue was that the A.O. after recording the sequence of
events from acquiring the property vide the deed of conveyance dated 23^rdApril, 1980 noted that the assessee had converted part of the property
into stock-in-trade on 1^st October, 1987 with a view to construct
flats. On the date of conversion into stock-in-trade, the value thereof was
determined at Rs. 66,29,365. Up to A.Y.1991-92 there was no construction. After
the building was constructed, the constructed flats were sold to various
customers. On the sale of flats, the assessee reduced the proportionate market
value of the land as on 31^st March, 1989, in the same ratio as the
area of the flat sold bore to the total constructed area. However, the assessee
valued the closing stock at market price prevailing as on 1^st
October, 1987. According to the A.O., the closing stock should have been valued
at the market price on the close of each accounting year. This resulted in
undervaluation of closing stock and consequent reduction of profit.

Secondly, land as an asset is separate and distinct from the building. The
building was shown as a work in progress in the profit and loss account
prepared by the assessee and filed with the return. Even after construction of
the building and sale of flats, the stock, i.e., the land was still under the
ownership of the assessee. Ownership of land was not transferred. As the land
continued under the ownership of the assessee, its value could not be reduced
on the plea that a flat was sold. The whole of the land under ownership of the
assessee constituted its stock-in-trade and it should have been valued at the
market price as on the date of closing of the accounts for the year under
consideration. Therefore, the A.O. alleged that the assessee had suppressed the
market price of the closing stock, thus reducing the profit.

The third ground given was regarding computation of ‘capital gains’
furnished with the return of income. The A.O. noted that the total capital
gains as on 1^st October, 1987 was arrived at by deducting the cost
of the land as on 1^st October, 1987, i.e., Rs. 10,41,774, from the
fair market value of the land, i.e., Rs. 66,29,365, which came to Rs.
55,87,591. According to the A.O., the assessee made deduction of the cost
incurred for the entire land whereas only a fraction of the said land was
converted into stock-in-trade where construction was done.

The A.O. worked out that the cost of the converted piece of land was only
Rs. 13,260. He arrived at this figure by deducting Rs. 2,86,740, which was the
value of the tenanted property from the cost of the property, i.e., Rs.
3,00,000. Thus, he alleged that there was inflation of cost by Rs. 10,28,514
(Rs. 10,41,774 – Rs.13,260).

The last ground given by the A.O. was regarding offering of long-term
capital gain by the assessee. He noted that for the purpose of computation of
long-term capital gain, the assessee estimated the fair market value of the
land converted to stock as on 1^stOctober, 1987 at Rs. 66,29,365
which was reduced by the cost incurred as on 1^st October, 1987,
i.e., Rs. 10,74,774. However, the A.O. also noted that the method of
computation of cost was not clear in view of the fact that the whole of the
land with tenanted structures was purchased for Rs. 3,00,000. The A.O. further
noted the methodology adopted by the assessee for computation of long-term
capital gain. According to him, the assessee had worked out the difference
between the fair market value of the land converted to stock and the cost and
thereafter divided it by the total permissible built-up area. The quotient was
identified by the assessee as capital gains per sq. ft. The assessee thereafter
multiplied the built-up area of individual flats sold with such quotient and
claimed it to be the ‘capital gains’ for the year under consideration. By
adopting such a computation, the assessee was claiming sale of land in
different years in the same ratio as the area of flat sold bore to the total
permissible FSI area. But this calculation was not accepted by the A.O.
primarily on the ground that land as a stock was different from the flats.
Selling of flats did not amount to selling of proportionate quantity of land.

The Court held that u/s 45(2) of the Act, ‘capital gains’ for land should
be considered in the year when land was sold or otherwise transferred by the
assessee. Though flats were sold, ownership of the land continued to remain
with the assessee. ‘Capital gains’ would be chargeable to tax only in the year
when the land was sold or transferred to the co-operative society formed by the
flat purchasers and not in the year when individual flats were sold.

The Court accepted the contention of the petitioner that the A.O. proceeded
on the erroneous presumption that stock-in-trade had to be valued at the
present market value. In Chainrup Sampatram (Supra), the Supreme
Court had held that it would be wrong to assume that the valuation of the
closing stock at market rate has for its object the bringing into charge any
appreciation in the value of such stock. The true purpose of crediting the
value of unsold stock is to balance the cost of those goods entered on the
other side of the account so that the cancelling out of the entries relating to
the same stock from both sides of the account would leave only the transactions
on which there had been actual sales in the course of the year showing the
profit or loss actually realised on the year’s trading. While anticipated loss
is taken into account, anticipated profit in the shape of appreciated value of
the closing stock is not brought into the account as no prudent trader would
care to show increased profit before its actual realisation. This is the theory
underlying the rule that the closing stock has to be valued at cost or market
price whichever is lower and it is now generally accepted as an established
rule of commercial practice and accountancy. In such circumstances, taking the
view that profits for income tax purposes are to be computed in conformity with
the ordinary principles of commercial accounting unless such principles have
been superseded or modified by legislative enactments, the Supreme Court held
that it would be a misconception to think that any profit arises out of
valuation of the closing stock.

With regard to the third ground, i.e., computation of ‘capital gains’, the
Court held that the cost incurred included not only the sale price of the land,
i.e., Rs. 3,00,000, but also the expenditure incurred by way of stamp duty and
registration charges amounting to Rs. 44,087. That apart, the assessee had
incurred a further sum of Rs. 9,92,427 in getting the entire property vacated.
The contention of the A.O. that there was inflation of cost is not correct.
Thus, for computing the income under the head ‘capital gains’, the full value
of consideration received as a result of transfer of the capital asset shall be
deducted by the expenditure incurred in connection with such transfer, cost of
acquisition of the asset and the cost incurred in improvement of the asset. The
expression ‘the full value of the consideration’ would mean the fair market
value of the asset on the date of such conversion. The meaning of the
expressions ‘cost of improvement’ and ‘cost of acquisition’ are explained in
sections 55(1) and 55(2) of the Act, respectively.

The expression ‘capital asset’ occurring in sub-section (1) of section 45
is defined in sub-section (14) of section 2. ‘Capital asset’ means property of
any kind held by an assessee whether or not connected with his business or
profession as well as any securities held by a foreign institutional investor,
but does not include any stock-in-trade, consumable stores or raw materials,
personal effects, etc.

Again, the word ‘transfer’ occurring in sub-section (1) of section 45 has
been defined in section 2(47) of the Act. As per this definition, ‘transfer’ in
relation to a capital asset includes sale, exchange or relinquishment of the
asset or the extinguishment of any rights therein, or compulsory acquisition of
the asset, or in case of conversion of the asset by the owner into
stock-in-trade of the business carried on by him, such conversion or any
transaction involving the allowing of possession of any immovable property to
be taken or retained in part performance of a contract, or any transaction
whether by way of becoming a member of or acquiring shares in a co-operative
society, etc. which has the effect of transferring or enabling the enjoyment of
any immovable property.

In the case of Miss Piroja C. Patel (Supra), the court held
that on eviction of the hutment dwellers from the land in question, the value
of the land increases and therefore the expenditure incurred for having the
land vacated would certainly amount to cost of improvement.

Thus, the cost incurred on stamp duty, etc., together with the cost
incurred in carrying out eviction of the hutment dwellers would certainly add
to the value of the asset and thus amount to cost of improvement which is an
allowable deduction from the full value of consideration received as a result of
the transfer of the capital asset for computing the income under the head
‘capital gains’.

Insofar as the fourth ground is concerned, the A.O. has taken the view that
long-term capital gains arising out of sale or transfer of land would be
assessed to tax only in the year in which the land is sold or otherwise
transferred by the assessee. Opining that land as a stock is a different item
of asset than a flat, the A.O. held that ownership of land continued to remain
with the assessee notwithstanding the sale of flats. Therefore, he was of the view
that ‘capital gains’ would be chargeable to tax only in the year when the land
is sold or otherwise transferred to the co-operative society formed by owners
of the flats and not in the year when individual flats are sold.

According to the A.O., the assessee had erred in
offering to tax ‘capital gains’ in the year when the individual flats were
sold, whereas such ‘capital gains’ could be assessed to tax only when the land
was transferred to the co-operative society formed by the flat purchasers. If
the assessee had offered to tax as ‘capital gains’ in the assessment years
under consideration that which should have been offered to tax in the
subsequent years, it is beyond comprehension as to how a belief can be formed
that income chargeable to tax for the assessment year under consideration had
escaped assessment. That apart, the flat purchasers by purchasing the flats had
certainly acquired a right or interest in the proportionate share of the land
but its realisation is deferred till the formation of the
co-operative society by the owners of the flats and eventual transfer of the
entire property to the co-operative society.

The Court also referred to various other decisions, namely, Prashant
S. Joshi [324 ITR 154 (Bom)], Additional CIT vs. Mohanbhai Pamabhai, 165 ITR
166 (SC), Sunil Siddharthbhai vs. CIT, 156 ITR 509 (SC) and
Addanki Narayanappa vs. Bhaskara Krishnappa, AIR 1966 SC 1300, wherein
the Court held that what is envisaged on the retirement of a partner is merely
his right to realise his interest and to receive its value. What is realised is
the interest which the partner enjoys in the assets during the subsistence of
the partnership by virtue of his status as a partner and in terms of the
partnership agreement. Therefore, what the partner gets upon dissolution of the
partnership or upon retirement from the partnership is the realisation of a
pre-existing right or interest. The Court held that there was nothing strange
in the law that a right or interest should exist in praesenti but
its realisation or exercise should be postponed. Applying the above principle,
the Court held that upon purchase of the flat, the purchaser certainly acquires
a right or interest in the proportionate share of the land but its realisation
is deferred till formation of the co-operative society by the flat owners and
transfer of the entire property to the co-operative society.

Thus, on an overall consideration of the entire matter, the Court held
that there was no basis or justification for the A.O. to form a belief that any
income of the assessee chargeable to tax for the A.Y.s under consideration had
escaped assessment within the meaning of section 147 of the Act. The reasons
rendered could not have led to formation of any belief that income had escaped
assessment within the meaning of the aforesaid provision.

Therefore, in the facts and circumstances of the case, the impugned
notices issued u/s 148 of the Act dated 25^th February, 2000 were set
aside and quashed.

shailesh.kwebmaker

Settlement of cases – Chapter XIX-A of ITA, 1961 – Powers of Settlement Commission – Application for settlement of case – Settlement Commission cannot consider merits of case at that stage; A.Ys. 2015-16 to 2018-19

51. Hitachi Power Europe GMBH vs. IT Settlement Commission [2020] 423 ITR
472 (Mad.) Date of order: 17^th February, 2020 A.Ys.: 2015-16 to
2018-19

Settlement of cases – Chapter XIX-A of ITA, 1961 – Powers of Settlement
Commission – Application for settlement of case – Settlement Commission cannot
consider merits of case at that stage; A.Ys. 2015-16 to 2018-19

In June, 2010, the National Thermal Power Corporation had invited bids
under international competitive bidding for the supply and installation of
eleven 660-megawatt steam generators at five locations in India. A bid was
successfully submitted by B, a company incorporated in India and engaged in
providing turnkey solutions for coal-based thermal power plants. B
sub-contracted a portion of the scope of work under three contracts to its
joint venture company, which in turn sub-contracted a portion thereof to the
assessee. One of the contentions raised by the assessee on the merits was that
the scope of work under each of the contracts was separate and distinct in all
respects including the delineation of the work itself, the modes of execution
of the contract and the payments therefor.

For this reason, the assessee took the stand that the income from offshore
supplies would not be liable to tax in India. For the A.Ys. 2015-16 to 2018-19
the assessee filed returns of income offering to tax the income from onshore
supply and services only. While assessment proceedings were pending, the
assessee applied for settlement of the case. The Settlement Commission held
that the contract was composite and indivisible and hence the applicant, i. e.,
the assessee, had failed to make a full and true disclosure of income.

On a writ petition against the order, the Madras High Court held as under:

‘i) The scheme of Chapter XIX-A of the Income-tax Act, 1961 is to provide a
holistic resolution of issues that arise from an assessment in the case of an assessee that has approached the
Commission. The question of full and true disclosure and the discharge of tax
liability at all stages prior to final hearing should be seen only in the
context of the issues offered for settlement and the remittances of additional
tax thereupon. Issues decided by the Commission and the liability arising
therefrom will be payable only at the stage of such determination, which is the
stage of final hearing u/s 245D(4) of the Act.

ii) The assessee had just applied for settlement of the case. The Commission,
however, in considering the “validity” or otherwise of the application,
proceeded to delve into the merits of the matter even at that stage. The order
of the Settlement Commission was beyond the scope of section 245D(2C) having
been passed on the merits of the issue raised and set aside the same. This writ
petition is allowed.’

shailesh.kwebmaker

Glimpses Of Supreme Court Ruilings

14. Yum! Restaurants (Marketing) Private Limited vs.
Commissioner of Income Tax, Delhi

Date of order: 24^th April, 2020

Doctrine of mutuality – Applicability of – The
receipt of money from an outside entity without affording it the right to have
a share in the surplus does not only subjugate the first test of common
identity, but also contravenes the other two conditions for the existence of
mutuality, i.e., impossibility of profits and obedience to the mandate – There
is a fine line of distinction between absence of obligation and presence of
overriding discretion – An arrangement wherein one member is subjected to the
absolute discretion of another, in such a manner that the entire liability may
fall upon one whereas benefits are reaped by all, is antithetical to the mutual
character in the eyes of law – The raison d’être behind the refund of
surplus to the contributors or mandatory utilisation of the same in the
subsequent assessment year is to reduce their burden of contribution in the
next year proportionate to the surplus remaining from the previous year –
Non-fulfilment of this condition is antithetical to the test of mutuality

The
appellant company Yum! Restaurants (Marketing) Private Limited (‘YRMPL’ or
‘assessee company’ or ‘assessee’) was incorporated by Yum! Restaurants (India)
Pvt. Ltd. (‘YRIPL’), formerly known as Tricon Restaurants India Pvt. Ltd., as
its fully-owned subsidiary for undertaking the activities relating to
advertising, marketing and promotion (‘AMP activities’) for and on behalf of
YRIPL and its franchisees after having obtained approval from the Secretariat
for Industrial Assistance (‘SIA’) for the purpose of economisation of the cost
of advertising and promotion of the franchisees as per their needs. The
approval was granted subject to certain conditions as regards the functioning
of the assessee whereby it was obligated to operate on a non-profit basis on
the principles of mutuality.

In
furtherance of the approval, the assessee entered into a tripartite operating
agreement (the ‘tripartite agreement’) with YRIPL and its franchisees, wherein
the assessee company received fixed contributions to the extent of 5% of gross
sales for the proper conduct of the AMP activities for the mutual benefit of
the parent company and the franchisees.

For the
assessment year 2001-02, the assessee filed its return stating the income to be
Nil under the pretext of the mutual character of the company. The same was not accepted by the A.O.
who observed that the assessee company along with the franchisees was to
contribute a fixed percentage of its revenue to YRMPL. However, as per the
tripartite agreement submitted by YRMPL, YRIPL had the sole absolute discretion
to pay to YRMPL any amount as it may deem appropriate and that YRIPL had no
obligation to pay any amount if it chooses not to do so. YRIPL was under no
legal obligation to pay any amount of contribution as per its own version
reflected from the tripartite agreement. The A.O. determined the total income
at Rs. 44,44,002, being the excess of income over expenditure for A.Y. 2001-02.

The
imposition of liability by the A.O. was upheld by the CIT(A) on the ground of taint
of commerciality in the activities undertaken by the assessee company.

The
liability was further confirmed by the Tribunal, wherein the essential
ingredients of the doctrine of mutuality were found to be missing. The Tribunal
inter alia found that apart from others, contributions were also
received from M/s Pepsi Foods Ltd. and YRIPL. Pepsi Foods Ltd. was neither a
franchisee nor a beneficiary. Similarly, some contribution was also received
from YRIPL who was not under any obligation to pay. Thus, the essential
requirement, that the contributors to the common fund are either to participate
in the surplus or they are beneficiaries of the contribution, was missing.
Through the common AMP activities no benefit accrued to Pepsi Foods Ltd. or
YRIPL. Accordingly, the principles of mutuality could not be applied.

The
consistent line of opinion recorded by the aforementioned three forums was
further approved in appeal by the High Court.

According
to the Supreme Court, the following questions of law arose in the present case:

(i)
Whether the assessee company would qualify as a mutual concern in the eyes of
law, thereby exempting subject transactions from tax liability?

(ii)
Whether the excess of income over expenditure in the hands of the assessee
company is not taxable?

The
assessee had contended before the Supreme Court that the sole objective of the
assessee company was to carry on the earmarked activities on a no-profit basis
and to operate strictly for the benefit of the contributors to the mutual
concern. It was further contended that the assessee company levied no charge on
the franchisees for carrying out the operations. While assailing the
observations made in the impugned judgment, holding that Pepsi Foods Ltd. and
YRIPL were not beneficiaries of the concern, the assessee company had urged
that YRIPL was the parent company of the assessee and earned a fixed percentage
from the franchisees by way of royalty. Therefore, it benefited directly from
enhanced sales as increased sales would translate into increased royalties. A
similar argument had been advanced as regards Pepsi Foods Ltd. It was stated
that under a marketing agreement the franchisees were bound to serve Pepsi
drinks at their outlets and, thus, an increase in the sales at KFC and Pizza
Hut outlets as a result of AMP activities would lead to a corresponding
increase in the sales of Pepsi. It was pointed out that Pepsi was also
advertised by the franchisees in their advertising and promotional material,
along with Pizza Hut and KFC.

As
regards the doctrine of mutuality, it was urged by the assessee company that
the doctrine merely requires an identity between the contributors and
beneficiaries and it does not contemplate that each member should contribute to
the common fund or that the benefits must be derived by the beneficiaries in
the same manner or to the same extent. Reliance had been placed by the
appellant upon reported decisions to draw a parallel between the functioning of
the assessee company and clubs to support the presence of mutuality.

The
Revenue / respondent had countered the submissions made by the assessee company
by submitting that the moment a non-member joins the common pool of funds created
for the benefit of the contributors, the taint of commerciality begins and
mutuality ceases to exist in the eyes of law. It had been submitted that the
assessee company operated in contravention of the SIA approval as contributions
were received from Pepsi, despite it not being a member of the brand fund. It
was urged that once the basic purpose of benefiting the actual contributors was
lost, mutuality stands wiped out.

The
Supreme Court held that it was undisputed that Pepsi Foods Ltd. was a contributor
to the common pool of funds. However, it did not enjoy any right of
participation in the surplus or any right to receive back the surplus which was
a mandatory ingredient to sustain the principle of mutuality.

The
assessee company was realising money both from the members as well as
non-members in the course of the same activity carried on by it. The Supreme
Court noted that in Royal Western India Turf Club Ltd., AIR 1954 SC 85
it has categorically held such operations to be antithetical to mutuality.
Besides, the dictum in Bankipur Club (1997) 5 SCC 394 was apposite.

According
to the Supreme Court, the contention of the assessee company that Pepsi Foods
Ltd., in fact, did benefit from the mutual operations by virtue of its
exclusive contracts with the franchisees was tenuous, as the very basis of
mutuality was missing. Even if any remote or indirect benefit is being reaped
by Pepsi Foods Ltd., the same could not be said to be in lieu of
it being a member of the purported mutual concern and, therefore, could not be
used to fill the missing links in the chain of mutuality. The surplus of a
mutual operation was meant to be utilised by the members of the mutual concern
as members enjoy a proximate connection with the mutual operation. Non-members,
including Pepsi Foods Ltd., stood on a different footing and had no proximate
connection with the affairs of the mutual concern. The exclusive contract
between the franchisees and Pepsi Foods Ltd. stood on an independent footing
and YRIPL as well as the assessee company were not responsible for
implementation of the contract. As a result, the first limb of the
three-pronged test stood severed.

The
Supreme Court held that the receipt of money from an outside entity without
affording it the right to have a share in the surplus did not only subjugate
the first test of common identity, but also contravened the other two
conditions for the existence of mutuality, i.e., impossibility of profits and
obedience to the mandate. The mandate of the assessee company was laid down in
the SIA approval wherein the twin conditions of mutuality and non-profiteering
were envisioned as the sine qua non for the functioning of the assessee
company. The contributions made by Pepsi Foods Ltd. tainted the operations of
the assessee company with commerciality and concomitantly contravened the
prerequisites of mutuality and non-profiteering.

The
Court further held that YRIPL and the franchisees stand on two substantially
different footings. For, the franchisees are obligated to contribute a fixed
percentage for the conduct of AMP activities, whereas YRIPL is under no such
obligation in utter violation of the terms of the SIA approval. Moreover, even
upon request for the grant of funds by the assessee company, YRIPL is not bound
to accede to the request and enjoys a ‘sole and absolute’ discretion to decide
against such request. An arrangement wherein one member is subjected to the
absolute discretion of another, in such a manner that the entire liability may
fall upon one whereas benefits are reaped by all, is the antithesis to the
mutual character in the eyes of law.

According
to the Supreme Court, the contention advanced by the appellant that it is not
mandatory for every member of the mutual concern to contribute to the common
pool failed to advance the case of the appellant. The Court held that there is
a fine line of distinction between absence of obligation and presence of
overriding discretion. In the present case, YRIPL enjoyed the latter to the
detriment of the franchisees of the purported undertaking, both in matters of
contribution and of management. In a mutual concern, it is no doubt true that
an obligation to pay may or may not be there, but in the same breath it is
equally true that an overriding discretion of one member over others cannot be
sustained in order to preserve the real essence of mutuality wherein members
contribute for the mutual benefit of all and not of one at the cost of others.

The
Court observed that the settled legal position is that in order to qualify as a
mutual concern, the contributors to the common fund either acquire a right to
participate in the surplus or an entitlement to get back the remaining
proportion of their respective contributions. Contrary to the above stated
legal position, as per clause 8.4 the franchisees did not enjoy any
‘entitlement’ or ‘right’ on the surplus remaining after the operations were
carried out for a given assessment year. As per the aforesaid clause the
assessee company may refund the surplus subject to the approval of its Board of
Directors. It implied that the franchisees / contributors could not claim a
refund of their remaining amount as a matter of right. According to the Supreme
Court, the raison d’être behind the refund of surplus to the
contributors or mandatory utilisation of the same in the subsequent assessment
year is to reduce their burden of contribution in the next year proportionate
to the surplus remaining from the previous year. Thus, the fulfilment of this
condition is essential. In the present case, even if any surplus is remaining
in a given assessment year, it would not reduce the liability of the
franchisees in the following year as their liability to the extent of 5% was
fixed and non-negotiable, irrespective of whether any funds were surplus in the
previous year. The only entity that could derive any benefit from the surplus
funds was YRIPL, i.e., the parent company. This was antithetical to the test of
mutuality.

It was
observed that the dispensation predicated in the tripartite agreement may
result in a situation where YRIPL would not contribute even a single paisa to
the common pool and yet be able to derive profits in the form of royalties out
of the purported mutual operations, created from the fixed 5% contribution made
by the franchisees. This would be nothing short of derivation of gains /
profits out of inputs supplied by others. According to the Supreme Court, the
doctrine of mutuality, in principle, entails that there should not be any
profit-earning motive, either directly or indirectly. One of the tests of
mutuality requires that the purported mutual operations must be marked by an
impossibility of profits and this crucial test was also not fulfilled in the
present case.

The
Supreme Court further observed that the exemption granted to a mutual concern
is premised on the assumption that the concern is being run for the mutual
benefit of the contributors and the contributions made by the members ought to
be directed accordingly. Contrary to this fundamental tenet, the tripartite
agreement relieves the assessee company from any specific obligation of
spending the amounts received by way of contributions for the benefit of the contributors.
It explicates that the assessee company does not hold such amount under any
implied trust for the franchisees.

According
to the Supreme Court, the assessee company had acted in contravention of the
terms of approval.

The
appellant had urged before the Supreme Court that no fixed percentage of
contribution could be imputed upon YRIPL as it did not operate any restaurant
directly and, thus, the actual volume of sales could not be determined.
According to the Court this argument was not tenable as YRIPL received a fixed
percentage of royalty from the franchisees on the sales. If the franchisees
could be obligated with a fixed percentage of contribution, 5% in the present
case, there was no reason as to why the same obligation ought not to apply to
YRIPL.

The
Court further noted that the text of the tripartite agreement pointed towards
the true intent of the formation of the assessee company as a step-down subsidiary.
It was established to manage the retail restaurant business, the advertising,
media and promotion at the regional and national level of KFC, Pizza Hut and
other brands currently owned or to be acquired in future. In its true form, it
was not contemplated as a non-business concern because operations integral to
the functioning of a business were entrusted to it.

The
Supreme Court held that the doctrine of mutuality bestows a special status to
qualify for exemption from tax liability. The appellant having failed to fulfil
the stipulations and to prove the existence of mutuality, the question of
extending exemption from tax liability to the appellant, that, too at the cost
of the public exchequer, did not arise.

The
assessee company had relied upon reported decisions before the Supreme Court to
establish a parallel between the operations carried out by it and clubs.
According to the Supreme Court, all the members of the club not only have a
common identity in the concern but also stand on an equal footing in terms of
their rights and liabilities towards the club or the mutual undertaking. Such
clubs are a means of social intercourse and are not formed for the facilitation
of any commercial activity. On the contrary, the purported mutual concern in
the present case undertook a commercial venture wherein contributions were
accepted both from the members as well as from non-members. Moreover, one
member was vested with a myriad set of powers to control the functioning and
interests of other members (franchisees), even to their detriment. Such
assimilation could not be termed as a case of ordinary social intercourse
devoid of commerciality.

The
Supreme Court was of the view that once it had conclusively determined that the
assessee company had not operated as a mutual concern, there was no question of
extending exemption from tax liability.

To
support an alternative claim for exemption, the assessee company took a plea in
the written submissions that it was acting under a trust for the contributors
and was under an overriding obligation to spend the amounts received for
advertising, marketing and promotional activities. It urged that once the
incoming amount is earmarked for an obligation, it does not become ‘income’ in
the hands of the assessee as no occasion for the application of such income
arises.

The
Supreme Court left the question of diversion by overriding title open as the
same was neither framed nor agitated in the appeal memo before the High Court
or before it (except a brief mention in the written submissions), coupled with
the fact that neither the Tribunal nor the High Court had dealt with that plea
and that the rectification application raising that ground was pending before
the Tribunal.

15. Basir Ahmed
Sisodiya vs. The Income Tax Officer Date of order: 24^th
April, 2020

Cash credits – The
appellant / assessee, despite being given sufficient opportunity, failed to
prove the correctness and genuineness of his claim in respect of purchase of
marble from unregistered dealers to the extent of Rs. 2,26,000 and resultantly,
the said transactions were assumed as bogus entries (standing to the credit of
named dealers who were non-existent creditors of the assessee) – The appellant
/ assessee, however, in penalty proceedings had offered explanation and caused
to produce affidavits and record statements of the unregistered dealers
concerned and establish their credentials and that explanation having been
accepted by the CIT(A) who concluded that the materials on record would clearly
suggest that the unregistered dealers concerned had sold marble slabs on credit
to the appellant / assessee, as claimed – That being the indisputable position,
the Supreme Court deleted the addition of amount of Rs. 2,26,000

The appellant / assessee was served with a notice u/s
143(2) of the Income-tax Act, 1961 (the ‘1961 Act’) by the A.O. for the A.Y.
1998-99, pursuant to which an assessment order was passed on 30^th
November, 2000. The A.O., while relying on the balance sheet and the books of
accounts, inter alia took note of the credits amounting to Rs. 2,26,000.
He treated that amount as ‘cash credits’ u/s 68 of the 1961 Act and added the
same in the declared income of the assessee (the ‘second addition’). According
to the A.O., the credits of Rs. 2,26,000 shown in the names of 15 persons were
not correct and any correct proof / evidence had not been produced by the
assessee with respect to the income of the creditors and source of income. He
also made other additions to the returned income.

Aggrieved, the assessee preferred an appeal before the
Commissioner of Income Tax (Appeals), Jodhpur. The appeal was partly allowed vide
order dated 9^th January, 2003. However, as regards the trading
account and credits in question, the CIT(A) upheld the assessment order.

The
assessee then preferred a further appeal to the ITAT. Having noted the issues
and objections raised by the Department and the assessee, the ITAT partly
allowed the appeal vide order dated 4^th November, 2004.
However, the order relating to the second addition regarding the credits of Rs.
2,26,000 came to be upheld.

The
assessee then filed an appeal before the High Court u/s 260A of the 1961 Act.
The appeal was admitted on 27^th April, 2006 on the following
substantial question of law:

‘Whether
claim to purchase of goods by the assessee could be dealt with u/s 68 of the
Income-tax Act as a cash credit, by placing burden upon the assessee to explain
that the purchase price does not represent his income from the disclosed
sources?’

The High
Court dismissed the appeal vide impugned judgment and order dated 21^st
August, 2008 as being devoid of merits. The High Court opined that the amount
shown to be standing to the credit of the persons which had been added to the
income of the assessee, was clearly a bogus entry in the sense that it was only
purportedly shown to be the amount standing to the credit of the fifteen
persons, purportedly on account of the assessee having purchased goods on
credit from them, while since no goods were purchased, the amount did represent
income of the assessee from undisclosed sources which the assessee had only
brought on record (books of accounts), by showing to be the amount belonging to
the purported sellers and as the liability of the assessee. That being the
position, the contention about impermissibility of making addition under this
head, in view of addition of Rs. 10,000 having been made in trading account,
rejecting the books of accounts for the purpose of assessing the gross profit,
could not be accepted. The gross profit shown in the books had not been
accepted on the ground that the assessee had not maintained day-to-day stock
registers, nor had he produced or maintained other necessary vouchers, but
then, if those books of accounts did disclose certain other assets which were
wrongly shown to be liabilities, and for acquisition of which the assessee did
not show the source, it could not be said that the A.O. was not entitled to use
the books of accounts for this purpose.

The
assessee in the civil appeal before the Supreme Court reiterated the argument
that the A.O., having made the addition u/s 144 of the 1961 Act being ‘best
judgment assessment’, had invoked powers under sub-section (3) of section 145.
For, assessment u/s 144 is done only if the books are rejected. In that case,
the same books could not be relied upon to impose subsequent additions as had
been done in this case u/s 68.

The
assessee filed an I.A. No. 57442/2011 before the Supreme Court for permission
to bring on record subsequent events. By this application, the assessee placed
on record an order passed by the CIT(A) dated 13^th January, 2011
which considered the challenge to the order passed by the Income-Tax Officer
(ITO) u/s 271(1)(c) dated 17^th November, 2006 qua the
assessee for the self-same assessment year 1998-99. The ITO had passed the said
order as a consequence of the conclusion reached in the assessment order which
had by then become final up to the stage of ITAT vide order dated 27^thApril, 2006 – to the effect that the stated purchases by the assessee
from unregistered dealers were bogus entries effected by him. As a result,
penalty proceedings u/s 271 were initiated by the ITO. That order was set aside
by the appellate authority [CIT(A)] in the appeal preferred by the assessee, vide
order dated 13^th January, 2011 with a finding that the assessee
had not made any concealment of income or furnished inaccurate particulars of
income for the assessment year concerned. As a consequence of this decision of
the appellate authority, even the criminal proceedings initiated against the
assessee were dropped / terminated and the assessee stood acquitted of the
charges u/s 276(C)(D)(1)(2) of the 1961 Act vide judgment and order
dated 6^th June, 2011 passed by the Court of Additional Chief City
Magistrate (Economic Offence), Jodhpur City in proceedings No. 262/2005.

The
Supreme Court noted that during the course of appellate proceedings, the
appellant filed an application under Rule 46A vide letter dated 16^th
October, 2008 and the same was sent to the ITO, Ward-1, Makrana vide
this office letter dated 28^th January, 2009 and 1^st
December, 2010 to submit remand report after examination of additional
evidences. Along with the application under Rules 46A, the appellant filed
affidavits from 13 creditors, the Sales Tax Order for the Financial Year
1997-98 showing purchases from unregistered dealers to the tune of Rs.
2,28,900, cash vouchers duly signed on revenue stamp for receipt of payment by
the unregistered dealers and copy of ration card / Voter ID Card to show the
identity of the unregistered dealers. The A.O. recorded statements of 12
unregistered dealers out of 13. In the report dated 22^nd December,
2010, he mentioned that statements of the above 12 persons were recorded on 15^th
/ 16^th December, 2010 and in respect of identify the unregistered
dealers filed photo copies of their voter identity cards and all of them had
admitted that they had sold marble on credit basis to Basir Ahmed Sisodiya, the
appellant, during F.Y. 1997-98 and received payments after two or three years.
However, he observed that none of them had produced any evidence in support of
their statement since all were petty, unregistered dealers of marble and doing
small business and therefore no books of accounts were maintained. Some of them
had stated that they were maintaining small dairies at the relevant period of
time but they could not preserve the old dairies. Some of them had stated that
they had put their signature on the vouchers on the date of the transactions.

The
Supreme Court further noted that the CIT(A) had observed that in respect of the
addition of Rs. 2,26,000 there had been no denial of purchase of marble slabs
worth Rs. 4,78,900 and sale of goods worth Rs. 3,57,463 and disclosure of
closing stock of Rs. 2,92,490 in the trading account for the year ended on 31^st
March, 1998. Without purchases of marble, there could not have been sale and
disclosure of closing stock in the trading account which suggested that the
appellant must have purchased marble slabs from unregistered dealers. The
CIT(A) had found that the explanation given by the appellant in respect of
purchases from unregistered dealers and their genuineness were substantiated by
filing of affidavits and producing these before the A.O. in the course of
remand report, and the A.O. did not find anything objectionable in respect of
the identity of the unregistered dealers and claims made for the sale of marble
slabs to the appellant in the F.Y. relevant to A.Y. 1998-99.

The
Supreme Court observed that considering the findings and conclusions recorded
by the A.O. and which were commended to the appellate authority as well as the
High Court, it must follow that the assessee despite being given sufficient
opportunity, failed to prove the correctness and genuineness of his claim in
respect of purchase of marble from unregistered dealers to the extent of Rs.
2,26,000. As a result, the said transactions were assumed as bogus entries
(standing to the credit of named dealers who were non-existent creditors of the
assessee).

According
to the Supreme Court, the assessee, however, in penalty proceedings had offered
explanation and caused to produce affidavits and record statements of the
unregistered dealers concerned and establish their credentials and that
explanation having been accepted by the CIT(A) who concluded that the materials
on record would clearly suggest that the unregistered dealers concerned had
sold marble slabs on credit to the assessee, as claimed.

The
Supreme Court was therefore of the view that the factual basis on which the
A.O. formed his opinion in the assessment order dated 30^th November,
2000 (for A.Y. 1998-99) in regard to the addition of Rs. 2,26,000, stood
dispelled by the affidavits and statements of the unregistered dealers
concerned in penalty proceedings. That evidence fully supported the claim of
the assessee. The appellate authority vide order dated 13^th
January, 2011, had not only accepted the explanation offered but also recorded
a clear finding of fact that there was no concealment of income or furnishing
of any inaccurate particulars of income by the appellant / assessee for the
A.Y. 1998-99. That now being the indisputable position, it must necessarily
follow that the addition of the amount of Rs. 2,26,000 could not be justified,
much less maintained.

The
Supreme Court, therefore, allowed the appeal.

16. Union of India (UOI) and Ors. vs. U.A.E.
Exchange Centre Date of order: 24^th
April, 2020

India-UAE DTAA – Merely
having a fixed place of business through which the business of the assessee is
being wholly or partly carried on is not conclusive unless the assessee has a
PE situated in India, so as to attract Article 7 dealing with business profits
to become taxable in India, to the extent attributable to the PE of the
assessee in India – As per Article 5, which deals with and defines the
‘Permanent Establishment (PE)’, a fixed place of business through which the
business of an enterprise is wholly or partly carried on is to be regarded as a
PE and would include the specified places referred to in Clause 2 of Article 5,
but Article 5(3) of the DTAA which starts with a non obstante clause and
also contains a deeming provision predicates that notwithstanding the preceding
provisions of the Article concerned, which would mean clauses 1 and 2 of
Article 5, it would still not be a PE if any of the clauses in Article 5(3) are
applicable – No income as specified in section 2(24) of the 1961 Act was earned
by the liaison office of the respondent in India because the liaison office was
not a PE in terms of Article 5 of DTAA as it was only carrying on activity of a
preparatory or auxiliary character

The
respondent, a limited company incorporated in the United Arab Emirates (UAE)
was engaged in offering, among other things, remittance services for
transferring amounts from UAE to various places in India. It had applied for
permission u/s 29(1)(a) of the Foreign Exchange Regulation Act, 1973 (‘the 1973
Act’), pursuant to which approval was granted by the Reserve Bank of India (the
RBI) vide letter dated 24^th September, 1996.

The
respondent set up its first liaison office in Cochin, Kerala in January, 1997
and thereafter in Chennai, New Delhi, Mumbai and Jalandhar. The activities carried on by the respondent
from the said liaison offices were stated to be in conformity with the terms
and conditions prescribed by the RBI in its letter dated 24^th
September, 1996. The entire expenses of the liaison offices in India were met
exclusively out of funds received from the UAE through normal banking channels.
Its liaison offices undertook no activity of trading, commercial or industrial,
as the case may be. The respondent had no immovable property in India otherwise
than by way of lease for operating the liaison offices. No fee / commission was
charged or received in India by any of the liaison offices for services
rendered in India. It was claimed that no income accrued or arose or was deemed
to have accrued or arisen, directly or indirectly, through or from any source
in India from liaison offices within the meaning of section 5 or section 9 of
the Income-tax Act, 1961 (the 1961 Act). According to the respondent, the
remittance services were offered by it to non-resident Indians (NRIs) in the
UAE. The contract pursuant to which the funds were handed over by the NRI to
the respondent in the UAE was entered into between the respondent and the NRI
remitter in the UAE. The funds were collected from the remitter by charging a
one-time fee of Dirhams 15. After collecting the funds from the NRI remitter,
the respondent made an electronic remittance of the funds on behalf of its
customer in one of two ways:

(i) By telegraphic transfer through bank
channels; or

(ii) On
the request of the NRI remitter, the respondent sent an instrument / cheque
through its liaison offices to the beneficiaries designated by the NRI
remitter.

In
compliance with section 139 of the ITA, 1961, the respondent had been filing
its returns of income from the A.Y. 1998-99 and until 2003-04, showing Nil
income, as according to the respondent no income had accrued or was deemed to
have accrued to it in India, both under the 1961 Act as well as the agreement
entered into between the Government of the Republic of India and the Government
of the UAE, which is known as the Double Taxation Avoidance Agreement (‘DTAA’).
This agreement (DTAA) had been entered into between the two sovereign countries
in exercise of powers u/s 90 of the 1961 Act for the purpose of avoidance of
double taxation and prevention of fiscal evasion with respect to taxes and
income on capital. The DTAA had been notified vide notification No. GSR
No. 710(E) dated 18^th November, 1993. The returns were filed on a
regular basis by the respondent and were accepted by the Department without any
demur.

However,
as some doubt was entertained, the respondent filed an application u/s 245Q(1)
before the Authority for Advance Rulings (Income Tax), New Delhi, which was
numbered as AAR No. 608/2003 and sought ruling of the Authority on the
following question:

‘Whether
any income is accrued / deemed to be accrued in India from the activities
carried out by the Company in India?’

The
Authority vide its ruling dated 26^th May, 2004 answered the
question in the affirmative, saying, ‘Income shall be deemed to accrue in India
from the activity carried out by the liaison offices of the applicant in
India.’ In so holding, the Authority opined that in view of the deeming
provision in sections 2(24), 4 and 5 read with section 9 of the 1961 Act, the
respondent-assessee would be liable to pay tax under the 1961 Act as it had
carried on business in India through a ‘permanent establishment’ (PE) situated
in India and the profits of the enterprise needed to be taxed in India, but
only that proportion that was attributable to the liaison offices in India (the
PE).

The
Authority held that the applicant had liaison offices in India which attended
to the complaints of the clients in cases where remittances were sent directly
to banks in India from the UAE. In addition, in cases where the applicant had
to remit the amounts to the beneficiaries in India as per the directions of the
NRIs, the liaison offices downloaded the information from the internet, printed
cheques / drafts in the name of the beneficiaries in India and sent them
through couriers to various places in India. Without the latter activity, the
transaction of remittance of the amounts in terms of the contract with the NRIs
would not be complete. The commission which the applicant received for
remitting the amount covered not only the business activities carried on in the
UAE but also the activity of remittance of the amount to the beneficiary in
India by cheques / drafts through courier which was being attended to by the
liaison offices.

There
was, therefore, a real relation between the business carried on by the
applicant for which it received commission in the UAE and the activities of the
liaison offices (downloading of information, printing and preparation of
cheques / drafts and sending the same to the beneficiaries in India), which
contributed directly or indirectly to the earning of income by the applicant by
way of commission. There was also continuity between the business of the
applicant in the UAE and the activities carried on by the liaison offices in
India. Therefore, it followed that income had deemed to have accrued / arisen
to the applicant in the UAE from ‘business connection’ in India.

The
Authority further held that insofar as the amount was remitted telegraphically
by transferring directly from the UAE through bank channels to various places
in India and in such remittances the liaison offices had no role to play except
attending to the complaints, if any, in India regarding the remittances in
cases of fraud etc., it could be said to be auxiliary in character. However,
downloading the data, preparing cheques for remitting the amount and
dispatching the same through courier by the liaison offices was an important
part of the main work itself because without remitting the amount to the
beneficiaries as desired by the NRIs, performance of the contract would not be
complete. It was a significant part of the main work of the UAE establishment.
It, therefore, followed that the liaison offices of the applicant in India for
the purposes of this mode of remittance were a ‘permanent establishment’ within
the meaning of the expression in the DTAA.

Following
the impugned ruling of the Authority, dated 26^th May, 2004, the
Department issued four notices of even date, i.e., 19^th July, 2004
u/s 148 of the 1961 Act addressed to the respondent and pertaining to A.Y.s
2000-01, 2001-02, 2002-03 and 2003-04, respectively. The respondent approached
the Delhi High Court by way of Writ Petition No. 14869/2004, inter alia
for quashing of the ruling of the Authority dated 26^th May, 2004,
quashing of the stated notices and for a direction to the appellants not to tax
the respondent in India because no income had accrued to it or was deemed to
have accrued to it in India from the activities of its liaison offices in
India.

The High
Court was of the opinion that the Authority proceeded on a wrong premise by
first examining the efficacy of section 5(2)(b) and section 9(1)(i) of the 1961
Act instead of applying the provisions in Articles 5 and 7 of the DTAA for
ascertaining the respondent’s liability to tax. Further, the nature of
activities carried on by the respondent-assessee in the liaison offices being
only of a preparatory and auxiliary character, were clearly excluded by virtue
of the deeming provision. The High Court distinguished the decisions relied
upon by the Authority in Anglo-French Textile Co. Ltd., by
agents, M/s. Best & Company Ltd., Madras vs. Commissioner of Income
Tax, Madras AIR 1953 SC 105 and R.D. Aggarwal & Company
(Supra). The ratio in these decisions, according to the High
Court, was that the non-resident entity could be taxed only if there was a
business connection between the business carried on by a non-resident which
yields profits or gains and some activity in the taxable territory which
contributes directly or indirectly to the earning of those profits or gains.

The High
Court then concluded that the activity carried on by the liaison offices of the
respondent in India did not in any manner contribute directly or indirectly to the
earning of profits or gains by the respondent in the UAE and every aspect of
the transaction was concluded in the UAE, whereas the activity performed by the
liaison offices in India was only supportive of the transaction carried on in
the UAE. The High Court also took note of Explanation 2 to section 9(1)(i) and
observed that the same reinforces the fact that in order to have a business
connection in respect of a business activity carried on by a non-resident
through a person situated in India, it should involve more than what is
supportive or subsidiary to the main function referred to in clauses (a) to
(c). The High Court eventually quashed the impugned ruling of the Authority and
also the notices issued by the Department u/s 148 of the 1961 Act, since the
notices were based on the ruling which was being set aside. The High Court,
however, gave liberty to the appellants to proceed against the respondent on
any other ground as may be permissible in law.

Feeling
aggrieved, the Department filed a Special Leave Petition before the Supreme
Court.

According
to the Supreme Court, the core issue that was required to be answered in the
appeal was whether the stated activities of the respondent-assessee would
qualify the expression ‘of preparatory or auxiliary character’?

The
Supreme Court observed that having regard to the nature of the activities
carried on by the respondent-assessee, as held by the Authority, it would
appear that the respondent was engaged in ‘business’ and had ‘business
connections’ for which, by virtue of the deeming provision and the sweep of
sections 2(24), 4 and 5 read with section 9 of the 1961 Act, including the
exposition in Anglo-French Textile Co. Ltd. (Supra) and R.D.
Aggarwal & Company (Supra), it would be a case of income deemed to
accrue or arise in India to the respondent. However, in the present case, the
matter in issue would have to be answered on the basis of the stipulations in
the DTAA notified in exercise of the powers conferred u/s 90 of the 1961 Act.

Keeping
in view the finding recorded by the High Court, the Supreme Court proceeded on
the basis that the respondent-assessee had a fixed place of business through
which its business was being wholly or partly carried on. That, however, would
not be conclusive until a further finding is recorded that the respondent had a
PE situated in India so as to attract Article 7 dealing with business profits
to become taxable in India, to the extent attributable to the PE of the
respondent in India. For that, one has to revert back to Article 5 which deals
with and defines the ‘Permanent Establishment (PE)’. A fixed place of business
through which the business of an enterprise is wholly or partly carried on is
regarded as a PE. The term ‘Permanent Establishment (PE)’ would include the specified
places referred to in clause 2 of Article 5. According to the Supreme Court, it
was not in dispute that the place from where the activities were carried on by
the respondent in India was a liaison office and would, therefore, be covered
by the term PE in Article 5(2). However, Article 5(3) of the DTAA opens with a non
obstante clause and also contains a deeming provision. It predicates that
notwithstanding the preceding provisions of the Article concerned, which would
mean clauses 1 and 2 of Article 5, it would still not be a PE if any of the
clauses in Article 5(3) are applicable. For that, the functional test regarding
the activity in question would be essential. The High Court had opined that the
respondent was carrying on stated activities in the fixed place of business in
India of a preparatory or auxiliary character.

The
Supreme Court, after noting the meaning of the expression ‘business’ in section
2(13) of the 1961 Act, discerning the meaning of the expressions ‘business
connection’ and ‘business activity’ from section 9(1) of the 1961 Act and the
dictionary meaning of the expressions ‘preparatory’ and ‘auxiliary’, concluded
that since the stated activities of the liaison offices of the respondent in
India were of preparatory or auxiliary character, the same would fall within
the excepted category under Article 5(3)(e) of the DTAA. As a result, it could
not be regarded as a PE within the sweep of Article 7 of the DTAA.

According
to the Supreme Court, while answering the question as to whether the activity
in question could be termed as other than that ‘of preparatory or auxiliary
character’, it was to be noted that the RBI had given limited permission to the
respondent u/s 29(1)(a) of the 1973 Act on 24^th September, 1996.
From paragraph 2 of the stated permission it was evident that the RBI had
agreed for establishing a liaison office of the respondent at Cochin, initially
for a period of three years, to enable the respondent to (i) respond quickly
and economically to inquiries from correspondent banks with regard to suspected
fraudulent drafts; (ii) undertake reconciliation of bank accounts held in
India; (iii) act as a communication centre receiving computer (via modem)
advices of mail transfer T.T. stop payments messages, payment details, etc.,
originating from the respondent’s several branches in the UAE and transmitting
to its Indian correspondent banks; (iv) printing Indian Rupee drafts with a
facsimile signature from the Head Office and counter signature by the
authorised signatory of the office at Cochin; and (v) following up with the
Indian correspondent banks. These were the limited activities which the
respondent had been permitted to carry on within India. This permission did not
allow the respondent-assessee to enter into a contract with anyone in India but
only to provide service of delivery of cheques / drafts drawn on the banks in
India.

The
permitted activities were required to be carried out by the respondent subject
to conditions specified in Clause 3 of the permission, which included not to
render any consultancy or any other service, directly or indirectly, with or
without any consideration and further that the liaison office in India shall
not borrow or lend any money from or to any person in India without prior
permission of the RBI. The conditions made it amply clear that the office in
India would not undertake any other activity of trading, commercial or
industrial, nor shall it enter into any business contracts in its own name
without prior permission of the RBI. The liaison office of the respondent in
India could not even charge commission / fee or receive any remuneration or
income in respect of the activities undertaken by it in India. From the onerous
stipulations specified by the RBI, it could be safely concluded, as opined by
the High Court, that the activities in question of the liaison office(s) of the
respondent in India were circumscribed by the permission given by the RBI and
were in the nature of preparatory or auxiliary character. That finding reached
by the High Court was unexceptionable.

The
Supreme Court concluded that the respondent was not carrying on any business
activity in India as such, but only dispensing with the remittances by
downloading information from the main server of the respondent in the UAE and
printing cheques / drafts drawn on the banks in India as per the instructions
given by the NRI remitters in the UAE. The transaction(s) had been completed
with the remitters in the UAE, and no charges towards fee / commission could be
collected by the liaison office in India in that regard. To put it differently,
no income as specified in section 2(24) of the 1961 Act was earned by the
liaison office in India and more so because the liaison office was not a PE in
terms of Article 5 of the DTAA (as it was only carrying on activity of a
preparatory or auxiliary character).

The
concomitant was that no tax could be levied or collected from the liaison
office of the respondent in India in respect of the primary business activities
consummated by the respondent in the UAE. The activities carried on by the
liaison office in India as permitted by the RBI clearly demonstrated that the
respondent must steer away from engaging in any primary business activity and
in establishing any business connection as such. It could carry on activities
of preparatory or auxiliary nature only. In that case, the deeming provisions
in sections 5 and 9 of the 1961 Act could have no bearing whatsoever.

The Supreme
Court dismissed the appeal with no order as to costs.

shailesh.kwebmaker

Settlement of cases – Sections 245C(1) and 245D(4) of ITA, 1961 – Powers and duties of Settlement Commission – Application for settlement – Duty of Commission either to reject or proceed with application filed by assessee – Settlement Commission relegating assessee to A.O. – Not proper; A.Ys. 2008-09 to 2014-15

50. Samdariya Builders Pvt. Ltd. vs. IT Settlement Commission [2020] 423
ITR 203 (MP) Date of order: 7^th May, 2019 A.Ys.: 2008-09 to 2014-15

Settlement of cases – Sections 245C(1) and 245D(4) of ITA, 1961 – Powers
and duties of Settlement Commission – Application for settlement – Duty of Commission
either to reject or proceed with application filed by assessee – Settlement
Commission relegating assessee to A.O. – Not proper; A.Ys. 2008-09 to 2014-15

The assessee was a part of a group of companies. Search and survey
operations under sections 132 and 133A of the Income-tax Act, 1961 were
conducted in the residential and business premises of the group, including
those of the assessee and some brokers. No incriminating material was found
against the assessee during the operations, but nine loose sheets of paper,
purportedly relating to the assessee, were seized from a broker. In compliance
with notices issued u/s 153A for the A.Ys. 2008-09 to 2013-14 and section
142(1) for the A.Y. 2014-15, the assessee filed returns of income. During the
assessment proceedings, the assessee filed an application u/s 245C(1) before
the Settlement Commission for settlement and the application was admitted u/s
245D(1) and was proceeded with by the Settlement Commission u/s 245D(2C).
Thereafter, the Principal Commissioner filed a report under Rule 9 of the
Income-tax Rules, 1962. The Settlement Commissioner, by his order u/s 245D(4)
relegated the assessee to the A.O. Hence, the A.O. issued a notice to the
assessee to comply with the earlier notice issued u/s 142(1).

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

‘i) The Settlement Commission’s power of settlement has to be exercised in
accordance with the provisions of the Income-tax Act, 1961. Though the
Commission has sufficient powers in assessing the income of the assessee, it
cannot make any order with a term of settlement which would be in conflict with
the mandatory provisions of the Act, such as in the quantum and payment of tax
and the interest. The object of the Legislature in introducing section 245C of
the Income-tax Act, 1961 is to see that protracted proceedings before the
authorities or in courts are avoided by resorting to settlement of cases.

ii) The Settlement Commission could have either rejected the application or
allowed it to be proceeded with further. If the Settlement Commission was of
the opinion that the matter required further inquiry, it could have directed
the Principal Commissioner or the Commissioner to inquire and submit the report
to the Commission to take a decision. The Commission could not get around the
application for settlement. When a duty was cast on the Commission, it is
expected that the Commission would perform the duty in the manner laid down in
the Act, especially when no further remedy is provided in the Act against the
order of the Settlement Commission. The order of the Settlement Commission
relegating the assessee to the A.O. was to be set aside.’

shailesh.kwebmaker

Offences and prosecution – Sections 271(1)(c), 276C(2), 278B(3) of ITA, 1961 and Section 391 of Cr.P.C., 1973 – Wilful default in payment of penalty for concealment of income – Conviction of managing director and executive director of assessee by judicial magistrate – Appeal – Evidence – Documents to prove there was no wilful default left out to be marked due to inefficiency and inadvertence – Interest of justice – Appellate court has power to allow documents to be let in as additional evidence; A.Y. 2012-13

49. Gangothri Textiles Ltd. vs. ACIT [2020] 423 ITR 382 (Mad.) Date of
order: 20^th November, 2019 A.Y.: 2012-13

Offences
and prosecution – Sections 271(1)(c), 276C(2), 278B(3) of ITA, 1961 and Section
391 of Cr.P.C., 1973 – Wilful default in payment of penalty for concealment of
income – Conviction of managing director and executive director of assessee by
judicial magistrate – Appeal – Evidence – Documents to prove there was no
wilful default left out to be marked due to inefficiency and inadvertence –
Interest of justice – Appellate court has power to allow documents to be let in
as additional evidence; A.Y. 2012-13

The assessee company was a textile manufacturer. It
was represented by its managing director and executive director. The Assistant
Commissioner of Income-tax filed a complaint before the Judicial Magistrate u/s
200 and 190(1) of the Code of Criminal Procedure, 1973 against the petitioners
for offences u/s 276C(2) read with section 278B(3) of the Income-tax Act, 1961
for the A.Y. 2012-13 for wilful default in payment of penalty levied u/s
271(1)(c) of the IT Act.

The petitioners filed revision petitions and
contended that the trial court had failed to take into consideration the
necessity and requirement for marking the documents adduced by way of
additional evidence. The Madras High Court allowed the revision petition and
held as under:

‘i) Where documents of evidence are left out to be
marked due to carelessness and ignorance, they can be allowed to be marked for
elucidation of truth, in the interests of justice, by exercising powers u/s 391
of the Code of Criminal Procedure, 1973. The intention of section 391 of the
Code is to empower the appellate court to see that justice is done between the
prosecutor and the prosecuted in the interests of justice.

ii) According to section 391
of the Code, if the appellate court opined that additional evidence was
necessary, it shall record its reasons and take such evidence itself. The
petitioners had been charged u/s 276C(2) read with section 278B(3) of the Act
for having wilfully failed to pay the penalty and having deliberately failed to
admit the capital gains that arose from the sale transactions done by the
assessee. The criminal revision petition u/s 391 of the Code had been filed by
the petitioners even at the time of presentation of the appeal. The documents
sought to be marked as additional evidence were not new documents and they were
documents relating to filing of returns with the Department in respect of the
earlier assessment years, copies of which were also available with the
Department. By marking these documents, the nature or course of the case would
not be altered. The documents had not been produced before the trial court due
to inefficiency or inadvertence of the person who had conducted the case. Where
documents were left out to be marked due to carelessness and ignorance, they
could be allowed to be marked for elucidation of truth, in the interest of
justice, by exercising powers u/s 391 of the Code.

iii) The petitioners should be allowed to let in
additional evidence subject to the provisions of Chapter XXIII of the Code in
the presence of the complainant and his counsel.’

shailesh.kwebmaker

Income – Accrual of income – Mercantile system of accounting – Business of distribution of electricity to consumers – Surcharge levied on delayed payment of bills – Assessee liable to tax on receipt of such surcharge; A.Y. 2005-06

48. Principal CIT vs. Dakshin Haryana Bijli Vitran Nigam
Ltd. [2020] 423 ITR 402 (P&H) Date of order: 29^th November, 2018 A.Y.: 2005-06

Income – Accrual of income – Mercantile system of accounting – Business of
distribution of electricity to consumers – Surcharge levied on delayed payment
of bills – Assessee liable to tax on receipt of such surcharge; A.Y. 2005-06

The assessee distributed electricity. For the A.Y.
2005-06 the assessment was completed u/s 143(3). Subsequently, proceedings for
reassessment were initiated on the ground that the assessee had charged
surcharge on delayed payment of bill and this was charged as part of the single
bill along with the electricity charges. The assessee did not account for the
surcharge as part of its income on the ground that its recovery was not
definite. The A.O. made an addition on account of the surcharge levied but not
realised since the assessee followed the mercantile system of accounting.

The Commissioner (Appeals) deleted the addition
following his earlier orders. The Tribunal affirmed his order.

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

‘i) As and when the assessee received payment of
surcharge, it would be obliged to pay tax on such amount. There was no
illegality or perversity in the findings recorded by the appellate authorities
which warranted interference.

ii) No question of law arose.’

shailesh.kwebmaker

Fringe benefits tax – Charge of tax – Section 115WA of ITA, 1961 – Condition precedent – Relationship of employer and employee – Free samples distributed to doctors by pharmaceutical company – Not fringe benefit – Amount spent not liable to fringe benefits tax; A.Y. 2006-07

47. Principal CIT vs. Aristo Pharmaceuticals P. Ltd. [2020] 423 ITR 295 (Bom.) Date of order: 23^rd January, 2020 A.Y.: 2006-07

Fringe benefits tax – Charge of tax – Section 115WA of ITA, 1961 –
Condition precedent – Relationship of employer and employee – Free samples
distributed to doctors by pharmaceutical company – Not fringe benefit – Amount
spent not liable to fringe benefits tax; A.Y. 2006-07

The
following questions were raised in the appeal filed by the Revenue before the
Bombay High Court:

‘i)
Whether on the facts and in the circumstances of the case and in law, the
Tribunal was right in setting aside the action of the A.O. without appreciating
the fact that the fringe benefit assessment was framed after duly considering
the CBDT Circular No. 8 of 2005 ([2005] 277 ITR (St.) 20] and the Explanatory
Notes to the Finance Act, 2005 on the provisions relating to fringe benefit
tax?

ii)
Whether on the facts and in the circumstances of the case and in law, the
Tribunal was right in ignoring the fact that the Tribunal has explained
considering the case of Eskayef vs. CIT [2000] 245 ITR 116 (SC),
of the Supreme Court that free medical samples distributed to doctors is in the
nature of sales promotion and, similarly, any expenditure on free samples of
other products distributed to trade or consumers would be liable to fringe
benefit tax?’

The
Bombay High Court held as under:

‘i) From
a bare reading of section 115WA of the Income-tax Act, 1961 it is evident that
for the levy of fringe benefits tax it is essential that there must be a
relationship of employer and employee and the fringe benefit has to be provided
or deemed to be provided by the employer to his employees. The relationship of
employer and employee is the sine qua non and the fringe benefits have
to be provided by the employer to the employees in the course of such
relationship.

ii) The
assessee was a pharmaceutical company. Since there was no employer-employee
relationship between the assessee on the one hand and the doctors on the other
hand to whom the free samples were provided, the expenditure incurred for them
could not be construed as fringe benefits to be brought within the additional
tax net by levy of fringe benefit tax.’

shailesh.kwebmaker

Deemed income – Section 41(1) of ITA, 1961 – Remission or cessation of trading liability – Condition precedent for application of section 41(1) – Deduction must have been claimed for the liability – Gains on repurchase of debenture bonds – Not assessable u/s 41(1)

46. CIT vs. Reliance Industries Ltd. [2020] 423 ITR 236 (Bom.) Date of order: 15^th January, 2019

Deemed income – Section 41(1) of ITA, 1961 – Remission or cessation of
trading liability – Condition precedent for application of section 41(1) –
Deduction must have been claimed for the liability – Gains on repurchase of
debenture bonds – Not assessable u/s 41(1)

The
assessee had issued foreign currency bonds in the years 1996 and 1997 carrying
a coupon rate of interest ranging between 10 and 11% and having a maturity
period of 30 to 100 years. The interest was payable half-yearly. According to
the assessee, on account of the attack on the World Trade Centre in the USA on
11^th September, 2001, the financial market collapsed and the
investors of debentures and bonds started selling them which, in turn, brought
down the market price of such bonds and debentures which were traded in the
market at less than the face value. The assessee, therefore, purchased such
bonds and debentures from the market and extinguished them. In the process of
buyback, the assessee gained a sum of Rs. 38.80 crores. The A.O. treated this
as assessable to tax in terms of section 41(1) and made addition accordingly.

The
Commissioner (Appeals) deleted the addition. The Tribunal confirmed the
decision of the Commissioner (Appeals).

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

‘i) For
applicability of section 41(1), it is a sine qua non that there should
be an allowance or deduction claimed by the assessee in any assessment year in
respect of loss, expenditure or trading liability incurred. Then, subsequently,
during any previous year, if the creditor remits or waives any such liability,
the assessee is liable to pay tax u/s 41(1).

ii) It
was not the case of the Revenue that in the process of issuing the bonds the
assessee had claimed deduction of any trading liability in any year. Any
extinguishment of such liability would not give rise to applicability of
sub-section (1) of section 41.’

shailesh.kwebmaker

Capital gains – Transfer of bonus shares – Bonus shares in respect of shares held as stock-in-trade – No presumption that bonus shares constituted stock-in-trade – Tribunal justified in treating bonus shares as investments; A.Ys. 2006-07 to 2009-10

45. Principal CIT vs. Ashok Apparels (P.) Ltd. [2020] 423 ITR 412 (Bom.) Date of order: 8^th April, 2019 A.Ys.: 2006-07 to 2009-10

Capital gains – Transfer of bonus shares – Bonus shares in respect of
shares held as stock-in-trade – No presumption that bonus shares constituted stock-in-trade
– Tribunal justified in treating bonus shares as investments; A.Ys. 2006-07 to
2009-10

In the
appeal by the Revenue against the order of the Tribunal, the following question
was raised before the Bombay High Court.

‘Whether
on the facts and in the circumstances of the case and in law, the Income-tax
Appellate Tribunal was justified in treating the bonus shares as investments
with a cost of acquisition of Rs. Nil for the year under consideration,
ignoring the fact that the original shares, for which bonus shares were
allotted, were present in the trading stock itself for the year under
consideration, thus the bonus shares allotted against the same were also
required to be treated as a part of trading stock itself?’

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

‘i) In CIT
vs. Madan Gopal Radhey Lal [1969] 73 ITR 652 (SC) the Supreme Court
observed that bonus shares would normally be deemed to be distributed by the
company as capital and the shareholder receives the shares as capital. The
bonus shares are accretions to the shares in respect of which they are issued,
but on that account those shares do not become stock-in-trade of the business
of the shareholder. A trader may acquire a commodity in which he is dealing for
his own purposes and hold it apart from the stock-in-trade of his business.
There is no presumption that every acquisition by a dealer in a particular
commodity is acquisition for the purpose of his business; in each case the
question is one of intention to be gathered from the evidence of conduct and
dealings by the acquirer with the commodity.

ii) The
A.O. had merely proceeded on the basis that the origin of the bonus shares
being the shares held by the assessee by way of stock-in-trade, necessarily the
bonus shares would also partake of the same character. The Tribunal was
justified in the facts and circumstances of the case in treating the bonus
shares as investments.’

shailesh.kwebmaker

Capital gains – Exemption u/s 54 of ITA, 1961 – Sale of residential house and purchase or construction of new residential house within stipulated time – Construction of new residential house need not begin after sale of original house; A.Y. 2012-13

44. Principal CIT vs. Akshay Sobti [2020] 423 ITR 321 (Del.) Date of order: 19^th December, 2019 A.Y.: 2012-13

Capital gains – Exemption u/s 54 of ITA, 1961 – Sale of residential house
and purchase or construction of new residential house within stipulated time –
Construction of new residential house need not begin after sale of original
house; A.Y. 2012-13

For the
A.Y. 2012-13 the assessee had claimed deduction u/s 54 in respect of capital
gains from the sale of residential house. The A.O. disallowed the deduction u/s
54 on the ground that the assessee had entered into an agreement dated 10^th
February, 2006 and the date of the agreement was to be treated as the date of
acquisition, which fell beyond the one year period provided u/s 54 and was also
prior to the date of transfer.

The
Commissioner (Appeals) held that the assessee had booked a semi-finished flat
and was to make payments in instalments and the builder was to construct the
unfinished bare shell of a flat. Under these circumstances, the Commissioner
(Appeals) considered the agreement to be a case of construction of new
residential house and not purchase of a flat. He observed that since the
construction has been completed within three years of the sale of the original
asset, the assessee was entitled to relief u/s 54. The Tribunal upheld the
decision of the Commissioner (Appeals).

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

‘i)
Section 54 of the Income-tax Act, 1961 requires an assessee to purchase a
residential house property either one year before or within two years after the
date of transfer of a long-term capital asset, or construct a residential
house. It is not stipulated or indicated in the section that the construction
must begin after the date of sale of the original or old asset.

ii) The
assessee had fulfilled the conditions laid down in section 54 and was entitled
to the benefit under it.’

shailesh.kwebmaker

Business expenditure – Deduction u/s 42(1)(a) of ITA, 1961 – Exploration and extraction of oil – Conditions precedent for deduction – Expenditure should be infructuous or abortive exploration expenses, and area should be surrendered prior to commencement of commercial production – Meaning of expression ‘surrender’ – Does not always connote voluntary surrender – Assessee entering into production sharing contract with Government of India and requesting for extension at end of contract period – Government refusing extension – Assessee entitled to deduction u/s 42(1)(a); A.Y. 2008-09

43. Principal CIT vs. Hindustan Oil Exploration Co. Ltd. [2020] 423 ITR 465 (Bom.) Date of order: 25^th March, 2019 A.Y.: 2008-09

Business expenditure – Deduction u/s 42(1)(a) of ITA, 1961 – Exploration
and extraction of oil – Conditions precedent for deduction – Expenditure should
be infructuous or abortive exploration expenses, and area should be surrendered
prior to commencement of commercial production – Meaning of expression
‘surrender’ – Does not always connote voluntary surrender – Assessee entering
into production sharing contract with Government of India and requesting for
extension at end of contract period – Government refusing extension – Assessee
entitled to deduction u/s 42(1)(a); A.Y. 2008-09

The assessee was engaged in the business of exploration and extraction of
mineral oil. It entered into a production-sharing contract with the Government
of India on 8^th October, 2001 for the purposes of oil exploration.
According to the contract, a licence was issued to a consortium of three
companies, which included the assessee, to carry out the exploration initially
for a period of three years and the entire exploration was to be completed
within a period of seven years in three phases. At the end of the period,
extension was denied by the Government of India. In its Nil return of income
filed for the A.Y. 2008-09, the assessee claimed deduction u/s 42(1)(a) of the
Income-tax Act, 1961 on the expenditure on oil exploration on the ground that
the block was surrendered on 15^th March, 2008. The A.O. was of the
opinion that it had not surrendered the right to carry on oil exploration since
the assessee was interested in extension of time which was denied by the
Government of India and disallowed the claim.

The Commissioner (Appeals) allowed the appeal. The Tribunal found that
according to article 14 of the contract, relinquishment and termination of
agreement were two different concepts and that by a letter dated 28^th
March, 2007 the assessee was informed that its contract stood relinquished. The
Tribunal held that the assessee was covered by the deduction provision
contained in section 42, that such expenditure was not amortised or was not
being allowed partially year after year and it had to be allowed in full, and
therefore there was no justification to deny the benefit of deduction to the
assessee.

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

‘i) As long as the commercial production had not begun and the expenditure
was abortive or infructuous exploration expenditure, the deduction would be
allowed. The term “surrender” itself was a flexible one and did not always
connote the meaning of voluntary surrender. The surrender could also take place
under compulsion. The assessee had no choice but to surrender the oil blocks
because the Government of India had refused to extend the validity period of
the contract. Admittedly, commercial production of oil had not commenced. The
act of the assessee to hand over the oil blocks before the commencement of
commercial production was covered within the expression “any area surrendered
prior to the beginning of commercial production by the assessee”.

ii) The
provisions of section 42 recognised the risks of the business of exploration
which activity was capital-intensive and high in risk of the entire expenditure
not yielding any fruitful result and provided for special deduction. The
purpose of the enactment would be destroyed if interpreted rigidly. For
applicability of section 42(1)(a) the elements vital were that the expenditure
should be infructuous or abortive exploration expenses and that the area should
be surrendered prior to the beginning of commercial production by the assessee.
As long as these two requirements were satisfied, the expenditure in question
would be recognised as a deduction. The term “surrender” had to be appreciated
in the light of these essential requirements of the deduction clause. It was
not the contention of the Department that the expenditure was infructuous or
abortive exploration expenditure.

iii) The interpretation of section 42(1)(a) by the Tribunal and its order
holding the assessee eligible for deduction thereunder were not erroneous.’

shailesh.kwebmaker

i) Business expenditure – Disallowance – Sections 14A and 36(1)(iii) of ITA, 1961 – Interest on borrowed capital – Finding that investment from interest-free funds available with assessee – Presumption that advances made out of interest-free funds available with assessee – Deletion of addition made u/s 14A justified (ii) Unexplained expenditure – Section 69C of ITA, 1961 – Suspicion that certain purchases were bogus based on information from sales tax authority – Neither independent inquiry conducted by A.O. nor due opportunity given to assessee – Deletion of addition by appellate authorities justified; A.Y. 2010-11

42. Principal CIT vs.
Shapoorji Pallonji and Co. Ltd. [2020] 423 ITR 220
(Bom.) Date of order: 4^th
March, 2020 A.Y.: 2010-11

(i) Business expenditure –
Disallowance – Sections 14A and 36(1)(iii) of ITA, 1961 – Interest on borrowed
capital – Finding that investment from interest-free funds available with
assessee – Presumption that advances made out of interest-free funds available
with assessee – Deletion of addition made u/s 14A justified

(ii) Unexplained
expenditure – Section 69C of ITA, 1961 – Suspicion that certain purchases were
bogus based on information from sales tax authority – Neither independent
inquiry conducted by A.O. nor due opportunity given to assessee – Deletion of
addition by appellate authorities justified; A.Y. 2010-11

For the
A.Y. 2010-11, the A.O. held that the purchases made by the assessee from two
sellers were bogus; according to information received from the Sales Tax
Department, Government of Maharashtra, those two sellers had not actually sold
any material to the assessee. Accordingly, he issued a show cause notice in
response to which the assessee furnished copies of the bills and entries made
in its books of accounts in respect of such purchases. However, the A.O. in his
order made addition u/s 69C of the Income-tax Act, 1961. He also made
disallowances under sections 14A and 36(1)(iii) of the Act.

The
Commissioner (Appeals) deleted the disallowances. The Tribunal upheld the
decision of the Commissioner (Appeals). According to the Tribunal, the A.O. had
merely relied upon the information received from the Sales Tax Department but
had not carried out any independent inquiry. The Tribunal recorded a finding
that the A.O. failed to show that the purchased materials were bogus, whereas
the assessee produced materials to show the genuineness of the purchases and
held that there was no justification to doubt the genuineness of the purchases
made by the assessee.

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

‘i) On
the facts as found by the Commissioner (Appeals) and as affirmed by the
Tribunal, the presumption that if there were funds available with the assessee,
both interest-free and overdraft or loans, the investments were out of the
interest-free funds generated or available with the assessee was established.
The Tribunal had affirmed the order of the Commissioner (Appeals) deleting the
addition made by the A.O. u/s 14A on the ground that the interest-free funds
available with the assessee were far in excess of the advance given. The
principle of apportionment under Rule 8D of the Income-tax Rules, 1962 did not
arise as the jurisdictional facts had not been pleaded by the Department.

ii) The
finding of the Commissioner (Appeals) as affirmed by the Tribunal was that the
assessee had not utilised interest-bearing borrowed funds for making
interest-free advances but had its own interest-free fund far in excess of
interest-free advance. No question of law in respect of the deletion of the
disallowance made by the A.O. u/s 36(1)(iii) arose.

iii) The Tribunal was justified in deleting the addition
made u/s 69C on the ground of bogus purchases. Merely on suspicion based on the
information received from another authority, the A.O. ought not to have made
the additions without carrying out independent inquiry and without affording
due opportunity to the assessee to controvert the statements made by the
sellers before the other authority.’

shailesh.kwebmaker

Search and seizure – Sections 132, 143(2) and 158BC of ITA, 1961 – Block assessment u/s 158BC – Issue and service of notice u/s 143(2) is mandatory – Non-issuance of notice – Assessment vitiated

39. CIT vs.
Sodder Builder and Developers (P) Ltd.; [2019] 419 ITR
436 (Bom.) Date of order:
16^th July, 2019

Search and
seizure – Sections 132, 143(2) and 158BC of ITA, 1961 – Block assessment u/s
158BC – Issue and service of notice u/s 143(2) is mandatory – Non-issuance of
notice – Assessment vitiated

A search and seizure operation u/s 132 of the Income-tax Act, 1961 was
conducted in the assessee’s premises. A notice was issued u/s 158BC to assess
the undisclosed income. The Assistant Commissioner passed an assessment order
u/s 158BC. The records indicated that no notice u/s 143(2) was issued to the
assessee.

The assessee contended that non-issuance of such a notice vitiated the
assessment made under the special procedure under Chapter XIV-B. The Tribunal
accepted the assessee’s claim and allowed the appeal filed by the assessee.

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

‘i) In the present case,
admittedly, no notice u/s 143(2) of the said Act was ever issued to the
assessee. By applying the law laid down by the Hon’ble Apex Court in Asst.
CIT vs. Hotel Blue Moon (210) 321 ITR 362 (SC), we will have to hold
that the assessment made in the present case stands vitiated.

ii) Therefore, even if we were to
hold in favour of the Revenue with regard to the other substantial questions of
law framed at the time of admission of this appeal, the assessment made in the
present matter would nevertheless stand vitiated for want of mandatory notice
u/s 143(2) of the said Act.

iii) The assessment made by the
Assistant Commissioner pursuant to the notice issued u/s 158BC was vitiated for
want of the mandatory notice u/s 143(2).’

shailesh.kwebmaker

Search and seizure – Sections 68, 132, 153A and 153C of ITA, 1961 – Assessment of third person – Jurisdiction of AO – Addition made u/s 68 not based on material seized during search – Not sustainable

38. Principal
CIT vs. Ankush Saluja; [2019] 419 ITR
431 (Del.) Date of order:
14^th November, 2019 A.Y.: 2007-08

Search and
seizure – Sections 68, 132, 153A and 153C of ITA, 1961 – Assessment of third
person – Jurisdiction of AO – Addition made u/s 68 not based on material seized
during search – Not sustainable

A search and seizure operation u/s 132 of the Income-tax Act, 1961 was
conducted in the S group. Cash and jewellery which belonged to the assessee
were found and seized from the residence of the assessee’s father in whose name
the search warrant of authorisation was issued. The satisfaction note was
recorded by the AO in this regard and a notice u/s 153C read with section 153A
was issued against the assessee. In response thereto, the assessee filed his
return of income. The AO treated the unsecured loans as unexplained cash credit
u/s 68 of the Act and made an addition to that effect.

The Commissioner (Appeals) held that the addition u/s 68 was not based
on any incriminating document found and seized during the search and,
therefore, the addition could not be sustained. The Tribunal upheld the order
of the Commissioner (Appeals).

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

‘i) There were concurrent
findings of fact to the effect that the additions made by the Assessing Officer
u/s 68 were not based on any incriminating document found or seized during the
search action u/s 132. In this view of the matter, the assumption of
jurisdiction u/s 153C by the Assessing Officer was not justified and
accordingly the additions made u/s 68 could not be sustained.

ii) No question of law arose.’

shailesh.kwebmaker

Reassessment – Sections 147 and 148 of ITA, 1961 – Condition precedent for notice – Tangible material to show escapement of income from taxation – Agricultural income disclosed in return and accepted – Subsequent advisory by IT Department that claims of agricultural income should be investigated – Notice based solely on advisory – Not valid

37. Ravindra
Kumar (HUF) vs. CIT; [2019] 419 ITR
308 (Patna) Date of order:
6^thAugust, 2019 A.Y.: 2011-12

Reassessment –
Sections 147 and 148 of ITA, 1961 – Condition precedent for notice – Tangible
material to show escapement of income from taxation – Agricultural income
disclosed in return and accepted – Subsequent advisory by IT Department that
claims of agricultural income should be investigated – Notice based solely on
advisory – Not valid

For the A.Y. 2011-12, the assessee had filed return of income which
included agricultural income. On 22^ndMarch, 2018, the AO issued
notice u/s 133(6) of the Income-tax Act, 1961 requiring the assessee to furnish
the information relating to the agricultural income disclosed in his return.
The assessee did not respond to this notice. The notice was followed by a
notice u/s 148. The reassessment notice was based on an advisory issued by the
Income-tax Department. The advisory directed the AO to verify whether there was
any data entry error in the returns filed, to provide feedback where assessment
was complete and in cases where assessment was pending, to thoroughly verify
the claims on agricultural income. The assessee filed a writ petition and
challenged the notice.

The Patna High Court allowed the writ petition and held as under:

‘i) A power to reopen an
assessment would vest in the Assessing Officer only if there is tangible material
in his possession for coming to a conclusion that there was escapement of
income chargeable to tax, from assessment, and the reasons with the Assessing
Officer must have a live link with the formation of belief.

ii) The Assessing Officer
mentioned in the “reasons” supplied that the assessee had not
produced certain evidence in support of agricultural income and in the absence
of which the claim towards agricultural income could not be substantiated. The
admission by the Assessing Officer regarding absence of material could not lead
to the formation of belief that the disclosure was incorrect and chargeable to
tax u/s 147 of the Act. The reason was firstly that such opportunity was very
much available to the Assessing Officer at the stage of filing of the returns
when in exercise of powers u/s 142/143 such directions could have been issued
for production of records and a failure of the assessee to satisfy the
Assessing Officer on such count could have led to a best judgment assessment
u/s 144 at the stage of original assessment; but having not done so, such
recourse could not be adopted by relying upon the statutory provisions of
section 147 of the Act.

iii) Secondly such enabling powers
were only to be exercised where there was tangible material available with the
Assessing Officer and not in the absence thereof. In view of the clear fact
situation available on the record where such reopening was simply founded on
the advisory dated 10^th March, 2016 issued by the Department and
where the reasons so present for the formation of belief was not resting on any
tangible material in possession of the Assessing Officer, the entire exercise
was illegal and de hors the provisions of section 147 / 148’.

shailesh.kwebmaker

Section 115JB – Waiver of loan would not assume the character of income and hence, not part of book profit and adjustment in accumulated debit balance of profit & loss account through restructuring account to be disregarded for the purpose of computation of brought-forward losses

11. Windsor Machines Ltd. vs. DCIT (Mumbai) Manoj Kumar Aggarwal (A.M.) and Madhumita Roy (J.M.) ITA Nos. 2709, 2710 and 4697/Mum/2019 A.Ys.: 2013-14 and 2014-15 Date of order: 28^thMay, 2020 Counsel for Assessee
/ Revenue: Pradip N. Kapasi and Akhilesh Pevekar / Vinay Sinha

Section
115JB – Waiver of loan would not assume the character of income and hence, not
part of book profit and adjustment in accumulated debit balance of profit &
loss account through restructuring account to be disregarded for the purpose of
computation of brought-forward losses

FACTS

The assessee was
declared a sick company under the provisions of the Sick Industrial Companies
(Special Provisions) Act, 1985 (SICA) and a rehabilitation Scheme was
sanctioned. The Scheme envisaged several reliefs and concessions from various
agencies, including certain tax concessions, viz., exemption from the
provisions of sections 41, 72, 43-B and 115JB for a period of eight years from
the cut-off date (i.e., 31^st March, 2009 as per the Scheme).

The
assessee’s net worth turned positive on 31^st March, 2011, hence the
BIFR discharged the assessee from the purview of SICA vide its order
dated 16^th August, 2011. According to the DIT (Recovery), since the
assessee was discharged by SICA on 16^th August, 2011 and its net
worth turned positive by virtue of implementation of the revival Scheme, the
assessee was precluded from relief u/s 115JB in view of Explanation 1(vii) to
section 115JB(2) and, therefore, no relief would be available to it from A.Y.
2011-12 onwards from applicability of the provisions of section 115JB. The
assessee prayed for
reconsideration of the order pleading before the DIT (Recovery) that in terms
of the BIFR Scheme, it was entitled to relief u/s 115JB for a period of eight
years, i.e., up to A.Y. 2017-18.

In the meantime, the A.O., referring to the
decision of the DIT (Recovery), held that the assessee would be entitled for
relief u/s 115JB only up to A.Y. 2011-12. Accordingly, he computed book profits
u/s 115JB at Rs. 1,076.27 lakhs which was nothing but profit shown by the
assessee in the financial statements (after excluding exempt dividend income).
The CIT(A), on appeal, upheld the order of the A.O.

HELD

According to
the Tribunal, since the assessee was discharged by SICA on 16^th
August, 2011 and its net worth turned positive by virtue of implementation of
the revival Scheme, the assessee was precluded from relief u/s 115JB in view of
Explanation 1(vii) to section 115JB(2) and, therefore, no relief would be
available from A.Y. 2011-12 onwards.

The Tribunal
also found substance in the contention of the assessee that

(a) the
amount credited to profit & loss account on account of waiver of loan would
not assume the character of income and hence should not form part of book
profits u/s 115JB, and

(b)
adjustment in accumulated debit balance of profit & loss account through
restructuring account should be disregarded for the purpose of computation of
brought-forward losses in terms of Explanation 1(iii) to section 115JB(2),

However, the
Tribunal also noted that the issues had not been delved upon either by the A.O.
or by the CIT(A). Therefore, on the facts and circumstances of the case, the
Tribunal remitted the matter back to the file of the CIT(A).

shailesh.kwebmaker

Section 2(22)(e) – No addition can be made u/s 2(22)(e) since as per annual return filed by the assessee, he had transferred his shareholding in borrower company before the advancement of loan by the lender company to the borrowing company

19. [(2020) 117 taxmann.com 451
(Chd.)(Trib.) ACIT vs. Gurdeep Singh ITA No. 170 (Chd.) of 2018 A.Y.: 2013-2014 Date of order: 26^th June, 2020

Section 2(22)(e) – No addition can be made
u/s 2(22)(e) since as per annual return filed by the assessee, he had
transferred his shareholding in borrower company before the advancement of loan
by the lender company to the borrowing company

FACTS

The assessee was a shareholder in two companies, namely, C Ltd. and J
Ltd. During the previous year relevant to the assessment year under
consideration, C Ltd. gave loans and advances to J Ltd. out of its surplus
funds. The A.O. took a view that since the assessee was holding shares in both
companies in excess of ten percent of total shareholding, the amount of loan is
to be taxed as dividend u/s 2(22)(e) of the Act.

The annual return
filed with the Registrar of Companies (ROC) revealed that the assessee held
only one share of C Ltd., whereas the other shares were transferred to J Ltd.
The annual return was belatedly filed with the ROC, along with payment of late
fee, which was accepted by the ROC. Based on the belatedly filed annual return,
the assessee contended that the shares were transferred prior to the
advancement of loan and, therefore, the provisions of section 2(22)(e) were not
applicable. The A.O. did not agree with the submissions made by the assessee
and held the plea of share transfer to be an afterthought since the return with
the Registrar was filed late.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the
appeal since the transfer of shares was accepted by the A.O. while framing assessments
of subsequent years, and also held that the transfer of shares had to be
considered. He also held that the transaction was commercially expedient with
no personal benefit involved.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

HELD

The Revenue could
not establish beyond doubt that the assessee was having substantial interest in
C Ltd. on the date of advancement of loan by C Ltd. to J Ltd. Even though the
annual return was filed belatedly, once accepted by the ROC, it was a legal and
valid document as per law and the effective date for transfer of shares should
be considered as that mentioned in the return filed. To apply a deeming
fiction, the first set of facts is to be proved beyond doubt and the deeming
fiction cannot be applied on the basis of assumption, presumption or suspicion
about the first set of facts. The Tribunal observed that it was the A.O.’s
suspicion that the assessee was holding substantial shares in C Ltd. on the
date of advancement of loan. The Revenue could not rebut the facts beyond
reasonable doubt. The Tribunal upheld the order passed by the CIT(A) and
confirmed the deletion of the addition made u/s 2(22)(e).

The appeal filed by
the Revenue was dismissed.

shailesh.kwebmaker

Section 115BBE, read with sections 69, 143 and 154 – Amount surrendered, in the course of survey, as undisclosed investment in stock and assessed as business income cannot be subsequently brought to tax u/s 115BBE by passing an order u/s 154

18. [(2020) 117 taxmann.com 178
(Jai.)(Trib.) ACIT vs. Sudesh Kumar Gupta ITA No. 976 (Jp) of 2019 A.Y.: 2014-2015 Date of order: 9^th June, 2020

Section 115BBE, read with sections 69, 143
and 154 – Amount surrendered, in the course of survey, as undisclosed
investment in stock and assessed as business income cannot be subsequently
brought to tax u/s 115BBE by passing an order u/s 154

FACTS

During the course of survey, the assessee surrendered an amount of Rs. 21
lakhs as undisclosed investment in stock. This amount was offered to tax in the
return of income as business income. In the assessment completed u/s 143(3) of
the Act, the returned income was accepted.

Subsequently, the A.O. issued a notice u/s 154 proposing to tax the
undisclosed investment of Rs. 21,00,000 in stock u/s 69 and tax thereon levied
u/s 115BBE at 30%. The assessee submitted that the amount admitted as
undisclosed excess stock was on an estimated basis and it had been accepted by
the A.O. in an assessment made u/s 143(3). The A.O. rejected the submission
made by the assessee and passed an order u/s 154 and levied tax on the amount
of undisclosed investment at 30% in accordance with section 115BBE.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the
appeal holding that the A.O. was not justified in invoking the provisions of
section 69 once he had charged it to tax under the head business income while
passing the assessment order u/s 143(3).

Aggrieved, the Revenue preferred an appeal to the Tribunal.

HELD

The Tribunal noted
that the amount of undisclosed investment in stock surrendered by the assessee
was offered as ‘business income’ in the return of income and was accepted by
the A.O. In the course of assessment, there was no adjustment / variation
either in the quantum, nature or classification of income offered by the
assessee. The A.O. had not called for any explanation regarding the nature and
source of such investment during the course of assessment proceedings. Further,
he had neither formed any opinion, nor recorded any satisfaction for invoking
the provisions of section 69. The Tribunal held that since the provisions of
section 69 had not been invoked at the first instance while passing the
assessment order u/s 143(3), they cannot be independently applied by invoking
the provisions of section 154.

The Tribunal
dismissed the appeal filed by the Revenue.

shailesh.kwebmaker

Sections 2(47), 45: When the terms of the sale deed and the intention of the parties at the time of entering into the sale deed have not been adhered to whereby full sale consideration has not been discharged, there is no transfer of land, even though the sale deed has been registered, and no income accrues and consequently no liability towards capital gains arises in the hands of the assessee

17. [2020] 117 taxmann.com 424 (Jai.)(Trib.) CIT vs. Ijyaraj Singh ITA Nos. 91 and 152/Jp/2019 A.Y.: 2013-14 Date of order: 18^th June, 2020

Sections 2(47), 45: When the terms of the
sale deed and the intention of the parties at the time of entering into the
sale deed have not been adhered to whereby full sale consideration has not been
discharged, there is no transfer of land, even though the sale deed has been
registered, and no income accrues and consequently no liability towards capital
gains arises in the hands of the assessee

FACTS

The assessee in his
return of income filed u/s 139(1) declared long-term capital gains of Rs.
2,51,85,149 in respect of sale of agricultural land situate in Kota. In the
course of assessment proceedings, the assessee revised his return of income
wherein the income under the head long-term capital gains was revised to Rs.
1,10,18,918 as against Rs. 2,51,85,149 shown in the original return. The reason
for revising the return was that out of three sale deeds, two sale deeds of
land executed with Mr. Rajeev Singh were invalid sale deeds and consequently no
transfer took place and hence no capital gain arises in respect of the two
invalid sale deeds. In respect of these two sale deeds, the assessee had
received only Rs. 63 lakhs towards consideration out of Rs. 803 lakhs. The
cheques received from the buyer were dishonoured and even possession was not
handed over to the buyer. The Rajasthan High Court has also granted stay on the
sale deeds executed by the assessee.

But the A.O. was of
the view that the contract entered into by the assessee was a legal and valid
contract entered into in accordance with the procedure laid down by law. The
assessee voluntarily agreed to register the sale deed before the Registrar and
on the date of execution and also on the date of registration there was no
dispute between the parties. The A.O. computed long-term capital gains by
considering the full value of consideration, including the two sale deeds which
were contended to be invalid, and computed the full value of consideration u/s
50C of the Act.

Aggrieved, the
assessee preferred an appeal to the CIT(A) who held that the transaction in
respect of the two invalid sale deeds is not chargeable to capital gains tax.

Aggrieved, the
Revenue preferred an appeal to the Tribunal.

HELD

The Tribunal noted
that the question for its consideration is that where the full value of
consideration has not been discharged by the purchaser of the impugned land as
per the sale deed, and there is violation of the terms of the sale deed,
whether the impugned transaction would still qualify as transfer and be liable
for capital gains tax, given that the same is evidenced by a registered sale
deed. Having considered the provisions of sections 2(24), 2(47), 45 and 48 of
the Act, and also the decision of the Punjab & Haryana High Court in the
case of Hira Lal Ram Dayal vs. CIT [122 ITR 461 (Punj. & Har. HC)]
where the question before the Court was ‘whether it is open to the assessee to
prove that the sale transaction evidenced by the registered sale deed was a
sham transaction and no sale in fact took place’, and also the decision of the
Patna High Court in the case of Smt. Raj Rani Devi Ramna vs. CIT [(1992)
201 ITR 1032 (Patna)], the Tribunal held that the legal proposition
which emerges is that a registered sale deed does carry an evidentiary value.

At the same time,
where the assessee is able to prove by cogent evidence brought on record that
no sale has in fact taken place, then in such a scenario the taxing and
appellate authorities should consider these evidences brought on record by the
assessee and on the basis of an examination thereof, decide as to whether a
sale has taken place in a given case or not. The title in the property does not
necessarily pass as soon as the instrument of transfer is registered and the
answer to the question regarding passing of title lies in the intention of the
parties executing such an instrument. The registration is no proof of an
operative transfer and where the parties had intended that despite execution
and registration of sale deed, transfer by way of sale will become effective
only on payment and receipt of full sale consideration and not at the time of
execution and registration of sale deed.

The Tribunal noted
that no payment was received before execution of the sale deed but only
post-dated cheques were received by the assessee. It held that mere handing
over of the post-dated cheques which have been subsequently dishonoured and
returned unpaid to the assessee, cannot be held to be discharge of full sale
consideration as intended and agreed upon between the parties and there is
clearly a violation of the terms of the sale deed by the buyer.

Although the sale
deed has been registered, given that the terms of the sale deed and the
intention of the parties at the time of entering into the said sale deed have
not been adhered to whereby full sale consideration has not been discharged,
there is no transfer of the impugned land and no income accrues and
consequently, no liability towards capital gains arises in the hands of the
assessee. The Tribunal also held that it is only the real income which can be
brought to tax and there cannot be any levy of tax on hypothetical income which
has neither accrued / nor arisen or been received by the assessee. Since the
transaction fell through in view of non-fulfilment of the terms of the sale
deed whereby cheques issued by the buyer have been dishonoured, there is no
transfer and no income which has accrued or arisen to the assessee. There is no
real income in the hands of the assessee and in the absence thereof, the
assessee is not liable to capital gains. It observed that a similar view has
been taken by the Pune Bench of the Tribunal in the case of Appasaheb
Baburao Lonkar vs. ITO [(2019) 176 ITD 115 (Pune-Trib.)].

This ground of
appeal filed by the Revenue was dismissed.

shailesh.kwebmaker

SET OFF OF UNABSORBED DEPRECIATION WHILE DETERMINING BOOK PROFIT u/s 40(B)

ISSUE FOR CONSIDERATION

Section 40(b)
limits the deduction, in the hands of a partnership firm, in respect of an
expenditure on specified kinds of payments to partners. Amongst several
limitations provided in respect of deduction to be claimed by the partnership
firm, clause (5) of section 40(b) limits the deduction for remuneration to the
working partners to the specified percentage of the ‘book profit’ of the firm.

The term ‘book
profit’ is defined exhaustively by Explanation 3 to section 40(b) which reads
as under:

‘Explanation 3 –
For the purpose of this clause, “book profit” means the net profit, as shown in
the profit and loss account for the relevant previous year, computed in the
manner laid down in Chapter IV-D as increased by the aggregate amount of the
remuneration paid or payable to all the partners of the firm if such amount has
been deduced while computing the net profit.’

‘Book profit’, as per Explanation 3, means the net profit as per the
profit and loss account of the relevant year, computed in the manner laid down
in Chapter IV-D. The net profit in question is the one that is shown in the
profit and loss account which is computed in the manner laid down in Chapter
IV-D. This requirement to compute the net profit in the manner laid down in
Chapter IV-D has been the subject matter of debate. Section 32, which is part
of Chapter IV-D, provides for the depreciation allowance in computing the
income of the year and, inter alia, sub-section (2) provides for the
manner in which the unabsorbed depreciation of the earlier years is to be
adjusted against the income of the year. The interesting issue which has arisen
with respect to the computation of ‘book profit’ for the purpose of section
40(b) is whether the net profit for the year should also be reduced by the
unabsorbed depreciation of earlier years and whether the amount of remuneration
to the partners eligible for deduction should be computed with respect to such
reduced amount.

The Jaipur bench of
the Tribunal has held that in computing the ‘book profit’ and the amount
eligible for deduction on account of the remuneration to partners, unabsorbed
depreciation of the earlier years should be deducted from the net profit for
the year as provided in section 32(2). As against this, the Pune bench of the
Tribunal has taken a contrary view and has allowed the assessee firm’s claim of
the remuneration paid to its partners which was computed on the basis of ‘book
profit’ without reducing it by the unabsorbed depreciation of the earlier
years.

THE VIKAS OIL MILLS CASE

The issue first
came up for consideration of the Jaipur bench of the Tribunal in the case of Vikas
Oil Mills vs. ITO (2005) 95 TTJ 1126.

In that case, for
the assessment year 2001-02 the A.O. disallowed the remuneration amounting to
Rs. 1,79,005 paid to the working partners on the ground that the assessee firm
had not reduced the unabsorbed brought-forward depreciation of earlier years
from the profit of the year under consideration while claiming deduction for
the remuneration payable to the partners. Since the resultant figure after
reducing the unabsorbed depreciation of earlier years from the profit of the
assessee firm was a negative figure, the A.O. disallowed the remuneration paid
to the partners. The CIT(A) confirmed this order.

The assessee argued
before the Tribunal that the unabsorbed depreciation was allowed to be deducted
only because of a fiction contained in section 32(2) and that otherwise the
deduction was subject to the provisions of section 72(2). Hence, unabsorbed
depreciation should not be considered for computation of net profit in Chapter
IV-D. On the other hand, the Departmental representative supported the orders
of the lower authorities by submitting that unabsorbed depreciation of earlier
years was part of the current year’s depreciation as per section 32(2) which
fell in Chapter IV-D and, therefore, for computation of book profit unabsorbed
depreciation was to be necessarily taken into account.

The Tribunal
concurred with the view of the lower authorities and held that the remuneration
paid to the working partners was to be reduced from the book profit as per the
provisions of section 40(b)(v). The definition of book profit was provided in
Explanation 3 as per which it was required to be computed in the manner laid
down in Chapter IV-D. Therefore, the Tribunal held that the unabsorbed
depreciation of earlier years had to be reduced as provided in section 32(2)
while determining the book profit for the purpose of determining the amount of
deductible remuneration. However, the Tribunal agreed with the alternative plea
of the assessee for allowing the minimum amount of remuneration which was
allowable even in case of a loss.

RAJMAL LAKHICHAND CASE

The issue
thereafter came up for consideration before the Pune bench of the Tribunal in
the case of Rajmal Lakhichand vs. JCIT (2018) 92 taxmann.com 94.

In this case, for
the assessment year 2010-11 the A.O. disallowed the remuneration to working
partners amounting to Rs. 17,50,000 on the ground that the unabsorbed
depreciation of earlier years was not reduced in computing the book profit
which was contrary to the provisions of section 40(b). Upon further appeal, the
CIT(A) deleted this disallowance by holding that the remuneration to partners
was to be worked out on the basis of the current year’s book profit and
therefore the remuneration was to be deducted first before allowing the set-off
of brought-forward losses. He held that the computation of book profit was as
per section 40(b) while the set-off of brought-forward losses was to be granted
in terms of section 72. Therefore, while arriving at the business income, the
deduction of section 40(b) was to be given first and then, if at all there
remained positive income, the brought-forward losses were to be set off.

Before the
Tribunal, the Income-tax Department assailed the findings of the CIT(A) on the
ground that the unabsorbed brought-forward depreciation became a part of the
current year’s depreciation as per the provisions of section 32(2) and that as
per Chapter IV-D, the book profit was determined only after deduction of
depreciation including unabsorbed depreciation. Since, in the assessee’s case,
there was a loss after deduction of unabsorbed brought-forward depreciation to
the tune of Rs. 10,84,75,430 remuneration to the extent of only Rs. 1,50,000
should have been allowed. Reliance was placed on the decision in Vikas
Oil Mills (Supra).

As against that,
the assessee submitted that the remuneration paid to the partners was to be
based on the current year’s book profit derived before deducting the unabsorbed
depreciation and that the set-off of unabsorbed losses and depreciation was
governed by section 72. The unabsorbed business losses were to be set off first
and then the unabsorbed depreciation was to be considered.

The Tribunal upheld
the order of the CIT(A) deleting the disallowance of remuneration paid to the
working partner by the assessee-firm. In addition to accepting the contention
of the assessee, the Tribunal also relied upon the decision of the Ahmedabad
bench of the Tribunal in the case of Yogeshwar Developers vs. ITO [IT
Appeal No. 1173/AHD/2014 for assessment year 2005-06 decided on 13^th
April, 2017]. The decision of the Jaipur bench in the case of
Vikas Oil Mills (Supra) cited before the Tribunal by the Income-tax
Department was not followed by the bench.

OBSERVATIONS

Sub-section (2) of
section 32 provides that where full effect cannot be given to the depreciation
allowance for any previous year, then the depreciation remaining to be absorbed
shall be added to the amount of the depreciation allowance for the following
previous year and deemed to be part of the depreciation allowance for that
year. It further provides that if there is no such depreciation allowance for
the succeeding previous year, then that unabsorbed depreciation of the
preceding previous year itself shall be deemed to be the depreciation allowance
for that year. However, such a treatment of unabsorbed depreciation u/s 32(2)
is subject to the provisions of sub-section (2) of section 72 and sub-section
(3) of section 73 under which first brought-forward business loss needs to be set
off and then unabsorbed depreciation. Therefore, in a situation where the
assessee has brought-forward business loss as well as unabsorbed depreciation,
the combined reading of sections 32 and 72 or 73 required that the
brought-forward business loss shall be set off first against the income of the
previous year and then against the unabsorbed depreciation.

As per
Explanation-3 to section 40(b), all the deductions as provided in Chapter IV-D
including depreciation allowance provided in section 32 have to be taken into
consideration while determining the book profit. Since the provision of section
32(2) treats the unabsorbed depreciation of earlier years at par with the
depreciation allowance of the current year, except where there is a
brought-forward business loss, the issue as to whether the unabsorbed
depreciation should also be deducted from the book profit requires deeper
analysis.

Though the literal
interpretation of all the provisions concerned may appear to support the view
that the amount of depreciation allowance, whether of the current year or the
one which is of the earlier years and has remained unabsorbed, should be
reduced from the net profit for the purpose of arriving at the book profit, one
needs to also consider the legislative history as well as the intent of the
provisions of section 32(2) before accepting the literal interpretation. The
present provision of section 32(2) as it stands today was brought in force by
the Finance Act, 2001 by substituting the old provision with effect from assessment
year 2002-03. The old provision of section 32(2), prior to its substitution by
the Finance Act, 2001, was effective for the assessment years 1997-98 to
2001-02 and it read as under:

(2) Where in the
assessment of the assessee full effect cannot be given to any allowance under
clause (ii) of sub-section (1) in any previous year owing to there being no
profits or gains chargeable for that previous year or owing to the profits or
gains being less than the allowance, then, the allowance or the part of
allowance to which effect has not been given (hereinafter referred to as
unabsorbed depreciation allowance), as the case may be,

(i) shall be set off against the profits and gains,
if any, of any business or profession carried on by him and assessable for that
assessment year;

(ii) if the unabsorbed depreciation allowance cannot
be wholly set off under clause (i), the amount not so set off shall be set off
from the income under any other head, if any, assessable for that assessment
year;

if the unabsorbed
depreciation allowance cannot be wholly set off under clause (i) and clause
(ii), the amount of allowance not so set off shall be carried forward to the
following assessment year and,

(a) it shall be
set off against the profits and gains, if any, of any business or profession
carried on by him and assessable for that assessment year;

(b) if the
unabsorbed depreciation allowance cannot be wholly so set off, the amount of
unabsorbed depreciation allowance not so set off shall be carried forward to
the following assessment year not being more than eight assessment years
immediately succeeding the assessment year for which the aforesaid allowance
was first computed.

It is significant
to note that for the assessment years up to 2001-02, the unabsorbed depreciation
did not become part of the current year’s depreciation and was not to be
reduced from the net profit for the purposes of section 40(b) of the Act; in
short, it was not to be reduced from the book profit. It can be noticed that
the manner in which the unabsorbed depreciation is treated under the old
provision differed greatly from the manner in which it is treated under the
present provision. One of the glaring differences is that before the amendment
it was not being treated as part of the depreciation allowance for the current
year. Instead, it was required to be set off against the profits and gains of
business or profession separately. Sub-clause (a) of clause (iii) of the old
provision made this expressly clear by providing that unabsorbed depreciation
allowance was to be set off against the profits and gains of any business or
profession assessable for the subsequent assessment year as such and not as a
part of the depreciation allowance of that year. Further, the amount against
which the unabsorbed depreciation allowance was required to be set off was the
profits and gains of any business or profession carried on by the assessee and
assessable for that assessment year. The assessable profits and gains of any
business or profession for the purpose was necessarily the profits determined
after claiming all the permissible deductions, including remuneration to the
partners, subject to the limitations provided in section 40(b). Any other
interpretation or connotation was not possible; a contrary interpretation would
have needed an express provision to that effect which was not the case.

As a result, the
requirement under the then Explanation-3 to section 40(b) to compute the book
profit in the manner laid down in Chapter IV-D was to exclude the set-off of
unabsorbed depreciation. Any interpretation otherwise would have led to an
unworkable situation whereunder the amount of unabsorbed depreciation which
could have been set off would then be dependent upon the amount of the
deductible remuneration, and the amount of the deductible remuneration would in
turn be dependent upon the amount of unabsorbed depreciation that could be set
off.

Having analysed the
position under the old provision of section 32(2), let us consider the
objective of its substitution by the Finance Act, 2001 with effect from 1^stApril, 2002. The Memorandum explaining the provisions of the Finance
Bill, 2001, which is reproduced below, explains the legislative intent behind
the amendment.

Modification of
provisions relating to allowance of depreciation

Under the
existing provision of sub-section (2) of section 32 of the Income-tax Act,
carry forward and set off of unabsorbed depreciation is allowed for 8
assessment years.

With a view to
enable the assessee to conserve sufficient funds to replace capital assets,
specially in an era where obsolescence takes place so often, the Bill proposes
to dispense with the restriction of 8 years for carry forward and set off of
unabsorbed depreciation.

It can be observed
that the limited purpose of substituting the provision of sub-section (2) of
section 32 was to relax the limitation of eight years over the carry forward of
unabsorbed depreciation. It is worth noting that in order to achieve this
objective, the old provision as it existed prior to its amendment by the
Finance (No. 2) Act, 1996, was being restored. Therefore, effectively, the
present provision of sub-section (2) of section 32 is the same as the provision
as it existed prior to its amendment by the Finance (No. 2) Act, 1996. It was
only for the period starting from the assessment year 1997-98 to 2002-03 that
the provision was different.

In the context of
the old provision prevailing up to assessment year 1996-97, the Supreme Court
in the case of CIT vs. Mother India Refrigeration Industries (P) Ltd.
(1985) 155 ITR 711 has held as follows:

‘It is true that
proviso (b) to section 10(2)(vi) creates a legal fiction and under that fiction
unabsorbed depreciation either with or without current year’s depreciation is deemed to be
the current year’s depreciation but it is well settled that legal fictions are
created only for some definite purposes and these must be limited to that
purpose and should not be extended beyond that legitimate field. Clearly, the
avowed purpose of the legal fiction created by the deeming provision contained
in proviso (b) to section 10(2)(vi) is to make the unabsorbed carried forward
depreciation partake of the same character as the current depreciation in the
following year, so that it is available, unlike unabsorbed carried forward
business loss, for being set off against other heads of income of that year.
Such being the purpose for which the legal fiction is created, it is difficult
to extend the same beyond its legitimate field and will have to be confined to
that purpose.’

In view of these
observations of the Supreme Court and the legislative intent behind section
32(2), it can be inferred that the only purpose of deeming the unabsorbed
depreciation as the depreciation allowance of the current year, post amendment,
is limited to ensuring the benefit of its set off, irrespective of the number
of years, against any income, irrespective of the head of income under which it
falls. In other words the intention has never been to treat it as part of the depreciation of the year.

Further, in a
situation where the assessee has both, i.e., unabsorbed depreciation and
business loss brought forward from earlier years, the set off of business loss
in terms of sections 72 or 73 needs to be given a preference over set-off of
unabsorbed depreciation as per section 72(2). This again confirms that the
unabsorbed depreciation is given a separate treatment than the business loss
and both are intended to be distinct and separate from each other. The Supreme
Court, in the case of CIT vs. Jaipuria China Clay Mines (P) Ltd. 59 ITR
555, had held that the reason for such order of allowance is as under:

‘The unabsorbed depreciation allowance is carried
forward under proviso (b) to section 10(2)(vi) of the 1922 Act and the method
of carrying it forward is to add it to the amount of the allowance of
depreciation in the following year and deeming it to be part of that allowance;
the effect of deeming it to be part of that allowance is that it falls in the
following year within clause (vi) and has to be deducted as allowance. If the
legislature had not enacted proviso (b) to section 24(2) of the 1922 Act, the
result would have been that depreciation allowance would have been deducted
first out of the profits and gains in preference to any losses which might have
been carried forward under section 24 of the 1922 Act, but as the losses can be
carried forward only for six years under section 24(2) of the 1922 Act, the
assessee would in certain circumstances have in his books losses which he would
not be able to set off. It seems that the legislature, in view of this gave a
preference to the deduction of losses first.’

The set off of
business loss is governed by section 72 which is part of Chapter VI and not
Chapter IV-D and, therefore, is not required to be considered while computing
the book profit for the purpose of section 40(b). Hence, it would be absurd and
contrary to the provisions to set off the unabsorbed depreciation first only
for the purpose of arriving at the book profit for the purpose of section
40(b), though unabsorbed depreciation is to be set off only after brought-forward
business losses are exhausted in accordance with section 72(2).

Further, if one
analyses the definition of book profits as contained in Explanation 3 to
section 40(b), it refers to ‘net profit, as shown in the profit and loss
account for the relevant previous year…’
Therefore, clearly, the intention is only to consider the profit of the
relevant year and not factor in adjustments permissible against such profits
relating to earlier years, such as unabsorbed depreciation.

The better view, in our considered opinion,
therefore is that the brought-forward depreciation should not be deducted while
computing the book profit for the purpose of
section 40(b).

shailesh.kwebmaker

Charitable purpose – Sections 2(15) and 12AA of ITA, 1961 – Registration – Cancellation of registration – Condition precedent – The assessee is hit by proviso to section 2(15) is not a ground for cancellation of registration

22. Goa Industrial Development Corporation vs. CIT [2020] 421 ITR 676 (Bom.) [2020] 116 taxmann.com 42 (Bom.) Date of order: 4^th February, 2020

Charitable purpose – Sections 2(15) and 12AA of ITA, 1961 – Registration
– Cancellation of registration – Condition precedent – The assessee is hit by proviso
to section 2(15) is not a ground for cancellation of registration

The appellant is a statutory corporation established under the Goa,
Daman and Diu Industrial Development Corporation Act, 1965 (GIDC Act) with the
object of securing orderly establishment in industrial areas and industrial
estates and industries so that it results in the rapid and orderly
establishment, growth and development of industries in Goa. The appellant was
granted registration u/s 12A of the Income-tax Act, 1961 on 16^th
December, 1983 and the same continued until the making of the impugned orders
in these appeals. By an order dated 27^th December, 2011, the
Commissioner of Income-tax withdrew the registration granted to the appellant
by observing that it is crystal clear that the activities of the appellant are
inter-connected and inter-woven with commerce or business. The Commissioner of
Income- tax has based its decision almost entirely on the proviso to
section 2(15) of the Income-tax Act which defines ‘charitable purpose’. This proviso
was introduced with effect from 1^st April, 2009.

The Tribunal dismissed the appeal filed by the assessee.

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

‘i) The cancellation of registration has to be
initiated strictly in accordance with the provisions u/s 12AA(3) of the
Income-tax Act, 1961. The power of cancellation of registration can be
exercised by the Commissioner where the Commissioner is satisfied that the
activities of the trust or institution are not genuine or are not being carried
out in accordance with the objects of the trust or institution, as the case may
be. The powers u/s 12AA(3) cannot be exercised merely because the institution
in question may be covered under the proviso to section 2(15) after the
amendment, or that the income limit specified in the proviso is
exceeded.

ii) There were no categorical
findings that the activities of the assessee were not genuine or were not in
accordance with the objects of the trust or the institution. Merely because, by
reference to the amended provisions in section 2(15), it may be possible to
contend that the activities of the assessee were covered under the proviso,
that, by itself, did not render the activities of the assessee as non-genuine
activities so as to entitle the Commissioner to exercise powers u/s 12AA(3).
The cancellation of registration was not valid.’

shailesh.kwebmaker

Cash credits (Bogus purchases) – Section 68 of ITA, 1961 – Assessee had declared certain purchases to be made during year and A.O. added entire quantum of purchases to income of assessee on plea that purchases were bogus purchases – Tribunal held that only reasonable profit at rate of 5% on purchases should be added back to income of assessee – Tribunal was justified in its view; A.Y.: 2010-11

21. Principal CIT vs. Rishabhdev Technocable Ltd. [2020] 115 taxmann.com 333 (Bom.) Date of order: 10^th February, 2020 A.Y.: 2010-11

Cash credits (Bogus purchases) – Section 68 of ITA, 1961 – Assessee had
declared certain purchases to be made during year and A.O. added entire quantum
of purchases to income of assessee on plea that purchases were bogus purchases
– Tribunal held that only reasonable profit at rate of 5% on purchases should
be added back to income of assessee – Tribunal was justified in its view; A.Y.:
2010-11

The assessee is a company engaged in the business of manufacturing and
dealership of all kinds of industrial power controlling instrument cables and
related items. For the A.Y. 2010-11, the assessee filed return of income
declaring income of Rs. 1,35,31,757. The A.O. noticed that the Sales Tax
Department, Government of Maharashtra, had provided a list of persons who had
indulged in the unscrupulous act of providing bogus hawala entries and
purchase bills. The names of beneficiaries were also provided. The A.O. also
noticed that the assessee was one of the beneficiaries of such bogus hawala
bills. He referred to the purchases allegedly made by the assessee through four
hawala entries for the assessment year under consideration. He
disallowed the entire expenditure shown as incurred by the assessee on
purchases and made the addition.

The CIT(A) enhanced the quantum of such purchases from Rs. 24,18,06,385
to Rs. 65,65,30,470. The CIT(A) held that there can be no sales without
purchases. When the sales were accepted, then the corresponding purchases could
not be disallowed. Therefore, the CIT(A) held that only the profit element
embedded in the purchases would be subject to tax and not the entire purchase
amount. The CIT(A) added 2% of the purchase amount of Rs. 65,65,30,470 as
profit which worked out to Rs. 1,31,30,609 to the income of the assessee and
the balance addition was deleted. On appeal by the Revenue, the Tribunal
increased the profit element from 2% to 5% and increased the addition
accordingly.

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

‘i) In Bholanath Polyfab
(P.) Ltd. (Supra), the Gujarat High Court was also confronted with a
similar issue. In that case the Tribunal was of the opinion that the purchases
might have been made from bogus parties but the purchases themselves were not
bogus. Considering the facts of the situation, the Tribunal was of the opinion
that not the entire amount of purchases but the profit margin embedded in such
amount would be subjected to tax. The Gujarat High Court upheld the finding of
the Tribunal. It was held that whether the purchases were bogus or whether the
parties from whom such purchases were allegedly made were bogus, was
essentially a question of fact. When the Tribunal had concluded that the
assessee did make the purchase, as a natural corollary not the entire amount
covered by such purchase but the profit element embedded therein would be
subject to tax.

ii) We are in respectful
agreement with the view expressed by the Gujarat High Court.

iii) Thus, we do not find any
merit in this appeal. No substantial question of law arises from the order
passed by the Tribunal. Consequently, the appeal is dismissed.’

shailesh.kwebmaker

Business expenditure – Allowability of (prior period expenses) – Section 37 of ITA, 1961 – Assessee had prior period income and prior period expenses – Assessee set off the two and offered only net amount of expenses for disallowance – A.O. disallowed the claim – Tribunal allowed the claim – No substantial question of law arose from Tribunal’s order; A.Y.: 2004-05

20. Principal CIT vs. Mazagon Dock Ltd. [2020] 116 taxmann.com 325 (Bom.) Date of order: 20^th August, 2019 A.Y.: 2004-05

Business expenditure – Allowability of (prior period expenses) – Section
37 of ITA, 1961 – Assessee had prior period income and prior period expenses –
Assessee set off the two and offered only net amount of expenses for
disallowance – A.O. disallowed the claim – Tribunal allowed the claim – No
substantial question of law arose from Tribunal’s order; A.Y.: 2004-05

The assessee had prior period income and prior period expenses. The
assessee had set off the two and offered only the net amount of expenses for
disallowance. The A.O. did not accept the method of setting off of prior period
income with prior period expenses as claimed by the assessee and disallowed the
expenditure.

The Tribunal held that the assessee was justified in computing the
disallowance after setting off prior period income against the prior period
expenses. In fact, the Tribunal noted the fact that for the A.Y. 2007-08, the
Revenue had accepted the net income offered after set-off of prior period
income with prior period expenses. This is in that year where expenses of prior
period were less than prior period income. The Tribunal allowed the assessee’s
claim.

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

‘Whether on the facts and in the circumstances of the case and in law,
the Tribunal is correct in allowing the setting off of the prior period income
against the prior period expenditure without ascertaining the nexus between
income and expenditure?’

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

‘i) We find that the view taken
by the Tribunal on the facts cannot be found fault with. This particularly as
the Revenue for a subsequent period accepted this practice of set-off, which
resulted in income and subjected it to tax. The basis / principles for allowing
the set-off of prior period income with prior period expenses has to be consistent
for years. Therefore, the view taken by the Tribunal cannot be faulted.

ii) In view of the above, the
question as framed does not give rise to any substantial question of law. Thus,
not entertained.’

shailesh.kwebmaker

Business expenditure – Section 37 of ITA, 1961 – General principles – Difference between ascertained and contingent liability – Public sector undertaking – Provision for revision of pay by government committee – Liability not contingent – Provision deductible u/s 37 Income – Accrual of income – Principle of real income – Public sector undertaking – Amounts due as fees – Amounts included in accounts in accordance with directions of Comptroller and Auditor-General – Amounts had not accrued – Not assessable; A.Y.: 2007-08

19. Housing and Urban Development Corporation Ltd. vs.
Additional CIT [2020] 421 ITR 599 (Del. [2020] 115 taxmann.com 166 (Del.) Date of order: 6^th February, 2020 A.Y.: 2007-08

Business expenditure – Section 37 of ITA, 1961 – General principles –
Difference between ascertained and contingent liability – Public sector
undertaking – Provision for revision of pay by government committee – Liability
not contingent – Provision deductible u/s 37

Income – Accrual of income – Principle of real income – Public sector
undertaking – Amounts due as fees – Amounts included in accounts in accordance
with directions of Comptroller and Auditor-General – Amounts had not accrued –
Not assessable; A.Y.: 2007-08

The assessee was a public sector undertaking. For the A.Y. 2007-08, it
claimed deduction of Rs. 1.60 crores on account of the provision for revision
of pay in its books of accounts. The deduction was made in the light of the Pay
Revision Committee appointed by the Government of India. The A.O. disallowed
the claim, holding that the expenditure was purely a provision against an
unascertained liability and could not be claimed as expenditure for the A.Y.
2007-08. The disallowance was upheld by the Tribunal.

The assessee was following the accrual or mercantile system of
accounting and was accounting the ‘fees’ as its revenue from the date of
signing of the loan agreement. The amount was finally realised from the loan
amount, when it was actually disbursed to the borrower. There were instances
when the loan agreement was signed and the borrower would not take the
disbursement and, accordingly, fees would not be realised. The Comptroller and
Auditor-General (CAG) objected to this on the ground that the accounting
treatment was not in accordance with the Accounting Standards issued by the
Institute of Chartered Accountants of India which provide guidance for
determination of income on accrual basis. The assessee assured the CAG that the
accounting policy was reviewed for the F.Y. 2006-07 and, accordingly, the Board
had approved the change in accounting policy in its meeting held on 27^th
September, 2007. The revised accounting policy recognised the fees as on the
date of their realisation, instead of the date of signing of the loan
agreement. For the A.Y. 2007-08, the A.O. made an addition of Rs. 1.28 crores
on the ground that the change had resulted in understatement of profits and
also because the change was introduced after the closing of the financial year.
The addition was upheld by the Tribunal.

The Delhi High Court allowed the assessee’s appeal and held as under:

‘(i) The position was that the
liability to pay revised wages had already arisen with certainty. The committee
was constituted for the purpose of wage revision. That the wages would be
revised was a foregone conclusion. Merely because the making of the report and
implementation thereof took time, it could not be said that there was no basis
for making the provision. The expenditure of Rs. 1.60 crores on account of
anticipated pay revision in the A.Y. 2007-08 was deductible.

(ii) No income accrued at the
point of execution of agreement. The change in the accounting policy was a
result of the audit objection raised by the CAG. The assessee had claimed
deduction in profits in the computation of the total income and added it as
income in the subsequent assessment year, which had been accepted by the A.O.
The change was, thus, revenue-neutral. The addition of Rs. 1,28,00,000 was not
justified.’

shailesh.kwebmaker

Section 54 – Deduction in full is available to the assessee even when the new house property is purchased in the joint names of the assessee and others

6.
Subbalakshmi Kurada vs. ACIT (Bangalore) N.V. Vasudevan (V.P.) and B.R. Baskaran
(A.M.) ITA No. 2493/Bang/2019 A.Y.: 2016-17 Date of order: 8^th May, 2020 Counsel for Assessee / Revenue: V.
Srinivasan / Rajendra Chandekar

Section 54 –
Deduction in full is available to the assessee even when the new house property
is purchased in the joint names of the assessee and others

FACTS

The assessee had
sold a residential house property for a sum of Rs. 12.75 crores on 6^th
November, 2015. She purchased another residential house property on 17^th
February, 2016 for Rs. 11.02 crores.

The new house
property was purchased in the joint name of the assessee and her son. The
assessee claimed deduction of Rs. 8.47 crores u/s 54. Since the new residential
house property was purchased in the name of the assessee and her son, the A.O.
restricted the deduction u/s 54 to 50%, i.e., he allowed deduction to the extent
of Rs. 4.23 crores only. The CIT(A) also confirmed the same.

Before the
Tribunal, the Revenue supported the order passed by the CIT(A).

HELD

The Tribunal
observed that the entire consideration towards the purchase of the new
residential house had flown from the bank account of the assessee. It also
noted that the Karnataka High Court in the case of DIT (Intl.) vs. Mrs.
Jennifer Bhide (15 taxmann.com 82) had held that deduction u/s 54
should not be denied merely because the name of the assessee’s husband was
mentioned in the purchase document, when the entire purchase consideration had
flown from the assessee. Therefore, following the ratio laid down in the
said decision and the decision of the co-ordinate Bench in the case of Shri
Bhatkal Ramarao Prakash vs. ITO (ITA No. 2692/Bang/2018 dated 4^th
January, 2019), the Tribunal held that the assessee was entitled to
full deduction of Rs. 8.47 crores u/s 54.

shailesh.kwebmaker

Sections 10(37) and 56(2)(viii) – Interest received u/s 28 of the Land Acquisition Act, 1894 treated as enhanced consideration not liable to tax

5. Surender vs. Income-tax Officer (New Delhi) Sushma Chowla
(V.P.) and Dr. B.R.R. Kumar (A.M.) ITA No.
7589/Del/2018 A.Y.:
2013-14 Date of
order: 27^th April, 2020 Counsel
for Assessee / Revenue: Sudhir Yadav / N.K. Choudhary

Sections 10(37) and 56(2)(viii) – Interest
received u/s 28 of the Land Acquisition Act, 1894 treated as enhanced
consideration not liable to tax

FACTS

The agricultural
land of the assessee was acquired by Haryana State Industrial and
Infrastructure Development Corporation Ltd. (‘HSIIDC’) u/s 4 of the Land
Acquisition Act, 1894 (‘the Acquisition Act’). The HSIIDC had not paid the
compensation at the prevailing market rate, therefore the assessee filed an
appeal before the High Court for increase in compensation. The Court enhanced
the compensation which included Rs. 1.84 crores in interest u/s 28 of the
Acquisition Act. The assessee claimed that the amount so received was enhanced
consideration, hence exempt u/s 10(37). However, according to the A.O. as well
as the CIT(A), the amount so received could not partake the character of
compensation for acquisition of agricultural land. Hence, both held that the
sum so received was interest taxable u/s 56(2)(viii).

The question before
the Tribunal was whether the amount received can be treated as enhanced
consideration u/s 28 of the Acquisition Act and hence exempt u/s 10(37) as
claimed by the assessee, or u/s 34 of the Acquisition Act and hence taxable u/s
56(2)(viii) as held by the CIT(A).

HELD

The Tribunal
referred to the decision of the Supreme Court in Commissioner of
Income-tax, Faridabad vs. Ghanshyam (HUF) (Civil Appeal No. 4401 of 2009
decided on 16^th July, 2009). As per that decision, section
28 of the Acquisition Act empowers the Court in its discretion to award
interest on the excess amount of compensation over and above what is awarded by
the Collector. It depends upon the claim by the assessee, unlike interest u/s
34 which depends upon and is to be paid for undue delay in making the award /
payment. The Apex Court in the said decision further observed that interest
awarded could either be in the nature of an accretion in the value of the lands
acquired, or interest for undue delay in payment. According to the Court,
interest u/s 28 of the Acquisition Act is an accretion to the value of the land
and thus it forms part of the enhanced compensation or consideration. On the
other hand, interest awarded u/s 34 of the Acquisition Act is interest paid for
a delay in payment of compensation.

Therefore, relying
on the decision of the Apex Court referred to above, the Tribunal held that
since the compensation payable to the assessee was increased u/s 28 of the
Acquisition Act as per the order of the High Court, the amount received by the
assessee was exempt u/s 10(37).

shailesh.kwebmaker

Section 194C r/w/s 40(a)(ia) – Even an oral contract is good enough to invoke section 194C – Payment of hire charges made by assessee to cab owners for hiring cabs for the purpose of providing transportation services to its customers would attract section 194C – Since payment is made by the assessee, the presumption would be that there was a contract for hiring of vehicles

12.
[2020] 116 taxmann.com 230 (Bang.) Singonahalli
Chikkarevanna Gangadharaiah vs. ACIT ITA No.
785/Bang/2018 A.Y.: 2014-15 Date of
order: 24^th February, 2018

Section 194C r/w/s 40(a)(ia) – Even an oral
contract is good enough to invoke section 194C – Payment of hire charges made
by assessee to cab owners for hiring cabs for the purpose of providing
transportation services to its customers would attract section 194C – Since
payment is made by the assessee, the presumption would be that there was a
contract for hiring of vehicles

FACTS

The A.O. noticed
from the Profit & Loss account of the assessee that the assessee has debited
a sum of Rs. 6,18,73,785 for vehicle hire charges paid and Rs. 2,48,39,356 for
petrol and diesel expenses paid. The assessee was asked to produce details of
TDS on expenses. However, the assessee failed to do so.

Subsequently, the
assessee submitted the PAN cards from cab drivers and owners to whom hire
charges were paid and said that the cab drivers and owners were all regular
income tax payers and hence, as per section 194C, no TDS was made where PAN was
provided.

According to the
A.O., section 194C will only apply to a contractor engaged in the business of plying, hiring or leasing goods
carriages – and not to a contractor engaged in the business of plying passenger
vehicles. Accordingly, the A.O. held that the assessee is liable to deduct
TDS and disallowed a sum of Rs. 6,18,73,785 for vehicle hire charges u/s
40(a)(ia) of the Act.

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

HELD

Upon going through
the provisions of section 194C, the Tribunal held that there is no doubt that
the assessee in this case has made the payments of hire charges to cab owners.
As regards the contention of the assessee that the payments have not been made
in pursuance of any contract, the Tribunal held that a contract need not be in
writing; even an oral contract is good enough to invoke the provisions of
section 194C. The cab owners have received the payments from the assessee
towards the hiring charges, therefore, the presumption normally would be that
there was a contract for hiring of vehicles. Hence, if the assessee has made
the payment for hiring the vehicles, the provisions of section 194C are clearly
applicable.

The contract has to
be looked into party-wise, not on the basis of the individual. The Tribunal
held that all the payments made to a cab owner throughout the year are to be
aggregated to ascertain the applicability of the TDS provision as all the
payments pertain to a contract. A contract need not be in writing. It may infer
from the conduct of the parties. It may even be oral. The Tribunal also noted
that u/s 194C, sub-section (5) proviso thereto, if the aggregate amount
paid or credited to a person exceeds Rs.
75,000, then the assessee shall be liable to deduct income tax at source.

The Tribunal then
discussed the amendment brought in by the Finance (No. 2) Act, 2014 with effect
from 1^st April, 2015 by virtue of which only 30% of any sum payable
to a resident is to be disallowed. It noted that in the present case the
authorities below have added the entire sum of Rs. 6,18,73,785 by disallowing
the whole amount. Though the substitution in section 40 has been made effective
from 1^stApril, 2015, in its view the benefit of the amendment
should be given to the assessee either by directing the A.O. to confirm from
the cab owners as to whether the said parties have deposited the tax or not,
and further restrict the addition to 30% of the disallowance. The Tribunal held
that it will be tied (sic) and meet the ends of justice if the
disallowance is only restricted to 30% of the amount liable for TDS u/s 194C.
Accordingly, this issue is partly allowed.

Following the decision of the Calcutta High Court in IT Appeal No.
302 of 2011, GA 3200/2011, CIT vs. Virgin Creations decided on 23^rd
November, 2011, the Tribunal restored the issue to the file of the A.O.
with the direction that the assessee shall provide all the details to the A.O.
with regard to the recipients of the income and the taxes paid by them. The
A.O. shall carry out necessary verification in respect of the payments made to
the cab drivers and taxes paid on the same by the cab drivers and filing of
returns by the recipients. In case the A.O. finds that the recipient has duly
paid the taxes on the income, the addition made by the A.O. shall stand
deleted.

The appeal filed by
the assessee was partly allowed.

shailesh.kwebmaker

Journal

Brieficles

Resources

About

Reach Us