Subscribe to the Bombay Chartered Accountant Journal Subscribe Now!

Category: Direct Taxes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Aggrieved, the Revenue preferred an appeal before the Tribunal.

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

BUSINESS INCOME OF A CHARITABLE INSTITUTION

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

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

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

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

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

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

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

MEHTA CHARITABLE PRAJNALAY TRUST’S CASE

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BHARATHAKSHEMAM’S CASE


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FACTS

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

HELD


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

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

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

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

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

FACTS

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

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

HELD


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

This ground of appeal filed by the assessee was allowed.

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

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

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

FACTS

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

HELD


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

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

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

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

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

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

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

FACTS

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

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

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

HELD


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Tribunal allowed the appeal filed by the assessee.

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

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

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

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

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

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

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

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

DEDUCTION OF MAINTENANCE CHARGES IN COMPUTING INCOME FROM HOUSE PROPERTY

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Revenue filed a further appeal before the ITAT.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Housing project – Special deduction u/s 80-IB(10) – Condition regarding extent of built-up area – Some flats conforming to condition – Proportionate deduction can be granted

5. CIT vs. S.N. Builders and Developers [2021] 431 ITR 241 (Karn) Date of order: 7th January, 2021 A.Y.: 2009-10


 

Housing project – Special deduction u/s 80-IB(10) – Condition regarding extent of built-up area – Some flats conforming to condition – Proportionate deduction can be granted

 

The assessee was a firm engaged in the development of real estate and construction of apartments. For the A.Y. 2009-10 the assessee claimed deduction u/s 80-IB(10) on the profits determined by applying the percentage completion method. A survey u/s 133A was carried out during which it was found that the built-up area of 26 flats exceeded 1,500 square feet. The A.O. completed the assessment rejecting the claim of the assessee for deduction u/s 80-IB(10).

 

The Commissioner (Appeals) held that derivation of profits based on the percentage completion method by the assessee was correct and the assessee was entitled to proportionate deduction u/s 80-IB(10) in respect of those flats which conformed to the limits prescribed under the relevant provisions of the Act. This was upheld by the Tribunal.

 

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

 

‘i) The Tribunal was correct and the assessee was entitled to the benefit of proportionate deduction u/s 80-IB(10) in respect of flats which conformed to the limits under the relevant provisions of the Act.

 

ii) The Institute of Chartered Accountants has issued a clarification that revised Accounting Standard 7 is not applicable to the enterprises undertaking construction activities. The assessee was right in following the project completion method of accounting in terms of Accounting Standard 9.’

Exempt income – Disallowance u/s 14A – Disallowance of expenditure relating to exempt income – Scope of section 14A and rule 8D – Disallowance cannot exceed non-taxable income

4. Principal CIT vs. Envestor Ventures Ltd. [2021] 431 ITR 221 (Mad) Date of order: 18th January, 2021 A.Y.: 2015-16

Exempt income – Disallowance u/s 14A – Disallowance of expenditure relating to exempt income – Scope of section 14A and rule 8D – Disallowance cannot exceed non-taxable income

Dealing with the scope of section 14A, the Madras High Court held as under:

‘i) The disallowance u/s 14A read with rule 8D of the Income-tax Rules, 1962 of the expenditure incurred to earn exempted income has to be computed in accordance with rule 8D which in essence stipulates that the expenditure directly relatable to the earning of such exempted income can alone be disallowed u/s 14A. The assessing authority has to mandatorily record his satisfaction that the proportionate disallowance of expenditure u/s 14A as made by the assessee is not satisfactory and therefore the same is liable to be rejected for such cogent reasons as specified and, thereafter, the computation method under rule 8D can be invoked to compute the quantum of disallowance. It is well settled that the Rules cannot go beyond the main parent provision. Therefore, what has been provided as computation method in rule 8D cannot go beyond the roof limit of section 14A itself under any circumstances.

ii) The Tribunal was right in restricting the disallowance u/s 14A to the extent of exempt income earned during the previous year relevant to the A.Y. 2015-16.’

Business expenditure – Disallowance u/s 40(a)(i) – Depreciation – Scope of section 40(a)(i) – Depreciation is not an expenditure and is not covered by section 40(a)(i)

3. Principal CIT vs. Tally Solutions Pvt. Ltd. [2021] 430 ITR 527 (Karn) Date of order: 16th December, 2020 A.Y.: 2009-10

Business expenditure – Disallowance u/s 40(a)(i) – Depreciation – Scope of section 40(a)(i) – Depreciation is not an expenditure and is not covered by section 40(a)(i)

The assessee was engaged in the business of software development and sale of software product licences, software maintenance and training in software. For the A.Y. 2009-10, the A.O. disallowed a sum of Rs. 6,70,94,074 in respect of depreciation on intellectual property rights u/s 40(a)(i).

The Commissioner (Appeals) held that there being an irrevocable and unconditional sale of intellectual property and the transfer being absolute, it was an outright purchase of a capital asset and, therefore, section 40(a)(i) could not be invoked. This was confirmed by the Tribunal.

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

‘i) From a close scrutiny of section 40(a)(i) it is axiomatic that an amount payable towards interest, royalty, fee for technical services or other sums chargeable under the Act on which tax is deductible at source shall not be deducted while computing the income under the head profits and gains of business or profession where such tax has not been deducted. The expression “amount payable” which is otherwise an allowable deduction refers to expenditure incurred for the purpose of business of the assessee and, therefore, the expenditure is a deductible claim. Thus, section 40 refers to the outgoing amount chargeable under the Act and subject to tax deduction at source under Chapter XVII-B. The deduction u/s 32 is not in respect of an amount paid or payable which is subjected to tax deduction at source, but it is a statutory deduction on an asset which is otherwise eligible for deduction of depreciation.

ii) Section 40(a)(i) and (ia) provides for disallowance only in respect of expenditure, which is revenue in nature, and does not apply to a case of the assessee whose claim is for depreciation which is not in the nature of expenditure but an allowance. Depreciation is not an outgoing expenditure and therefore the provisions of section 40(a)(i) and (ia) are not applicable. Depreciation is a statutory deduction available to the assessee on an asset, which is wholly or partly owned by the assessee and used for business or profession.

iii) The Commissioner (Appeals) had held that the payment had been made by the assessee for an outright purchase of intellectual property rights and not towards royalty. This finding had rightly been affirmed by the Tribunal. The findings recorded by the Commissioner (Appeals) as well as the Tribunal could not be termed perverse. Depreciation was allowable. In any case, the amount could not be disallowed u/s 40(a)(i).’

Business expenditure – Section 37 – Assessee company taking over business of another company – Scheme for voluntary retirement of employees of such company – Amount paid under scheme was for purposes of business – Deductible expenditure

2. CIT vs. G.E. Medical Systems (I) (P) Ltd. [2021] 430 ITR 494 (Karn) Date of order: 18th November, 2020 A.Y.: 2000-01

Business expenditure – Section 37 – Assessee company taking over business of another company – Scheme for voluntary retirement of employees of such company – Amount paid under scheme was for purposes of business – Deductible expenditure

GE was incorporated in Singapore and EI in India. The two companies entered into a joint venture agreement on 9th December, 1993 as a result of which the assessee came into existence with the object of carrying on the business of manufacturing and distribution of X-ray equipment. The agreement also provided that the assessee company would take over certain assets of EI and 184 of its employees. A separate agreement termed ‘equipment sales and employees absorption agreement’ was executed between the assessee and EI. This agreement was part of the share purchase agreement. Under the agreement, the employees were given a choice of continuity of service. The assessee introduced a scheme under which it paid a sum of Rs. 4,33,67,658 as retirement benefit to employees who availed of the benefit of the scheme. The amount paid under the scheme was claimed as a deduction u/s 37. The claim was rejected by the A.O.

The Commissioner (Appeals) and the Tribunal allowed the claim.

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

‘i) The sum was paid as retirement benefit to employees who availed of the benefit of the scheme. Under the scheme, compensation was paid not only for past services but also for the remaining years of service with the company. The employees had also filed a complaint against the assessee under the labour laws and, therefore, the assessee had to offer a scheme to avoid any kind of future problems. The scheme was sanctioned by the Chief Commissioner for the exemption u/s 10(10C) of the Act and it was a contractual obligation and was an ascertained liability.

ii) The genuineness of the scheme was not doubted by any of the authorities, rather it had been approved by the Chief Commissioner. The expenditure incurred by the assessee under the scheme had been incurred solely and exclusively for the purposes of business and was eligible for deduction u/s 37(1).’

Appeal to ITAT – Sections 253, 254 and 254(2) of ITA, 1961 – Ex parte order – Application for recall of order – Limitation – Assessee not served with notice of hearing before Tribunal though change of address intimated by assessee in Form 35 – Rejection of application for recall of order on ground of bar of limitation – Order unsustainable – Ex parte order in appeal and order rejecting application u/s 254(2) quashed and set aside – Matter remanded to Tribunal

1. Pacific Projects Ltd. vs. ACIT [2021] 430 ITR 522 (Del) Date of order: 23rd December, 2020

Appeal to ITAT – Sections 253, 254 and 254(2) of ITA, 1961 – Ex parte order – Application for recall of order – Limitation – Assessee not served with notice of hearing before Tribunal though change of address intimated by assessee in Form 35 – Rejection of application for recall of order on ground of bar of limitation – Order unsustainable – Ex parte order in appeal and order rejecting application u/s 254(2) quashed and set aside – Matter remanded to Tribunal

The assessee filed an application u/s 254(2) of the Income-tax Act, 1961 before the Tribunal for recall of the ex parte order remanding the matter to the Assessing Officer to decide the matter afresh after examining all the documents, including additional evidence as well as books of accounts, bills and vouchers, etc. The Tribunal held that it had no power to condone the delay in filing the application u/s 254(2) as the assessee had filed the application after six months from the end of the month in which the ex parte order had been passed.

The assessee filed a writ petition and challenged the order of the Tribunal contending that it had changed its address and shifted to new premises and this fact was mentioned in the appeal filed by the assessee in Form 35 against the order passed by the Deputy Commissioner and the assessee was never served in the appeal filed by the Department before the Tribunal. The Delhi High Court allowed the writ petition and held as under:

‘i) The course adopted by the Tribunal at the first instance by dismissing the appeal for non-prosecution and then refusing to entertain the application filed by the assessee u/s 254(2) for recall of the order, could not be sustained. The address of the assessee mentioned in the appeal before the Tribunal by the Department was the assessee’s former address and not the new address, which had been mentioned in the appeal filed before the Commissioner (Appeals) in Form 35. The assessee was never served in the appeal filed by the Department before the Tribunal.

ii) The Tribunal had erroneously concluded that the miscellaneous application filed by the assessee was barred by limitation u/s 254(2) inasmuch as the assessee had filed the application within six months of actual receipt of the order. If the assessee had no notice and no knowledge of the order passed by the Tribunal, the limitation period would not start from the date the order was pronounced by the Tribunal. The order dismissing the application filed by the assessee u/s 254(2) was quashed and on the facts the ex parte order whereby the matter was remanded to the Assessing Officer was set aside. The Tribunal is directed to hear and dispose of the appeal on the merits.’

Item (c) of the Explanation to section 115JB – Reduction of provision of doubtful debts written-back from book profit allowed, even when in the year when provision was made and the tax was paid under normal provisions of the Act, while computing book profit, the same was not added to book profit

2. BOB Financial Solutions Ltd. vs. DCIT (Mumbai) Mahavir Singh (V.P.) and Manoj Kumar Aggarwal (A.M.) I.T.A. No. 1207/Mum/2019 A.Y.: 2014-15 Date of order: 15th March, 2021 Counsel for Assessee / Revenue: Kishor C. Dalal / Rahul Raman

Item (c) of the Explanation to section 115JB – Reduction of provision of doubtful debts written-back from book profit allowed, even when in the year when provision was made and the tax was paid under normal provisions of the Act, while computing book profit, the same was not added to book profit

FACTS

While computing book profits u/s 115JB, the assessee reduced ‘provision of card receivables written-back’ amounting to Rs. 19.30 crores. According to the A.O., the provision made for card receivable, in earlier years, was not added back to compute book profits, hence, the same cannot be reduced from book profit in the current year. The assessee explained that in the earlier years the same was disallowed while computing total income under the normal provisions of the Act. In those years, the assessee had business losses and, therefore, as advised by its consultant, the book profit was shown as ‘Nil’ without making any adjustment as required u/s 115JB as it had no impact on his tax liability. However, the A.O. disallowed the said reduction of Rs. 19.30 crores from the book profit. The CIT(A), on appeal, confirmed the A.O.’s order.

HELD

The Tribunal noted that a similar issue had arisen before it in the assessee’s own case in A.Y. 2012-13 (ITA No. 4485 & 4297/Mum/2017 order dated 7th May, 2019) which was decided in favour of the assessee. In the said case also, the assessee had book losses and even after adding back the said write-offs, the resultant figure would have still been a negative figure and the assessee would not have any liability to pay tax u/s 115JB. Following the same, the Tribunal held that the assessee was entitled for deduction of write-back while computing book profit u/s 115JB.

IMPACT OF WAIVER OF LOAN ON DEPRECIATION CLAIM

ISSUE FOR CONSIDERATION
When a loan taken for acquiring a depreciable capital asset or a part of the purchase price of such capital asset is waived in a year subsequent to the year of acquisition, an issue that arises with respect to waiver of loan or part of the purchase price is whether the depreciation claimed in the past on that portion of the cost of the asset which represents the waiver of the purchase price, or which had been met from the loan waived, can be added / disallowed u/s 41(1) / 43(6) in the year in which that amount of the loan / purchase price has been waived, and whether the written down value (WDV) of the block of the assets concerned needs to be reworked so as to reduce it by the amount of loan / purchase price waived. The Hyderabad Bench of the Tribunal has held that while section 41(1) would not apply, the depreciation claimed in the past needs to be added as income and the WDV is also required to be reworked in such a case. As against this, the Bengaluru Bench of the Tribunal has held that waiver of loan taken to acquire a depreciable asset does not have any consequences in the year in which the loan has been waived off, insofar as claim of depreciation is concerned.

BINJRAJKA STEEL TUBES LTD.’s CASE

The issue had earlier come up for consideration of the Hyderabad Bench of the Tribunal in the case of Binjrajka Steel Tubes Ltd. vs. ACIT 130 ITD 46.

In this case, the assessee had purchased certain machinery from M/s Tata SSL Ltd. for a total consideration of Rs. 6 crores. Since the machinery supplied was found to be defective, the matter was taken up with the supplier for replacement and after protracted correspondence and a legal battle, the supplier agreed to an out-of-court settlement. As per this settlement, the liability of the assessee which was payable to the supplier to the extent of Rs. 2 crores was waived.

During the previous year relevant to assessment year 2005-06, the assessee gave effect to this settlement in its books of accounts by reducing the cost of machinery by Rs. 2 crores. Consequently, the depreciation for the year had also been adjusted, including withdrawal of excess charged depreciation of earlier years amounting to Rs. 1,19,01,058. While making the assessment, the A.O. added back the amount of Rs. 2 crores as income of the assessee u/s 41(1), and this was confirmed by the CIT(A).

Before the Tribunal, the assessee submitted that the remission of liability of Rs. 2 crores which was written back was not taxable u/s 41(1) because cessation of liability was towards a capital cost of asset and, hence, it was a capital receipt. On the other hand, the Department argued that the assessee had claimed the depreciation on Rs. 6 crores from the year of acquisition of the asset. From the date of inception of the asset, depreciation was allowed by the Department on the block of assets, and when the assessee received any amount as benefit by way of reduction of cost of acquisition, the amount of benefit had to be offered for taxation as per the provisions of section 41(1).

The Tribunal referred to the provisions of section 41(1) and held that it could be invoked only where any allowance or deduction had been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently, during any previous year, the assessee had obtained any amount or some benefit with respect to such loss, expenditure or trading liability. The benefit of depreciation obtained by the assessee in the earlier years could not be termed as an allowance or expenditure claimed by the assessee in the earlier years. Hence, any recoupment received by the assessee on this count could not be taxed u/s 41(1). Accordingly, the Tribunal rejected the Revenue’s contention that the assessee had obtained the benefit of depreciation in the earlier years as allowance in respect of expenditure incurred by it when it bought the plant and machinery and the Rs. 2 crores liability waived by the supplier of the machinery in the year under consideration was liable to be taxed as deemed income within the purview of section 41(1).

Though the issue raised before the Tribunal was only with regard to the taxability of the amount waived u/s 41(1), it further dealt with the issue of adding back of depreciation which was already claimed on the said amount. For the purpose of dealing with the said issue of disallowance of depreciation which was not raised before it, the Tribunal placed reliance on the decision of the Calcutta High Court in the case of Steel Containers Ltd. vs. CIT [1978] 112 ITR 995, wherein it was held that when the Tribunal finds that disallowance of a particular expenditure by the authorities below is not proper, it is competent to sustain the whole or part of the disputed disallowance under a different section under which it is properly so disallowable.

On the merits of the issue of disallowance of depreciation, the Tribunal held that depreciation already allowed in past years on the amount which was waived by the supplier under the settlement with the assessee had to be withdrawn and added back in the year under consideration, as otherwise, the assessee would get double benefit which was not justified. Accordingly, the A.O. was directed to add the amount of depreciation claimed in past years on the amount of Rs. 2 crores as income u/s 28(iv) as the value of benefit arising from the business. After reducing the said amount of depreciation granted earlier from the amount of Rs. 2 crores, the Tribunal further directed that the balance amount was to be reduced from the closing WDV of the block of assets, without giving any reasoning or relying on any relevant provision of the Act.

AKZO NOBEL COATINGS INDIA (P) LTD.’s CASE
The issue, thereafter, came up for consideration before the Bengaluru Bench of the Tribunal in the case of Akzo Nobel Coatings India (P) Ltd. vs. DCIT (2017) 139 ITD 612.

In this case, the assessee acquired plant and machinery for its Hoskote plant in April, 1996. Since the assessee could not obtain approval from the RBI for making payment to the supplier, ultimately CEL, UK, one of the group companies, made the payment for the machinery to the suppliers. Thus, the funds for supply of machinery which were originally payable by the assessee to the suppliers became payable by the assessee to CEL, UK. Later, CEL, UK was taken over by Akzo International BV. As a part of the business restructuring and because of the absence of RBI approval for making remittances of monies due for supply of machinery, and taking note of the business exigency, Akzo International BV decided to waive the money payable in respect of supply of machineries to the assessee. Thus, the assessee was the beneficiary of the waiver of loan to the extent of Rs. 13,48,09,000.

This waiver of the loan took place in April, 2000. The benefit as a result of the waiver was shown in the books of accounts of the assessee in the balance sheet as a capital receipt not chargeable to tax. The assessee had claimed depreciation on those machineries from the A.Y. 1997-98 onwards. The fact of waiver of the amount payable by the assessee came to the knowledge of the A.O. in the course of assessment proceedings for the A.Y. 2004-05. Thereafter, action was initiated u/s 148 to reduce the WDV of the relevant block of assets and withdraw the depreciation already granted to the assessee in the past.

According to the A.O., on the waiver of loan by the parent company, the WDV of the plant and machinery had to be reworked by reducing from the opening WDV, the amount of loan which had been waived by the parent company, viz., a sum of Rs. 13,48,09,000. The A.O., accordingly, worked out the depreciation allowable on plant and machinery by reducing the WDV on which depreciation had to be allowed for A.Y. 2001-02. A similar exercise of reworking the amount of the WDV and resultant depreciation thereon was made for the subsequent years as well.

On appeal by the assessee, the CIT(A) took the view that the entire waiver of the loan cannot be reduced from the WDV of the block of assets. He held that the whole of the original cost cannot be reduced from the opening WDV as on 1st April, 2001. This was on the basis that the provisions of section 43(6) did not envisage reduction of cost of assets in the guise of disallowance of depreciation. He, accordingly, directed the A.O. to reduce only the WDV of the assets concerned, i.e., Rs. 4,73,32,812, and not the whole of the original cost. The assessee as well as the Revenue filed appeals before the Tribunal against the order of the CIT(A) giving partial relief.

Before the Tribunal, the assessee contended that only those adjustments which have been provided u/s 43(6)(c) could be made to the WDV of the block of assets. Since no assets were sold, discarded, demolished or destroyed, the amount of loan waived by the supplier of machinery could not be reduced. The assessee relied upon the decision of the Supreme Court in the case of CIT vs. Tata Iron & Steel Co. Ltd. [1998] 231 ITR 285, wherein the Supreme Court held that the manner of repayment of loan availed by an assessee for the purchase of an asset on which depreciation is claimed cannot have any impact on allowing depreciation on such assets. It was also submitted that Explanation 10 to section 43(1) would not apply to the present case, because the amount waived by the parent company cannot be said to be the cost of the asset met directly or indirectly by any authority in the form of ‘subsidy or grant or reimbursement’. On the other hand, Revenue pleaded to restore the order of the A.O.

The Tribunal held that the only way by which the WDV on which depreciation is to be allowed as per the provisions of section 32(1)(ii) can be altered is as per the situation referred to in section 43(6)(c)(i), A and B, i.e., increased by the actual cost of any asset falling within that block, acquired during the previous year and reduced by the monies payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any. In the present case, neither was there purchase of the relevant assets during the previous year, nor was there sale, discarding or demolition or destruction of those assets during the previous year. The relevant assets continued to be owned and used by the assessee. Therefore, these provisions could not have been resorted to for the purpose of making adjustments to the WDV of the block as made by the A.O.

Examining the applicability of the provisions of Explanation 10 to section 43(1), which provide for reduction of cost under certain circumstances, the Tribunal held that they would apply only when there was a subsidy or grant or reimbursement. In the present case, there was no subsidy or grant or reimbursement. There was only a waiver of the amounts due for purchase of machinery, which did not fall within the scope of any of the aforesaid expressions used in Explanation 10. Even otherwise, section 43(1) was applicable only in the year of purchase of machinery and in the case before the Tribunal, the purchase of the machinery in question was not in A.Y. 2001-02. Therefore, the actual cost which had already been recognised in the books in the A.Y. prior to A.Y. 2001-02 could not be disturbed in A.Y. 2001-02.

The Tribunal pointed out that there was a lacuna in the law as the assessee on the one hand got the waiver of monies payable on purchase of machinery and claimed such receipt as not taxable because it was a capital receipt. On the other hand, the assessee claimed depreciation on the value of the machinery for which it did not incur any cost. Thus, the assessee was benefited both ways.

As per the law as it prevailed as on date, the Revenue was without any remedy. The only way that the Revenue could remedy the situation was that it had to reopen the assessment for the year in which the asset was acquired and fall back on the provisions of section 43(1), which provided that actual cost means the actual cost of the assets to the assessee. Even this could be done only after the waiver of the loan which was used to acquire machinery. By that time if the assessments for that A.Y. got barred by time, the Revenue was without any remedy. Even the provisions of section 155 did not provide for any remedy to the Revenue in this regard.

The Tribunal also relied on the decision of the Supreme Court in the case of Tata Iron & Steel Co. Ltd. (Supra) wherein a view had been taken that repayment of loan borrowed by an assessee for the purpose of acquiring an asset had no relevance to the cost of assets on which depreciation has to be allowed.

OBSERVATIONS


There is a distinction in the facts between the two decisions – in Binjrajka Steel Tubes case (Supra), the waiver was a part of the purchase price itself by the seller of the machinery, while in the Akzo Nobel Coatings case, it was a waiver of the loan extended by a group company. The issue really is whether the cost of the asset can undergo a change in a subsequent year, due to waiver of a part of the purchase price, or a loan taken to acquire the asset, whether such waiver is to be ignored or given effect to, and when and how the effect is to be given for such change in the cost of the asset.

The claim of depreciation is governed by the provisions of section 32. It allows a deduction of an amount to be calculated at prescribed percentage on the WDV of the block of assets. Section 43(6)(c) defines the expression ‘written down value’ with respect to a block of assets and it reads as under:

(6) ‘written down value’ means –
(c) in the case of any block of assets, –
(i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted, –
(A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year;
(B) by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and…………………..

The WDV of the block of assets is required to be determined only in the manner as provided in section 43(6)(c). Nothing can be added to it and nothing can be reduced from it which has not been provided for in the aforesaid provision. The aforesaid provision leaves no scope for any reduction in the WDV of any block of assets for any reasons other than the sale, discarding, demolition or destruction of the assets falling within that block.

Thus, once the actual cost of any asset has been added to the WDV of the block of assets, no further adjustments have been provided for in the Act to reduce the amount of that actual cost in any later year on the ground that the loan taken to pay that cost or a part of the purchase price has been waived off. In the absence of any such provision under the Act allowing reduction of the WDV of the block of assets on account of waiver of loan taken or part of purchase price for acquiring the assets forming part of that block of assets, no adjustment could have been made for giving effect to the benefits derived by the assessee on account of such a waiver by revising the amount of WDV.

This leads us to the issue whether on account of waiver of the loan from which that asset was acquired it can be said that the ‘actual cost’ of the asset which was added to the WDV of the block of assets has now undergone a change and, therefore, the adjustment is required to be made to give effect to the revised amount of the ‘actual cost’. In this regard, attention is drawn to the decision of the Supreme Court in the case of Tata Iron & Steel Co. Ltd. (Supra); the relevant extract from it is reproduced below:

Coming to the question raised, we find it difficult to follow how the manner of repayment of loan can affect the cost of the assets acquired by the assessee. What is the actual cost must depend on the amount paid by the assessee to acquire the asset. The amount may have been borrowed by the assessee, but even if the assessee did not repay the loan, it will not alter the cost of the asset. If the borrower defaults in repayment of a part of the loan, the cost of the asset will not change. What has to be borne in mind is that the cost of an asset and the cost of raising money for purchase of the asset are two different and independent transactions. Even if an asset is purchased with non-repayable subsidy received from the Government, the cost of the asset will be the price paid by the assessee for acquiring the asset. In the instant case, the allegation is that at the time of repayment of loan, there was a fluctuation in the rate of foreign exchange as a result of which the assessee had to repay a much lesser amount than he would have otherwise paid. In our judgment, this is not a factor which can alter the cost incurred by the assessee for purchase of the asset. The assessee may have raised the funds to purchase the asset by borrowing but what the assessee has paid for it is the price of the asset. That price cannot change by any event subsequent to the acquisition of the asset. In our judgment, the manner or mode of repayment of the loan has nothing to do with the cost of an asset acquired by the assessee for the purpose of his business.

Relying on the aforesaid decision of the Supreme Court, the Kerala High Court in the case of Cochin Co. (P) Ltd. 184 ITR 230 (Supra) while dealing with the same issue of adjustment to the actual cost consequent to waiver of loan, held as under:

The Tribunal has categorically found that Atlanta Corpn. is only a financier and when Atlanta Corpn. wrote off the liability of the assessee, it cannot be said in retrospect that the cost of the assessee to any part of the machinery purchased in 1968 was met by Atlanta Corpn. The Tribunal held that the remission of liability by Atlanta Corpn. long after the liability was incurred, cannot be relied on to hold that Atlanta Corpn. met directly or indirectly part of the cost of the machinery of the assessee purchased as early as 1968. As per section 43(7), if the cost of the asset is met directly or indirectly, at the time of purchase of the machinery, by any other person or authority, to that extent the actual cost of the asset to the assessee will stand reduced. But it is a far cry to state that though at the time of purchase of the machinery, no person met the cost either directly or indirectly, if, long thereafter a debt incurred in that connection is written off, it could be equated to a position that the financier met part of the cost of the asset to the assessee. We are unable to accept the plea that the remission of liability by Atlanta Corpn. can, in any way, be said to be one where the Corpn. met directly or indirectly the cost of the asset to the assessee.

Thus, the ‘actual cost’ of the asset does not undergo any change due to waiver of the loan obtained to acquire that asset. Explanation 10 to section 43(1) has limited applicability when the subsidy, grant or reimbursement is involved. The waiver of loan in no way can be equated with the subsidy, grant or reimbursement.

The next issue then is whether change in cost on account of price difference has any effect. The Supreme Court, in the case of CIT vs. Arvind Mills Ltd. 193 ITR 255, held as under:

‘On strict accountancy principles, the increase or decrease in liability towards the actual cost of an asset arising from exchange fluctuation can be adjusted in the accounts of the earlier year in which the asset was acquired (if necessary, by reopening the said accounts). In that event, the accounts of that earlier year as well as subsequent years will have to be modified to give effect to variations in depreciation allowances consequent on the re-determination of the actual cost. However, though this is a course which is theoretically advisable or precise, its adoption may create a lot of practical difficulties. That is why the Institute of Chartered Accountants gave an option to business people to make a mention of the effect of devaluation by way of a note on the accounts for the earlier year in case the balance sheet in respect thereof has not yet been finalised but actually to give effect to the necessary adjustments in the subsequent years instead of reopening the closed accounts of the earlier year.

So far as depreciation allowance is concerned, under section 32, read with section 43(1) and (6) of the Act, the depreciation is to be allowed on the actual cost of the asset less all depreciation actually allowed in respect thereof in earlier year. Thus, where the cost of the asset subsequently goes up because of devaluation, whatever might have been the position in the earlier year, it is always open to the assessee to insist and for the ITO to agree that the written down value in the year in which the increased liability has arisen should be taken on the basis of the increased cost minus depreciation earlier allowed on the basis of the old cost. The written down value and allowances for subsequent years will be calculated on this footing. In other words, though the depreciation granted earlier will not be disturbed, the assessee will be able to get a higher amount of depreciation in subsequent years on the basis of the revised cost and there will be no problem.
,,,,,,,,,,,,,
To obviate all these doubts and difficulties, section 43A was enacted.
…………………….
We also find it difficult to find substance in the second argument of Shri Salve that sub-section (1) was inserted only to define the year in which the increase or decrease in liability has to be adjusted. It is no doubt true that but for the new section, various kinds of arguments could have been raised regarding the year in which such liability should be adjusted. But, we think, arguments could also have been raised as to whether the actual cost calls for any adjustment at all in such a situation. It could have been contended that the actual cost can only be the original purchase price in the year of acquisition of the asset and that, even if there is any subsequent increase in the liability, it cannot be added to the actual cost at any stage and that, for the purposes of all the statutory allowances, the amount of actual cost once determined would be final and conclusive. Also, section 43A provides for a case in which, as in the present case, the assessee has completely paid for the plant or machinery in foreign currency prior to the date of devaluation but the variation of exchange rate affects the liability of the assessee (as expressed in Indian currency) for repayment of the whole or part of the monies borrowed by him from any person directly or indirectly in any foreign currency specifically for the purposes of acquiring the asset. It is a moot question as to whether in such a case, on general principles, the actual cost of the assessee’s plant or machinery will be the revised liability or the original liability. This is also a situation which is specifically provided for in the section. It may not, therefore, be correct to base arguments on an assumption that the figure of actual cost has necessarily to be modified for purposes of development rebate or depreciation or other allowances and that the only controversy that can arise will be as to the year in which such adjustment has to be made. In our opinion, we need not discuss or express any concluded opinion on either of these issues.’

The Supreme Court has therefore pointed out the situation in the absence of section 43A, which provision applies only to foreign exchange fluctuations. The identical logic would apply to other changes in cost, if such difference in cost is on account of difference in purchase price. In the absence of any specific provision similar to section 43A, any adjustment in cost would not be possible.

Further, the logic applied by the Tribunal in Binjrajka’s case to the effect that write-back of depreciation is a benefit derived by the assessee on waiver of the purchase price, and is therefore taxable u/s 28(iv), does not seem to be justified. A depreciation is only an allowance, and not an expenditure. It is merely an internal book entry to reflect diminution in value of the asset. By writing back depreciation, the assessee cannot be said to have derived any benefit. Further, as held by the Supreme Court in CIT vs. Mahindra & Mahindra Ltd. 404 ITR 1, the benefit taxable u/s 28(iv) has to be a non-monetary benefit and a monetary benefit is not covered by section 28(iv). Therefore, the waiver of cost to the extent of excess depreciation allowed cannot be said to result in a perquisite chargeable to tax u/s 28(iv).

It is very clear that the provisions of section 41(1) would not apply in such a situation of waiver of loan or part of purchase price, as has also been accepted by the Tribunal in both the decisions. The provisions of section 28(iv) would also not apply. There is no other provision by which such waiver of a sum of a capital nature can be subjected to tax. The depreciation allowed in the past on the cost is not an expenditure or trading liability, which has been remitted or has ceased. It is the loan amount or the purchase price of the asset which has been remitted or which has ceased. Depreciation cannot be regarded to be a deduction claimed of such purchase price, being a statutory allowance. Therefore, as rightly pointed out by the Bangalore Bench of the Tribunal, there is a lacuna in law, whereby such waiver is not required to be reduced from the cost of acquisition of the asset or from the written down value, nor is there a requirement for addition by way of reversal of depreciation claimed on such waived amount. The only recourse is to the provisions of section 155, within the specified time limit.

The better view of the matter, therefore, seems to be the view taken by the Bengaluru Bench of the Tribunal in the case of Akzo Nobel Coatings India (P) Ltd. (Supra) that neither the depreciation claimed in the past year can be disallowed nor the written down value for the current year can be adjusted in a case where the loan taken to acquire or a part of the purchase price of the depreciable asset has been waived.

Company – Book profits – Computation – Amount disallowed u/s 14A cannot be included

31 Sobha Developers Ltd. vs. Dy. CIT(LTU) [2021] 434 ITR 266 (Karn) A.Y.: 2008-09; Date of order: 1st April, 2021 Ss. 14A and 115JB of ITA, 1961

Company – Book profits – Computation – Amount disallowed u/s 14A cannot be included

This appeal u/s 260A was preferred by the assessee and was admitted by the Karnataka High Court on the following substantial question of law:

‘Whether the Tribunal is justified in law in holding that the indirect expenditure disallowed u/s 14A read with rule 8D(iii) of Rs. 24,64,632 in computing the total income under normal provisions of the Act is to be added to the net profit in computation of book profit for Minimum Alternate Tax purposes u/s 115JB and thereby importing the provisions of section 14A read with rule 8D into the Minimum Alternate Tax provisions on the facts and circumstances of the case?’

The High Court held as under:

‘Sub-section (1) of section 115JB provides the mode of computation of the total income of an assessee-company and tax payable on the assessee u/s 115JB. Sub-section (5) of section 115JB provides that save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee being a company mentioned in this section. The disallowance u/s 14A is a notional disallowance and therefore, by recourse to section 14A, the amount cannot be added back to the book profits under clause (f) of Explanation 1 to section 115JB.’

Section 28(i) – Disallowance of loss made merely on ad interim order of SEBI and in absence of any material to prove that assessee entered into dubious transactions deliberately to show business loss, was liable to be deleted

29 Kundan Rice Mills Ltd. vs. Asst. CIT [2020] 83 ITR(T) 466 (Del-Trib) IT(TP) Appeal No. 853 (Del) of 2020 A.Y.: 2015-16; Date of order: 9th July, 2020

Section 28(i) – Disallowance of loss made merely on ad interim order of SEBI and in absence of any material to prove that assessee entered into dubious transactions deliberately to show business loss, was liable to be deleted

FACTS
The assessee company was engaged inter alia in trading in shares, futures and options. During the year under consideration, it claimed loss on account of trading in stock options. The A.O. found that SEBI had passed an ex parte interim order in the matter of illiquid stock options wherein the name of the assessee company also figured in the list of entities which had entered into non-genuine, fraudulent trades to generate fictitious profits / losses for the purpose of tax evasion / facilitating tax evasion.

However, the assessee explained before the A.O. that (i) it had acted as a bona fide trader as it had been doing in the past and complied with all procedures and requirements of the stock exchange, (ii) at the time of the relevant transactions / trades, the assessee could not have had any idea about any profit or loss in the said transactions, and (iii) the assessee was not connected with the counter-parties in the trade and there was no grievance of any of the investors or BSE. It also claimed that only 4.85% sale transactions allegedly matched with entities named by SEBI. The A.O., however, rejected this submission of the assessee and disallowed loss in trading from stock options. The Commissioner (Appeals) upheld the addition made by the A.O. on the basis that since detailed investigation was carried out by SEBI, no separate investigation was required to be done by the A.O. to disallow the bogus losses.

Aggrieved, the assessee filed an appeal before the ITAT.

HELD
The disallowance of loss made by the A.O. was deleted by the ITAT. In doing so, it observed that:

1. Trading in stock futures and options was done by the assessee regularly since past several years. The transactions were recorded in the books of accounts. The intrinsic value mentioned in the SEBI order was only one of the ways of calculating and there is no set formula / law / rule / circular which defines intrinsic value or prohibits trading below intrinsic value.
2. The A.O., in the assessment order, had observed that in screen-based electronic trading, ideally, it was not possible to choose the counter party for trade. The circuit breaker limits set by SEBI were not applicable to the Futures and Options (F&O) segment.
3. SEBI subsequently directed that there was no need to continue with the directions issued against the assessee company and others (these were the same orders relied upon by the Income-tax authorities). Thus, in principle, the interim order and subsequent orders of the SEBI which were the basis of passing the assessment order in question, were vacated by SEBI itself.
4. The assessee filed complete documentary evidence before the authorities like carrying out transactions through banking channels, fulfilling margin requirements mandated by SEBI, etc. The same were supported by contract notes. There was also no allegation made by BSE against any of the transactions carried out by the assessee company. The A.O. as well
as the Commissioner (Appeals) did not conduct any investigation on the documentary evidences filed by the assessee.
5. Loss on account of similar nature of transactions was incurred in the preceding year, which was not disallowed and hence, the A.O. ought to have followed the principle of consistency.
6. The ad interim order of SEBI was passed without hearing the objections of the assessee and when
those objections were considered, the interim order was diluted by giving permission to the assessee to deal
in the transactions. Since both the orders of SEBI relied upon by the A.O. were vacated by the SEBI, there was no material available with the authorities below so as to conclude that the assessee has entered into any dubious or other transactions deliberately to show business losses.
7. The ad interim order which was passed by SEBI ex parte would not disclose any precedent or ratio which may be binding on the Income-tax Department.

Based on the above observations, the disallowance was finally deleted.

ITAT allows claim of interest – Sets aside CIT(A)’s order arbitrarily restricting interest rate at 12% p.a. – Treats expenditure as allowable u/s 36(1)(iii)

28 Shri Bhavarlal Mangilal Jain [2021] TS-420-ITAT-2021 (Mum)b A.Y.: 2012-13; Date of order: 4th May, 2021 Section 36(1)(iii)

ITAT allows claim of interest – Sets aside CIT(A)’s order arbitrarily restricting interest rate at 12% p.a. – Treats expenditure as allowable u/s 36(1)(iii)

FACTS
The assessee, an individual, had wrongly claimed certain interest expenditure under ‘income from other sources’ which was disallowed by the A.O. during assessment. At the appellate proceedings with the CIT(A), the assessee raised an additional ground that such interest be allowed under the head ‘Profits & Gains of Business / Profession’. The CIT(A) allowed the interest expenditure, but restricted the rate of interest to 12% p.a. The interest paid in excess of 12% was disallowed on the grounds that the rate of interest is higher (the assessee had paid interest ranging from 5% to 24%) than the interest received on Partnership Capital Account. The CIT(A), thus made a disallowance of interest in excess of 12% p.a.

Aggrieved, the assessee preferred an appeal with the Tribunal.

HELD
The Tribunal observed that the Department had accepted the genuineness of the loan transactions and also the same being for business purposes. Once the expenditure has been accepted to be business expenditure, the interest rate cannot be arbitrarily restricted. In order to disallow interest beyond a certain rate, it has to be shown that such interest was excessive or for extraneous consideration. Based on facts, the Tribunal noted that some of the parties to whom interest was paid at a rate of more than 12% included banks, non-banking financial institutions and some private lenders, and none of these parties was related to the assessee within the provisions of section 40A. Thus, the assessee’s appeal was allowed.

ITAT allows assessee to claim the property cohabited by her as ‘let-out’ – Allows eligible deductions u/s 24 in computation of income under ‘house property’

27 Hima Bindu Putta [2021] TS-428-ITAT-2021 (Hyd) A.Y.: 2009-10; Date of order: 3rd May, 2021 Section 23

ITAT allows assessee to claim the property cohabited by her as ‘let-out’ – Allows eligible deductions u/s 24 in computation of income under ‘house property’

FACTS

The assessee, an individual, filed her return of income declaring loss under the head ‘house property’. She was in ownership of a property which was let-out by her to a company in which her husband was a director-employee. The company in turn provided this property by way of accommodation to her husband, Mr. A, with whom she resided in the property. The assessee treated this property as a let-out property and offered the rental income in her computation. The A.O. treated 50% of the property as let-out and the balance 50% as self-occupied, as the assessee was also residing in the property. Accordingly, he restricted deductions u/s 24 to 50% of the allowable amounts. The CIT(A) dismissed the assessee’s appeal.

Aggrieved, the assessee is in appeal before the Tribunal.

HELD


The Tribunal, relying on the material available on record, found that there was no dispute that the assessee was the owner of the property and she had purchased it with borrowed capital. Further, the property had been let-out to the company and she had offered the rental income in her computation for the relevant assessment year. ‘The assessee is the wife of Mr. A, who was given the property as residential accommodation by the company, and therefore it cannot he held that the assessee herself is occupying the property.’

The Tribunal ruled in favour of the assessee, stating that such income has to be treated as income from ‘house property’ and all eligible deductions including interest on borrowed capital was to be allowed in computing such income.

The assessee’s appeal was thus allowed.

Right to collect toll is an intangible asset which qualifies for depreciation @ 25%

26 BSC C&C Krunali Toll Road Ltd. vs. DCIT TS-381-ITAT-2021 (Del) A.Ys.: 2012-13 & 2013-14; Date of order: 18th May, 2021 Section: 32

Right to collect toll is an intangible asset which qualifies for depreciation @ 25%

FACTS

The assessee company developed a toll road on the Kurla-Kiratpur section in Punjab on BOOT basis. The contract was awarded by the National Highways Authority of India (NHAI). The entire cost of construction was Rs. 441,27,05,614, including a grant of Rs. 43.92 crores from the NHAI. The assessee, in its return of income, claimed depreciation thereon @ 25%. While assessing its total income u/s 143(3), the A.O., following the judgment of the Allahabad High Court in CIT vs. Noida Toll Bridge Co. Ltd. 213 Taxman 333, restricted depreciation on the toll road to 10%.

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

The assessee then preferred an appeal to the Tribunal where it contended that the lower authorities erred in holding that it was the owner of the road. Actually, the assessee had only been given the right to collect toll fee from vehicles entering the road which right could not be equated with ownership. On behalf of the assessee, reliance was placed on the following decisions:

(a) North Karnataka Expressway Ltd. vs. CIT [Appeal No. 499 of 2012]; (b) West Gujarat Expressway Ltd. [ITA Nos. 5904 & 6204/M/2012; order dated 15th April, 2015]; (c) Progressive Construction Ltd. [ITA No. 214/Hyd/2014; order dated 7th November, 2014]; (d) Kalyan Toll Infrastructure Ltd. vs. ACIT [ITA Nos. 201 & 247/Ind/2008; order dated 14th December, 2010]; and (e) Mokama Munger Highway Ltd. vs. ACIT [ITA Nos. 1729, 2145 & 2146/Hyd/2018; order dated
3rd July, 2019].

HELD


The Tribunal noted that there were conflicting decisions rendered by the High Court and the Special Bench of the Tribunal. The Bench then noted the ratio of the decisions of the Tribunal in the case of ACIT vs. West Gujarat Expressway Ltd. (Supra) and also of the Special Bench decision of the Tribunal in ACIT vs. Progressive Construction Ltd. Following the ratio of the decision of the Bombay High Court and also the Special Bench decision, the Tribunal held that the assessee is entitled to claim depreciation @ 25%.

Gain received by assessee owing to fluctuation in foreign exchange rates in respect of loan which was given, as also received back in US dollars, by assessee to his cousin in Singapore under Liberalised Remittance Scheme issued by Reserve Bank of India, is a capital receipt not chargeable to tax

25 Aditya Balkrishna Shroff vs. ITO [2021] 127 taxmann.com 343 (Mum-Trib) A.Y.: 2013-14; Date of order: 17th May, 2021 Sections: 2(24), 4, 56

Gain received by assessee owing to fluctuation in foreign exchange rates in respect of loan which was given, as also received back in US dollars, by assessee to his cousin in Singapore under Liberalised Remittance Scheme issued by Reserve Bank of India, is a capital receipt not chargeable to tax

FACTS
In the course of assessment proceedings, the A.O. noticed that as per AIR Information and as per capital account filed by the assessee, he was in receipt of Rs. 1,12,35,326. Upon seeking an explanation, the assessee informed that on 29th March, 2010, he had granted an interest-free loan of US $2,00,000 to his cousin in Singapore. The remittance was made under the Liberalised Remittance Scheme of the RBI. The rate of exchange prevailing on that date was Rs. 45.14. On 24th May, 2012 the assessee received back the said loan of US $2,00,000. The exchange rate on the date of receiving back the loan was Rs. 56.18. Accordingly, the capital account of the assessee was credited with a sum of Rs. 1,12,35,326.

The A.O. was of the view that the difference in amount of Rs. 22,04,568 was of the nature of income. The assessee explained that the loan was given on a personal account to his cousin and was not a business transaction and there was no motive of any economic gain in the transaction. It was done in terms of the Liberalised Remittance Scheme of the RBI inasmuch as it was a permitted transaction and specifically on capital account. It was further explained that the transaction was capital in nature, therefore ‘the gain is in the nature of capital receipt and hence not offered for taxation’.

But these submissions did not impress the A.O. who held that ‘the gain on realisation of loan would partake the character of income under the head “income from other sources”’. Accordingly, he added a sum of Rs. 1,12,35,326 to the total income of the assessee as ‘income from other sources’.

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

HELD


The Tribunal held that when a receipt is in the capital field, even if that be a gain, it is in the nature of a capital gain, but then as the definition of income stands u/s 2(24)(vi), only such capital gains can be brought to tax as are permissible to be taxed u/s 45. In other words, a capital gain which is not taxable under the specific provisions of section 45 or which is not specifically included in the definition of income by way of a specific deeming fiction, is outside the ambit of taxable income. All ‘gains’ are not covered by the scope of ‘income’. Take, for example, capital gains. It is not even the case of the authorities below that the capital gains in question are taxable u/s 45. Thus, the reasoning adopted by the A.O. was incorrect.

The Tribunal observed that the CIT(A)’s line of reasoning was no better. While he accepts that the transaction in question was in the capital field, he proceeds to hold that ‘income’ arising out of the loan transaction is required to be treated as ‘interest’ or ‘income from other sources’, but all this was a little premature because he proceeded to decide as to what is the nature of the income or under which head it is to be taxed, without dealing with the foundational plea that the scope of income does not include gains in the capital field. According to the Tribunal, if the transaction was in the capital field, as he accepts, ‘where is the question of a capital receipt being taxed as income unless there is a specific provision of bringing such a capital receipt to tax?’

The Tribunal held that where the loan is in a foreign currency and the amount received back as repayment is exactly the same, there is no question of any interest component at all.

The Tribunal allowed this ground of appeal filed by the assessee.

Amendment made to section 54B by the Finance Act, 2013 w.e.f. 1st April, 2013 making HUFs entitled for claiming benefit u/s 54B is clarificatory

24 Shri Sitaram Pahariya (HUF) vs. ITO [2021] 127 taxmann.com 618 (Agra) A.Y.: 2012-13; Date of order: 31st May, 2021 Section: 54B

Amendment made to section 54B by the Finance Act, 2013 w.e.f. 1st April, 2013 making HUFs entitled for claiming benefit u/s 54B is clarificatory

FACTS
During the previous year relevant to the assessment year under consideration, the assessee HUF sold agricultural land and claimed benefit u/s 54B on subsequent purchase of another plot of land. The A.O., while assessing the total income of the assessee, denied the claim made by the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the denial of claim on the ground that for the assessment year under consideration, section 54B does not apply to HUFs.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal held as under:

(i) the Hindu undivided family was entitled to the benefit of 54B even prior to the insertion of ‘the assessee being an individual or his parent, or a Hindu undivided family’ by the Finance Act, 2013;
(ii) the assessee is a person subjected to tax under the Act, and the person includes the individual as well as the Hindu undivided family. Therefore, the benefit of provisions of 54B cannot be restricted to only individual assessees;
(iii) the Revenue is duty-bound to make out a clear case of debarring the HUF from availing the benefit of section 54F / 54B and the assessee cannot be denied the benefit merely based on its interpretation. If the Revenue wanted to tax the assessee (HUF), then the statute should have provided specifically that the assessee in 54B is only restricted to a living individual and is not applicable to a Hindu undivided family;
(iv) further, the High Court had not considered that individual assessee and HUF can both be used as and when the context so desires and it will not lead to any absurdity. In case the assessee is a Hindu undivided family, the second part of section 54B, i.e., ‘of parents of his’, would not be applicable. Harmonious interpretation is required to be invoked so that the word used in the provisions would not become redundant or otiose;
(v) in case of doubt or confusion, the benefit in respect of taxability or exemption should be given to the assessee rather than to Revenue;
(vi) the Co-ordinate Bench in the matter of Sandeep Bhargava (‘HUF’) [(2020) 117 taxmann.com 677 (Chandigarh-Trib)] has held that an HUF is entitled to claim benefit of section 54B;
(vii) on the facts of the present case, the Tribunal found that the assessee, within two years of the sale of agricultural land, had invested the amount and purchased land in accordance with the requirement of section 54B and was entitled to the benefit of 54B;
(viii) the assessee HUF is entitled to the benefit of section 54B for the assessment year under consideration as the word assessee used in 54B had always included HUF, and further, the amendment brought on by the Finance Act, 2013 in section 54 by inserting ‘the assessee being an individual or his parent, or a Hindu undivided family’ was classificatory in nature and was introduced by the Ministry with a view to extend the benefit to the Hindu undivided family;
(ix) the Hindu undivided family (HUF) has been recognised as a separate tax entity; therefore, before and after the amendment, if the agricultural land which was being used by the HUF for two years prior to the transfer has been transferred by it and it purchases any other agricultural land within two years of such transfer, then it shall be entitled to the benefit of section 54B/54F.

Receipt in the form of share premium cannot be brought to tax as revenue receipt

23 ACIT vs. Covestro India Private Limited (formerly Bayer Sheets India Private Limited) TS-394-ITAT-2021 (Mum) A.Y.: 2011-12; Date of order: 27th April, 2021
Section: 4

Receipt in the form of share premium cannot be brought to tax as revenue receipt

FACTS
The assessee, a private limited company engaged in the business of manufacturing and trading of polycarbonate sheets, articles and high impact polystyrene articles, commenced business operations in the previous year relevant to the assessment year under consideration. For the A.Y. 2011-12, it filed its return of income declaring therein a loss of Rs. 17,39,073.

During the year under consideration, the assesse had issued 7,00,000 equity shares of Rs. 10 each at a premium of Rs. 115.361351 per share. Of the 7,00,000 equity shares issued, 3,57,000 were issued to a foreign company Bayer Material Science for a monetary consideration; 3,08,000 shares were issued to Malibu Plastica Private Limited (‘MPPL’) and 35,000 to Malibu Tech Private Limited (‘MTPL’) for non-monetary consideration, i.e., for purchase of polycarbonate extrusion and thermo-forming sheet material from the said Indian companies.

While assessing the total income of the assessee, the A.O. treated share premium of Rs. 8,07,52,945 (7,00,000 x 115.361351) as taxable u/s 56 on the ground that the assessee sought to justify the issue price of the shares by adopting the DCF method without furnishing business plans and projections to justify the premium; the year of issue of shares was the first year of business of the assessee; and the assessee has utilised the share premium for purposes other than those specified u/s 78 of the Companies Act, 1956; hence, the receipt of share premium partakes the character of revenue receipt taxable as income.

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

HELD
The Tribunal noted that the addition had been made by the A.O. u/s 56(1) and hence what is to be adjudicated is limited and confined to the fact as to whether receipt of share premium per se could be treated as revenue receipt so as to make it taxable u/s 56(1).

It held that receipt of share premium per se cannot be treated as income or revenue receipt. In order to make a particular receipt taxable within the ambit of section 56(1), the receipt should be in the nature of income as defined in section 2(24). Share premium received by the company admittedly forms part of share capital and shareholders’ funds of the assessee company. When receipt of share capital partakes the character of a capital receipt, the receipt of share premium also partakes the character of capital receipt only. Hence, at the threshold itself, the receipt in the form of share premium cannot be brought to tax as revenue receipt and consequently be treated as income u/s 56(1).

The Tribunal noted that the Co-ordinate Bench of the Tribunal in the case of Credit Suisse Business Analysis (India) (P) Ltd. vs. ACIT [72 taxmann.com 131 (Mum-Trib)] has addressed the very same issue and decided in favour of the assessee. This order was the subject matter of challenge by the Revenue before the High Court and the question of law was not admitted by the High Court on the addition made u/s 56(1). A similar view has been taken by the Tribunal in the case of Green Infra Ltd. vs. ITO [38 taxmann.com 253].

The Tribunal dismissed in limine the observation made by the A.O. in his order that receipt of premium was akin to a gift and hence taxable u/s 56(1). It held that receipt of share capital and share premium is normal in case of a limited company and the same by no stretch of imagination can be equated with a gift. Moreover, a gift can be received only by individuals or HUFs and not by a company.

The Tribunal held that the case of Cornerstone Property Investment Pvt. Ltd. vs. ITO [ITA No. 665/Bang/2017 dated 9th February, 2018], on which reliance was placed by the Revenue, is distinguishable on facts as in that case addition had been made u/s 68 by doubting the genuineness of the parties from whom share premium had been received.

The ground of appeal filed by the assessee was allowed.

Where accrual of income takes place but its realisation becomes impossible, such hypothetical income cannot be charged to tax

22 Nutan Warehousing Co. Pvt. Ltd. vs. ACIT TS-396-ITAT-2021 (Pune) A.Y.: 2013-14: Date of order: 11th May, 2021 Section: 4

Where accrual of income takes place but its realisation becomes impossible, such hypothetical income cannot be charged to tax

FACTS

The assessee company filed its return of income for A.Y. 2013-14 declaring a total income of Rs. 66,41,800. The A.O., in the course of assessment proceedings, observed from 26AS data that the assessee has not shown bank interest amounting to Rs. 26,125 from deposits with The Rupee Co-operative Bank Ltd. He added this sum of Rs. 26,125 to the total income returned.

Aggrieved, the assessee preferred an appeal to the CIT(A). The CIT(A) was of the view that the assessee is following the mercantile system of accounting. Once interest has accrued to the assessee, it becomes chargeable to tax, notwithstanding its non-receipt. He upheld the action of the A.O.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD


The Tribunal observed that the bank had become defunct, no financial transactions were allowed and RBI had banned its transactions. Due to the ban, even the principal amount deposited by the assessee became doubtful of recovery, much less the interest in question that was not received. It noted that the assessee stated before the CIT(A) during the course of the first appellate proceedings in the year 2017 that the interest was not received even till that time.

The Tribunal held that the concept of ‘accrual of income’ needs to be considered in the light of the ‘real income theory’. Where accrual of income takes place but its realisation becomes impossible, such hypothetical income cannot be charged to tax. In the case of the mercantile system of accounting, an accruing income can be charged to tax only when it is likely to be received under the given circumstances. In a case where receipt of income, after its accrual, is marred with complete uncertainty as to its realisation, such an accrual gets deferred to the point of clearing of the clouds of uncertainty over it.

On consideration of the mercantile system of accounting in juxtaposition with the ‘real income theory’, the Tribunal held that the inescapable conclusion which follows is that the interest income of Rs. 26,125 cannot be included in the total income of the assessee for the year under consideration. Such income may be appropriately charged to tax on the regularisation of the operations of the bank, coupled with the possibility of receipt of income in the foreseeable future. For the year under consideration, the interest cannot be charged to tax.

Sections 153A, 153C search assessments – A statement recorded u/s 132(4) has evidentiary value but cannot justify the additions in the absence of corroborative material – No opportunity to cross-examine the said witness

1. PCIT (Central) – 3 vs. Anand Kumar Jain (HUF) [Income-tax Appeal No. 23 of 2021 and other appeals; order dated 12th February, 2021 (Delhi High Court)]
[Arising from Anand Kumar Jain (HUF) vs. ACIT; ITA No. 5947/Del/2018, ITA No. 4723/Del/2018, ITA No. 5954/Del/2018, ITA No. 5950/Del/2018, ITA No. 5948/Del/2018 and ITA No. 5955/Del/2018, dated 30th July, 2019, Del. ITAT]

Sections 153A, 153C search assessments – A statement recorded u/s 132(4) has evidentiary value but cannot justify the additions in the absence of corroborative material – No opportunity to cross-examine the said witness

The assessee purchased shares of an unlisted private company in 2010. This unlisted company then merged with another unlisted company, M/s Focus Industrial Resources Ltd., and shares of this merged entity were allotted to the assessee. Subsequently, the merged entity allotted further bonus shares and thereafter it was listed on the Bombay Stock Exchange. The assessee sold these shares on the stock exchange in 2014 and earned a huge profit which was claimed as exempt income on account of being long-term capital gain.

A search was conducted u/s 132 on 18th November, 2015 at the premises of the assessee [being Anand Kumar Jain (HUF), its coparceners and relatives] as well as at the premises of one Pradeep Kumar Jindal. During the search, a statement of Pradeep Jindal was recorded on oath u/s 132(4) on the same date, wherein he admitted to providing accommodation entries to Anand Kumar Jain (HUF) and his family members through their Chartered Accountant. The A.O. framed the assessment order detailing the modus operandi as to how cash is provided to the accommodation entry operator in lieu of allotment of shares of a private company. Thereafter, when the matter was carried in appeal before the CIT(A), the findings of the A.O. were affirmed. However, in further appeal before the ITAT the said findings were set aside.

On further appeal before the High Court, the Revenue submitted that the ITAT has erred by holding that the assessee’s premises were not searched and therefore notice u/s 153A could not have been issued. It submitted that the ITAT ignored that the assessment order itself revealed that a common search was conducted at various places on 18th November, 2015 including at the premises of the entry provider and the assessee and thus assessment u/s 153A has been rightly carried out. It further said that the ITAT erred in setting aside the assessment order on the ground that no right of cross-examining Pradeep Jindal was afforded to the assessee. Further, there is no statutory right to cross-examine a person whose statement is relied upon by the A.O. so long as the assessee is provided with the statement and given an opportunity to rebut the statement of the witness. The assessee has been provided with a copy of the statement of Pradeep Jindal and the ITAT has wrongly noted to the contrary.

Furthermore, the assessee has failed to bring in any evidence to dispute the factual position emerging therefrom and has therefore failed to establish any prejudice on account of not getting the opportunity to cross-examine the witness. In view of the statement of Pradeep Jindal, it was incumbent upon the assessee to discharge the onus of proof which had been shifted on him. The Revenue has sufficient material in hand in the nature of the statements recorded during the search and, therefore, the assessee ought to have produced evidence to negate or to contradict the evidence collected by the A.O. during the course of the search and assessment proceeding which followed thereafter. It was also emphasised that the statement recorded u/s 132(4) can be relied upon for any purpose in terms of the language of the Act and thus action u/s 153A was justified.

The Court held that the assessment has been framed u/s 153A consequent to the search action. The scope and ambit of section 153A is well defined. This Court, in CIT vs. Kabul Chawla (2016) 380 ITR 573 concerning the scope of assessment u/s 153A, has laid out and summarised the legal position after taking into account the earlier decisions of this Court as well as the decisions of other High Courts and Tribunals. In the said case, it was held that the existence of incriminating material found during the course of the search is a sine qua non for making additions pursuant to a search and seizure operation. In the event no incriminating material is found during search, no addition could be made in respect of the assessments that had become final. Revenue’s case is hinged on the statement of Pradeep Jindal, which according to them is the incriminating material discovered during the search action. This statement certainly has evidentiary value and relevance as contemplated under the explanation to section 132(4). However, this statement cannot, on a standalone basis, without reference to any other material discovered during search and seizure operations, empower the A.O. to frame the block assessment. This Court in Principal Commissioner of Income Tax, Delhi vs. Best Infrastructure (India) P. Ltd. [2017] 397 ITR 82 2017 has inter alia held that:

‘38. Fifthly, statements recorded under section 132(4) of the Act do not by themselves constitute incriminating material as has been explained by this Court in Commissioner of Income Tax vs. Harjeev Aggarwal (2016) 290 CTR 263.’

Further, the Court noted that the A.O. has used this statement on oath recorded in the course of search conducted in the case of a third party (i.e., search of Pradeep Jindal) for making the additions in the hands of the assessee. As per the mandate of section 153C, if this statement was to be construed as an incriminating material belonging to or pertaining to a person other than the person searched (as referred to in section 153A), then the only legal recourse available to the Department was to proceed in terms of section 153C by handing over the same to the A.O. who has jurisdiction over such person. Here, the assessment has been framed u/s 153A on the basis of alleged incriminating material [being the statement recorded u/s 132(4)]. As noted above, the assessee had no opportunity to cross-examine the said witness, but that apart, the mandatory procedure u/s 153C has not been followed. The Court didn’t find any perversity in the view taken by the ITAT. Accordingly, the appeals, were dismissed.

Writ – Article 226 of Constitution of India and sub-sections 10(10C)(viii), 89(1), 154, 246A – Existence of alternative remedy not a bar to issue of writ where proceedings are without jurisdiction – Amounts received under voluntary retirement scheme – Denial of claim for deduction u/s 10(10C)(viii) and relief u/s 89(1) on basis of letter issued by CBDT – Decision of court quashing letter of Board – Order of denying relief – Proceedings without jurisdiction – Assessee entitled to relief

9. V. Gopalan vs. CCIT [2021] 431 ITR 76 (Ker) Date of order: 5th January, 2021 A.Y.: 2001-02

Writ – Article 226 of Constitution of India and sub-sections 10(10C)(viii), 89(1), 154, 246A – Existence of alternative remedy not a bar to issue of writ where proceedings are without jurisdiction – Amounts received under voluntary retirement scheme – Denial of claim for deduction u/s 10(10C)(viii) and relief u/s 89(1) on basis of letter issued by CBDT – Decision of court quashing letter of Board – Order of denying relief – Proceedings without jurisdiction – Assessee entitled to relief

The assessee claimed deduction u/s 10(10C)(viii) and under the provisions of section 89(1) on the amounts received by him under the voluntary retirement scheme of the State Bank of Travancore. The A.O. held that the assessee was not entitled to claim deduction u/s 10(10C)(viii) and also u/s 89(1).

The assessee filed an application u/s 264 for revision of the order but the Commissioner denied relief. Thereafter, the assessee filed an application to the Commissioner u/s 154 for rectification of his order relying on a decision in State Bank of India vs. CBDT [2006] (1) KLT 258 wherein the Court had held that the amounts received by employees under a voluntary retirement scheme were entitled to benefit u/s 89(1) in addition to the exemption granted u/s 10(10C)(viii) and quashed letter / Circular No. E.174/5/2001-ITA-I dated 23rd April, 2001 issued by the CBDT which held to the contrary. Since recovery proceedings were initiated in the meanwhile, the assessee paid certain amounts to the Department to satisfy the demand that arose out of the denial of relief u/s 89(1).

On a writ petition filed by the assessee, the single judge relegated the assessee to the alternative remedy of appeal u/s 246A. The Division Bench of the Kerala High Court allowed the appeal and held as under:

‘i) On the facts the assessee need not have been relegated to the alternative remedy of filing an appeal u/s 246A.

ii) Admittedly, the assessee had taken voluntary retirement in the year 2001. He had also claimed deduction u/s 10(10C)(viii) and benefit u/s 89(1) in his return of income for the relevant assessment year and the claim was rejected on the basis of the letter issued by the Board on 23rd April, 2001. The letter of the Board had been quashed by the Court in State Bank of India vs. CBDT. In that decision it was also declared that the assessee was entitled to deduction of amounts received under a voluntary retirement scheme u/s 10(10C)(viii) and u/s 89(1) simultaneously. That being the position, the entire proceedings initiated against the assessee were without jurisdiction.

iii) When the proceedings were without jurisdiction the existence of an alternative remedy was not a bar for granting relief under Article 226 of the Constitution. The assessee was entitled to deduction u/s 10(10C)(viii) and benefit u/s 89(1) (as the provision stood at the relevant point of time) in respect of the amounts received by him under the voluntary retirement scheme. If any amounts had been paid by the assessee pursuant to demands which arose on account of denial of deduction u/s 10(10C)(viii) and benefit u/s 89(1), such amounts should be refunded to the assessee.’

TDS – Sections 197 and 264 and Rule 18AA of IT Rules, 1962 – Certificate for Nil deduction or deduction at lower rate – Application by assessee for certificate for Nil withholding rate – Issuance of certificate at higher rate than Nil rate without recording reasons – Copy of order supported by reasons to be furnished to assessee – Matter remanded to Dy. Commissioner (TDS)

48. Tata Teleservices (Maharashtra) Ltd. vs. Dy. CIT [2020] 430 ITR 273 (Bom.) Date of order: 17th December, 2020 A.Y.: 2021-22


 

TDS – Sections 197 and 264 and Rule 18AA of IT Rules, 1962 – Certificate for Nil deduction or deduction at lower rate – Application by assessee for certificate for Nil withholding rate – Issuance of certificate at higher rate than Nil rate without recording reasons – Copy of order supported by reasons to be furnished to assessee – Matter remanded to Dy. Commissioner (TDS)

 

For the A.Y. 2018-19, the assessee was issued Nil withholding rate certificates u/s 197. However, those certificates were cancelled. The assessee filed a writ petition which was allowed, and the cancellation order was quashed. Thereafter, fresh certificates for deduction of tax at Nil rate were issued to the assessee for the A.Y. 2018-19. For the A.Ys. 2019-20 and 2020-21, the assessee submitted applications for tax withholding certificates at Nil rate. However, certificates u/s 197 were issued at rates higher than Nil rate. The assessee stated that it did not contest such certificates because it was focused on providing various wire-line voice, data and managed telecommunications services and therefore had opted for demerger of the consumer mobile business. Under the scheme of demerger, the consumer mobile business of the assessee stood transferred to BAL. The assessee filed an application seeking issuance of Nil rate tax withholding certificates u/s 197 on various grounds for the A.Y. 2021-22 and furnished the details that had been sought. However, the authorities issued certificates at rates higher than Nil. The assessee sought the order sheet / noting on the basis of which such certificates were issued but it did not get a response.

 

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

 

‘i) The procedure for issuance of certificate u/s 197 for deduction at lower rates or no deduction of tax from income other than dividends is laid down in Rule 28AA of the Income-tax Rules, 1962.

 

ii) Since the authorities were required to pass an order u/s 197 either rejecting the application for such certificate or allowing such application resulting in issuance of certificates which may be at rates higher than Nil as sought by the assessee, such an order must be supported by reasons. Not only that, a copy of such an order had to be furnished to the assessee so that it could be challenged u/s 264 if it was aggrieved. Not passing an order to that effect or keeping such an order in the file without communication would vitiate the certificates.

 

iii)   The reasons for not granting Nil rate certificates to the assessee were not known. The contemporaneous order required to be passed u/s 197 was also not available. The order was set aside, and the certificates were quashed. The matter was remanded to the Deputy Commissioner (TDS) for passing fresh order and issuing consequential certificates u/s 197 complying with the requirements of rule 28AA.’

Business expenditure – Section 37(1) – Capital or revenue expenditure – Payment made by assessee under agreement to an entity for additional infrastructure for augmenting continuous supply of electricity – No asset acquired – Expenditure revenue in nature and allowable

34. CIT vs. Hanon Automotive Systems India Private Ltd. [2020] 429 ITR 244 (Mad.) Date of order: 16th October, 2020 A.Y.: 2010-11

Business expenditure – Section 37(1) – Capital or revenue expenditure – Payment made by assessee under agreement to an entity for additional infrastructure for augmenting continuous supply of electricity – No asset acquired – Expenditure revenue in nature and allowable

Under an agreement to establish additional infrastructure facility to ensure uninterrupted power supply to it, the assessee made a lump sum payment to a company. The A.O. held that the amount paid by the assessee was to improve its asset and was non-refundable and even if the assessee received ‘services’ from the company in future, it would be separately governed by a ‘separate shared services agreement’ and hence the amount paid was not ‘wholly and exclusively’ for the assessee’s business and that it was spent towards the acquisition of a capital asset. The A.O. disallowed the expenditure claimed u/s 37(1) and also rejected the assessee’s alternate claim to depreciation.

The Commissioner (Appeals) held that the expenditure was capital expenditure, but allowed depreciation. The Tribunal held that the expenditure was revenue in nature and allowed the assessee’s claim for deduction.

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

‘i)    The Tribunal had rightly examined the nature of the transaction and held that the lump sum payment made by the assessee for the development of infrastructure for uninterrupted power supply to it was revenue expenditure u/s 37(1).

ii)    Though the assessee had parted with substantial funds to the company, the capital asset continued to remain the property of the company.’

Appeal to High Court – Territorial jurisdiction – Section 260A of ITA, 1961 and Article 226 of Constitution of India – Company located in Karnataka and assessed in Karnataka – Appeal to Appellate Tribunal in Bombay – Appeal from order of Tribunal – Bombay High Court had no jurisdiction to consider appeal

33. CIT vs. M.D. Waddar and Co. [2020] 429 ITR 451 (Bom.) Date of order: 27th October, 2020 A.Y.: 2008-09


 

Appeal to High Court – Territorial jurisdiction – Section 260A of ITA, 1961 and Article 226 of Constitution of India – Company located in Karnataka and assessed in Karnataka – Appeal to Appellate Tribunal in Bombay – Appeal from order of Tribunal – Bombay High Court had no jurisdiction to consider appeal

 

The assessee company was located in Raichur District, Karnataka. Its registered office, too, was in Karnataka. For Income-tax purposes, the assessee fell within the jurisdiction of the Assistant Commissioner, Belgaum, Karnataka. For the A.Y. 2008-09, the A.O., Belgaum reopened the assessment u/s 147, issued a notice u/s 148 and completed the reassessment in March, 2013.

 

Assailing that assessment order, the assessee appealed to the Commissioner (Appeals), Bangalore. Eventually, both the assessee and the Revenue further appealed to the Appellate Tribunal, Panaji Bench. The Tribunal held in the assessee’s favour.

 

The Revenue then filed an appeal before the Bombay High Court. The question before the High Court was as under:

 

‘An Income-tax Appellate Tribunal exercises its jurisdiction over more than one State, though it is located in one of those States. Its order is sought to be challenged. Which High Court should have the jurisdiction to rule on the Tribunal’s order? Is it the High Court in whose territorial jurisdiction the Tribunal is located? Or is it the High Court in whose territorial jurisdiction the authority that passed the preliminary order operates?’

 

The High Court held as under:

 

‘i)    In the Ambica Industries case the Supreme Court has held that in terms of Article 227 as also clause (2) of Article 226 of the Constitution of India, the High Court will exercise its discretionary jurisdiction and also issue writs of certiorari over orders passed by the subordinate courts within its territorial jurisdiction. Besides, if any cause of action arises within its territorial limits, it will exercise its jurisdiction. According to Ambica Industries, when the appellate court exercises jurisdiction over a Tribunal situated in more than one State, the High Court located in the State where the first court is located should be considered to be the appropriate appellate authority. The mere physical location of an inter-State Tribunal cannot be determinative of the High Court’s jurisdiction for an aggrieved party to challenge that Tribunal’s order.

 

ii)    The assessee was located in Karnataka and so were the Income-tax authorities. The primary order, too, emanated from Karnataka; so did the first appellate order. All challenges, including the appeal before the Tribunal were in continuation of that primary adjudication or consideration before the Assessing Officer at Belgaum, Karnataka. The Bombay High Court had no jurisdiction to entertain the appeal.’

Third proviso to section 50C(1) – Insertion of the proviso and subsequent enhancement in its limit to 10% is curative in nature to take care of unintended consequences of the scheme of section 50C, hence relate back to the date when the statutory provision of section 50C was enacted, i.e., 1st April, 2003

13. Maria Fernandes Cheryl vs. ITO (Mumbai) Pramod Kumar (V.P.) and Saktijit Dey (J.M.) ITA No. 4850/Mum/2019 A.Y.: 2011-12 Date of order: 15th January, 2021 Counsel for Assessee / Revenue: None / Vijaykumar G. Subramanyam

Third proviso to section 50C(1) – Insertion of the proviso and subsequent enhancement in its limit to 10% is curative in nature to take care of unintended consequences of the scheme of section 50C, hence relate back to the date when the statutory provision of section 50C was enacted, i.e., 1st April, 2003

FACTS

During the year under appeal, the assesse had sold her flat for a consideration of Rs. 75 lakhs. The valuation of the property for the purpose of charging stamp duty was Rs. 79.91 lakhs. She computed capital gains based on the sale consideration of Rs. 75 lakhs. But according to the A.O., the assessee had to adopt the Stamp Duty Valuation (SDV) which was Rs. 79.91 lakhs for the purpose of computing the capital gains. The CIT(A), on appeal, confirmed the A.O.’s order.

On appeal by the assessee, the Tribunal noted that the variation in the sale consideration as disclosed by the assessee vis-à-vis the valuation adopted by the SDV authority was only 6.55%. The Tribunal then queried the Departmental Representative (DR) as to why the assessee not be allowed the benefit of the third proviso to section 50C(1) as the variation was much less than the prescribed permissible variation of up to 10%.

In reply, the DR contended that the said provision is applicable by virtue of the Finance Act, 2018 with effect from 1st April, 2019. And for the permissible variation of 10%, as against variation of 5% as per the originally enacted third proviso to section 50C, it was contended that the enhancement is effective only from 1st April, 2021. Reference was also made to the Explanatory Notes to the Finance Act, 2020 with regard to increase in the safe harbour limit of 5% under sections 43CA, 50C and 56 to 10%. According to the DR, the insertion of the third proviso to section 50C could not be treated as retrospective in nature.

In conclusion, the DR also submitted that in case the Tribunal was in favour of granting relief to the assessee, then the relief may be provided as a special case and it may be clarified that this decision should not be considered as a precedent.

HELD


According to the Tribunal if the rationale behind the insertion of the third proviso to section 50C(1) was to provide a remedy for unintended consequences of the main provision, then the insertion of the third proviso should be considered as effective from the same date on which the main provision, i.e., section 50C, was brought into effect.

The Tribunal noted that the CBDT itself, in Circular No. 8 of 2018, has accepted that there could be various bona fide reasons explaining the small variations between the sale consideration of immovable property as disclosed by the assessee vis-à-vis the SDV. Further, it also noted that the Tribunals as well as the High Courts in the following cases have held that a curative amendment to avoid unintended consequences is to be treated as retrospective in nature even though it may not state so specifically:
•    Agra Bench of the Tribunal in the case of Rajeev Kumar Agarwal vs. ACIT (45 taxmann.com 555);
•    Delhi High Court in CIT vs. Ansal Landmark Township Pvt. Ltd. (61 taxmann.com 45);
•    Ahmedabad Tribunal in the case of Dharmashibhai Sonani vs. ACIT (161 ITD 627); and
•    Madras High Court in CIT vs. Vummudi Amarendran (429 ITR 97).

According to the Tribunal, the insertion of the third proviso to section 50C(1) was in the nature of a remedial measure to address a bona fide situation, where there was little justification for invoking an anti-avoidance provision – a curative amendment to take care of unintended consequences of the scheme of section 50C.

As for the enhancement of the tolerance band to 10% by the Finance Act, 2020, the Tribunal noted that the CBDT Circular itself acknowledges that it was done in response to the representations of the stakeholders for enhancement in the tolerance band. According to the Tribunal, once the Government acknowledged this genuine hardship of the taxpayer and addressed the issue by a suitable amendment in law, there was no reason to justify any particular time frame for implementing this enhancement of the tolerance band or safe harbour provision.

Therefore, the Tribunal held that the insertion of the third proviso to section 50C and the enhancement of the tolerance band to 10% were curative in nature and, therefore, the same relate back to the date when the related statutory provision of section 50C, i.e., 1st April, 2003, was enacted.

The Tribunal did not agree with the DR’s submission to mention in the order that ‘relief is being provided as a special case and this decision may not be considered as a precedent’. According to the Tribunal, ‘Nothing can be farther from a judicious approach to the process of dispensation of justice, and such an approach, as is prayed for, is an antithesis of the principle of “equality before the law,” which is one of our most cherished constitutional values. Our judicial functioning has to be even-handed, transparent, and predictable, and what we decide for one litigant must hold good for all other similarly placed litigants as well. We, therefore, decline to entertain this plea…’

Section 56(2)(vii) – Prize money received in recognition of services to Indian Cricket from BCCI is exempt

12. Maninder Singh vs. ACIT (Delhi) N.K. Billaiya (A.M.) and Sudhanshu Srivastava (J.M.) ITA No. 6954/Del/2019 A.Y.: 2013-14 Date of order: 6th January, 2021 Counsel for Assessee / Revenue: G.S. Grewal and Simran Grewal / Rakhi Vimal

Section 56(2)(vii) – Prize money received in recognition of services to Indian Cricket from BCCI is exempt

 

FACTS

The assessee is a former Indian cricketer. During the year under appeal, he received an award of Rs. 75.09 lakhs from the BCCI in recognition of his services to Indian Cricket. Placing reliance on the CBDT Circular No. 447 dated 22nd January, 1986, the assessee did not include this amount in his return of income. But, according to the A.O., CBDT Circular No. 2 of 2014 supersedes Circular No. 447 relied upon by the assessee. Therefore, he added the amount of Rs. 75.09 lakhs to the total income of the assessee. The CIT(A), on appeal, confirmed the order of the A.O.

 

HELD

The Tribunal referred to the second proviso to section 56(2)(vii). As per the said provisions, section 56(2)(vii) does not apply to any sum of money or any property received from any trust or institution registered u/s 12AA. The Tribunal noted that the BCCI is registered u/s 12AA. Therefore, it did not find any merit in the impugned addition made by the A.O. Accordingly, the Tribunal directed the A.O. to delete the addition of Rs. 75.09 lakhs made by him.

Section 115JB – Where additional revenue was not shown by assessee in books of accounts, the A.O. could not tinker with book profit by adding additional revenue on account of subsequent realisation of export while computing book profit u/s 115JB

26. [2020] 80 ITR (Trib.) 528 (Bang.)(Trib.) DCIT vs. Yahoo Software Development (P) Ltd. ITA No.: 2510 (Bang.) of 2017 A.Y.: 2009-10 Date of order: 27th April, 2020


 

Section 115JB – Where additional revenue was not shown by assessee in books of accounts, the A.O. could not tinker with book profit by adding additional revenue on account of subsequent realisation of export while computing book profit u/s 115JB

 

FACTS

The assessee filed a revised return of income by including certain additional revenue in the total income (and claimed deduction u/s 10A in respect of the additional revenue).

 

But it did not modify the books of accounts, nor did it modify the calculation of book profit u/s 115JB.

 

However, the A.O. increased the book profit by adding the additional revenue on account of subsequent realisation of export. The CIT(A) sustained the addition made by the A.O. Aggrieved, the assessee preferred an appeal before the ITAT.

 

HELD

The ITAT, following the ratio of the Supreme Court decision in Apollo Tyres Ltd. vs. CIT [2002] 122 Taxman 562/255 ITR 273, allowed the assessee’s appeal.

 

In the said decision, the Court was concerned with the issue of the power of the A.O. to question the correctness of the profit and loss account prepared by the assessee in accordance with the requirements of Parts II and III of Schedule VI to the Companies Act (in the context of section 115J as then applicable).

 

In Apollo Tyres (Supra), the Court observed that it was not open to the A.O. to re-scrutinise the accounts and satisfy himself that these accounts had been maintained in accordance with the provisions of the Companies Act. Sub-section (1A) of section 115J did not empower the A.O. to embark upon a fresh inquiry in regard to the entries made in the books of accounts of the company and to probe into the accounts accepted by the authorities under the Companies Act. If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the purpose of section 115J, then it should be that income which is acceptable to the authorities. If the Legislature intended the A.O. to reassess the company’s income, then it would have stated in section 115J that ‘income of the company as accepted by the A.O. Thus, according to the Apex Court, the A.O. did not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to section 115J.’

 

Thus, applying the ratio of the abovementioned judgment, the ITAT took the view that the A.O. cannot tinker with / re-compute book profit arrived at on the basis of books maintained in accordance with the Companies Act.

 

Section 54F – Where possession of flat was taken within period of two years from date of transfer of original asset, assessee was entitled to benefit of section 54F irrespective of the date of agreement

25. [2020] 80 ITR(T) 427 (Del.)(Trib.) Rajiv Madhok vs. ACIT ITA No.: 2291 (Del.) of 2017 A.Y.: 2012-13 Date of order: 29th May, 2020

Section 54F – Where possession of flat was taken within period of two years from date of transfer of original asset, assessee was entitled to benefit of section 54F irrespective of the date of agreement

 

FACTS

The assessee offered to tax long-term capital gain (LTCG) on sale of shares effected on 2nd September, 2011. He also claimed deduction u/s 54F on purchase of a new residential house, on the premise that the property was constructed within the time allowed u/s 54F. However, according to the A.O. the residential house was purchased prior to the time period provided in section 54F. The CIT(A) upheld the addition. Consequently, the assessee filed an appeal before ITAT.

 

HELD

The only dispute arising in this case was pertaining to the date of purchase of the new residential property as contemplated u/s 54F – whether the date of agreement with the builder was to be considered as the date of purchase of the new asset or the date of payment in entirety and the date of possession received subsequently was to be considered as the date of purchase of the new asset. The stand taken by the Department was that the date of agreement with the builder was to be considered as the date of purchase of the new asset, while that of the assessee was that the date of payment in entirety and the date of possession received subsequently was to be considered as the date of purchase of the new asset.

 

In the instant case, the assessee sold shares on 17th August, 2011 and entered into an agreement with the builder on 29th September, 2009. However, the final amount of consideration was paid to the builder in April, 2012 and possession of the flat received in July, 2012.

 

The ITAT took into consideration the relevant clause in the deed for purchase of the new house which read as under:

‘46.0 The allottee understands and confirms that the execution of this agreement shall not be construed as sale or transfer under any applicable law and the title to the allottee hereby allotted shall be conveyed and transferred to the allottee only upon his fully discharging all the obligations undertaken by the allottee, including payment of the entire sale price and other applicable charges / dues, as mentioned herein and only upon the registration of the conveyance / sale deed in his favour. Prior to such conveyance, the allottee shall have no right or title in the apartment.’

 

The ITAT observed that in the backdrop of the aforesaid clause the date of possession of the flat was the date of actual purchase for the purpose of claiming exemption u/s 54F. In arriving at the decision, the ITAT analysed the decision rendered by the Bombay High Court in the case of CIT vs. Smt. Beena K. Jain [1994] 75 Taxman 145 [1996] 217 ITR 363, upholding the decision of the ITAT. In the said decision, the High Court observed that: ‘the Tribunal has looked at the substance of the transaction and come to the conclusion that the purchase was substantially effected when the agreement of purchase was carried out or completed by payment of full consideration on 29th July, 1988 and handing over of possession of the flat on the next day.’

 

The ITAT also observed that clause 46.0 of the buyer’s agreement in the assessee’s case was identical to clause 12 of the deed of agreement between the assessee and the builder as noted in the case of Ayushi Patni vs. DCIT [2020] 117 taxmann.com 231 (Pune-Trib.) ITA No. 1424 & 1707 (Pune) of 2016 and held that in view of identical facts and circumstances, the ratio of the above decision in the case of Ayushi Patni (Supra) was squarely applicable to the facts of the instant case.

 

Thus, the ITAT concluded that the new asset was purchased within two years from the date of transfer of the original asset, i.e., shares, and thus the assessee was entitled to benefit of section 54F.

Section 54 – Exemption from capital gains cannot be denied where the assessee sold more than two residential properties and made reinvestment in one residential property

FACTS
The assessee, an individual deriving income from various heads of income, had submitted his return of income for the year under consideration. The return was duly processed u/s 143(1). Subsequently, the assessment was sought to be reopened based on information about the sale of immovable property and the assessee was asked to reconcile the same. The assessee filed a reply stating that he had not made any transaction for the year concerned and the transaction might have been wrongly reflected using his PAN. The assessee further requested the A.O. to recheck with the sub-registrar. Accordingly, the A.O. issued notice u/s 133(6) to the Sub-Registrar and received information that the assessee had effected sale of an immovable property being a residential flat for which no capital gains tax had been offered. The assessee furnished a capital gains working, submitting that the amount had been reinvested in purchasing another residential property. The A.O. contented that since the claim of capital gains and reinvestment thereof was not made in the return of income, the same was to be rejected and made an addition of Rs. 35 lakhs.

The A.O. also received information from the ITO that during the assessment proceedings of the assessee’s wife, it was found that a property jointly owned by the two had been sold during the year and the proceeds were reinvested in acquiring the same property for which exemption was claimed in the assessee’s case.

On appeal before the CIT(A), the CIT(A) accepted the capital gains workings submitted by the assessee and held that the assessee is eligible for exemption, even though the same was not claimed in the return of income. The A.O. had relied on the Supreme Court decision in the case of  Goetze (India) Ltd. vs. CIT to deny the claim for exemption. The CIT(A) held that the decision had categorically held that the appellate authorities could accept such a claim.

As far as the jointly owned property was concerned, the CIT(A) observed that since the capital gains on the same had been reinvested, the assessee would be eligible for capital gains exemption. Thus, the CIT(A) held that the assessee would be eligible for exemption u/s 54 on the sale of the second property also.

Aggrieved, the Revenue filed an appeal before the Tribunal.

HELD
The Tribunal held that exemption u/s 54 is granted to the assessee for reinvestment made in the residential house. The section nowhere restricts that the assessee should have sold only one property and claimed the exemption u/s 54 for only one property. In the instant case, the assessee has sold two residential properties and reinvested in one residential property. The entire conditions of section 54, both pre and post the amendment to section 54 [vide Finance Act (No. 2) of 2014, w.e.f. A.Y. 2015-16] had been satisfied. Thus, the order of the CIT(A) was upheld and Revenue’s appeal was dismissed.

Section 56(2) – The A.O. was erroneous in mechanically applying the provisions of section 56(2) to the difference between the stamp duty value and the actual sale consideration – The addition made by the A.O. without making a reference to the DVO despite the assessee submitting valuation report was unjustified

23. [2020] 208 TTJ 835 (Mum.)(Trib.) Mohd. Ilyad Ansari vs. ITO A.Y.: 2014-15 Date of order: 6th November, 2020

Section 56(2) – The A.O. was erroneous in mechanically applying the provisions of section 56(2) to the difference between the stamp duty value and the actual sale consideration – The addition made by the A.O. without making a reference to the DVO despite the assessee submitting valuation report was unjustified

FACTS

The assessee was engaged in the business of readymade garments. During the year under consideration, he purchased a flat jointly with his wife for a total consideration of Rs. 40,00,000 which was part of an SRA project. The builder, unable to complete the project, decided to exit from it at the half-way stage. An attempt to revive the project also failed, leading to the flat being sold at a distress price of Rs. 40,00,000 to the assessee. The sale was registered and thereafter the builder disappeared without completing the project. The agreement was made by the builder for a flat admeasuring 1,360 sq. feet. However, when the assessee got the possession, he found that it had been sold to two persons. The actual area of the flat, too, was only 784 sq. feet against the agreement area of 1,360 sq. feet. During the course of assessment proceedings, the A.O. noticed that the stamp duty valuation of the flat is Rs. 2,20,49,999 but the assessee had purchased it only for Rs. 40,00,000.

The assessee was required to explain why the difference is not to be treated as income u/s 56(2)(vii). The assessee filed a valuation report of Perfect Valuation & Consultants, a Government registered valuer, who valued the flat at Rs. 82.60 lakhs. During the assessment proceedings, the assessee filed this valuation report disputing the valuation made by the Stamp Valuation Authority (SVA). However, the A.O. did not refer the matter of valuation to the District Valuation Officer, though the valuation of the SVA was disputed by the assessee by way of the valuation report. The A.O. made an addition of Rs. 1,80,49,999 u/s 56(2)(vii)(b) in the hands of the assessee. The assessee filed an appeal before the CIT(A) against this order. But the CIT(A) also did not consider the valuation report submitted by the assessee, holding that the assessee had not disputed the valuation made by the SVA and confirmed the addition. Aggrieved, the assessee filed an appeal before the Tribunal.

HELD


The A.O. ignored the valuation report of the Government registered valuer submitted by the assessee. The provisions of section 56(2) had been mechanically applied without making any effort to determine the actual cost of the property. It ought to have been done since the property was acquired in semi-construction stage and later abandoned due to disputes amongst the builders. Besides, there was a dispute as regards the area acquired by the assessee as the same flat had been sold to two parties. In view of these circumstances, it was even more necessary for the A.O. to refer it to the valuation officer. Even at the stage of appellate proceedings when the assessee produced the valuation officer’s report that valued other flats in the very same building at Rs. 1,00,76,000, the CIT(A) should have called for remand report and in turn the valuation officer’s report which the CIT(A) had failed to do.

Thus, it was held that the addition made by the A.O. was totally unjustified and the assessee’s appeal was allowed.

Section 36(1)(iii) – Interest on funds borrowed for acquisition of land held as inventory is allowable u/s 36(1)(iii) – The provisions of Accounting Standards and the provisions of the Act are two different sets of regulations. It is well settled that if there is a contradiction between the two, the provisions of the Act shall prevail – There is no restriction in the provisions of section 36(1)(iii) that the interest can be disallowed if incurred for the purpose of inventory as provided in AS 16

22. [2020] 118 taxmann.com 541 (Bang.)(Trib.) DCIT vs. Cornerstone Property Investment (P) Ltd. A.Ys.: 2013-14 and 2014-15 Date of order: 14th August, 2020

Section 36(1)(iii) – Interest on funds borrowed for acquisition of land held as inventory is allowable u/s 36(1)(iii) – The provisions of Accounting Standards and the provisions of the Act are two different sets of regulations. It is well settled that if there is a contradiction between the two, the provisions of the Act shall prevail – There is no restriction in the provisions of section 36(1)(iii) that the interest can be disallowed if incurred for the purpose of inventory as provided in AS 16

FACTS

The facts as observed by the A.O. in the assessment order were that the assessee held land as inventory. It utilised the proceeds from the issue of debentures for acquiring lands and for making advances for purchase of lands and repayment of loans borrowed earlier. The A.O. also observed that in the earlier year, too, the borrowed funds were utilised for purchase of lands. The total interest expenditure of Rs. 16,39,35,373 being interest on ICDs, interest on NCDs and other ancillary borrowings was directly attributable to purchase of lands. There was no dispute about the use of borrowed funds for which the entire interest expenditure of Rs. 16,39,35,373 was incurred.

Of this total interest expenditure, the assessee claimed deduction for only a part, i.e., Rs. 6,81,01,384, which was disallowed by the A.O.

The CIT(A) deleted the amount of interest disallowed by the A.O. relying on various judgments.

Aggrieved, the Revenue preferred an appeal to the Tribunal where the assessee contended that the facts of the present case are squarely covered by the order of the Tribunal rendered in the case of DLF Ltd. vs. Addl. CIT [IT Appeal No. 2677 (Delhi) of 2011, order dated 11th March, 2016].

HELD


Inventory is a qualifying asset as it is held for more than 12 months and therefore interest attributable to it is required to be capitalised in the books of accounts as per AS 16. The Tribunal rejected the argument of the authorised representative of the assessee that AS 16 does not apply to inventory. It held that the provisions of Accounting Standards are the provisions which are applicable for the maintenance of the accounts of the company and interest is allowable according to section 36(1)(iii). The provisions of Accounting Standards and the provisions of the Act are two different sets of regulations and it is well settled that if there is a contradiction between the two, the provisions of the Act shall prevail. Since in the present case the interest is paid not for the purpose of acquisition of any capital asset but for inventory, the Tribunal did not find any restriction in provisions contained in section 36(1)(iii) which provide that the interest can be disallowed if incurred for the purpose of inventory as provided in AS 16. The Tribunal noted that there is not even an allegation that the interest is not paid on capital borrowed for the purpose of business. The Tribunal noted the observations in the case of DLF Ltd. (Supra) and also the ratio of various benches of the Tribunal where deduction of interest has been allowed u/s 36(1)(iii) even where the assessee has followed project completion method.

The Tribunal, following the decision of the Bombay High Court and also of various co-ordinate benches of the Tribunal, declined to interfere with the order of the CIT(A).

TAXABILITY OF PRIVATE TRUST’S INCOME – SOME ISSUES

Taxability as to the income of the trustees of a private trust is something which at times eludes answers. This is despite the fact that most of the taxation law in this regard is contained in just a few sections, viz., sections 160 to 167.

SPECIFIC TRUST VS. DISCRETIONARY TRUST

Section 161 provides inter alia that tax shall be levied upon and recovered from the representative assessee in the like manner and to the same extent as it would be leviable upon the person represented. This phrase, ‘in like manner and to the same extent’, came to be interpreted by the Hon’ble Supreme Court in the case of C.W.T. Trustees of H.E.H. Nizam’s Family (Remainder Wealth) Trust, 108 ITR 555, page 595 in which the Court explained the three-fold consequences:

a) There must be as many assessments on the trustees as there are beneficiaries with determinate and known shares, though for the sake of convenience there may be one assessment order specifying separately the tax due in respect of the income of each of the beneficiaries;
b) The assessment of the trustees must be made in the same status as that of the particular beneficiary whose income is sought to be taxed in the hands of the trustee; and
c) The amount of tax payable by the trustees must be the same as that payable by each beneficiary in respect of the share of his income, if he were to be assessed directly.

Thus, it is clear that income in case of specific trust cannot be taxed in the hands of the trustees as one unit u/s 161(1) and tax on the share of each beneficiary shall be computed separately as if it formed part of the beneficiaries’ income. It is because of this reason that the Madras High Court in the case of A.K.A.S. Trust vs. State of Tamil Nadu, 113 ITR 66, held that a single assessment on the trustees by clubbing the income of all beneficiaries whose shares were defined and determined was not valid.

As opposed to specific trust there is a discretionary trust which means that the trustees have absolute discretion to apply the income and capital of the trust and where no right is given to the beneficiary to any part of the income of the trust property. Section 164 of the Act itself provides that a discretionary trust is a trust whose income is not specifically receivable on behalf of or for the benefit of any one person, or wherein the individual shares of the beneficiaries are indeterminate or unknown.

Therefore, section 161(1) can apply only where income is specifically received or receivable by the representative assessee on behalf of or for the benefit of the single beneficiary, or where there are more than one, the individual shares of the beneficiaries are defined and known. Tax in such a case would be levied on the representative assessee on the portion of the income to which any particular beneficiary is entitled and that, too, in respect of such portion of income. On the other hand, if income is not receivable or received by the representative assessee specifically on behalf of or for the benefit of the single beneficiary, or where the beneficiaries being more than one, their shares are indeterminate or unknown, the assessment on the representative assessee qua such income would be in accordance with the provision of section 164.

APPLICABILITY OF MAXIMUM MARGINAL RATE

The next issue is that relating to the interpretation of sub-section (1A) of section 161 which provides that in case of a specific trust where income includes profits and gains of business, tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate. Therefore, whenever there is any income of profits and gains of business in the case of specific trust, the whole income would suffer the tax at the maximum marginal rate irrespective of the tax which could have been levied upon the beneficiary as per the plain text of that section. But it has been held in CIT vs. T.A.V. Trust 264 ITR 52, 60 (Kerala) that where there are business income as well as other income in case of specific trust, then, too, income from the business earned by the trust alone shall be taxed at the maximum marginal rate and the other income has to be assessed in the hands of the trustees in the manner provided in section 161(1), i.e., in the hands of the beneficiaries. It would be appropriate if the observations of the High Court are extracted:

‘Now reverting to section 161(1A) of the Act it must be noted the sub-section (1A) only says, “notwithstanding anything contained in sub-section (1)”: in other words, it does not say “notwithstanding anything contained in this Act”. Thus, though the provisions of sub-section (1A) override the provisions of sub-section (1) of section 161, it does not have the effect of overriding the provisions of section 26 of the Act and consequently computation of the income from house property has to be made under sections 22 to 25 of the Act since the Tribunal had entered a categorical finding that the shares of the beneficiaries are definite. As already noted, as per sub-section (1A), where any income in respect of which a representative assessee is liable consists of, or includes, income by way of profits or gains of business, tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum rate. The income so liable referred to in the said sub-section is only the business income of the trust and not any other income. It is only the income by way of profits and gains of business that can be charged at the maximum marginal rate. Any other interpretation, according to us, is against the very scheme of the Act and further such an interpretation will make the provisions of sub-section (1A) of section 161 unconstitutional. It is a well settled position that if two constructions of a statute are possible, one of which would make it intra vires and the other ultra vires, the Court must lean to that construction which would make the operation of the section intra vires (Johri Mal vs. Director of Consolidation of Holdings, AIR 1967 SC 1568).

This was an important interpretation placed by the Kerala High Court which is available to the taxpayers and can be pressed in appropriate cases.

According to section 164(1), income of the discretionary trust shall suffer tax at the maximum marginal rate, meaning that there would not be any basic exemption available except in situations provided under the provisos appended thereto. However, the Gujarat High Court in Niti Trust vs. CIT 221 ITR 435 (Guj.) has held that if there is a long-term capital gain, the maximum marginal rate applicable is 20% and such income would suffer the tax @ 20%. A similar position has been explained and taken by the Mumbai Bench of the Income-tax Appellate Tribunal in the case of Jamshetji Tata Trust vs. JDIT (Exemption) 148 ITD 388 (Mum.) and in Mahindra & Mahindra Employees’ Stock Option Trust vs. Additional CIT 155 ITD 1046 (Mum).

It may, however, be noted that the maximum marginal rate (MMR) as per the existing tax structure otherwise would work out to approximately 42.74%. Therefore, it can be taken in case of discretionary trust that if income includes any income on which special tax rate is applicable, that special rate being MMR for that income would be applicable qua such income and the rest of the income would suffer the tax rate (MMR) of 42.74% approximately.

‘ON BEHALF OF’ ‘FOR THE BENEFIT OF’


Private trust in itself is not a ‘person’ under the Act. Trustees who receive or are entitled to receive income ‘on behalf of’ or ‘for the benefit of any person’ are assessed to tax as taxable entities. Although section 160(1) uses the twin expressions ‘on behalf of’ and ‘for the benefit of’, but section 5(1)(a) which prescribes the scope of total income, uses the expression ‘by or on behalf of’ and therefore the question arises as to whether the implications of both the expressions are similar or are different.

The Supreme Court in the case of W.O. Holdswords & Ors. vs. State of Uttar Pradesh, 33 ITR 472, had occasion to examine both the phrases in the context of the position of trustees. The Court held that trustees do not hold the land from which agricultural income is derived on behalf of the beneficiary but they hold it in their own right though for the benefit of the beneficiary. Besides, a trust is defined in the English Law as ‘A trust in the modern and confined sense of the word is the confidence reposed in a person with respect to property of which he has possession or over which he can exercise a power to the intent that he may hold the property or exercise the power for the benefit of some other person or objects’ (vide Halsbury’s Laws of England, Hailsham Edition, Volume 33, page 87, para 140).

Thus, it is more than evident that legal estate is vested in the trustees who hold it for the benefit of the beneficiary. Section 3 of the Indian Trust Act, 1882 is also clear and categorical on this point to the effect that the trustees hold the trust property for the benefit of the beneficiaries but not ‘on their behalf’.

Section 56(2)(x) introduced by the Finance Act, 2017 provides inter alia that any sum of money and / or property received by a person without consideration, or property received by a person without adequate consideration, would constitute income. There is some threshold limit in certain situations given under that section but that is not relevant for the purpose of the present discussion. Exceptions given in the proviso to section 56(2)(x) provide inter alia that money or property received from an individual by a trust created or established solely for the benefit of a relative of an individual would not be hit by clause (x) of section 56(2). Thus, if the settlor is an individual and the beneficiary is a relative of such individual, receipt of money and / or property by the trustees for the benefit of the relative would not be hit by the provisions of section 56(2)(x).

But whether the property settled by the individual settlor for the benefit of a non-relative would become taxable income u/s 56(2)(x) is a question which would engage all of us.

Section 4, which is the charging section, provides inter alia that income tax shall be charged for any assessment year in accordance with and subject to the provisions of the Act in respect of total income of the previous year of every person. Section 5 provides inter alia that total income of any previous year of a person includes all income from whatever source derived which is received or deemed to be received in India in such year by or on behalf of such person. Therefore, any income which is not received by the person or on behalf of such person cannot be brought within the scope of total income. In other words, income received for the benefit of such person is not contemplated to be covered u/s 5 and cannot be brought to tax in the hands of such person. Therefore, when the trustees receive the property for the benefit of the beneficiary, such receipt falls outside the scope of total income even if the beneficiary is a non-relative qua the settlor as the receipt of the property by the trustees cannot be said to be received by the beneficiary or received on behalf of the beneficiary. Therefore, the applicability of section 56(2)(x) even in the case of a non-relative beneficiary in the light of the above interpretation may not be easy for the Revenue. However, such interpretation is liable to be fraught with strong possibility of litigation.

In sum, taxability of private trust has been saddled with lots of controversies many of which have been sought to be given quietus with amendments made from time to time, but such controversies are never-ending.

 

The point of modern propaganda isn’t only to misinform or push an agenda. It is to exhaust your critical thinking, to annihilate truth
– Gary Kasparov

Teachers should prepare the student for the student’s future, not for the teacher’s past
– Richard Hamming

[Income Tax Appellate Tribunal, Chennai ‘A’ Bench; dated 24th July, 2006, passed in I.T.A. Nos. 490/MDS/2000, 352/MDS/2000 and 353/MDS/2002 for A.Ys. 1996-1997, 1997-1998 and 1998-1999] Business expenditure – Provision made for site restoration – Contingent liability – Commercial expediency – Allowable expenditure u/s 37

5. M/s Vedanta Limited vs.
The Jt. CIT, Special Range-I [Tax
Case Appeal Nos. 2117 to 2119 of 2008; Date of order: 23rd January,
2020] (Madras High Court)

 

[Income
Tax Appellate Tribunal, Chennai ‘A’ Bench; dated 24th July, 2006,
passed in I.T.A. Nos. 490/MDS/2000, 352/MDS/2000 and 353/MDS/2002 for A.Ys.
1996-1997, 1997-1998 and 1998-1999]

 

Business
expenditure – Provision made for site restoration – Contingent liability –
Commercial expediency – Allowable expenditure u/s 37

 

The
assessee is engaged in the business of oil exploration in India and as per the
Product Sharing Contract between the Government of India, Oil and Natural Gas
Corporation Limited (ONGC), Videocon Petroleum Limited, Command Petroleum
(India) Pte. Limited, Ravva Oil (Singapore) Pte. Ltd. with respect to the
contract area identified as Ravva Oil & Gas Fields. The assessee company
undertaking the oil exploration is obligated under Clauses 1.77 and 14.9 of the
contract to restore the site by filling up the pits after the oil exploration
work is over.

 

The provision for such expenditure to be incurred in future for site
restoration work was made on a scientific and rational basis depending upon the
quantum of oil expected to be explored, based on production of the oil which
was worked out depending upon the share of the oil of various companies of
which the assessee had 22.5% of the total oil explored, and over the expected
production of the oil in barrels and abandonment costs computed by the company.
The assessee company computed the said expected liability of site restoration
charges and accordingly made provisions for the three A.Ys. in question.

 

The
Tribunal disallowed the provisions made by the assessee for site restoration
cost for the A.Ys. in question by holding that ‘an expenditure which is
deducted for income-tax purpose is one which is towards a liability actually
existing at the time, but putting aside some money which may become an
expenditure on the happening of an event is not an expenditure.’ In other
words, the Tribunal held that since the provision made under site restoration
fund is a contingent liability incurred by the assessee, the same is not an
allowable expenditure. The Tribunal held that the provision for site
restoration fund cannot be allowed even u/s 37(1) of the Act.

 

The
Tribunal also referred to the provisions of section 33ABA inserted by the
Finance (No. 2) Act, 1998 with effect from 1st April, 1999 from
which date such a provision for site restoration made by the assessee cannot be
allowed unless an actual deposit is made in the Site Restoration Fund u/s
33ABA. But the A.Ys. in question before the Court are prior to this amendment
of law.

 

Before the
Hon’ble High Court the only question left for deciding the controversy on hand
was whether such deduction of ‘Provision made for Site Restoration’ by the
assessee can be allowed as a business expenditure u/s
37(1).

 

Section
37(1) of the Act is a residual provision and apart from various deductions for
business expenditure prescribed under sections 32 to 36 which are specific in
nature, section 37(1) provides that any expenditure (not being expenditure of
the nature described in sections 30 to 36 and not being in the nature of
capital expenditure or personal expenses of the assessee), ‘laid out or expended’ ‘wholly and exclusively’
for the purposes of the business or profession shall be allowed in computing
the income chargeable under the head ‘Profits and gains of business or
profession’. Thus, the expenditure incurred by the assessee or a provision made
for the same are both allowable u/s 37(1), provided such expenditure is
incurred wholly and exclusively for the purpose of business and is laid out or
expended for the purpose of business.

 

The
assessee urged that the Supreme Court in the case of Calcutta Company Limited vs. CIT (1959) 37 ITR 1 (SC)
has laid down that inasmuch as the liability which had accrued during the
accounting year was to be discharged at a future date, the amount to be
expended in the discharge of that liability would have to be estimated in order
that under the mercantile system of accounting the amount could be debited
before it was actually disbursed.

 

Further,
relying upon another judgment of the Supreme Court in the case of Bharat Earth Movers vs. CIT (2000) 245 ITR 428 (SC),
it was submitted that the law is settled – if a
business liability has definitely arisen in the accounting year, the deduction
should be allowed although the liability may have to be quantified and
discharged at a future date.

 

It was
further submitted that the three yardsticks, criteria or parameters for
allowing the ‘Provisions made for future expenditure’ were discussed by the
Supreme Court in the case of Rotork Controls India
(P) Ltd. vs. Commissioner of Income-tax reported
in 2009 314 ITR 0062. Thus,
the three criteria of the provision are recognised when (a) an enterprise has a present obligation as a result of a past
event; (b) it is probable that an outflow of resources will be required to
settle the obligation; and (c) a reliable estimate can be made of the amount of
the obligation.

 

It was
urged that all the three criteria are satisfied by the assessee in the present
cases and there is no dispute from the side of the Revenue that the assessee
has incurred an obligation under the contract. The question of restoring the
site of exploration after the work is over for which the said provision is made
is based on a scientific method and relevant materials.

 

The High
Court observed that for the three assessment years in question the provision
made by the assessee was clearly an allowable expenditure u/s 37(1). The only
ingredient required to be complied with for section 37(1) is that the
expenditure in question should be laid out or expended wholly for the purpose
of the business of the assessee. There is no dispute that the provision in
question was made wholly and exclusively for the purpose of business. The only
dispute was that the expenditure was not actually incurred in these years and
the amount was to be spent in future out of the provisions made during those
assessment years, viz., 1996-1997 to 1998-1999.

 

The Court
observed that there was no prohibition or negation for making a provision for
meeting such a future obligation and such a provision being treated as a
revenue expenditure u/s 37(1). The Supreme Court in the case of Calcutta Company Limited (Supra) had
clearly held that the words ‘Lay’ (laid out) or ‘Expend’ include expendable in
future, too. The making of a provision by an assessee is a matter of good
business or commercial prudence and it is to set apart a fund computed on
scientific basis to meet the expenditure to be incurred in future. There is no
time frame or limitation prescribed for the said provisions to be actually
spent. Merely because in the context like the one involved in this case the
contract period is long, viz., 25 years, which, too, now stands extended by a
period of ten years or more, and therefore the actual work of site restoration
may happen after 35 years depending upon the actual exploration of oil reserves
and the site restoration would be undertaken only if there is no longer some
oil to be explored or drawn out, therefore, it cannot be said that the
provision made for the three assessment years at the beginning of the contract
period was irrational or a disallowable expenditure.

 

The
question of commercial expediency is a usual business and economic decision to
be taken by the assessee and not by the Revenue authorities, therefore the
provision made on a reasonable basis cannot be disallowed u/s 37(1) unless it
can be said to have no connection with the business of the assessee. The words
‘wholly and exclusively for the purpose of business’ is a sufficient safeguard
and check and balance by the Revenue authorities to test and verify the
creation of provisions for meeting a liability by the assessee in future and its
connectivity with the business of the assessee. Assuming that such set-apart
provision is not actually spent in future or something less is spent on site
restoration, nothing prevents the Revenue authorities and the assessee himself
from offering it back for taxation in such future year, the unspent provision
to be thus brought back to tax as per section 41(1).

 

In view of the aforesaid facts, the appeals
filed by the assessee were allowed.

Scientific research – Special deduction u/s 80-IB(8A) – Jurisdiction to examine nature of research – Prescribed authority under Act alone has power to examine nature of scientific research and determine whether assessee is entitled to special deduction u/s 80-IB(8A) – A.O. has no power to determine questions

32. CIT vs. Quintiles Research (India) Private Ltd. [2020]
429 ITR 4 (Kar.) Date
of order: 14th October, 2020 A.Y.:
2008-09

 

Scientific
research – Special deduction u/s 80-IB(8A) – Jurisdiction to examine nature of
research – Prescribed authority under Act alone has power to examine nature of
scientific research and determine whether assessee is entitled to special
deduction u/s 80-IB(8A) – A.O. has no power to determine questions

 

aged in
pharmaceutical research and development as well as clinical research for
pharmacy products. For the A.Y. 2008-09 the assessee claimed deduction of Rs.
31,32,49,090 u/s 80-IB(8A). The A.O. held that the assessee is not undertaking
any scientific research and development on its own as specified under rule
18DA(1)(c) of the Rules. It was further held that the assessee has not been
able to sell any output / prototype till date and undertakes the activities as
specified in the agreement and transfers the data / information to the customer
who in turn may use the same to develop a technology product / patent and the
assessee itself is not engaged in scientific research and development
activities leading to development / improvement / transfer of technology. Thus,
it was held that the assessee does not meet the prescribed conditions u/s
80-IB(8A). Accordingly, the claim of the assessee for deduction under the
aforesaid provision was disallowed.

 

The
Dispute Resolution Panel rejected the objections of the assessee. The Tribunal
allowed the appeal preferred by the assessee and set aside the order of the
A.O. In the appeal filed by the Revenue, the following question of law was
raised before the Karnataka High Court:

 

‘Whether,
on the facts and in the circumstances of the case, the Tribunal is right in law
in holding that the conditions of rule 18DA can be looked into only by the
prescribed authority and not by the A.O., whereas the said rule prescribes the
conditions necessary for allowing deduction u/s 80-IB(8A) and the A.O. is well
within his jurisdiction to accept or reject the same based on the conformity
adhered to by the assessee?’

 

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

 

‘i)    Section 80-IB provides for
deduction in respect of profits and gains from certain industrial undertakings
other than infrastructure development undertakings. Under sub-section (8A) in
the case of an assessee engaged in scientific research and development, there
would be 100% deduction of the profits and gains of such business for a period
of ten consecutive assessment years subject to the condition that the company
satisfied the conditions enumerated in sub-section (8A) of section 80-IB. From
a conjoint reading of rules 18D and 18DA of the Income-tax Rules, 1962 it is
axiomatic that it is for the prescribed authority to examine the nature of
research and scientific development proposed to be or being carried out by the
company who seeks approval or extension of approval. Once under sub-rule (2)
approval is granted which enures for a period of three years, it can be
extended only on satisfactory performance of the company, which has to be
assessed on periodic review by the prescribed authority. The prescribed
authority is also empowered to call for such information or documents which may
be found necessary for consideration of the application for grant of approval.
Even during the currency of the approval granted by the prescribed authority,
the company has to satisfy several conditions in terms of rule 18DA(2) of the
Rules. The prescribed authority is also empowered to withdraw the approval.
Thus, the statutory scheme of the Rules mandates the prescribed authority to be
a body which can minutely examine the highly technical and scientific
requirements in the case of a company.

 

ii)    Therefore, once the
prescribed authority grants approval and such approval holds the field, it
would not be open to the A.O. or any other Revenue authority to sit in appeal
over such approval certificate and re-examine the issue of fulfilment of
conditions mentioned in sub-rule (1) of rule 18DA of the Rules. The prescribed
authority is a specialised body having expertise in the field of scientific
research and development and the requirements being extremely complex,
scientific requirements have, therefore, been rightly placed in the hands of
the expert body.

 

iii)   There is no plausible reason
why the A.O. should be allowed to sit in appeal over the decision of a body
which is prescribed under the Rules. An issue with regard to violation of
conditions mentioned in rule 18DA can be looked into only by the prescribed
authority and not by the A.O.’

Non-resident – Income deemed to accrue or arise in India – Section 9(1)(vii) – Fees for technical services – Effect of Explanation 2 to section 9(1)(vii) – Agreement for export of garments – Non-resident company inspecting garments, ensuring quality and export within stipulated time – No technical services performed by non-resident – Income received by non-resident not taxable in India

31. DIT (International
Taxation) vs. Jeans Knit Pvt. Ltd. [2020]
428 ITR 285 (Kar.) Date
of order: 10th September, 2020 A.Y.: 2007-08

 

Non-resident
– Income deemed to accrue or arise in India – Section 9(1)(vii) – Fees for
technical services – Effect of Explanation 2 to section 9(1)(vii) – Agreement
for export of garments – Non-resident company inspecting garments, ensuring
quality and export within stipulated time – No technical services performed by
non-resident – Income received by non-resident not taxable in India

 

The assessee was
engaged in the business of manufacturing and export of garments and was a 100%
export-oriented undertaking. The assessee company imported accessories from
other countries, mostly from Europe. For this purpose it had engaged a Hong
Kong company to render various services at the time of import such as
inspection of fabrics and timely dispatch of material. The assessee paid 12.5%
of the import value as charges to the non-resident company. The assessee made
payments to the non-resident company in the A.Y. 2007-08 without deduction of
tax at source. The A.O., by an order, inter alia held that the non-resident company was a service provider and was
not an agent of the assessee and the services rendered by the non-resident
company had to be treated as technical services and were squarely covered under
the scope and ambit of section 9(1)(vii). The assessee failed to deduct tax at
source at the rate of 10% and therefore the assessee was treated as an assessee
in default.

 

The Commissioner
(Appeals) upheld the order of the A.O. But the Tribunal set aside the order.

 

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

 

‘i)    From the agreement executed by the assessee
with the non-resident company it was evident that the non-resident company was
required to inspect the quality of fabrics and other accessories in accordance
with the sample approved by the assessee and coordinate with the suppliers to
ship the goods within the stipulated date. The assessee in consultation with
the exporters identified the manufacturers as well as the quality and price of
the material to be imported.

ii)    The non-resident company was nowhere involved
either in identification of the exporter or in selecting the material and
negotiating the price. The quality of material was also determined by the
assessee and the non-resident company was only required to make physical
inspection to see if it resembled the quality specified by the assessee. For
rendering this service, no technical knowledge was required.

 

iii)   The Tribunal on the basis of meticulous
appreciation of the evidence on record had recorded a finding that the
non-resident company was not rendering any consultancy service to the assessee.
Therefore, it would not fall within the services contemplated u/s 9(1)(vii).

 

iv) The substantial
questions of law framed by a Bench of this Court are answered against the
Revenue and in favour of the assessee.’

 

Export – Exemption u/s 10A – Effect of section 10A and Notification No. S.O. 890(e) of CBDT – Assessee carrying on back-office work and preparation of applications for patent in USA – Assessee entitled to exemption u/s 10A

30. CIT vs. Narendra R. Thappetta [2020]
428 ITR 485 (Kar.) Date
of order: 10th September, 2020 A.Ys.: 2009-10 and 2010-11

 

Export –
Exemption u/s 10A – Effect of section 10A and Notification No. S.O. 890(e) of
CBDT – Assessee carrying on back-office work and preparation of applications
for patent in USA – Assessee entitled to exemption u/s 10A

 

The
assessee received back-office work from the legal department of software
companies in the USA. For the A.Ys. 2009-10 and 2010-11 he claimed deduction
u/s 10A of Rs. 3,24,74,124 and Rs. 3,34,41,151, respectively. The A.O. held
that section 10A applies only in respect of profits and gains derived from
export of articles, or things or computer software and, therefore, the assessee
is not entitled to deduction u/s 10A as his activities do not constitute
development of a computer programme as defined u/s 10A. It was further held
that the activities of the assessee do not fall in any of the categories as
mentioned in Notification No. 890 dated 26th September, 2000 ([2000] 245 ITR (St.) 102) issued by
the CBDT and rejected the claims of deduction of the assessee u/s 10A.

 

The
Commissioner of Income-tax (Appeals) allowed the appeals filed by the assessee
and held that the assessee is entitled to deduction u/s 10A in the light of the
Notification issued by the CBDT which is applicable to the case of the assessee
as the services rendered by him can broadly be classified as office operations,
data processing, legal databases and the same can be termed as information
technology-enabled services. The Tribunal held that the activities of the
assessee can be categorised as back-office operations, data processing, legal
databases or even under remote maintenance and the same can be termed as
information technology-enabled products or services. The Tribunal therefore
held that the assessee is entitled to claim deduction u/s 10A.

 

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

 

‘i)    Section 10A provides for
exemption of profits derived from export of computer software. The CBDT issued
a Notification No. S.O. 890(E), dated 26th September, 2000 ([2000] 245 ITR (St.) 102) to specify the information technology-enabled products /
services as provided u/s 10A. The Notification is clarificatory in nature and
has been issued to clarify the expression “computer software” used in
Explanation 2(i)(b) of section 10A. The Notification specifies that information
technology-enabled products or services mentioned in the Notification shall be
treated as information technology-enabled products or services for the purposes
of Explanation 2(i)(b) of section 10A, which includes back-office operations
and data processing
as well.

 

ii)    The assessee received back-office work from
the legal department of software companies in the US. These companies assigned
back-office work of registering their technology in the US patent office. The
applications were prepared and finalised and signatures were obtained in the
declaration. For development of work product as patent application, the US
patent application contained drawings and specifications. The drawings were
generated using computer-aided design software and specifications were written
using word processing software. The back-office standard required a level of
control over formulation of the editing of the content of the application which
was possible only with the use of information technology.

 

iii)  The activities of the assessee could be
classified as data processing, legal databases and remote maintenance in terms
of the Notification issued by the CBDT. The assessee was transmitting the
patent application and related data which was stored in electronic form and
therefore, such data was customised data and the assessee was eligible for
deduction u/s 10A. The Appellate Tribunal was justified in holding that the
assessee was entitled to the benefit of deduction u/s 10A.’

Dividend – Deemed dividend – Section 2(22)(e) – Sum shown as unsecured loan obtained by assessee firm from company in which one partner shareholder – Nature of transaction – Deferred liability – Assessee not shareholder of lender company – Loan not assessable as deemed dividend in hands of assessee

29. CIT vs. T. Abdul Wahid and Co. [2020]
428 ITR 456 (Mad.) Date
of order: 21st September, 2020 A.Ys.: 2005-06 and 2006-07

 

Dividend
– Deemed dividend – Section 2(22)(e) – Sum shown as unsecured loan obtained by
assessee firm from company in which one partner shareholder – Nature of
transaction – Deferred liability – Assessee not shareholder of lender company –
Loan not assessable as deemed dividend in hands of assessee

 

One of the
partners of the assessee firm with a 35% stake in the assessee was also a
shareholder in a company with 26.25% shareholding in it. A sum of Rs. 2 crores
was shown as unsecured loan obtained from the company by the assessee. For the
A.Ys. 2012-13 and 2014-15, the A.O. considered this sum as deemed dividend
attracting the provisions of section 2(22)(e).

 

The
Tribunal held that the deemed dividend u/s 2(22)(e) was to be assessed in the
hands of the shareholder and not in the hands of the assessee firm and allowed
the appeals filed by the assessee.

 

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

 

‘i)    Section 2(22)(e) would stand attracted when
a payment is made by a company in which public are not substantially interested
by way of advance or loan to a shareholder being a person who is the beneficial
owner of the shares.

 

ii)    On the facts it is clear that the payment
has been made to the assessee, a partnership firm. The partnership firm is not
a shareholder in the company. If such is the factual position, the decision in
the case of National Travel Services
relied on by the Revenue cannot be applied, nor can the case of Gopal and Sons, as they are factually
distinguishable. The records placed before the A.O. clearly show the nature of
the transaction between the firm and the company and it is neither a loan nor
an advance, but a deferred liability. These facts have been noted by the A.O.
In such circumstances, this Court is of the view that the Tribunal rightly
reversed the order passed by the Commissioner of Income-tax (Appeals) affirming
the order of the A.O.

 

iii)   For the above reasons, we find no grounds to
interfere with the order passed by the Tribunal and, accordingly, dismiss the
present appeals and answer the substantial question of law against the
Revenue.’

 

Depreciation – Section 32 – Rate of depreciation – Assessee running a hotel – Additional floor space index granted – Not an intangible right – Consideration for additional floor space index payable in instalments – One instalment paid and entire amount debited in accounts – Assessee entitled to depreciation on entire amount at rate applicable to buildings

28. Principal CIT vs. V. Hotels Ltd. [2020]
429 ITR 54 (Bom.) Date
of order: 21st September, 2020 A.Y.: 2006-07

 

Depreciation
– Section 32 – Rate of depreciation – Assessee running a hotel – Additional
floor space index granted – Not an intangible right – Consideration for additional
floor space index payable in instalments – One instalment paid and entire
amount debited in accounts – Assessee entitled to depreciation on entire amount
at rate applicable to buildings

 

The
assessee was running a hotel. For the A.Y. 2006-07 the assessee claimed
depreciation of Rs. 63,90,248 on floor space index; on an opening written down
value of Rs. 2,55,60,990 depreciation at 25% was claimed. The A.O. rejected the
claim of the assessee and added back the sum to the total income of the
assessee. He took the view that grant of floor space index was not in the
nature of any asset but only a payment made to the Government for increasing
the size of the building.

 

The
Commissioner (Appeals) held that the amount spent was for the purpose of
business and being of enduring nature, it would add value to the existing
building as additional floor space index would enable the company to add more
floors over and above the existing structure. Since it related to the building
block of assets, the overall cost of the building block would increase by this
amount. Accordingly, the A.O. was directed to add the amount spent during the
year, i. e., Rs. 68,16,264, to the building block of assets and allow
depreciation as per law. The Tribunal held that on payment of the first
instalment, rights in the form of additional floor space index were capitalised
in the books of accounts. The Tribunal held that the assessee would be entitled
to depreciation at 10% on the whole of the consideration towards floor space
index and not at 25%.

 

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

 

‘Floor
space index relates to the right to construct additional floor to the assessee
which enhances the value or cost of the existing building. It strictly pertains
to addition to the building and therefore depreciation allowable would be at
the rate applicable to buildings and not to intangible rights u/s 32(1)(ii).’

Deduction of tax at source – Section 190 – Liability to deduct tax at source only if there is income – Reimbursement of expenses – No income arises – Tax not deductible at source

27. Zephyr Biomedicals vs. JCIT [2020]
428 ITR 398 (Bom.) Date of order: 7th October, 2020

 

Deduction
of tax at source – Section 190 – Liability to deduct tax at source only if
there is income – Reimbursement of expenses – No income arises – Tax not
deductible at source

 

In the
appeal by the assessee before the Bombay High Court against the order of the
Tribunal the following question of law was raised:

 

‘Whether
on the facts and in the circumstances of the case, the Hon’ble Tribunal was
right in law in holding that the appellant is liable to deduct tax at source
u/s 194C on the payments made to clearing and forwarding agents which is
outright reimbursement of freight charges having no element of profit?’

 

The Bombay
High Court held as under:

 

‘i)    Income-tax is a tax payable in respect of
the “total income” of the previous year of every person. Further, such
Income-tax shall have to be deducted at source or paid in advance, where it is
so deductible or payable under any of the provisions of the Income-tax Act,
1961.

 

ii)    From this it follows that unless the paid
amount has any “income element” in it, there will arise no liability to pay any
Income-tax upon such amount. Further, in such a situation there will also arise
no liability of any deduction of tax at source upon such amount.

 

iii)   Again, the liability to deduct or collect
Income-tax at source is upon “such income” as referred to in section 190(1).
The expression “such income” would ordinarily relate to any amount which has an
“income element” in it and not otherwise.’

 

 

Capital gains – Sections 45 and 50C – Computation – Law applicable – Amendment of section 50C w.e.f. 1st April, 2017 – Amendment retrospective

26. CIT vs. Vummudi Amarendran [2020]
429 ITR 97 (Mad.) Date
of order: 28th September, 2020 A.Y.:
2014-15

 

Capital
gains – Sections 45 and 50C – Computation – Law applicable – Amendment of
section 50C w.e.f. 1st April, 2017 – Amendment retrospective

 

The
assessee owned 44,462 sq. ft. of land and entered into an agreement for sale on
4th August, 2012 to sell the land for a total sale consideration of
Rs. 19 crores. He received a sum of Rs. 6 crores as advance consideration by
cheque payment from the purchaser. The sale deed was registered on 2nd
May, 2013. The A.O. found that on the date of execution and registration of the
sale deed, i.e., on 2nd May, 2013, the guideline value of the
property as fixed by the State Government was Rs. 27 crores. Applying the
provisions of section 50C, the A.O. adopted the full value of consideration at
Rs. 27 crores and recomputed the capital gains and raised a tax demand.

 

The case
of the assessee was that the guideline value on the date of the agreement i.e.,
4th August, 2012 should be taken as per proviso
to section 50C(1). The Commissioner (Appeals) and the Tribunal accepted the
assessee’s claim.

 

In appeal
by the Revenue, the following questions of law were raised:

 

‘(1)
Whether on the facts and in the circumstances of the case, the Tribunal was
right in holding that the amendment to section 50C which was introduced with
effect from A.Y. 2017-18 prospectively was applicable retrospectively from the
A.Y. 2014-15 when the language used in the proviso
does not indicate that it was inserted as a clarification?

 

(2) Is not
the reasoning and finding of the Tribunal bad by holding that the prospective
amendment to provisions of section 50C for the A.Y. 2017-18 are applicable
retrospectively to A.Y. 2014-15 without appreciating the fact that unless
explicitly stated a piece of legislation is presumed not to be intended to have
retrospective operation based on the principle lex
prospicit non respicit, meaning that the law looks
forward and not backwards?’

 

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

 

‘i) Once a
statutory amendment is made to remove an undue hardship to the assessee or to
remove an apparent incongruity, such an amendment has to be treated as
effective from the date on which the law, containing such an undue hardship or
incongruity, was introduced.

 

ii) The proviso to section 50C(1) deals with
cases where the date of the agreement, fixing the amount of consideration, and
the date of registration for the transfer of the capital assets are not the
same and states that the value adopted or assessed or assessable by the stamp
valuation authority on the date of agreement may be taken for the purposes of
computing full value of consideration for such transfer. The amendment by
insertion of the proviso seeks to
relieve the assessee from undue hardship.

 

iii) The Commissioner
(Appeals) and the Tribunal were justified in setting aside the order of the
A.O.’

 

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: 6th October, 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 10th 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 1st April, 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.’

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: 4th 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 2nd 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.’

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: 11th 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 31st 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.

 

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: 11th 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 19th 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 14th 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 16th 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., 23rd 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 6th
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 11th 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 11th August,
2016;

b.
Bank
of Baroda vs. DCIT in ITA No.646/Mum/2017 dated 20th 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., 6th September, 2013. It further held
that the refund granted on 6th 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.

 

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: 29th 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.


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 16th 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 18th 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
28th 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 12th 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 29th 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
27th 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
1st 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
1st 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. 1st 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.
1st April, 1973. The two reliefs are now conferred under a new
provision of section 10(17A) made effective from 1st 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. 1st 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

 

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: 22nd 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. 29th 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 10th
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.

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: 23rd 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 13th 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.

 

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: 4th November, 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.

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: 17th August, 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 28th 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. 1st
April, 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 13th
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 13th 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 13th
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

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: 9th October, 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 9th 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).

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: 19th 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 16th
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 6th September, 2010 and
made advance payments of Rs. 2,51,000 on 10th October, 2010 and Rs.
9,87,090 on 14th 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 16th 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 10th
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 16th 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 10th
October, 2010 and subsequently on 14th 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 10th 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).

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: 15th September,
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.

 

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: 3rd November,
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 31st
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’.

 

 

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: 19th 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).

 

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: 6th 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 1st April, 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. 1st 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 27th 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.

 

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: 6th 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. 1st
April, 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 31st March, 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 20th
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’.

 

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: 10th 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.

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: 6th October,
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.

 

[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: 11th September, 2020] (Madras High Court)

 

[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

 

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 7th 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 30th 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 7th
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.

 

[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: 30th
January, 2020] (Madras High Court)

 

[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’

 

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

(c) Raj Dadarkar & Associates vs. Asst.
CIT [(2017) 394 ITR 592 (SC)].

 

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 1/6th 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.