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Category: Direct Taxes

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.

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

v)   Decision of the Single Judge Bench affirmed.

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

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

 

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

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

The Tribunal upheld
the order of the A.O.

 

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

 

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

 

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

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

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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

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

 

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

 

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

 

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

 

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

 

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

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

 

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

TAXABILITY OF INTEREST ON ENHANCED COMPENSATION OR CONSIDERATION

ISSUE FOR CONSIDERATION

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

 

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

 

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

 

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

 

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

 

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

 

THE MOVALIYA BHIKHUBHAI BALABHAI CASE

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

MAHENDER PAL NARANG’S CASE

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

 

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

 

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

 

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

 

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

 

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

 

OBSERVATIONS

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

 

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

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

 

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

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

 

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

 

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

 

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

 

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

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

34. Payment of
interest

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

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

 

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

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

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

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

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

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

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

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

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

In the result, the Revenue appeal was
dismissed.

 

 

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

 

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

 —  Marcus Aurelius

 

 

The sage acts without taking
credit.

She accomplishes without
dwelling on it.

She does not want to display her
worth

 —  Lao Tzu, Tao Te Ching, Ch.
77

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

 

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

 

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

 

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

 

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

 

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

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

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

 

FACTS

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

 

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

 

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

 

HELD

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

 

 

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

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

 

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

 

FACTS

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

 

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

 

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

 

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

 

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

 

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

 

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

 

HELD

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

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

 

FACTS

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

 

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

 

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

 

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

 

 

HELD

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

 

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

 

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

 

The Tribunal
observed that the Supreme Court in the case of

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

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

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

 

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

 

The Tribunal
held that

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

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

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

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

 

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

 

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

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

 

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

 

FACTS

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

 

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

 

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

 

HELD

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

 

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

 

The Tribunal
held that

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

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

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

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

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

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

 

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

 

FACTS

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

 

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

 

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

 

HELD

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

 

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

 

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

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

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

 

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

 

FACTS

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

 

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

 

Aggrieved, the
Revenue preferred an appeal to the Tribunal.

 

HELD

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

 

The Tribunal held that

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

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

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

 

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

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

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

 

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

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

 

FACTS

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

 

Aggrieved, the
assessee preferred an appeal with the Tribunal.

 

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

 

HELD

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

 

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

 

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

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

 

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

 

FACTS

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

 

The assessee
therefore filed an appeal before the ITAT.

 

HELD

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

 

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

 

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

 

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

 

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

 

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

 

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

 

DEEMED GRANT OF REGISTRATION U/S 12A

ISSUE FOR CONSIDERATION

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

 

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

 

TWO INTRICATELY LINKED CASES

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

THE TBI EDUCATION TRUST CASE

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

ADDOR FOUNDATION CASE

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

OBSERVATIONS

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

 

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

 

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

 

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

 

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

 

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

……..

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

……………………

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

……..

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

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

 

FACTS

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

 

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

 

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

 

HELD

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

 

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

 

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

 

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

 

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

TAXABILITY OF FORFEITURE OF SECURITY DEPOSIT

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

 

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

 

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

 

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

 

UNDERSTANDING THE NATURE OF SECURITY DEPOSITS

In general terms, a security deposit is

(a) a sum of money

(b) taken from the licensee

(c) to secure performance of contract, and

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

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

BURDEN OF PROOF

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

 

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

 

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

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

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

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

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

 

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

 

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

 

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

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

 

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

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

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

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

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

 

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

 

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

 

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

 

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

 

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

 

This view also draws support from the
following decisions:

 

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

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

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

 

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

 

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

 

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

 

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

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

 

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

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

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

OR

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

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

OR

(c)        Entire
security deposit is forfeited:

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

 

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

 

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

 

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

 

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

 

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

 

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

 

CONCLUSION

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

 

 

 

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

 — 
Anand Ranganathan, Author

 

 

UNEXPLAINED DEPOSITS IN FOREIGN BANK ACCOUNTS

ISSUE FOR CONSIDERATION

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

 

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

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

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

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

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

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

(vi) the reopening was bad in law.

 

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

 

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

 

THE DEEPAK B. SHAH CASE

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

THE RENU T. THARANI CASE

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

 

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

 

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

 

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

 

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

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

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

(c)  Even though the returned income were not
substantial, these facts show that she is having her interests in India.

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

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

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

 

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

 

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

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

B.  Smt. Renu Tharani is the sole beneficiary.

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

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

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

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

OBSERVATIONS

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

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

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

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

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

 

On an appeal by the assessee, the Gujarat
High Court reversed the decision of the Tribunal and held as under:

 

‘i)  The application of section 80IA(5) to deny the
effect of provisions of section 79 cannot be sustained. When the loss of
earlier years has already lapsed, it cannot be notionally carried forward and
set off against the profits and gains of the assessee’s business for the year
under consideration in computing the quantum of deduction u/s 80IA(1). The
provisions of section 80IA(5) cannot be invoked to ignore the provisions of
section 79.

 

ii)
The appeals are allowed. The impugned orders passed by the Tribunal in the
respective tax appeals are quashed and set aside. The substantial question is
answered in favour of the assessee and against the Revenue.’

Reassessment – Notice u/s 148 of ITA, 1961 – Validity – Officer recording reasons and issuing notice must be the jurisdictional A.O. – Reasons recorded by jurisdictional A.O. but notice issued by officer who did not have jurisdiction over assessee – Defect not curable u/s 292B – Notice and consequential proceedings and order invalid

7. Pankajbhai
Jaysukhlal Shah vs. ACIT [2020] 425 ITR 70
(Guj.) Date of order: 9th
April, 2019 A.Y.: 2011-12

 

Reassessment – Notice u/s 148 of ITA, 1961
– Validity – Officer recording reasons and issuing notice must be the
jurisdictional A.O. – Reasons recorded by jurisdictional A.O. but notice issued
by officer who did not have jurisdiction over assessee – Defect not curable u/s
292B – Notice and consequential proceedings and order invalid

 

For the A.Y.
2011-12 an order u/s 143(1) of the Income-tax Act, 1961 was passed against the
assessee. Thereafter, a notice dated 29th March, 2018 u/s 148 was issued
to reopen the assessment u/s 147 of the Act. In response to the notice, the assessee submitted that the original return filed by him be
treated as the return filed in response to the notice u/s 148 and requested the
A.O. to supply a copy of the reasons recorded for reopening the assessment. The
assessee participated in the assessment proceedings and raised objections
against the initiation of proceedings u/s 147 on the ground that the assumption
of jurisdiction on the part of the A.O. by issuance of notice u/s 148 was
invalid, contending that the notice was issued by the Income-tax Officer, Ward
No. 2(2), whereas the reasons were recorded by the Deputy Commissioner of
Income-tax, Circle 2. The Department contended that issuance of the notice by
the Income-tax Officer was a procedural lapse which had happened on account of
the mandate of the E-assessment scheme and non-migration of the permanent
account number of the assessee in time and that such defect was covered under
the provisions of section 292B and therefore, the notice issued could not be
said to be invalid.

 

The assessee filed
a writ petition and challenged the validity of the notice. The Gujarat High
Court allowed the writ petition and held as under:

 

“i)  While the reasons for reopening the assessment
had been recorded by the jurisdictional A.O., viz., the Deputy Commissioner,
Circle 2, the notice u/s 148(1) had been issued by the Income-tax Officer, Ward
2(2), who had no jurisdiction over the assessee and, hence, such a notice was
bad on the count of having been issued by an Officer who had no authority to
issue such notice.

 

ii)   It was the Officer recording the reasons who
had to issue the notice u/s 148(1), whereas the reasons had been recorded by
the jurisdictional A.O. and the notice had been issued by an Officer who did
not have jurisdiction over the assessee. The notice u/s 148 being a
jurisdictional notice, any inherent defect therein could not be cured u/s 292B.

iii)  It was not possible for the jurisdictional
A.O., viz., the Deputy Commissioner, to issue the notice u/s 148 on or before
31st March, 2018 as migration of the permanent account number was
not possible within that short period and therefore, the Income-tax Officer had
issued the notice instead of the jurisdictional Assessing Officer. Thus there
was an admission on the part of the Department that the Deputy Commissioner,
Circle 2, who had jurisdiction over the assessee had not issued the notice u/s
148 but it was the Income-tax Officer, Ward 2(2) who did not have any
jurisdiction over the assessee who had issued such notice.

 

iv)  No proceedings could have
been taken u/s 147 in pursuance of such invalid notice. The notice u/s 148(1)
and all the proceedings taken pursuant thereto could not be sustained.’

 

Reassessment – Notice u/s 148 of ITA, 1961 – Validity – Notice issued in name of dead person – Objection to notice by legal heir and representative – Department intimated about death of assessee in reply to summons issued u/s 131(1A) – Legal heir not submitting to jurisdiction of A.O. in response to notice of reassessment u/s 148 – Provisions of section 292A not attracted – Notice and proceedings invalid

6. Durlabhai
Kanubhai Rajpara vs. ITO [2020] 424 ITR 428
(Guj.) Date of order: 26th
March, 2019 A.Y.: 2011-12

 

Reassessment – Notice u/s 148 of ITA, 1961
– Validity – Notice issued in name of dead person – Objection to notice by
legal heir and representative – Department intimated about death of assessee in
reply to summons issued u/s 131(1A) – Legal heir not submitting to jurisdiction
of A.O. in response to notice of reassessment u/s 148 – Provisions of section
292A not attracted – Notice and proceedings invalid

 

For the A.Y.
2011-12, the A.O. issued a notice in the name of the assessee who was the
father of the petitioner u/s 148 of the Income-tax Act, 1961 dated 28th
March, 2018 to reopen the assessment u/s 147. Even prior to that, the Deputy
Director (Investigation) had issued a witness summons u/s 131(1A) in the name
of the assessee, the father of the petitioner, to personally attend the office
and the notice was served upon the petitioner. The petitioner furnished the
death certificate of his late father before the authority and submitted that he
had expired on 12th June, 2015, therefore, the notice was required
to be withdrawn. Thereafter, the notice in question dated 28th
March, 2018 was issued in the name of the late assessee. The petitioner also
received a notice dated 16th July, 2018 issued u/s 142(1) on 17th
July, 2018. The petitioner filed a reply and submitted that his father had
expired on 12th June, 2015 and a copy of the death certificate was
also annexed. The petitioner also contended in his reply that the fact of the
death of his father was disclosed pursuant to the summons issued by the Deputy
Director (Investigation) u/s 131(1A), that the notice issued u/s 148 was
without any jurisdiction as it was issued against a dead person and prayed that
the proceedings be dropped. The Department rejected the objections.

 

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

 

‘i)  The petitioner at the first point of time had
objected to the issuance of notice u/s 148 in the name of his deceased father
(assessee) and had not participated or filed any return pursuant to the notice.
Therefore, the legal representatives not having waived the requirement of
notice and not having submitted to the jurisdiction of the A.O. pursuant
thereto, the provisions of section 292A would not be attracted and hence the
notice had to be treated as invalid.

 

ii)  Even prior to the issuance of such notice, the
Department was aware about the death of the petitioner’s father (the assessee)
since in response to the summons issued u/s 131(1A) the petitioner had
intimated the Department about the death of the assessee. Therefore, the
Department could not say that it was not aware of the death of the petitioner’s
father (the assessee) and could have belatedly served the notice u/s 159 upon
the legal representatives of the deceased assessee.

 

iii)
The notice dated 28th March, 2018 issued in the name of the deceased
assessee by the A.O. u/s 148 as well as further proceedings thereto were to be
quashed and set aside.’

Reassessment – Notice u/s 148 of ITA, 1961 – Validity – Amalgamation of companies – Notice issued against transferor-company – Amalgamating entity ceases to have its own existence and not amenable to reassessment proceedings – Notice and subsequent proceedings unsustainable

5. Gayatri Microns
Ltd. vs. ACIT [2020] 424 ITR 288
(Guj.) Date of order: 24th
December, 2019 A.Y.: 2012-13

 

Reassessment – Notice u/s 148 of ITA, 1961
– Validity – Amalgamation of companies – Notice issued against
transferor-company – Amalgamating entity ceases to have its own existence and
not amenable to reassessment proceedings – Notice and subsequent proceedings
unsustainable

 

In the return for the A.Y. 2015-16, the
assessee company furnished information regarding amalgamation of three
companies GMCL, GISL and GFL with it. In the return, under the heading ‘holding
status’, further details were provided below the column ‘business
organisation’, that is, the status of those three companies which were
amalgamated with it.

 

For the A.Y. 2015-16, the A.O. called for
certain information, and the assessee submitted the details categorically
stating that by virtue of the order passed by the High Court dated 18th
June, 2015, the amalgamation had taken place amongst the three companies. The
Assistant Commissioner issued a notice dated 25th March, 2019 u/s
148 of the Income-tax Act, 1961 for the A.Y. 2012-13 to GISL.

 

The assessee filed a writ petition and
challenged the notice. The Gujarat High Court allowed the writ petition and
held as under:

 

‘i)  The notice issued u/s 148 had been issued to
GISL which had been amalgamated with the assessee by order dated 18th
June, 2015 passed by the court and thus, it had ceased to have its own
existence so as to render it amenable to reassessment proceedings under the
provisions of section 147.

 

ii)  The amalgamation had taken place much prior to
the issuance of the notice dated 25th March, 2019 for reopening the
assessment. Thereafter, the assessee had informed the Assistant Commissioner
about the amalgamation of all the three companies with it with sufficient
details, viz., (i) the passing of the order dated 18th June, 2015 by
the court ; (ii) the communication dated 9th September, 2017
addressed by the assessee to the Income-tax Officer, during the assessment proceedings
for the A.Y. 2015-16 containing the information of amalgamation; and (iii) the
details of amalgamation in the return for the A.Y. 2015-16. Moreover, the
Assistant Commissioner and the Department were duly informed by the assessee
about the amalgamation and despite this a statutory notice u/s 148 (was sent).

 

iii)
The notice for reopening of the assessment being without jurisdiction, was not
sustainable. The notice and all the proceedings taken pursuant thereto were to
be quashed and set aside.’”

Income – Unexplained money – Section 69A of ITA, 1961 – Condition precedent for application of section 69A – There should be evidence that assessee was the owner of the money – Assessee acting as financial broker – Material on record showing amounts passing through his hands – No evidence that amounts belonged to him – Amounts not assessable in his hands u/s 69A

4. CIT vs.
Anoop Jain [2020] 424 ITR 115
(Del.) Date of order: 22nd
August, 2019 A.Y.: 1992-93

 

Income – Unexplained money – Section 69A of
ITA, 1961 – Condition precedent for application of section 69A – There should
be evidence that assessee was the owner of the money – Assessee acting as
financial broker – Material on record showing amounts passing through his hands
– No evidence that amounts belonged to him – Amounts not assessable in his
hands u/s 69A

 

The assessee
was a financial broker. During the course of assessment for the A.Y. 1992-93,
the A.O. found that the assessee had received 13 pay orders aggregating to Rs.
5,17,45,958 from Standard Chartered Bank, Bombay during the financial years in
question, and mostly between December, 1991 and February, 1992. All these pay
orders were utilised by him for purchasing units and shares from different banks
and mutual funds. The explanation offered by the assessee was that all the pay
orders were received from C, a Bombay broker, and the purchase of units and
shares was done by him on behalf of C and these were then sold back to C after
earning normal brokerage. The A.O. found that all 13 pay orders were actually
tainted pay orders relating to the securities scam of 1992 and that they had
been issued by the Standard Chartered Bank under extraordinary circumstances.
The Standard Chartered Bank had informed the Assistant Commissioner, Circle
7(3) that it had been a victim of a massive fraud perpetrated in 1992 by
certain brokers in collusion with some ex-employees of the Bank to siphon out
funds. It was also conveyed that the Standard Chartered Bank had filed a first
information report with the C.B.I. in which ‘JP’, an ex-employee, was named as
one of the accused and the 13 pay orders were part of a total of 15 pay orders
fraudulently issued by ‘JP’. The A.O. did not accept the explanation and added
an amount of Rs. 5,17,45,958 to the income of the assessee u/s 69A of the
Income-tax Act, 1961.

 

The Commissioner (Appeals) noted that
certain assets were found by the C.B.I. in the possession of C, who then
surrendered them to the Bureau. The Commissioner (Appeals) also held that there
was no evidence to show that the money in question was utilised by the
assessee. The Commissioner (Appeals) accordingly deleted the addition. This was
upheld by the Tribunal.

 

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

 

‘i)  The very basis for making the additions was
the inference drawn by the A.O. that the assessee had received pay orders and
spent the monies for purchase of shares and units as a result of some “financial
quid pro quo”. There were certain facts that stood out which showed that
these amounts received by the assessee as pay orders did not belong to him. The
assessee was only a conduit through whom the amounts were floated.

 

ii)  One of the essential conditions in section 69A
of the Act is that the assessee should be the “owner of the money” and it
should not be recorded in his books of account. There was overwhelming evidence
to show the involvement of C acting on behalf of SP for SMI. The C.B.I. also did
not proceed against the assessee and that discounted the case of any collusion
between the assessee and C along with P.

 

iii)
The assessee was at the highest used as a conduit by the other parties and did
not himself substantially gain from these transactions. In that view of the
matter, the concurrent view of both the Commissioner (Appeals) and the Tribunal
that the addition of the sum to the income of the assessee was not warranted
was justified.’

 


Income – Business income or income from house property – Sections 22 and 28 of ITA, 1961 – Company formed with object of developing commercial complexes – Setting up of commercial complex and rendering of services to occupants – Income earned assessable as business income

3. Principal CIT vs. City Centre Mall Nashik Pvt. Ltd. [2020] 424 ITR 85
(Bom.) Date of order: 13th
January, 2020 A.Y.: 2010-11

 

Income – Business income or income from
house property – Sections 22 and 28 of ITA, 1961 – Company formed with object
of developing commercial complexes – Setting up of commercial complex and
rendering of services to occupants – Income earned assessable as business
income

 

The assessee was a private limited company
incorporated with the object of construction and running of commercial and
shopping malls. The assessee set up a commercial complex-cum-shopping mall and
the operations commenced during F.Y. 2009-10. The assessee let out various
shops in this commercial complex dealing with various products.

 

Apart from letting out the premises, the
assessee also provided various services to the occupants such as security
services, housekeeping, maintenance, lighting, repairs to air conditioners,
marketing and promotional activities, advertisement and such other activities.
The premises were let out on leave and licence basis, and the compensation was
based on revenue-sharing basis. For the A.Y. 2010-11, the assessee declared its
income under the head ‘Income from business’. The A.O., however, treated it as
income from house property.

 

The Tribunal held that the income was
assessable as business income.

 

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

 

‘i) The object of
the assessee was clearly to acquire, develop, and let out the commercial
complex. The assessee provided even marketing and promotional activities. The
intention of the assessee was a material circumstance and the objects of
association, and the kind of services rendered, clearly pointed out that the
income was from business.

 

ii)
All the factors cumulatively taken demonstrated that the assessee had intended
to enter into a business of renting out commercial space to interested parties.
The findings rendered by the Tribunal on assessment of the factual position
before it that the income in question had to be treated as business income was
justified.’

Section 28(iv) – Waiver of loan

1. M/s Essar Shipping Limited vs. Commissioner of
Income-tax, City-III, Mumbai [Income-tax Appeal (IT) No. 201 of 2002 Date of order: 5th March, 2020 [Order dated 16th August, 2001
passed by the ITAT ‘A’ Bench, Mumbai in Income-tax Appeal No. 144/Ban/91 for
the A.Y. 1984-85] (Bombay High Court)

 

Section 28(iv) – Waiver of loan

 

The appellant company earlier was known as
M/s Karnataka Shipping Corporation Limited and carrying on the business of
shipping. During the relevant previous year, because of certain developments it
was amalgamated with M/s Essar Bulk Carriers Limited, Madras, whereafter it
came to be known as M/s Essar Shipping Limited.

 

In the assessment proceedings for the A.Y.
1984-85 following amalgamation, it filed a revised return of income wherein an
amount of Rs. 2,52,00,000 was claimed as a deduction being the amount of loan
given by the Government of Karnataka which was subsequently waived. It was
claimed on behalf of the appellant that the Government of Karnataka had written
off the said loan advanced to the appellant as the said amount had become
irrecoverable. The A.O. did not accept the claim of the appellant and observed
that waiver of loan benefited the appellant in carrying on its business and in
terms of the provisions contained in section 28, the said benefit enjoyed by
the appellant should constitute income in its hand. Accordingly, the aforesaid
amount was added to the total income of the assessee.

 

Aggrieved
by this, the assessee preferred an appeal before the CIT(Appeals)-III,
Bangalore. The first appellate authority considered the requirement of section
28(iv) of the Act and held that waiver of loan could not be treated as a
benefit or perquisite because it was clearly a cash item. The amount would be
includible u/s 28(iv) only if it was a non-cash item and that cash item cannot
be treated as a perquisite. It was further held that what can be assessed u/s
28 are only items of revenue nature and not items of capital nature. Therefore,
waiver of loan cannot partake the character of income to be includible for
assessment. Accordingly, the addition made by the A.O. was deleted.

 

On further appeal by Revenue, the Tribunal
took the view that writing off of the loan was inseparably connected with the
business of the assessee and therefore this benefit had arisen out of the
business of the assessee. The amount written off was nothing but an incentive
for its business. It was held that the benefit was received by the assessee in
the form of writing off of the liability to the extent of the loan. Therefore,
it could not be said that the assessee received cash benefit. The Tribunal
opined that the A.O. had correctly made the addition considering the waiver of
loan as revenue receipt of the assessee and, therefore, set aside the finding
of the first appellate authority, thereby restoring the order of the A.O.

 

The appellant contended that to be an income
chargeable to income tax under the head ‘profits and gains of business and
profession’, the value of any benefit or perquisite has to arise from business
or the exercise of a profession and it should not be in cash. He submitted that
this court in Mahindra & Mahindra vs. CIT, 261 ITR 501 has
held that the income which can be taxed u/s 28(iv) must not only be referable
to a benefit or perquisite, but it must be arising from business. Secondly,
section 28(iv) would not apply to benefits in cash or money. The Supreme Court
in CIT vs. Mahindra & Mahindra Ltd., 404 ITR 1 had affirmed
the finding of the Bombay High Court and declared that for applicability of
section 28(iv) of the Act, the income should arise from the business or
profession and that the benefit which is received has to be in some other form
rather than in the shape of money.

 

On the other hand, the Department contended
that after a loan is waived or written off, it partakes the character of a
subsidy, more particularly an operational subsidy. Emphasis was laid on the
expression ‘operational subsidy’ to contend that the action of the Government
of Karnataka in writing off of the loan provided was an act of providing
operational subsidy to the assessee, thus extending a helping hand to the
assessee to salvage its losses thereby benefiting the assessee to the extent of
the waived loan and it is in this context that he placed reliance on the
decision of Sahney Steel & Press Works Limited (Supra) and
Protos Engineering Company Private Limited vs. CIT, 211 ITR 919.

 

The Court observed that section 28 deals with profits and gains of
business or profession. It says that the incomes mentioned therein shall be
chargeable to income tax under the head ‘profits and gains of business or
profession’. Clause (iv) refers to the value of any benefit or perquisite
whether or not convertible into money arising from business or the exercise of
a profession. The Court relied on the decision in the case of  Mahindra & Mahindra Limited (Supra)
wherein the Supreme Court was examining whether the amount due by Mahindra
& Mahindra to Kaiser Jeep Corporation which was later on waived off by the
lender constituted taxable income of Mahindra & Mahindra or not. The
Supreme Court held as under:

 

‘On a plain reading of section 28(iv) of
the Income-tax Act, prima facie, it appears that
for the applicability of the said provision, the income which can be taxed
shall arise from the business or profession. Also, in order to invoke the
provisions of section 28(iv) of the Income-tax Act, the benefit which is
received has to be in some other form rather than in the shape of money.’

 

In the above case, according to the Supreme
Court, for applicability of section 28(iv) of the Act the income which can be taxed has to arise from the business or profession. That apart,
the benefit which is received has to be in some other form rather than in the
shape of money. Therefore, it was held that section 28(iv) was not satisfied
inasmuch as the prime condition of section 28(iv) that any benefit or
perquisite arising from the business or profession shall be in the form of
benefit or perquisite other than in the shape of money, was absent. Therefore,
it was held that the said amount could not be taxed u/s 28(iv) in any circumstances.

 

The Court observed that the facts and issue
in the present case are identical to those in Mahindra & Mahindra
(Supra). Here also, a loan of Rs. 2.52 cores was given by the Karnataka
Government to the assessee which was subsequently waived off. Therefore, this
amount would be construed to be cash receipt in the hands of the assessee and
cannot be taxed u/s 28(iv). In view of the Supreme Court decision in Mahindra
& Mahindra, the earlier decision of this court in Protos
Engineer Comp. would no longer hold good.

 

The Court further observed that in the
decision in Sahney Steel & Press Works Limited (Supra) the
issue pertained to subsidy received by the assessee from the Andhra Pradesh
Government. The question was whether or not such subsidy received was taxable
as revenue receipt. In the facts of that case, it was held that such subsidies
were of revenue nature and not of capital nature.

 

Insofar as the argument of the Department,
that upon waiver of loan the amount covered by such loan would partake the
character of operational subsidy, the Court is unable to accept such a
contention. Conceptually, ‘loan’ and ‘subsidy’ are two different concepts.

 

In Sahney Steel and Press Works Ltd.
(Supra), the Supreme Court held that the subsidy provided by the Andhra Pradesh Government was basically an endeavour of the state to extend
a helping hand to newly-set up industries to enable them to be viable and
competitive.

 

Thus, the Court held that there is a
fundamental difference between ‘loan’ and ‘subsidy’ and the two cannot be
equated. While ‘loan’ is a borrowing of money required to the repaid with
interest, ‘subsidy’ being a grant, is not required to be repaid. Such grant is
given as part of a public policy by the state in furtherance of the public
interest. Therefore, even if a ‘loan’ is written off or waived, which may be
for various reasons, it cannot partake the character of a ‘subsidy’.

 

The substantial question of law therefore is
answered in favour of the assessee by holding that waiver of loan cannot be
brought to tax u/s 28(iv) of the Act. The appeal is accordingly allowed.

 

 

 

BCAJ:
Positive impact of COVID-19 on number of pages

 

Month

2019

2020

%  change

May

112

148

32%

June

124

132

6%

July

136

148

9%

August

116

124

7%

September

140

156

11%

Total

628

708

13%

 

 

Do not dwell in the past, do not
dream of the future, concentrate the
mind on the present moment

— 
Buddha

 

 

God doesn’t dwell in the wooden,
stony or earthen idols.
His abode is in our feelings, our thoughts

 — 
Chanakya

Charitable institution – Exemption – Sections 2(15) and 11 of ITA, 1961 – Denial of exemption – Activity for profit – Effect of proviso to section 2(15) – Concurrent finding of appellate authorities that the assessee was charitable institution – Event organised to raise money – Amount earned entitled to exemption

2. CIT (Exemption)
vs. United Way of Baroda [2020] 423 ITR 596
(Guj.) Date of order: 25th
February, 2020 A.Y.: 2014-15

 

Charitable institution – Exemption –
Sections 2(15) and 11 of ITA, 1961 – Denial of exemption – Activity for profit
– Effect of proviso to section 2(15) – Concurrent finding of appellate
authorities that the assessee was charitable institution – Event organised to
raise money – Amount earned entitled to exemption

 

The assessee is a
charitable institution registered u/s 12A of the Act. For the A.Y. 2014-15, the assessee filed its return of income declaring total income as Nil after claiming exemption u/s
11. But the A.O. assessed the total income at Rs. 4,53,97,808. He had found
that the assessee had received a total sum of Rs. 5,48,04,054 which included
Rs. 4,37,61,637 as income from organising the event of garba during the
Navratri festival. According to the A.O., the assessee sold passes and gave
food stalls on rent, etc., which constitutes 79.85% of its total income. The
assessee, during the year, had declared gross receipts of Rs. 5,27,40,432 and
showed surplus of Rs. 26,27,243. The assessee thereby claimed Rs. 4,42,59,665
as income from charitable event. The A.O. held that the activities of the
assessee as per the amended provision of section 2(15) could not be said to be
advancement of any other object of general public utility and, therefore, the
assessee was not eligible to claim the benefit under sections 11 and 12,
respectively, more particularly in view of section 13(8) of the Act. The A.O.,
having regard to the gross receipts of Rs. 5,48,04,054, made the addition of
Rs. 58,90,500 on account of the interest on FSF fund and Rs. 1,67,90,118 on
account of anonymous donation.

 

The Commissioner of
Income-tax (Appeals), allowed the appeal of the assessee, taking the view that
the activities of the assessee could be termed as charitable in nature and the
assessee would be eligible for the benefit under sections 11 and 12. The
Tribunal concurred with the findings of the Commissioner (Appeals) and
dismissed the appeal filed by the Revenue.

 

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

 

‘i) Once the activity of the assessee falls within
the ambit of trade, commerce or business, it no longer remains a charitable
activity and the assessee is not entitled to claim any exemption under sections
11 and 12 of the Income-tax Act, 1961. The expression “trade”, “commerce” and
“business” as occurring in the first proviso to section 2(15) must be
read in the context of the intent and purport of section 2(15) and cannot be
interpreted to mean any activity which is carried on in an organised manner.
The purpose and the dominant object for which an institution carries on its
activities is material to determine whether or not it is business.

 

ii) The object of introducing the first proviso
is to exclude organisations which carry on regular business from the scope of
“charitable purpose”. An activity would be considered “business” if it is
undertaken with a profit motive, but in some cases, this may not be
determinative. Normally, the profit motive test should be satisfied, but in a
given case the activity may be regarded as a business even when the profit
motive cannot be established. In such cases, there should be evidence and
material to show that the activity has continued on sound and recognised
business principles and pursued with reasonable continuity. There should be
facts and other circumstances which justify and show that the activity
undertaken is in fact in the nature of business.

 

iii)  The main object of the
assessee could not be said to be organising the event of garba. The
assessee had been supporting 120 non-government organisations. The assessee was
into health and human services for the purpose of improving the quality of life
in society. All its objects were charitable. The activities like organising the
event of garba, including the sale of tickets and issue of passes, etc.,
cannot be termed as business. The two authorities had taken the view that
profit-making was not the driving force or the objective of the assessee. The
assessee was entitled to exemption under sections 11 and 12.’

 

 

 

Assessment: (i) Effect of electronic proceedings – Possibility of erroneous assessment if transactions and statement of account of assessee not properly understood – A.O. to call for assessee’s explanation in writing to conclude that cash deposits made by assessee post-demonetisation of currency was unusual; (ii) Unexplained money – Sections 69A and 115BBE of ITA, 1961 – Chit company – Tax on income included u/s 69A – Monthly subscriptions / dues – Cash deposits of collection made post-demonetisation of currency by Government – Cash deposits during period in question not in variance with same period during preceding year – Addition of amount as unexplained money – Provisions of section 115BBE cannot be invoked

1. Salem Sree Ramavilas Chit Co. Pvt. Ltd. vs. Dy. CIT [2020] 423 ITR 525
(Mad.) Date of order: 4th
February, 2020 A.Y.: 2017-18

 

Assessment: (i) Effect of electronic
proceedings – Possibility of erroneous assessment if transactions and statement
of account of assessee not properly understood – A.O. to call for assessee’s
explanation in writing to conclude that cash deposits made by assessee post-demonetisation
of currency was unusual;

(ii) Unexplained money – Sections 69A and
115BBE of ITA, 1961 – Chit company – Tax on income included u/s 69A – Monthly
subscriptions / dues – Cash deposits of collection made post-demonetisation of
currency by Government – Cash deposits during period in question not in
variance with same period during preceding year – Addition of amount as
unexplained money – Provisions of section 115BBE cannot be invoked

 

The assessee was in
the chit fund business. For the A.Y. 2017-18, the A.O. added the amounts
received and deposited by it during the period between 9th November,
2016 and 31st December, 2016, post-demonetisation of Rs. 500 and Rs.
1,000 notes by the Government on 8th November, 2016 to the income of
the assessee. The order stated that the assessee did not properly explain the
source and the purpose of cash along with party-wise break-up as required in
the notice issued u/s 142(1) of the Income-tax Act, 1961.

 

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

 

‘i) The order making the assessee liable to tax at the maximum marginal
rate of tax by invoking section 115BBE was misplaced. The assessee had prima
facie demonstrated that the assessment proceedings had resulted in
distorted conclusion on the facts that the amount collected by it during the
period was huge and remained unexplained and therefore the amount was liable to
be treated as unaccounted money in the hands of the assessee u/s 69A. The
closing cash on hand during the preceding months of the same year was not at
much variance with the closing cash on hand as on 31st October,
2016. The demonetisation of Rs. 500 and Rs. 1,000 notes by the Government was
on 8th November, 2016 and the collection of the assessee between 1st
November, 2016 and 8th November, 2016 was not unusual compared to
its collection during the month of November, 2015. The cash deposits made by
the assessee in the year 2016 were not at variance with the cash deposits made
by it in the preceding year. Collection of monthly subscription / dues by the
assessee during the period in question was reasonable as compared to the same
period in the year 2015.

 

ii) Since the
assessment proceedings no longer involved human interaction and were based on
records alone, such assessment proceedings could lead to erroneous assessment
if officers were not able to understand the transactions and statement of
accounts of the assessee or the nature of the assessee. The assessee was to
explain its stand in writing so that the A.O. could arrive at an objective
conclusion on the facts based on the record.

 

iii) Under these
circumstances, the impugned order is set aside and the case is remitted back to
the respondent to pass a fresh order within a period of sixty days from the
date of receipt of a copy of this order. The petitioner shall file additional
representation if any by treating the impugned order as the show cause notice
within a period of thirty days from the date of receipt of a copy of this
order. Since the Government of India has done away with the human interaction
during the assessment proceedings, it is expected that the petitioner will
clearly explain its stand in writing so that the respondent-A.O. can come to an
objective conclusion on facts based on the records alone. It is made clear that
the respondent will have to come to an independent conclusion on facts
uninfluenced by any of the observations contained herein.’

Section 40(a)(ia) r/w section 195 – Payments to overseas group companies considered as reimbursement of expense incurred, not liable to deduction of tax at source

3. ACIT vs. APCO Worldwide (India) Pvt. Ltd. (Delhi) Members: Sushma Chowla (V.P.) and Anil Chaturvedi (A.M.) ITA No. 5614/Del./2017 A.Y.: 2013-14 Date of order: 9th September, 2020 Counsel for Revenue / Assessee: Rakhi Vimal / Ajay Vohra and Gaurav
Jain

 

Section
40(a)(ia) r/w section 195 – Payments to overseas group companies considered as
reimbursement of expense incurred, not liable to deduction of tax at source

 

FACTS


The issue was
with respect to disallowance of expenses u/s 40(a)(ia). The assessee had made
payments to its overseas group companies towards recoupment of actual cost
incurred by them on behalf of the assessee for corporate administration,
finance support, information technology support, etc., without deduction of tax
u/s 195. According to the assessee, the payments made cannot be considered as
income of the recipients, as no profit element was involved. However, according
to the A.O., the provisions of section 40(a)(ia) were attracted. He accordingly
disallowed the payment of Rs. 1.49 crores so made. On appeal, the CIT(A)
deleted the addition by holding that the assessee was not required to deduct
tax at source on the reimbursement of the expenses made to overseas entities.

 

HELD


The Tribunal
noted that the CIT(A) had found that the payments made were on cost-to-cost
basis. Further, the coordinate bench of the Tribunal while deciding an
identical issue in the assessee’s own case in A.Ys. 2010-11, 2011-12 and
2012-13, had held that the provisions of section 195 were not attracted on the
amounts paid by the assessee to its overseas group companies as it was mere
reimbursement. Accordingly, it was held that no disallowance u/s 40(a)(ia) was
required to be made.

 

Section 199(3) and Rule 37BA – Credit for TDS allowed in the year of deduction even when related revenue was booked in subsequent year(s)

2. HCL Comnet Limited vs. DCIT (Delhi) Members: O.P. Kant (A.M.) and Kuldip Singh (J.M.) ITA No. 1113/Del./2017 A.Y.: 2012-13 Date of order: 4th September, 2020 Counsel for Assessee / Revenue: Ajay Vohra, Aditya Vohra and Arpit
Goyal / S.N. Meena

 

Section
199(3) and Rule 37BA – Credit for TDS allowed in the year of deduction even
when related revenue was booked in subsequent year(s)

 

FACTS


The assessee
was in the business of selling networking equipment and installation and
provision of after-sales services. In respect of after-sales services, the
customers would make payment which covered 
a period of three to four years. The assessee would recognise revenue
from such services on a year-to-year basis. However, the customer would deduct
TDS on the entire amount at the time of payment as per the provisions of the
Act. Relying on the decision of the Visakhapatnam bench of the Tribunal in the
case of Asstt. CIT vs. Peddu Srinivasa Rao (ITA No. 324/Vizag./2009, CO
No. 68/Vizag./2009, dated 3rd March, 2011), the assessee
claimed that it was eligible to claim the entire TDS in the year of deduction
(even when the related revenue was booked in subsequent financial years).
Reliance was also placed on the decision of the Mumbai Tribunal in the case of Toyo Engineering India Limited vs. JCIT (5 SOT 616)
and of the Delhi Tribunal in the case of HCL Comnet Systems and Services
Ltd. vs. DCIT (ITA No. 3221/Del./2017 order dated 31st December,
2019). However, the A.O. rejected the claim of the assessee.

 

HELD


The Tribunal,
following the order passed by the coordinate bench of the Tribunal in the case
of HCL
Comnet Systems and Services Ltd., held that the TDS credit is to be
granted irrespective of the fact that related revenue is booked in subsequent financial years. Accordingly, the assessee’s
claim for credit of the TDS in the year of deduction was allowed.

Section 80IC – Income arising from scrap sales is part of business income eligible for deduction u/s 80IC

1. Isolloyd Engineering Technologies Limited vs. DCIT (Delhi) Members: O.P. Kant (A.M.) and Kuldip Singh (J.M.) ITA No. 3936/Del./2017 A.Y.: 2012-13 Date of order: 4th September, 2020 Counsel for Assessee / Revenue: None / S.N. Meena and M. Barnwal

 

Section 80IC
– Income arising from scrap sales is part of business income eligible for
deduction u/s 80IC

 

FACTS


The assessee
had three manufacturing units. It was entitled to claim deduction u/s 80IC @30%
on the first two units and @100% on the third one. During the year under
appeal, the assessee’s claim for deduction u/s 80IC included the sum of Rs.
52.67 lakhs qua the amount of scrap sales aggregating to Rs. 80.13
lakhs. According to the A.O., the same was not related to manufacturing
activity, hence it was disallowed. On appeal, the CIT(A) restricted the
addition to Rs.7.08 lakhs by allowing the deduction to the extent of Rs. 45.59
lakhs claimed u/s 80IC.

 

HELD


The Tribunal
noted that the scrap consisted of empty drums, off-cuts, trims, coils,
leftovers, packing material, ‘gatta’, scrap rolls, etc., which were generated
in the course of the business. According to it, it was settled principle of law
that scrap generated in the business is part and parcel of the income derived
from the business and as such forms part of the business profit, as held by the
Delhi High Court in the case of CIT vs. Sadu Forgings Ltd. (336 ITR 444).
It further noted that the CIT(A) had duly obtained and analysed unit-wise
details of scrap sold in the year under appeal and found the claim of the
assessee prima facie plausible. However, without giving any reason, the
sum of Rs. 7.08 lakhs was disallowed. According to the Tribunal, the CIT(A) had
erred in disallowing the amount of Rs. 7.08 lakhs out of the total claim of Rs.
52.67 lakhs made u/s 80IC. Accordingly, it allowed the appeal of the assessee.

Section 244A – Interest is payable on refund arising out of payment of self-assessment tax even though refund is less than ten per cent of tax determined

4. [2020] 119 taxmann.com 40 (Del.)(Trib.) Maruti Suzuki India Ltd. vs. CIT ITA Nos. 2553, 2641 (Delhi) of 2013 &
others A.Ys.: 1999-00 to 1994-95 Date of order: 31st August, 2020

 

Section 244A – Interest is payable on
refund arising out of payment of self-assessment tax even though refund is less
than ten per cent of tax determined

 

FACTS


The assessee
claimed refund of Rs. 201,37,93,163 comprising of advance tax, TDS and
self-assessment tax of Rs. 14,59,79,228 and Rs. 186,78,13,935, the tax paid on
different dates. The A.O. did not allow interest u/s 244A(1)(a) on the amount
of Rs. 14.59 crores as the refund was less than 10% of the tax determined u/s
254 r/w/s 143(3).

 

Aggrieved, the
assessee preferred an appeal to the CIT(A) who confirmed the order on the
ground that to give effect to the provisions of section 244A(3), the assessee
had to mandatorily cross the limitations imposed u/s 244A(1)(a).

 

Aggrieved, the
assessee preferred an appeal to the Tribunal.

 

HELD


The Tribunal observed that the CIT(A) treated the entire amount of Rs.
14.60 crores as prepaid taxes for the purpose of section 244A(1)(a). This, according to the Tribunal, was where the
CIT(A) considered / read the provisions wrong. The Tribunal held that the
prepaid taxes consist of TDS and advance tax. The provisions of self-assessment
tax are governed by section 140A which is not covered by the provisions of
section 244A(1)(a). Self-assessment tax which is payable on the basis of return
does not constitute part of advance tax. For the purpose of embargo of 10% of
tax determined in accordance with the provisions of section 244A(1)(a), it is
clear from the provisions of the section that self-assessment tax does not form
part of the embargo as self-assessment tax falls under clause (b) of section
244A(1). The proviso to clause (a) of sub-section (1) of section 244A is
applicable and has to be considered for the computational purpose of interest
computable for the refund payable u/s 244A(1)(a).

 

As regards the
question whether or not interest is payable on self-assessment tax paid, the
Tribunal observed that it is trite law that whenever the assessee is entitled
to refund, there is a statutory liability on the Revenue to pay the interest on
such refund on general principles to pay interest on sums wrongfully retained.

 

Section 244A does
not deny payment of interest in case of refund of amount paid u/s 140A. On the
contrary, clause (b) being a residuary clause, necessarily includes payment
made u/s 140A. Since there is no proviso attached to sub-clause (b), the
embargo of 10% is not applicable for calculation of interest for the refund
arising out of payment of self-assessment tax.

 

The Tribunal held
that with regard to the self-assessment tax paid, the assessee is eligible for
interest on the total amount of refund in accordance with the provisions of
section 244A(1)(b). This ground of appeal was allowed.