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Category: Direct Taxes

Section 54F – Even after amendment w.e.f. A.Y. 2015-16, investment of long-term capital gain in two bungalows located adjacent to each other and used as one residential unit qualifies for exemption u/s 54F – Benefit of exemption could not have been denied on reasoning that there were two different registries of buildings / properties as both properties purchased by assessee were a single property located in same geographical area

7. [2020] 114 taxmann.com 508 (Ahd.)(Trib.)

Mohammadanif Sultanali Pradhan vs. DCIT

ITA No. 1797/Ahd/2018

A.Y.: 2015-16

Date of order: 6th January, 2020

 

Section 54F – Even after amendment w.e.f. A.Y. 2015-16,
investment of long-term capital gain in two bungalows located adjacent to each
other and used as one residential unit qualifies for exemption u/s 54F –
Benefit of exemption could not have been denied on reasoning that there were
two different registries of buildings / properties as both properties purchased
by assessee were a single property located in same geographical area

 

FACTS

During the previous year relevant to the A.Y. 2015-16, the
assessee in his return of income declared income under the head capital gain at
Rs. 23,84,101 after claiming exemption u/s 54F for Rs. 1,08,00,000. In support
of the exemption claimed, the assessee contended that he has made investment in
two bungalows which are adjacent to each other, bearing Nos. 18 and 19 located
at survey No. 606/2, TPS No. 92, Sarkhej – Makarba – Okaf – Fatewadi of Mouje
Sarkhej, taluka Vejalpur, district Ahmedabad.

 

The A.O. was of the view that the assessee can claim
exemption u/s 54F with respect to the investment in one bungalow only.
Accordingly, he computed the exemption with respect to one bungalow only
amounting to Rs. 43,77,118 and thus disallowed the excess claim u/s 54F of Rs.
64,22,882.

 

Aggrieved, the assessee preferred an appeal to the CIT(A) and
submitted that both the bungalows are in the same society, adjacent to each
other. As such both the bungalows are one unit for residential purposes.
Therefore, he claimed that he is entitled to deduction / exemption for both the
bungalows u/s 54F.

 

The CIT(A) rejected the claim of the assessee on the ground
that there is an amendment under the provisions of section 54F of the Act where
the expression previously used, ‘a residential house’, has been substituted
with ‘one residential house’. Such amendment is effective with effect from A.Y.
2015-16, i.e., the year under consideration.

 

Aggrieved, the assessee preferred an appeal to the Tribunal.

 

HELD

The Tribunal observed that:

(i) the
issue relates to whether the assessee is eligible for exemption u/s 54F of the
Act against the long-term capital gain for the investment made in the two
properties which are adjacent to each other and used as one residential unit.
It noted that indeed, the provision of the law requires that the exemption will
be available to the assessee u/s 54F for the investment in one residential
unit;

 

(ii) under
the provisions of section 54F, there is no definition / clarification provided
about the area of the residential property. It means that one assessee can buy
a huge bungalow / property of, say, one thousand square metres and can claim
the deduction subject to conditions. Similarly, another assessee acquired two
different residential properties adjacent to each other but both the properties
put together were only two hundred square metres – but he will be extended the
benefit of the exemption with respect to one unit only because there are two
different properties based on registry documents;

 

(iii) there can be a situation that the family of the assessee is quite
large, comprising of several members, and therefore he needs two properties
adjacent to each other to accommodate them. So from the point of view of the
assessee it is a single property but he got two different properties registered
as per the requirement of the builder;

 

(iv) the
assessee cannot be deprived of the benefit conferred under the statute merely
on the reasoning that there were two different registries of the buildings /
properties;

 

(v) it
is also not a case of the Revenue / assessee that both the properties purchased
by the assessee were located in different geographical areas. In such a
situation the law amended u/s 54F appears to be applicable where the assessee
buys two properties in two different areas;

 

(vi) the
principles laid down by the courts cannot be just brushed aside on the aspect
of defining one residential unit. It noted the observations of the Hon’ble High
Court of Karnataka in the case of CIT vs. D. Ananda Basappa [(2009) 309
ITR 329].

 

The Tribunal held that the assessee
is entitled to claim exemption u/s 54F in respect of investment made in two
adjacent bungalows used as one residential unit. The Tribunal deleted the
addition made by the A.O. and confirmed by the CIT(A).

 

This ground of appeal filed by the assessee was
allowed.

Section 56(2)(viib) – When there was no case of unaccounted money being brought in the garb of share premium, the provisions not attracted

11. Clearview Healthcare Pvt. Ltd. vs. ITO
(Delhi) Member: H.S. Sidhu (J.M.) ITA No. 2222/Del/2019 A.Y.: 2014-15 Date of order: 3rd January, 2020 Counsel for Assessee / Revenue: Kapil Goel /
Pradeep Singh Gautam

 

Section 56(2)(viib) – When there was no
case of unaccounted money being brought in the garb of share premium, the
provisions not attracted

 

FACTS

The issue before the Tribunal was about taxability or otherwise of share
premium received on shares issued by the assessee company u/s 56(2)(viib). The
assessee was incorporated on 29th January, 2010. During the year
under appeal, the company had issued shares at premium. According to the AO,
the difference between the share premium received and the share valuation
determined under Rule 11UA amounting to Rs. 9.20 lakhs was the income of the
assessee as per the provisions of section 56(2)(viib). On appeal, the CIT(A)
confirmed the AO’s order.

 

Before the Tribunal, the assessee referred to the Explanatory Memorandum
to the Finance Act, 2012 and contended that the legislative intent was to apply
the said provisions only where, in the garb of share premium, money was
received which was not clean and was unaccounted. According to the assessee,
the lower authorities have applied the provisions of section 56(2)(viib)
without any finding that the money was not clean money. It was also pointed out
that in the subsequent year, on 1st December, 2014, the company’s
shares were sold by one of its shareholders to a non-resident at a price which
was higher than the price at which the shares were issued by the company. And
the said price was accepted by the tax authorities in the shareholder’s tax
assessment.

HELD

The Tribunal agreed with the assessee that the provisions of section
56(2)(viib) would apply only when money received was not clean and was
unaccounted money, received in the garb of share premium as mentioned in the
Explanatory Memorandum to the Finance Act, 2012.

 

According to the
Tribunal, a subsequent transaction with a foreign buyer which was at a higher
amount and on the basis of detailed due diligence, also justified that the
share premium received by the assessee was not excessive and was fair.

 

Keeping in view the facts and circumstances of the case and by applying
the principles from the decision of the Chennai Tribunal in the case of Lalithaa
Jewellery Mart Pvt. Ltd. (ITA Nos. 663, 664 and 665/Chennai/2019
decided on 14th June, 2019) and legislative intent behind
the insertion of section 56(2)(viib), the Tribunal held that the addition made
by the AO on account of alleged excess share premium was unjustified when those
very shares were sold in the next financial year at a much higher amount after
proper due diligence to a non-resident buyer; and further there was no case of
unaccounted money being brought in in the garb of the stated share premium,
hence the addition made u/s 56(2)(vii) was deleted.

Proviso to section 2(15) r/w/s 11 and 12 – As part of running an educational institution and imparting training to the students, the assessee had undertaken research projects for the industry and earned consultancy fees from them – Since the dominant object was to impart education, the proviso to section 2(15) does not apply

10. Institute of Chemical Technology vs. ITO
(Mum.) Members: Saktijit Dey (J.M.) and Rifaur Rahman
(A.M.) I.T.A. Nos. 6111 and 6922/Mum/2016 A.Ys: 2011-12 and 2012-13 Date of order: 15th January, 2020 Counsel for Revenue / Assessee: Nishant Thakkar
and Jasmine Amalsadwala / Kumar Padmapani Bora

 

Proviso to
section 2(15) r/w/s 11 and 12 – As part of running an educational institution
and imparting training to the students, the assessee had undertaken research
projects for the industry and earned consultancy fees from them – Since the
dominant object was to impart education, the proviso to section 2(15)
does not apply

 

FACTS

The assessee was
established as the Department of Chemical Technology by the University of
Bombay on 1st October, 1933. With the passage of time, the assessee
was granted autonomy and subsequently got converted into an independent
institution in January, 2002. In September, 2008 the assessee was granted
deemed university status. When the assessee was a part of Mumbai (earlier
Bombay) University, the income earned by it formed part of the income of Mumbai
University and was exempt u/s 10(23C). For the impugned assessment years, the
assessee in its return of income declared nil income after claiming exemption
u/s 11.

 

During the year
under consideration the assessee had received consultancy fees. Applying the
provisions of section 2(15) read with 
sections 11 and 12, the AO disallowed its claim of exemption with regard
to the consultancy fee received. The assessee’s claim of exemption u/s 11 in
respect of other income was allowed by the AO.

 

The assessee explained that as a part of the curriculum and with a view that the students / fellows of the Institution gain
actual working experience, the assessee had undertaken research projects for
the industry and earned consultancy fees from the industry clients. Out of the
fees received, only 1/3rd amount was retained by the assessee and
the balance amount was paid to the faculty who undertook the research projects.
The amount retained by the assessee was mainly to cover the cost of
infrastructure / laboratory facilities provided for undertaking the research
and administrative expenditure. Thus, it was submitted, the activities undertaken
by the assessee were not in the nature of business but only for research and
training purposes and therefore were part of its main activity of imparting
education on the latest technical developments in the field of chemical
technology. However, the AO didn’t agree with the explanation offered by the
assessee.

 

Relying on the
decision of the Tribunal in the assessee’s own case for the assessment year
2010-11, the Commissioner (Appeals) upheld the disallowance / addition made by
the AO.

 

Before the Tribunal,
the assessee submitted that in respect of the aforesaid decision of the
Tribunal relied on by the CIT(A), the Tribunal had no occasion to consider the
assessee’s argument that the proviso to section 2(15) was not
applicable. According to the assessee, the proviso to section 2(15)
would be applicable only when the activity was for ‘advancement of any other
object of general public utility’. The assessee contended that the
consultancy service provided was part of its educational activity, therefore ancillary
and incidental to its main object of providing education. Therefore, even
though the assessee had received consultancy fee, the same was received in
furtherance of its object of educational activity, hence it cannot be treated
as an activity in the nature of trade, commerce or business and thereby treat
the same as for a non-charitable purpose.

 

HELD

The Tribunal agreed
with the assessee that applicability or otherwise of the proviso to
section 2(15) in the case of the assessee was not examined or dealt with by the
Tribunal in A.Y. 2010–11. According to it, the contention of the assessee
regarding applicability of the proviso to section 2(15) does require
examination keeping in view the decision of the Bombay High Court in DIT(E.)
vs. Lala Lajpatrai [2016] 383 ITR 345, wherein the Court held that the
test to determine as to what would be a charitable purpose within the meaning
of section 2(15) was to ascertain what was the dominant object / activity.
According to the Court, if the dominant object was the activity of providing
education, it will be charitable purpose under section 2(15) even though some
profit arose from such activity. Since the aforesaid claim of the assessee was
not examined by the Departmental authorities, the Tribunal restored the matter
to the file of the AO for re-examination and directed him to adjudicate the
issue keeping in view the additional evidence filed by the assessee and the
decisions cited before him.

 

Note: Before the Tribunal, the assessee had also alternatively claimed
exemption under sections 10(23C)(iiiab) and / or 10(23C)(vi) and furnished
additional evidence. The Tribunal directed the AO to also consider the same.

Section 80P(4): Provisions of section 80P(4) exclude only co-operative banks and the same cannot be extended to co-operative credit societies

20. [2019] 107 taxmann.com 53
(Trib.)(Ahd.)(SB) ACIT vs. People’s Co-op. Credit Society Ltd. ITA Nos. 1311, 2668 to 2670, 2865, 2866,
2871 & 2905 (Ahd.) of 2012 A.Ys.: 2007-08 to 2009-10 Date of order: 18th April, 2019

 

Section 80P(4):
Provisions of section 80P(4) exclude only co-operative banks and the same
cannot be extended to co-operative credit societies

FACTS

The assessee, a
co-operative credit society, providing credit facilities to its members and
carrying on banking business, claimed deduction u/s 80P(2)(a)(i). The AO
disallowed the same holding that provisions of section 80P(4) are applicable to
the assessee.

 

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

 

The Revenue then
preferred an appeal to the Tribunal.

 

HELD

In view of the
contrary decisions by various benches of the Tribunal, a Special Bench (SB) was
constituted by the President to consider the question whether a co-operative
credit society is to be considered as a co-operative bank and whether by virtue
of the provisions of section 80P(4), a co-operative credit society shall be
disentitled to claim deduction u/s 80P(2)(a)(i).

 

At the time of
hearing before the Tribunal, the learned representatives agreed that the issues
before the SB of the Tribunal are now covered in favour of the assessee by
various decisions of the Hon’ble Jurisdictional High Court – including in the
cases of Pr. CIT vs. Ekta Co-operative Credit Society Ltd. [2018] 91
taxmann.com 42/254, Taxman 33/402 ITR 85 
and CIT vs. Jafari Momin Vikas Co-operative Credit Society
Ltd. [2014] 49 taxmann.com 571/227, Taxman 59 (Mag.) 362 ITR 331 (Guj.).

 

The Tribunal, having considered the ratio of the decisions of the
Jurisdictional High Court in the cases of Pr. CIT vs. Ekta Co-operative
Credit Society Ltd. (Supra) and CIT vs. Jafari Momin Vikas
Co-operative Credit Society Ltd. (Supra), held that the legal position
is quite clear and unambiguous. As held by the Jurisdictional High Court, the
benefit of section 80P(2)(a)(i) cannot be denied in the case of co-operative
credit societies in view of their function of providing credit facilities to
the members and the same are not hit by the provisions of section 80P(4).

 

The appeals filed
by the Revenue were dismissed.

Rule 37BA(3) r/w/s 199: Credit for Tax Deducted at Source has to be allowed in the year in which the corresponding income is assessed even though the tax is deposited by the deductor in the subsequent assessment year

19. [2019] 112 taxmann.com 354 (Trib.)(Pune) Mahesh Software Systems (P) Ltd. vs. ACIT ITA No. 1288/Pune/2017 A.Y.: 2011-12 Date of order: 20th September, 2019

Rule 37BA(3) r/w/s 199: Credit for Tax Deducted at Source has to be allowed in the year in which the corresponding income is assessed even though the tax is deposited by the deductor in the subsequent assessment year

FACTS
The assessee raised an invoice and offered to tax income arising therefrom in March, 2011. The assessee claimed credit for tax deducted thereon. However, the deductor deposited TDS only in April, 2011, i.e., in the succeeding financial year. Consequently, the TDS claimed by the assessee did not appear in Form 26AS for the year in which the income was booked. The AO, relying on sub-rule (1) of Rule 37BA, did not allow the credit in A.Y. 2011-12.

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

The assessee then filed an appeal to the Tribunal.

HELD
The Tribunal observed that the AO had relied on sub-rule (1) of Rule 37BA for denying the benefit of TDS during the year under consideration. It provides that credit for TDS shall be given to the person to whom payment has been made or credit has been given on the basis of information furnished by the deductor. Thus, what is material for sub-rule (1) is the beneficiary of credit and not the time when credit ought to be allowed. The CIT(A), in addition, had relied on sub-rule (4) of Rule 37BA which again provides that credit for TDS shall be granted on the basis of information relating to TDS furnished by the deductor.

The Tribunal observed that the point of time at which the benefit of TDS is to be given is governed by  sub-rule (3) of Rule 37BA which very clearly provides that – ‘credit for tax deducted at source and paid to the Central Government, shall be given for the assessment year for which such income is assessable.’

In view of the above, the Tribunal held that the credit of TDS had to be allowed in the year under consideration even though the TDS was deposited by the deductor in the subsequent assessment year.

The Tribunal allowed the appeal filed by the assessee.

Section 142A(6): It is mandatory for the Valuation Officer to submit the Valuation Report within six months from the date of receipt of the reference – Delay in filing the report cannot be condoned

18. [2019] 75 ITR (Trib.) 219 (Hyd.) Shri Zulfi Revdjee vs. ACIT ITA No. 2415/Hyd/2018 A.Y.: 2013-14 Date of order: 5th September,
2019

 

Section 142A(6): It is mandatory for the
Valuation Officer to submit the Valuation Report within six months from the date
of receipt of the reference – Delay in filing the report cannot be condoned

 

FACTS

The assessee sold a
property during F.Y. 2012-13. He filed the return of income disclosing capital
gains arising from the sale of the said property. The AO sought to make an
addition u/s 50C of the Act. However, since the assessee objected to it, he
referred the file to the Departmental Valuation Officer (DVO) for valuation of
the property. The DVO submitted the report after the expiry of the period
stipulated u/s 142A(6). Further, he also considered the value of the house as
on the date of registration of agreement. The assessee, inter alia,
raised an objection that the report submitted by the DVO is beyond the
stipulated time limit of six months, as specified u/s 142A(6), and consequently
the assessment is barred by limitation.

 

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

 

HELD

The Tribunal
observed that u/s 142A the valuation report by the DVO has to be submitted
within six months from the date of receipt of the reference. However, the DVO
submitted his report after 15 months from the end of the month in which
reference was made to him. The Tribunal considered whether the time limit for
submission of report could be enlarged or condoned. It noted that the word used
in sub-section (6) of section 142A is ‘shall’, while in other sub-sections it
is ‘may’. In B.K. Khanna & Co. vs. Union of India and others, the
Delhi High Court [156 ITR 796 (Del.)] has held that where the words
‘may’ and ‘shall’ are used in various provisions of the same section, then both
of them contain different meanings and the word ‘shall’ shall mean ‘mandatory’.
In sub-section (6), since the word ‘shall’ is used, the time limit specified
therein is mandatory and, thus, delay cannot be condoned. The Tribunal held
that the report of the DVO had to be filed within the time limit prescribed
under section 142A(6) and, thus, the Assessment Order passed on the basis of
the DVO’s report is not sustainable.

 

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

 

Section 10AA – Profit of eligible unit u/s 10AA should be allowed without set-off of loss of other units

2.      
Genesys
International Corporation Limited vs. DCIT –-Mum.

Members: G. Manjunatha (A.M.) and Ravish Sood (J.M.)

ITA No. 7574/Mum/2019

A.Y.: 2011-12

Date of order: 4th March, 2020

Counsel for Assessee / Revenue:
V. Chandrasekhar & Harshad Shah / V. Vinod Kumar

 

Section 10AA – Profit of eligible unit u/s 10AA should be
allowed without set-off of loss of other units

 

FACTS

The assessee had filed its
return of income declaring total loss at Rs. 3.20 crores. The assessment was
completed u/s 143(3) determining the total loss at Rs. 1.68 crores. The case
was subsequently reopened u/s 147 and the assessment was completed u/s 143(3)
r.w.s. 147 determining the total income at Nil
after set-off of loss from business against profit of eligible unit
u/s 10AA.

 

Before the CIT(A) the assessee, relying on the decision of
the Supreme Court in the case of CIT vs. Yokogawa India Ltd. (2017) 77
taxmann.com 41, contended that the profit of the eligible unit u/s 10AA
should be allowed without set-off of loss of other units. The CIT(A) rejected
the arguments of the assessee on the ground that the findings of the Supreme
Court were based on the computation of deduction provided u/s 10A, not on
computation of deduction provided u/s 10AA.

 

Revenue submitted before the Tribunal that the CIT(A) had
clearly distinguished the decision of the Supreme Court and, hence, the
findings of the Supreme Court are not applicable.

 

HELD

Referring to the decisions
of the Supreme Court in the case of CIT vs. Yokogawa India Ltd. and
of the Bombay High Court in the case of Black & Veatch Consulting
Pvt. Ltd. (348 ITR 72), the Tribunal held that the sum and substance of
the ratio laid down by the Supreme Court and the Bombay High Court is
that the profit of eligible units claiming deduction u/s 10A / 10AA, shall be
allowed without setting off of losses of other units. Therefore, it was held
that the lower authorities erred in set-off of loss of business from the profit
of eligible units claiming deduction u/s 10AA before allowing deduction
provided u/s 10AA. Accordingly, the appeal filed by the assessee was allowed.

Section 54 / 54F – Exemption not denied when the property was purchased in the name of the spouse instead of the assessee Two conflicting High Court decisions – In case of transfer of case between two jurisdictions, the date of filing of appeal is the material point of time which determines jurisdictional High Court

1.       Ramphal
Hooda vs. Income Tax Officer (Delhi)

Members: Bhavnesh Saini
(J.M.) and
Dr. B.R.R. Kumar (A.M.)

ITA No. 8478/Del/2019

A.Y.: 2014-15

Date of order: 2nd
March, 2020

Counsel for Assessee /
Revenue: Ved Jain & Umung Luthra / Sanjay Tripathi

 

Section 54 / 54F – Exemption not denied when the property
was purchased in the name of the spouse instead of the assessee

Two conflicting High Court decisions – In case of transfer
of case between two jurisdictions, the date of filing of appeal is the material
point of time which determines jurisdictional High Court

 

FACTS

During the year the assessee had earned long-term capital
gain of Rs. 1.42 crores on the sale of property. This gain had been invested in
purchasing another property for Rs. 1.57 crores in the name of his wife. The
assessee claimed exemption of long-term capital gains u/s 54 / 54F. Relying on
the judgment of the jurisdictional High Court, i.e., the Punjab and Haryana
High Court, in the case of CIT Faridabad vs. Dinesh Verma (ITA No. 381 of
2014 dated 6th July, 2015) wherein it was held that ‘the
assessee is not entitled to the benefit conferred u/s 54B if the subsequent
property is purchased by a person other than the assessee…’ the A.O. had
denied the exemption.

 

It was submitted before the CIT(A) that the case of the
assessee is covered by the judgment of the Delhi High Court in the case of CIT
vs. Kamal Wahal (351 ITR 4) wherein, on identical facts, the issue had
been decided in favour of the assessee. The CIT(A), however, noted that the
assessee had filed the return with the ITO, Rohtak and the assessment was also
framed at Rohtak. Therefore, the judgment of the Punjab and Haryana High Court
was binding on the assessee and the A.O. Accordingly, the appeal of the
assessee was dismissed.

 

The assessee submitted before the Tribunal that his PAN was
transferred from Rohtak to Delhi because he was residing in Delhi. The case of
the assessee had also been transferred to Delhi, therefore the jurisdictional
High Court should be the Delhi High Court. He relied upon the judgment of the Delhi
High Court in the case of CIT vs. AAR BEE Industries [2013] 357 ITI 542
wherein it was held that ‘It is the date on which the appeal is filed which
would be the material point of time for considering as to in which court the
appeal is to be filed’. He further pointed out that the appeal of the
assessee had been decided by the CIT(A)-28, New Delhi and the address of the
assessee was also in Delhi. Therefore, it was submitted that the Delhi High
Court is the jurisdictional High Court and its decisions are binding on the
CIT(A).

 

HELD

The Tribunal noted that the jurisdiction and PAN
of the assessee had been transferred to Delhi and the appeal was also decided
by the CIT(A), New Delhi. Therefore, the Tribunal accepted the submission of
the assessee and held that the CIT(A) was bound to follow the judgments of the
Delhi High Court. Accordingly, relying on the judgments of the Delhi High Court
in the cases of CIT-XII vs. Shri Kamal Wahal (Supra) and of CIT
vs. Ravinder Kumar Arora [2012] 342 ITR 38, the Tribunal allowed the
appeal of the assessee.

Section 143(2) – The statutory notice u/s 143(2) of the Act issued by the non-jurisdictional A.O. is void ab initio – If there are discrepancies in the details as per notice issued and details as per postal tracking report, then that cannot be considered as valid service of notice

5.       [2019]
76 ITR (Trib.) 107 (Del.)

Rajeev Goel vs. ACIT

ITA No. 1184/Del/2019

A.Y.: 2014-15

Date of order: 26th September, 2019

 

Section 143(2) – The statutory notice u/s 143(2) of the Act
issued by the non-jurisdictional A.O. is void ab initio – If there are
discrepancies in the details as per notice issued and details as per postal
tracking report, then that cannot be considered as valid service of notice

 

FACTS

The assessee’s case was selected for scrutiny by issuing
statutory notice u/s 143(2). The notice was issued by the non-jurisdictional
A.O., i.e., A.O. Circle 34(1), and without any order u/s 127 for transfer of
the case from one A.O. to another. Without prejudice to the assessee’s
contention that the notice was issued by non-jurisdictional A.O., notice u/s
143(2) was not served upon the assessee. While serving notice u/s 143(2), there
were discrepancies in the address stated in the notice and the address
mentioned in the tracking report of the post. The address mentioned in the
notice was with Pin Code 110034 and the Pin Code as per the tracking report was
110006.

 

The assessee had filed an affidavit before the A.O. claiming
that no notice u/s 143(2) was served upon him. He had produced all possible
evidences to prove that there were discrepancies while serving the said notice
and also that the assessment was initiated by non-jurisdictional A.O. These
contentions were not accepted by the A.O.

 

Aggrieved, the assessee preferred an appeal to the CIT(A)
claiming that the statutory notice u/s 143(2) was issued by the
non-jurisdictional A.O. and, thus, the assessment was void ab initio.
Without prejudice to this, the statutory notice u/s 143(2) was not validly
served upon the assessee. The CIT(A) held that the notice was served upon the
assessee and the assessee had failed to raise objections within the stipulated
period prescribed u/s 124(3) of the Act and hence dismissed the assessee’s
appeal.

Aggrieved, the assessee preferred an appeal to the Tribunal.

 

HELD

The Tribunal observed that there was a difference between the
address mentioned in the PAN database and the address mentioned in the return
of income filed by the assessee. The jurisdiction of the assessee as per his
address in the PAN database was with the A.O. Ward 39(1), whereas the
jurisdiction of the assessee as per his address in his return of income was
with A.O. Circle 47(1). However, the notice was issued by the A.O. Circle 34(1)
who had no jurisdiction over the assessee either on the basis of his
residential address or on the basis of his business address. Further, no order
u/s 127 of the Act was passed either by the Commissioner of Circle 34(1), or
the Commissioner of Circle 47(1) for transfer of the case from one A.O. to
another A.O. Thus, the notice issued by the A.O. Circle 34(1) was held to be void
ab initio as it was issued by the non-jurisdictional A.O.

 

Further, the Tribunal observed that even if the notice u/s
143(2) issued by the A.O. Circle 34(1) was considered to be valid, the notice
was not duly served upon the assessee. The address mentioned in the notice was
one of Delhi with Pin Code 110034, whereas the notice had been delivered to a
Delhi address with Pin Code 110006. As regards service of notice, the assessee
had filed an affidavit before the A.O. Circle 47(1) claiming that no notice u/s
143(2) was served upon him. The assessee had produced all possible evidences to
prove that there were discrepancies while serving notice u/s 143(2). Besides,
there was also a difference in the name mentioned in the notice which was
Rajeev Goel, whereas that mentioned in the tracking report was Ranjeev Goel.
Hence, on the basis of the aforementioned discrepancies, the notice was held to
be not validly served upon the assessee.

 

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

Section 153(1) r/w clause (iv) of Explanation 1 – Extension of time is provided to complete the assessment in a case where A.O. makes reference to the Valuation Officer only u/s 142A(1) – Where a reference is made to the Valuation Officer u/s 55A or 50C, there is no extension of time to complete the assessment

4.       [2019]
76 ITR (Trib.) 135 (Luck.)

Naina Saluja vs. DCIT

ITA No. 393/LKW/2018

A.Y.: 2013-14

Date of order: 25th October, 2019

 

Section 153(1) r/w clause (iv) of Explanation 1 – Extension
of time is provided to complete the assessment in a case where A.O. makes
reference to the Valuation Officer only u/s 142A(1) – Where a reference is made
to the Valuation Officer u/s 55A or 50C, there is no extension of time to
complete the assessment

 

FACTS

The assessee had sold her
two properties and derived income under the head ‘Capital Gains’ during the
relevant A.Y. 2013-14. While computing long-term capital gain, the assessee had
worked out the cost of acquisition on the basis of the circle rates as on 1st
April, 1981. For this purpose, the A.O. had referred the matter to the
Valuation Officer for estimating the correct fair market value of the properties
as on that date. In the meanwhile, the assessee had challenged the Stamp Duty
Value adopted and requested to refer the matter to the Valuation Cell for
valuation of the property as on the date of transfer. As the transaction was
falling under ‘capital gains’, the reference made by the A.O. to the Valuation
Officer was u/s 55A and the reference made by the assessee for valuation was
u/s 50C. The A.O. had received the second valuation report on 21st
March, 2016 and had thereafter called for objections from the assessee on the
second valuation report. The A.O. concluded the assessment and passed an
assessment order on 19th May, 2019 making an addition to the capital
gains on the basis of the said valuation report.

 

Aggrieved, the assessee preferred an appeal to the CIT(A)
claiming that the assessment completed was beyond the time period prescribed in
section 153 of the Act and, thus, the assessment order was barred by
limitation. However, the CIT(A) held that both the references were made u/s
142A of the Act and thereby concluded that the assessment order was not barred
by limitation. The CIT(A) upheld the assessment order and dismissed the
assessee’s appeal.

 

The assessee preferred an appeal to the Tribunal.

 

HELD

The Tribunal observed that the reference to the Valuation
Officer u/s 142A can be made for the purpose of assessment or reassessment
where the valuation is required for the purpose of section 69, 69A, 69B or
section 56(2), whereas the references u/s 55A or u/s 50C are specific for the
purpose of computation of capital gains. The provisions of section 142A do not
govern the provisions of computation of capital gains.

 

The first reference to the Valuation Officer was made for
ascertaining the value of the asset as on 1st April, 1981 when it
was sold, and the second reference was made for valuation of property as on the
date of transfer which can only be made under the provisions of section 50C(2)
of the Act. Thus, neither of the references was made u/s 142A of the Act.

 

Further, as per the provision of section 153(1) r/w
Explanation 1, the provision for extension of time for completing the
assessment is available only if the reference is made to the Valuation Officer
u/s 142A. There is no provision for extension of time for completing the
assessment in case the reference is made u/s 55A or u/s 50C. Hence, the
assessment order was to be passed by 31st March, 2016 for the
relevant assessment year. The assessment order was, however, passed on 19th
May, 2016 which was beyond the period of limitation, hence the Tribunal quashed
the assessment order.

 

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

I.Section 194H – Benefit extended by assessee to the distributor under an agreement for supply of mobile phones cannot be treated as commission liable for deduction of tax at source u/s 194H as the relationship between the assessee and the distributor was not of a principal and agent II.Section 37 – Expenditure incurred on Trade Price Protection to counter changes in price of handsets by competitors, life of model, etc. was incurred wholly and exclusively for the purpose of business and was an allowable expenditure u/s 37(1)

11.
[2020] 114 taxmann.com 442 (Delhi) Nokia
India (P) Ltd. vs. DCIT ITA Nos.:
5791 & 5845(Del)2015 A.Y.:
2010-11 Date of
order: 20th February, 2020

 

I.   Section 194H – Benefit extended by assessee
to the distributor under an agreement for supply of mobile phones cannot be
treated as commission liable for deduction of tax at source u/s 194H as the
relationship between the assessee and the distributor was not of a principal
and agent

 

II.  Section 37 – Expenditure
incurred on Trade Price Protection to counter changes in price of handsets by
competitors, life of model, etc. was incurred wholly and exclusively for the
purpose of business and was an allowable expenditure u/s 37(1)

 

FACTS I

The assessee
company had extended certain benefits / post-sale discounts to the
distributors. These discounts / trade offers did not form part of the agreement
between the assessee and the distributors. The A.O. disallowed the expenditure
u/s 40(a)(ia) considering the fact that no TDS u/s 194H was deducted from these
amounts.

 

HELD I

Upon perusal of the
agreement, the Tribunal observed that the relationship between the assessee and
HCL is that of principal to principal and not that of principal and agent. The
Tribunal held that the discount which was offered to distributors is given for
promotion of sales. This element cannot be treated as commission. There is
absence of  principal-agent relationship
and the benefit extended to distributors cannot be treated as commission u/s
194H of the Act.

 

As regards the applicability of section 194J, the A.O. has not given any
reasoning or finding that there is payment for technical service liable for withholding
u/s 194J. Marketing activities had been undertaken by HCL on its own. Merely
making an addition u/s 194J without the actual basis for the same on the part
of the A.O. is not just and proper.

 

As regards the
contention of the Revenue that discounts were given by way of debit notes and
the same were not adjusted or mentioned in the invoice generated upon original
sales made by the assessee, the Tribunal observed that this contention does not
seem tenable after going through the invoice and the debit notes. In fact,
there is clear mention of the discount for sales promotion.

 

The Tribunal
allowed this ground of appeal and deleted the addition made.

 

FACTS II

The assessee
company had incurred certain expenditure on Trade Price Protection which was
extended to distributors to counter changes in the price of handsets by
competitors, protect them against probable loss, etc. The A.O. had disallowed
the expenditure questioning the commercial expediency involved in incurring the
same.

 

HELD II

The Tribunal held
that the expenditure can be treated as being incurred on account of commercial
expediency considering the modern-day technological changes which are very
fast. It observed that as per the submission made before the A.O., this
expenditure had been covered in a special clause in the Trade Schemes filed.
The Tribunal further held that expenditure incurred for Trade Price Protection
was allowed as deduction since the same was considered as being incurred wholly
and exclusively for the purpose of business.

This ground of
appeal filed by the assessee was allowed.

Section 10(13A), Rule 2(h) of Fourth Schedule – For the purpose of computing qualifying amount u/s 10(13A) of the Act, the amount received as performance bonus does not assume character of salary

17. [2020] 113
taxmann.com 295 (Trib.)(Kol.) Sudip Rungta vs.
DCIT ITA No.
2370/Kol/2017 A.Y.: 2011-12 Date of order: 10th
January, 2020

 

Section 10(13A), Rule 2(h) of Fourth Schedule – For the purpose of
computing qualifying amount u/s 10(13A) of the Act, the amount received as
performance bonus does not assume character of salary

 

FACTS

The assessee was a salaried employee who, for the year under
consideration, filed his return of income declaring total income of Rs.  2,61,97,296. During the year under
consideration, he had received a basic salary of Rs. 30,00,000 and performance
bonus of Rs. 1,50,00,000. In the return he had claimed exemption of HRA of Rs.
8,47,742. The AO called for details of the rent paid and calculation of the
amount of exemption. In response, the assessee submitted that the total rent
paid during the year was Rs. 8,20,000 and for the purposes of computing
exemption, only the basic salary had been regarded as ‘salary’.

 

The AO held that
‘performance bonus’ is covered under the term ‘salary’ as per the meaning
assigned to the definition of ‘salary’ for the purpose of calculating exemption
u/s 10(13A). ‘Performance bonus’ cannot be comprehended as an allowance or
perquisite as defined in Rule 2(h) of the Fourth Schedule to be excluded from
the purview of ‘salary’. Thus, the assessee’s total salary for computation of
exemption u/s 10(13A) for the year under assessment comes to Rs. 30,00,000 plus
Rs. 1,50,00,000, which totals Rs. 1,80,00,000; and 10% of this comes to Rs.
18,00,000. Since the assessee has paid rent of Rs. 8,20,000 which is much less
than the amount of Rs. 18,00,000, the assessee is not entitled to any benefit u/s
10(13A) of the Act. Thus, the AO denied the benefit u/s 10(13A) of the Act.

 

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

 

The assessee then
preferred an appeal to the Tribunal where it was submitted that clause (h) of
Rule 2A  specifically provides that
‘salary’ includes dearness allowance if the terms of employment so provide, but
excludes all other allowances and perquisites. Accordingly, the performance bonus
received by the appellant did not form part of ‘salary’ for the purposes of
computing exemption u/s 10(13A) of the Act.

 

HELD

The Tribunal noted
that the decision of the Hon’ble Kerala High Court in the case of CIT vs.
B. Ghosal (125 ITR 444) is on identical facts wherein on the same set
of facts, the Court had held that ‘performance bonus’ does not form part of
‘salary’ as defined in clause (h) of Rule 2A for the purposes of section
10(13A) of the Income tax Act, 1961.

 

Considering the facts narrated above, the Tribunal noted that total rent
paid by the assessee during the year is Rs. 8,20,000. The basic salary for the
purpose of computation of house rent disallowance is Rs. 3,00,000 (10% of Rs.
30,00,000 being basic salary). Therefore, excess of rent paid over 10% of
salary is Rs. 5,20,000 (Rs. 8,20,000 minus Rs. 3,00,000). Therefore, the
assessee is entitled for house rent allowance at Rs. 5,20,000 u/s 10(13A) of
the Act. The AO is directed to allow the exemption of HRA at Rs. 5,20,000.

 

The Tribunal
allowed the appeal filed by the assessee.

 

ITP-3(1)(4) vs. M/s Everlon Synthetics Pvt. Ltd. [ITA No. 6965/Mum/2013; Date of order: 23rd May, 2016; A.Y.: 2006-07; Mum. ITAT] Section 147: Reassessment – Within four years – Regular assessment u/s 143(3) – Issue of one-time settlement with bank and consequential relief granted by the bank was discussed and deliberated by the AO – Reopening notice issued on same ground is bad in law

12. The Pr.
CIT-3 vs. M/s Everlon Synthetics Pvt. Ltd. [Income tax Appeal No. 1039 of 2017] Date of order:
4th November, 2019 (Bombay High
Court)

 

ITP-3(1)(4) vs.
M/s Everlon Synthetics Pvt. Ltd. [ITA No. 6965/Mum/2013; Date of order: 23rd
May, 2016; A.Y.: 2006-07; Mum. ITAT]

 

Section 147:
Reassessment – Within four years – Regular assessment u/s 143(3) – Issue of
one-time settlement with bank and consequential relief granted by the bank was
discussed and deliberated by the AO – Reopening notice issued on same ground is
bad in law

 

The assessee is
engaged in the business of manufacture of polyester and texturised / twisted
yarn and management consultancy. The assessee filed its return of income on 29th
November, 2006. The AO completed the assessment on 24th November,
2008 u/s 143(3) of the Act, accepting ‘Nil’ return of income as filed by the
assessee. Thereafter, on 28th March, 2011, a notice was issued u/s
148 of the Act to the assessee, seeking to re-open the assessment. The reason
in support of the re-opening notice was in regards to cessation of liability
u/s 41 of the Act.

 

The assessee
objected to the re-opening notice on the ground that it was based on ‘change of
opinion’ and, therefore, without jurisdiction. However, this contention was not
accepted by the AO. This resulted in the assessment order dated 30th
August, 2011 u/s 143(3) r/w/s 147 of the Act, adding the sum of Rs. 1.37 lakhs
to the income of the assessee by holding it to be a revenue receipt.

 

Aggrieved by
this order, the assessee company filed an appeal to the CIT(A). The CIT(A)
recorded a finding of fact that during the course of regular scrutiny
proceedings u/s 143(3), the issue of the assessee’s one-time settlement with
the bank and consequential relief granted by the bank was discussed and
deliberated by the AO. In fact, queries were raised by the AO with regard to
the one-time settlement; the assessee, by its communication dated 11th
November, 2008, responded with complete details of the one-time settlement with
its bankers, including the details of relief / waiver obtained. The CIT(A) held
the settlements to the extent of Rs. 2.06 crores as revenue receipt, as
reflected in the Profit and Loss Account, and the fact that the amount of Rs.
1.37 crores was transferred to the capital account was deliberated upon by the
AO before passing an order u/s 143(3) of the Act. Thus, the CIT(A) held that
the re-opening notice was without jurisdiction as it was based on a mere change
of opinion.

 

Being aggrieved
by the order of the CIT(A), the Revenue filed an appeal to the Tribunal. The
Tribunal held that the issue of one-time settlement with the bank and the
treatment being given to the benefit received on account of settlement, was a
subject matter of consideration by the AO. It found on facts that during the
regular assessment proceedings, the issue of one-time settlement was inquired
into by the AO and the appellant had furnished all details in its letter dated
11th November, 2008. It also records the fact that the impugned
notice was only on the basis of audit objection and the AO had not applied his
mind before issuing a re-opening notice and merely acted on the dictate of the
audit party. In the circumstances, the Tribunal upheld the view of the CIT(A)
that the re-opening notice is without jurisdiction.

 

Aggrieved by
the order of the ITAT, the Revenue filed an Appeal to the High Court. The
Revenue submitted that the issue of one-time settlement found no mention in the
assessment order passed u/s 143(3). Thus, no opinion was formed by the AO while
passing the regular assessment order. Therefore, there was no bar on him on
issuing the re-opening notice. It was, thus, submitted that the issue requires
consideration and the appeal be admitted.

 

The Court
observed that during the scrutiny assessment proceedings, queries were raised
and the petitioner filed a detailed response on 11th November, 2008
giving complete details to the AO of the one-time settlement and the manner in
which it was treated. This finding of fact was not shown to be perverse in any
manner. The re-opening notice is not based on any fresh tangible material but
proceeds on the material already on record with the AO and also considered before
passing the order u/s 143(3). The submission
of Revenue that consideration of an issue by the AO must be reflected in the
assessment order, is in the face of the decision of the Court in GKN
Sinter Metals Ltd. vs. Ms Ramapriya Raghavan 371 ITR 225 which approved
the view of the Hon’ble Gujarat High Court in CIT vs. Nirma Chemicals
Ltd., 305 ITR 607, to the effect that an assessment order cannot deal
with all queries which the AO had raised during the assessment proceedings. The
AO restricts himself only to dealing with those issues where he does not agree
with the assessee’s submission and gives reasons for it. Otherwise, it would be
impossible to complete all the assessments within the time limit available.

 

Thus, the Court held that once a query is raised during assessment
proceedings and the assessee has responded to the query to the satisfaction of
the AO, then there has been due consideration of the same. Therefore, issuing
of the re-opening notice on the same facts which were considered earlier,
clearly amounts to a change of opinion and is, thus, without jurisdiction.
Accordingly, the Revenue appeal is dismissed.

 

 

Sections 2(47), 45 – Amount received by assessee, owner of a flat in a co-operative housing society, from a developer under a scheme of re-development was integrally connected with transfer of old flat to developer for purpose of re-development, in lieu of which assessee received the said amount and a new residential flat – To be treated as income under head ‘capital gain’

3.       [2020]
115 taxmann.com 7 (Mum.)

Pradyot B. Borkar vs. ACIT

ITA No. 4070/Mum/2016

A.Y.: 2011-12

Date of order: 17th January, 2020

 

Sections 2(47), 45 – Amount received by assessee, owner of a
flat in a co-operative housing society, from a developer under a scheme of
re-development was integrally connected with transfer of old flat to developer
for purpose of re-development, in lieu of which assessee received the
said amount and a new residential flat – To be treated as income under head
‘capital gain’

 

FACTS

The assessee, an individual, filed his return of income
declaring total income of Rs. 32,30,000. The A.O., in the course of assessment
proceedings noted that the assessee has offered long-term capital gain of Rs.
31,12,638, towards sale of residential flats at C-20, 179, MIG, Bandra, Mumbai,
and has simultaneously claimed deduction u/s 54 of the Act.

 

The A.O. found that the
assessee owned a flat in the housing society which was given for development
under a scheme of re-development. As per the terms of the development agreement
between the housing society and its members, in addition to receiving a new
residential flat after re-development, each member was also entitled to receive
an amount of Rs. 53,80,500, comprising of the following:

 

Rs. 25,00,000

Compensation for
non-adherence by the re-developer to the earlier agreed terms and that the
member should be required to vacate the old flat.

 

 

Rs. 28,50,500

Beneficial right and interest
in corpus and income of the society and nuisance annoyance and hardship that
will be suffered by the members during the re-development.

 

 

Rs. 30,000

Moving or shifting cost.

 

 

The A.O. held that the amount received is not in any way related
to transfer of capital asset giving rise to capital gain. He assessed the
amount of Rs. 53,30,500 under the head ‘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 noted that in the return of income the assessee
has offered the amount of Rs. 53,50,500 as income from long-term capital gain.
But the A.O. has held that the amount is in the nature of compensation received
due to some specific factors and not related to transfer of capital asset. He
also observed that as per the terms of the development agreement, any capital
gain arising due to re-development would accrue to the housing society.
Therefore, the compensation received, Rs. 53,50,500, cannot be treated as
capital gain.

 

The Tribunal held that the amount of Rs. 53,50,500 was
received by the assessee only because of handing over the old flat for the
purpose of re-development. Therefore, the said amount is integrally connected
with the transfer of his old flat to the developer for re-development in
lieu of which he received the said amount and a new residential flat.
Therefore, the amount of Rs. 53,50,500 has to be treated as income under the
head ‘Capital Gain’. The Tribunal observed that the decision of the Co-ordinate
Bench in Rajnikant D. Shroff [ITA No. 4424/Mum/2014, dated 23rd September,
2016] supports this view. It held that the amount of Rs. 53,50,500 has
to be assessed under the head ‘Capital Gain’.

 

This ground of appeal filed by the assessee was allowed.

DEDUCTIBILITY OF FOREIGN TAXES

ISSUE FOR CONSIDERATION

Section 40 of the Income Tax Act, 1961 deals with amounts
that are not deductible in computing income under the head ‘Profits and Gains
of Business or Profession’. This section, in particular clause (a)(ii)
thereof,  reads as under:

 

‘Notwithstanding
anything to the contrary in sections 30 to 38, the following amounts shall not
be deducted in computing the income chargeable under the head “Profits and
gains of business or profession”, –  

(a) in the case of any assessee—

(i)  ………..

(ia) …………….

(ib) ……………

(ic)  …………….

(ii)  any sum paid on account of any rate or tax
levied on the profits or gains of any business or profession or assessed at a
proportion of, or otherwise on the basis of, any such profits or gains.

Explanation 1. —
For the removal of doubts, it is hereby declared that for the purposes of this
sub-clause, any sum paid on account of any rate or tax levied includes and
shall be deemed always to have included any sum eligible for relief of tax
under section 90 or, as the case may be, deduction from the Indian income-tax
payable under section 91.

Explanation 2. —
For the removal of doubts, it is hereby declared that for the purposes of this
sub-clause, any sum paid on account of any rate or tax levied includes any sum
eligible for relief of tax under section 90A.’

 

Explanations 1 and
2 were inserted with effect from Assessment Year 2006-07. Prior to that there
was much litigation on whether income taxes paid in a foreign country were an
allowable deduction or not. These explanations were added to prevent a double
relief or benefit , since in most cases such foreign taxes for which deduction
was being claimed were also entitled to tax relief under sections 90, 90A or
91. After the amendment, the issue still remains alive insofar as taxes which
are not entitled to the relief or even a partial relief under sections 90, 90A
or 91, and under the rules only a part of the foreign taxes paid may be
entitled to the relief u/s 90 or u/s 90A in some cases.

 

An issue has arisen
involving the deductibility of the foreign tax paid on account of the profits
or gains of a foreign business or profession in computing the income under the
head ‘profits and gains of business and profession’ under the Income-tax Act,
1961. While there have been conflicting decisions on the subject, of the Ahmedabad
bench of the Tribunal post amendment, to really understand the controversy one
would need to understand the two conflicting decisions of the Bombay High Court
on the issue, one of which was rendered after the amendment but dealt with a
period prior to the amendment.

 

THE S. INDER SINGH GILL CASE

The issue came up before the Bombay High Court in the case
of S. Inder Singh Gill vs. CIT 47 ITR 284.

 

In this case,
pertaining to assessment years 1946-47 to 1951-52, under the Income-tax Act,
1922 the assessee was a non-resident. A resident was treated as the assessee’s
statutory agent u/s 43 of the 1922 Act (corresponding to representative
assessee u/s 163 of the 1961 Act).

 

In the original
assessments, income from certain Bombay properties was assessed to tax in
computing the total income. The Income Tax Officer later found that the
assessee owned certain other properties also in the taxable territories whose
income had escaped assessment, and therefore initiated re-assessment
proceedings. In response to the notice, the assessee filed his return of
income.

 

In the return,
among other deductions the assessee claimed that in computing his world income,
the tax paid by him to the Uganda government on his Ugandan income should be
deducted. This claim of the assessee was disallowed by the tax authorities. The
assessee’s first appeal was dismissed by the Appellate Assistant Commissioner.
The Tribunal also rejected the contention that tax paid to the Uganda
government on his foreign income should be deducted in determining his foreign
income and in including it in his total world income.

 

The Bombay High
Court in deciding the issue, noted that the Tribunal had observed as under:

 

‘We are not
aware of any commercial practice or principle which lays down that tax paid by
one on one’s income is a proper deduction in determining one’s income for the
purposes of taxation’.

 

The Bombay High
Court held that no reason had been shown to it by the assessee to differ from
the conclusion that the Tribunal had reached. The Court therefore rejected the
reference made to it by the assessee.

 

A similar view was
taken by the Calcutta High Court in the case of Jeewanlal (1929) Ltd. vs.
CIT 48 ITR 270, also a case under the 1922 Act, where the issue was
whether business profits tax paid in Burma was an allowable deduction.

 

Again, a similar
view was taken by the Karnataka High Court in Kirloskar Electric Co. Ltd.
vs. CIT 228 ITR 676, prior to the amendment, by applying section
40(a)(ii). Besides, the Madras High Court, in CIT vs. Kerala Lines Ltd.
201 ITR 106, has also held that foreign taxes are not allowable as a
deduction.

 

THE RELIANCE INFRASTRUCTURE CASE

Recently, the issue
again came up before the Bombay High Court in the case of Reliance
Infrastructure Ltd. vs. CIT 390 ITR 271.

 

This was a case
pertaining to A.Y. 1983-84. During the year, the assessee executed projects in
Saudi Arabia. The income earned in Saudi Arabia had been subjected to tax in
Saudi Arabia. While determining the tax payable under Indian tax laws, the
assessee sought the benefit of section 91, claiming relief from double taxation
of the same income, i.e., the Saudi income which was included in the total
income of the assessee.

 

The assessee
claimed the benefit of double taxation relief on the amounts of Rs. 47.3 lakhs,
otherwise claimed as deduction u/s 80HHB, and Rs. 5.59 lakhs on which a
weighted deduction was otherwise claimed u/s 35B. The A.O. dismissed the
assessee’s claim for relief u/s 91 on the ground that the relief u/s 91 would
be possible only when the amount of foreign income on which the foreign tax was
paid was again included in the taxable income liable to tax in India, i.e., the
relief was possible only where the same income was taxed in both the countries.

 

The Commissioner
(Appeals) rejected the assessee’s appeal, holding that the assessee had, in
respect of his Saudi income, 
claimed  deductions u/s 80HHB and
section 35B and such income did not suffer any tax in India and was therefore
not eligible for the benefit of relief u/s 91.

 

Before the
Tribunal, the assessee urged that the Commissioner (Appeals) ought to have held
that in respect of such percentage of income which was deemed to accrue in
India, and on which the benefit of section 91 was not available, the tax paid
in Saudi Arabia should be treated as an expenditure incurred in earning income,
which was deemed to have accrued or arisen in India, and reduced therefrom.

 

The Tribunal
dismissed the assessee’s appeal, holding that the issue stood concluded against
the assessee by the decision of the Andhra Pradesh High Court in the case of CIT
vs. C.S. Murthy 169 ITR 686. The Tribunal also held that the tax paid
in Saudi Arabia on which even where no double tax relief could be claimed, was
not allowable as a deduction in computing the income under the provisions of
the Income-tax Act. As regards tax in respect of income which had accrued or
arisen in India, the Tribunal rejected the assessee’s contention on two grounds
– that such a claim had not been raised before the Commissioner (Appeals), and
that the disallowance  was as per the
decision of the Bombay High Court in S. Inder Singh Gill’s case
(Supra).

 

It was claimed on
behalf of the assessee before the Bombay High Court inter alia that the
assessee  should be allowed a deduction
of the foreign tax paid in Saudi Arabia, once it was held that the benefit of
section 91 was not available for such tax. It was emphasised that the deduction
was claimed only to the extent that tax had been paid in Saudi Arabia on the
income which had been deemed to have accrued or arisen in India.

 

It was pointed out
to  the Bombay High Court that such a
deduction had been allowed by the Tribunal in the assessee’s own case for A.Y.
1979-80 and therefore the principle of consistency  required the Tribunal to adopt the same view
as it did in A.Y. 1979-80. It was pointed out that Explanation 1 added to
section 40(a)(ii) with effect from A.Y. 2006-07 was clarificatory in nature, as
was evident from the fact that it began with the words ‘for removal of doubts’.
It should therefore be deemed to have always been there and would apply to the
case before the High Court. It was argued that if it was held that section 91
was not applicable, then the bar of claiming deduction to the extent of the tax
paid abroad would not apply.

 

Reference was made
on behalf of the assessee to the commentary on ‘Law and Practice of Income
Tax’ by Kanga & Palkhivala (8th Edition), wherein a
reference was made to the decisions of the Bombay High Court in CIT vs.
Southeast Asian Shipping Co. (IT Appeal No. 123 of 1976) and CIT
vs. Tata Sons Ltd. (IT Appeal No. 209 of 2001)  holding that foreign tax did not fall within
the mischief of section 40(a)(ii) and that the assessee’s net income after
deduction of foreign taxes was his real income for the purposes of the
Income-tax Act.

 

It was therefore
argued on behalf of the assessee that the decision of the Bombay High Court in S.
Inder Singh Gill (Supra) would not apply and the tax paid in Saudi
Arabia on the income accrued or arising in India was to be allowed as a
deduction to arrive at the real profits which were chargeable to tax in India.

 

On behalf of the
Revenue, it was submitted that the issue stood concluded against the assessee
by the decision of the Bombay High Court in S. Inder Singh Gill (Supra).
It was submitted that the real income theory was inapplicable in view of the
specific provision of section 40(a)(ii) which prohibited deduction of any tax
paid. It was submitted that in terms of the main provisions of section
40(a)(ii), any sum paid on account of any tax on the profits and gains of
business or profession would not be allowed as a deduction.

 

It was argued on
behalf of the Revenue that the Explanation 2, inserted with effect from A.Y.
2006-07, only reiterated that any sum entitled to tax relief u/s 91 would be
covered by the main part of section 40(a)(ii). It did not take away the taxes
not covered by it out of the ambit of the main part of section 40(a)(ii).

 

The Bombay High
Court held that the Tribunal was justified in not following its order in the
case of the assessee itself for A.Y. 1979-80, as it noted the decision of the
Bombay High Court in S. Inder Singh Gill (Supra) on an identical
issue. The Court observed that the decisions in South Asian Shipping Co.
(Supra) and Tata Sons Ltd. (Supra) were rendered not at
the final hearing but while rejecting the applications for reference u/s 256(2)
and at the stage of admission u/s 260A, unlike the judgment rendered in a
reference by the Court in S. Inder Singh Gill, and therefore
could not be relied upon in preference to the decision in S. Inder Singh
Gill.

 

Further, the Court
observed that it was axiomatic that income tax was a charge on the profits or
income. The payment of income tax was not a payment made or incurred to earn
profits and gains of business. It could therefore not be allowed as an
expenditure to determine the profits of the business. Taxes such as excise
duty, customs duty, octroi, etc., were incurred for the purpose of doing
business and earning profits or gains from business or profession and
therefore, they  were allowable as
deduction to determine the profits of the business. It is the profits and gains
of business, determined after deducting all expenses incurred for the purpose
of business from the total receipts, which were subjected to income tax as per
the Act. The main part of section 40(a)(ii) did not allow deduction of tax to
the extent the tax was levied  on the
profits or gains of the business. According to the Court, it was on this
general principle, universally accepted, that the Bombay High Court had
answered the question posed to it in S. Inder Singh Gill in
favour of the Revenue.

 

The Bombay High
Court went on to observe that it would have followed the decision in the case
of S. Inder Singh Gill. However, it noticed that that decision
was rendered under the 1922 Act and not under the 1961 Act. The difference
between the two Acts was that the 1922 Act did not contain a definition of
‘tax’, unlike the 1961 Act where such term was defined in section 2(43) as
‘income tax chargeable under the provisions of this Act’. In the absence of any
definition of ‘tax’ under the 1922 Act, the tax paid on income or profits and
gains of business or profession anywhere in the world would not be allowable as
a deduction for determining the profits or gains of the business u/s 10(4) of
the 1922 Act, and therefore the decision in S. Inder Singh Gill
was correctly rendered on the basis of the law then prevalent.

 

Proceeding on the
said lines,  the Bombay High Court held
that by insertion of section 2(43) for defining the term ‘tax’, tax which was
payable under the 1961 Act on the profits and gains of business that alone was
not allowed to be deducted u/s 40(a)(ii), notwithstanding sections 30 to 38.
According to the Court, the tax, which had been paid abroad would not be
covered within the mischief of section 40(a)(ii), in view of the definition of
the word ‘tax’ in section 2(43). The Court said that it was conscious of the
fact that section 2, while defining the various terms used in the Act,
qualified it by preceding the definition with the words ‘in this Act, unless
the context otherwise requires’. It noted that it was not even urged by the
Revenue that the context of section 40(a)(ii) would require it to mean tax paid
anywhere in the world and not only tax payable under the Act.

 

The Court analysed
the rationale for introduction of the Explanations to section 40(a)(ii), as set
out in the Explanatory Memorandum to the Finance Act, 2006, recorded in CBDT
Circular No. 14 of 2006 dated 28th December, 2006. It  recorded the fact that some assessees, who
were eligible for credit against the tax payable in India on the global income
to the extent that the tax had been paid outside India u/s 90/91, were also
claiming deduction of the tax paid abroad as it was not tax under the Act. In
view of the above, the explanation would require in the context thereof that
the definition of the word ‘tax’ would also mean tax which was eligible to the
benefit of section 90/91. However, as per the High Court, this departure from
the meaning of the word ‘tax’ as defined in the Act was  restricted to the above-referred section 90/91
only and gave no license to widen the meaning of the word ‘tax’ to include all
taxes on income or profits paid abroad for the purposes of section 40(a)(ii).

 

The Court further
noted that it was undisputed that some part on which tax had been paid abroad
was on income that had been deemed to have accrued or arisen in India. To that
extent, the benefit of section 91 was not available for such tax so paid
abroad. Therefore, such tax was not hit by the Explanation to section 40(a)(ii)
and was to be considered in the nature of an expenditure incurred to earn
income. The Court then held that the Explanation to section 40(a)(ii) was
declaratory in nature and would have retrospective effect.

 

The Bombay High
Court therefore held that the assessee was entitled to deduction for foreign
taxes paid on income accrued or arisen in India in computing its income, to the
extent that such tax was not entitled to the benefit of section 91.

 

OBSERVATIONS

Before looking at
the applicability of section 40(a)(ii), one first needs to examine whether
income tax is at all an expenditure, and if so, whether it is a business
expenditure. Accounting Standard 22, issued by the Ministry of Corporate
Affairs under the Companies Act, provides that ‘Taxes on income are
considered to be an expense incurred by the enterprise in earning income and are accrued
in the same period as the revenue and expenses to which they relate.’ It
therefore seems that income tax is an expenditure under accounting principles.

 

Since only certain
types of business expenditure are allowable as deductions while computing
income under the head ‘Profits and Gains of Business or Profession’, the
question that arises is whether tax is a business expenditure. Accounting
Standard 22 states that ‘Accounting income (loss) is the net profit or loss
for a period, as reported in the statement of profit and loss, before deducting
income tax expense or adding income tax saving.’ Ind AS 12 issued by the
Ministry of Corporate Affairs states ‘The tax expense (income) related to
profit or loss from ordinary activities shall be presented as part of profit or
loss in the statement of profit and loss.’

 

However, if one
looks at the manner of presentation in the final accounts, it is clear that
income tax is treated quite differently from business expenditure, being shown
separately as a deduction after computing the pre-tax profit. Therefore, it
appears that while tax is an expense, it may not be a business expenditure.
This is supported by the language of AS 22, which states that ‘Accounting
income (loss) is the net profit or loss for a period, as reported in the
statement of profit and loss, before deducting income tax expense or adding
income tax saving.’

 

Further, the
fundamental issue still remains as to whether such foreign income taxes can
ever be a deductible expenditure under sections 30 to 38. Even on basic
commercial principles, income tax is not an expenditure for earning income; it
is a consequence of earning income. Whether such income tax is a foreign tax or
tax under the 1961 Act is irrelevant – it is still an application of income
after having earned the income. This view is supported by the decision of the
Madras High Court in the Kerala Lines case (Supra),
where the High Court observed that the payment of foreign taxes could not be
regarded as an expenditure for earning profits; they could at best be
considered as an application of profits earned by the assessee.

 

In the Reliance
Infrastructure case, the decision of the Bombay High Court was primarily
focused and based on the language of section 40(a)(ii), the Explanation thereto
read with the definition of ‘tax’ u/s 2(43). However, it needs to be kept in
mind that section 40 is a section listing out expenses, which are otherwise
allowable under sections 30 to 38, but which are specifically not allowable.
The provisions of section 40(a)(ii) will therefore come into play where an item
of expenditure is otherwise allowable as a business expenditure under sections
30 to 38. If such expenditure is in any case not allowable under sections 30 to
38, the question of applicability of section 40(a)(ii) does not arise.

 

The Bombay High
Court, in the case of CIT vs. Plasmac Machine Mfg. Co. Ltd. 201 ITR 650,
considered a situation of payment of tax liability of a transferor firm by the
transferee company, where the company had taken over the business of the
transferor firm. It held that the expenditure representing the liability of the
transferor, which was discharged by the transferee, was a capital expenditure
forming part of the consideration for the acquisition of the business and was
therefore not deductible in the computation of income. Hence, the question of
applicability of section 40(a)(ii) did not arise.

 

Under what clause
would foreign income taxes be allowable under sections 30 to 38? The only
possible provision under which such income taxes may fall for consideration as
a deduction would be section 37(1). Section 37(1) allows a deduction for
expenditure (not being in the nature of capital expenditure or personal
expenses) incurred wholly and exclusively for the purpose of business or
profession. Is a foreign income tax an expenditure incurred wholly and
exclusively for the purpose of business or profession, or is it an application
of the income after it has been earned?

 

The House of Lords,
in the case of Commissioners of Inland Revenue vs. Dowdall O’Mahoney
& Co. Ltd. 33 Tax Cases 259, had occasion to consider this issue in
the case of an Irish company which had branches in England; it claimed that in
computing the English profits, it was entitled to deduct that proportion of the
Irish taxes attributable to those profits. The House of Lords held that payment
of such taxes by a trader was not a disbursement wholly and exclusively laid
out for the purposes of the trade and this was so whether such taxes were
United Kingdom taxes or foreign or Dominion taxes. The House of Lords further
observed that taxes like these were not paid for the purpose of earning the
profits of the trade; they were the application of those profits when made and
not the less so that they were exacted by a Dominion or foreign government. It
further observed that there was not and never was any right under the
principles applicable to deduct income tax or excess profits tax, British or
foreign, in computing trading profits. According to the House of Lords, once it
was accepted that the criterion is the purpose for which the expenditure is
made in relation to the trade of which the profits are being computed, no
material distinction remained between the payment to make such taxes abroad and
a payment to meet a similar tax at home. A similar view was taken by the Madras
High Court in Kerala Lines (Supra).

 

In the Reliance
Infrastructure case, the Bombay High Court, while referring to this
basic principle, also accepted by it in the S. Inder Singh Gill
case, did not lay down any rationale for departing from this principle while
deciding the matter. It perhaps was swayed by the Explanation to section 90/91
and section 2(43), both of which had no application on the subject of allowance
of deduction of the foreign tax in computing the business income in the first
place.

 

The issue of
deductibility of foreign taxes had also come up recently before the Ahmedabad
Bench of the Tribunal, in which the Tribunal took differing views. In both
these cases the assessee had claimed foreign tax credit under section 90/91 on
the basis of the gross foreign income, but was allowed tax credit on the basis
of net foreign income taxable in India. It alternatively claimed deduction for
such foreign taxes not allowed as credit. In the first case, DCIT vs.
Elitecore Technologies (P) Ltd., 165 ITD 153, the Tribunal held, after
a detailed examination of the entire gamut of case laws on the subject, that
foreign taxes were not a deductible expenditure. It pointed out aspects which
had not been considered by the Bombay High Court in the Reliance
Infrastructure case. In the subsequent decision in Virmati
Software & Telecommunication Ltd. vs. DCIT, ITA No 1135/Ahd/2017 dated 5th
March, 2020, the Tribunal took a contrary view, following the Bombay
High Court decision in the Reliance Infrastructure case, that
such foreign taxes not allowed credit u/s 91 were deductible in computing the
income. The Mumbai Bench of the Tribunal, in the case of Tata Motors Ltd.
vs. CIT ITA No. 3802/Mum/2018 dated 15th April, 2019, has
also followed the Bombay High Court decision in Reliance Infrastructure
and held that the deduction for foreign taxes not entitled to relief under
section 90/91 could not be the subject matter of revision u/s 263.

 

The Mumbai Bench of
the Tribunal, on the other hand, in the case of DCIT vs. Tata Sons Ltd.
43 SOT 27, has, while disallowing the claim for deduction of foreign
taxes u/s 37(1), observed that if it was to be held that the assessee was
entitled to deduction of tax paid abroad, in addition to admissibility of tax
relief u/s 90 or section 91, it would result in a situation that on the one
hand double taxation of income would be eliminated by ensuring that the
assessee’s total income-tax liability did not exceed the income-tax liability
in India or the income-tax liability abroad, whichever was greater, and, on the
other hand, the assessee’s domestic tax liability would also be reduced by tax
liability in respect of income decreased due to deduction of taxes. Such a
double benefit to the assessee was contrary to the scheme of the Act as well as
the fundamental principles of international taxation.

 

Interestingly, the
Mumbai Bench of the Tribunal, in Tata Consultancy Services Ltd. vs. ACIT
203 TTJ 146, considered a disallowance of US and Canadian state taxes
and held that such taxes were not covered by section 40(a)(ii) and were
therefore allowable.

 

A question arose in
Jaipuria Samla Amalgamated Collieries Ltd. 82 ITR 580 (SC) where
the assessee, a lessee of mines, incurred statutory liability for the payment
of road and public works cess and education cess, and claimed deduction of such
cess in its computation of income. The A.O. disallowed such claim relying on
section 10(4) of the 1922 Act, corresponding to section 40(a)(ii) of the 1961
Act. In that decision, the Supreme Court held that the words ‘profits and gains
of any business, profession or vocation’ which were employed in section 10(4),
could, in the context, have reference only to profits or gains as determined
u/s 10 and could not cover the net profits or gains arrived at or determined in
a manner other than that provided by section 10. Can one apply the ratio
of this decision to foreign income taxes, which are levied on income computed
in a manner different from that envisaged under the 1961 Act?

 

Subsequently, the
Supreme Court itself in the case of Smithkline & French India Ltd.
vs. CIT 219 ITR 581 has taken a different view in the context of surtax.
The Supreme Court observed in this case:

‘Firstly, it may
be mentioned, s.10(4) of the 1922 Act or s.40(a)(ii) of the present Act do not
contain any words indicating that the profits and gains spoken of by them
should be determined in accordance with the provisions of the IT Act. All they
say is that it must be a rate or tax levied on the profits and gains of
business or profession. The observations relied upon must be read in the said
context and not literally or as the provisions in a statute…’

 

This argument
therefore seems to no longer be valid. In this case, the Supreme Court has also
approved the Bombay High Court decision in Lubrizol India Ltd. vs. CIT
187 ITR 25, where the Bombay High Court noted that section 40(a)(ii)
uses the term ‘any’ before ‘rate or tax’. The High Court had observed:

 

‘If the word “tax” is to be given the meaning
assigned to it by s.2(43) of the Act, the word “any” used before it will be
otiose and the further qualification as to the nature of levy will also become
meaningless. Furthermore, the word “tax” as defined in s.2(43) of the Act is
subject to “unless the context otherwise requires”. In view of the discussion
above, we hold that the words “any tax” herein refers to any kind of tax levied
or leviable on the profits or gains of any business or profession or assessed
at a proportion of, or otherwise on the basis of, any such profits or gains’.

 

This view is in
direct contrast to the view expressed in the Reliance Infrastructure
case, and having been approved by the Supreme Court in the case of Smithkline
& French (Supra), this view should prevail. Perhaps, the ratio
of the Reliance Infrastructure case was largely governed by the
fact that the non-applicability of section 2(43) to section 40(a)(ii) was never
urged by the Department before it.

 

Therefore, the better view is that foreign
income taxes are not a deductible expenditure in computing income under the
1961 Act, irrespective of whether they are eligible for credit under sections
90, 90A or 91.

Reopening – Beyond four years – Assessment completed u/s 143(3) – A mere bald assertion by the A.O. that the assessee has not disclosed fully and truly all the material facts is not sufficient – Reopening is not valid

6. M/s. Anand Developers vs. Asst.
Commissioner of Income Tax Circle-2(1) [Writ Petition No. 17 of 2020] Date of order: 18th February,
2020 Bombay High Court (Goa Bench)

 

Reopening –
Beyond four years – Assessment completed u/s 143(3) – A mere bald assertion by
the A.O. that the assessee has not disclosed fully and truly all the material
facts is not sufficient – Reopening is not valid

 

The petition challenged the
notice dated 29th March, 2019 issued u/s 148 of the Income-tax Act,
1961 and the order dated 17th December, 2019 disposing of the
assessee / petitioner’s objections to the reopening of the assessment in
pursuance of the notice dated 29th March, 2019.

 

The
petitioner had submitted its return of income within the prescribed period for
A.Y. 2012-13 declaring total income of Rs. 62,233. The case was selected for
scrutiny through CASS and notice was issued u/s 143(2) of the Act and served
upon the petitioner on 28th August, 2013. Based on the details
furnished by the petitioner, the A.O. passed the assessment order dated 16th
March, 2015 u/s 143(2).

 

It was the case of the
petitioner that vide its own letter dated 20th February, 2015
in the course of the assessment proceedings before the A.O., it had itself
submitted that a few flats may have been allotted to persons in violation of
Clause 10(f) of section 80IB. It was also contended that this ought not to be
regarded as any breach of the provisions of section 80IB; in any case, this
ought not to be regarded as any breach of the provisions of section 80IB in
its entirety and at the most benefit may be denied in respect of the
transfers made in breach of Clause 10(f) of section 80IB.

 

The petitioner submitted that
through this letter it had made true and complete disclosures in the course of
the assessment proceedings itself. It was upon consideration of these
disclosures that the A.O. finalised the assessment order of 16th
March, 2015 u/s 143(3). Under the circumstances, merely on the basis of a
change of opinion, the A.O. lacked jurisdiction to issue notice u/s 148 seeking
to reopen the assessment. Since there was absolutely no failure to make true
and full disclosures, there was no jurisdiction to issue such notice u/s 148
after the expiry of four years from the date of assessment.

 

The Department submitted that
since the petitioner had admitted vide its letter dated 20th
February, 2015 that it had violated the provisions of section 80IB and further
failed to make true and full disclosures, there was absolutely no
jurisdictional error in issuing the impugned notice or making the impugned
order.

 

The High Court observed that
the factum of the address of the letter dated 20th February,
2015 is indisputable because the respondents had themselves not only referred
to it but also quoted from it in the show cause notice dated 17th December,
2019 issued to the petitioner along with the impugned order of the same date by
which the objections of the petitioner to the reopening of the assessment came
to be rejected. Even the impugned order dated 17th December, 2019
rejecting the petitioner’s objections makes a specific reference to the
petitioner’s letter of 20th February, 2015 submitted during the
assessment proceedings u/s 143(3). Both the show cause notice dated 17th
December, 2019 and the impugned order of the same date specifically state that
the petitioner in the course of the assessment proceedings had furnished a list
of flat-owners to whom flats were sold in the project ‘Bay Village’.

 

The notice and the impugned
order proceed to state that upon perusal of this list, coupled with the letter
dated 20th February, 2015, it transpires that there was non-compliance
on the part of the petitioner with the provisions of section 80IB at least
insofar as some of the sales were concerned. Since it is virtually an admitted
fact that the petitioner had submitted a list of the flat-owners and vide
its letter dated 20th February, 2015 pointed out that there may be
breach insofar as the sale of some of the flats are concerned, it cannot be
said by the respondents that there was no truthful or complete disclosure on
the part of the petitioners in the course of the assessment proceedings itself.

 

The Court observed that
merely making of a bald statement that the assessee had not disclosed fully and
truly all the material facts is really never sufficient in such matters. In the
present case as well, apart from such a bald assertion, no details have been
disclosed as to the material which was allegedly not disclosed either truly or
fully. Rather, the record indicates that the entire list of flat-owners was
disclosed. Further, vide the same letter disclosures were made in
relation to the sale transactions and it was even suggested that some of the
transactions may not be compliant with the provisions of Clause 10(f) of
section 80IB. Clearly, therefore, the Department had failed to make out any
case that there was no true and full disclosure.

 

Further, section 147 of the
IT Act empowers the A.O. who has reason to believe that any income chargeable
to tax has escaped assessment for any A.Y. to reassess such income, no doubt
subject to the provisions of sections 148 to 153 of the Act. The proviso
to section 147, however, makes clear that where an assessment under sub-section
(3) of section 143 has been made for the relevant A.Y., no action shall be
taken u/s 147 after the expiry of four years from the end of the relevant
assessment year unless any income chargeable to tax has escaped assessment for
such assessment year by reason of failure on the part of the assessee, inter
alia ‘to disclose fully and truly all material facts necessary for its
assessment for that assessment year’. This means that normally, the limitation
period for re-assessment u/s 147 is four years. However, in a case where the
assessment has been made u/s 143(3) where, inter alia, the assessee
fails to disclose fully and truly all material facts necessary for assessment
for that assessment year, re-assessment can be made even beyond the period of
four years in terms of section 148. Therefore, in order to sustain a notice
seeking to reopen assessment beyond the normal period of four years it is
necessary for the respondents to establish, at least prima facie, that
there was failure to disclose fully and truly all material facts necessary for
the assessment for that assessment year.

 

In the present case, the
respondents have failed to establish this precondition even prima facie.
Rather, the material on record establishes that there were full and true
disclosures of all material facts necessary for the assessment for the A.Y.
2012-13. Despite this, the impugned notice seeking to reopen the assessment for
that year has been issued beyond the normal period of four years. On this short
ground, the impugned notice dated 29th March, 2019 and the impugned
order dated 17th December, 2019 were quashed and set aside. The
Court relied on the decisions of the Division Bench of this Court in the case
of Mrs. Parveen P. Bharucha [(2012) 348 ITR 325] and Zuari Foods and
Farms Pvt. Ltd. (WP No. 1001 of 2007 decided on 11th April, 2018).

 

The Court
observed that the decision in Calcutta Discount Co. Ltd. [(1961) 41 ITR
191 (SC)] in fact assists the case of the petitioner rather than the
respondents. In that decision, the Hon’ble Supreme Court has held that it is
the duty of the assessee to disclose fully and truly all primary relevant
facts, and once all primary facts are before the assessing authority, he
requires no further assistance by way of disclosure and it is for him to decide
what inference of facts can be reasonably drawn and what legal inferences have
ultimately to be drawn. However, if there are some reasonable grounds for
thinking that there had been under-assessment as regards any primary facts
which could have a material bearing on the question of under-assessment, that
would be sufficient to give jurisdiction to the ITO to issue notice for
re-assessment. In the present case, as noted earlier, there is absolutely no
reference to any alleged material facts which the petitioner failed to disclose
in the course of the assessment proceedings. Rather, the impugned notice refers
to the list as well as the letter issued by the petitioner itself which is
sought to be made the basis for the reopening of the assessment. For the
aforesaid reasons the petition is allowed and the impugned notice dated 29th
March, 2019 and the impugned order dated 17th December, 2019
are quashed and set aside. 

 

Revision – TDS – Non-resident – Shipping business – Section 263 and section 172, r/w sections 40(a)(ia), 194C and 195 of ITA, 1961 – Where assessee had paid export freight to a shipping agent of non-resident ship-owner or charter without deduction of tax at source, provisions of section 172 would be applicable and provisions of section 194C or section 195 which provide for deduction of tax at source shall not be applicable; A.Y.: 2014-15

26. Principal
CIT vs. Summit India Water Treatment and Services Ltd. [2020]
116 taxmann.com 107 (Guj.) Date
of order: 3rd February, 2020 A.Y.:
2014-15

 

Revision –
TDS – Non-resident – Shipping business – Section 263 and section 172, r/w sections
40(a)(ia), 194C and 195 of ITA, 1961 – Where assessee had paid export freight
to a shipping agent of non-resident ship-owner or charter without deduction of tax at source, provisions of section 172 would
be applicable and provisions of section 194C or section 195 which provide for
deduction of tax at source shall not be applicable; A.Y.: 2014-15

 

For the A.Y. 2013-14, the assessee filed its return of income declaring
total loss of Rs. 1,35,18,193. By an order dated 22nd March, 2016,
the A.O. finalised the assessment u/s 143(3). The Principal Commissioner of
Income-tax (‘the PCIT’) invoked the power of revision u/s 263 of the Act, 1961
on the ground that without deducting TDS on the export freight, the assessee
company had paid export freight amounting to Rs. 2,03,66,683 to Inter-Ocean
Shipping and Logistic Services. According to the PCIT, as no TDS return showing
the details of deduction of any tax in respect of the aforesaid export freight
had been filed and as the A.O. had not verified the same, the scope of
provisions of TDS on export freight, the entire amount was required to be
disallowed u/s 40(a)(ia) of the Act. By an order u/s 263 dated 21st
March, 2018, the PCIT directed the A.O. to pass a fresh assessment order after
providing an opportunity of being heard to the assessee in view of the
observations made in the order u/s 263.

 

The Tribunal
came to the conclusion that the A.O. has accepted the total loss declared by
the assessee in the return of income and passed order u/s 143(3) dated 22nd
March, 2016. The Tribunal considered the materials placed before it and found
that the respondent assessee had made payment for export freight to the Indian
Ocean Shipping and Logistics Services, which was an Indian agent acting on
behalf of the non-resident shipping company for collecting freight demurrage
and other charges and reimbursing the same to the shipping company. Therefore,
relying on the CBDT Circular No. 723 dated 19th September, 1995, the
Tribunal held that where payment is made to the shipping agents of the
non-resident ship-owner or charter, the agent steps into the shoe of the
principal, i.e. the shipping company, and according to the provisions u/s 172
of the Act, which provides for shipping business in respect of non-residents
would be applicable and the provisions of section 194C or 195 which provides
for deduction of tax at source shall not be applicable. The Tribunal,
therefore, held that the PCIT failed to consider that the assessee had
furnished the relevant materials in respect of export freight payment and it is
also not controverted by the PCIT; and therefore, it cannot be said that the
assessment order is erroneous or prejudicial to the interest of the Revenue in
any manner. The Tribunal set aside the order of the PCIT passed u/s 263 of the
Act.

 

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

 

‘i)   In view of the facts emerging
from the record and the finding of facts arrived at by the Tribunal, none of
the questions can be termed as substantial questions of law from the impugned
order passed by the Tribunal.

 

ii)   The appeal, therefore, fails
and is accordingly dismissed.’

 

INTERPLAY BETWEEN DEEMING FICTIONS OF SECTIONS 45(3) AND 50C

ISSUE FOR
CONSIDERATION

Section
45(3) of the Act provides for taxation of the capital gains on transfer of a capital
asset by a person to a firm in which he is or becomes a partner, by way of
capital contribution or otherwise, in the year of transfer and further provides
that the amount recorded in the books of accounts of the firm shall be deemed
to be the full value of the consideration received or accruing as a result of
such transfer of the capital asset for the purposes of section 48. Section 50C
of the Act provides that the value adopted or assessed or assessable by the
stamp valuation authority for the purpose of payment of stamp duty in respect
of transfer of a capital asset, being land or building or both, shall for the
purposes of section 48 be deemed to be the full value of the consideration
received or accruing as a result of such transfer if it is higher than its
actual consideration.

 

Whether both
the aforesaid provisions of the Act can be made applicable in a case where the
capital asset transferred by a partner to his firm by way of his capital
contribution is land or building or both is the issue that is sought to be
examined here. Whether for the purposes of section 48 the full value of
consideration should be the amount as recorded in the books of the firm in
accordance with the provisions of section 45(3), or whether it should be the
value as adopted or assessed or assessable by the stamp valuation authority in
accordance with the provisions of section 50C? Whether in computing the capital
gains, the higher of the two is to be adopted or not?

 

The Lucknow
bench of the Tribunal has held that the provisions of section 50C shall prevail
over the provisions of section 45(3) in a case where the stamp duty value was
higher than the value recorded in the books of the firm. As against this, the
Mumbai, Kolkata, Hyderabad and Chennai benches of the Tribunal have held that
the provisions of section 45(3), ignoring the provisions of section 50C, alone
can apply in a case where land or building has been introduced by a partner by
way of his capital contribution.


THE CARLTON HOTEL
(P) LTD. CASE

The issue
first came up for consideration of the Lucknow bench of the Tribunal in the
case of Carlton Hotel (P) Ltd. vs. ACIT 35 SOT 26 (Lucknow) (URO).
In this case, during the previous year relevant to A.Y. 2004-05 the assessee
company entered into a partnership with two other persons. The assessee company
contributed 2,40,000 sq. ft. of land as its capital contribution which was
valued at Rs. 7,81,96,735 and was so recorded in the books of the partnership
firm. The assessee was given 5% share in the partnership firm, whereas the
other two partners were given 95% share.

 

For the
purposes of computing capital gains in the hands of the partner assessee on
transfer of the land to the partnership firm, the A.O. invoked the provisions
of section 50C and applied circle rates for the purpose of calculating the
consideration for transfer. He valued the consideration at Rs. 29,75,46,468
instead of Rs. 7,81,96,735 and on that basis he calculated the long-term
capital gains. The A.O. inter alia doubted the genuineness of the
introduction of land and noted that the assessee has contributed 88% of capital
in lieu of only 5% share in profits which was beyond the normal business
prudence and the transfer of the land to the firm was as good as a sale. For
the purpose of holding so, he referred to the clauses of the partnership deed
and observed that the assessee had little role to play in the partnership
business, the assessee was not a managing partner in the firm, construction on
the plot was to be carried out by another partner of the firm, the assessee was
not having any civil, criminal or financial liability, the business of the
partnership was to be exclusively carried out by other partners of the firm,
the bank account could be independently operated only by the other two
partners, whereas the assessee could operate only with joint signatures of the
other two partners; it was only the other partners who had been empowered to
introduce new partners, the assessee did not have any right over the goodwill
of the firm, was not authorised to make any change in the composition of the
board which had controlling interest in its share capital, etc.

 

Thus, the A.O. alleged that the
assessee had adopted a device to evade capital gains tax by showing lower value
of sale consideration in the books of the firm, whereas the actual market value
of the land was much higher as reflected from the circle rate. He relied on the
decisions of the Supreme Court in the case of McDowell & Co. Ltd. vs.
CTO 154 ITR 148 for the proposition that if an assessee adopts a tax
avoidance scheme, then the form can be ignored. Thus, by taking the substance
of the transaction into consideration, the market value of the land transferred
to the firm as capital contribution was adopted by invoking section 50C,
contending that mere reliance on section 45(3) in isolation would defeat the
intent and purpose of the taxing statute.

 

Importantly, the A.O. also took a
view that section 50C was applicable even in a situation covered by section
45(3). The A.O., ignoring the facts that the transfer of land as capital
contribution was not through a registered document and that the provisions of
section 50C were amended only thereafter to rope in even the transfer of
immovable property otherwise than through a registered document, applied the provisions
of section 50C.

 

Upon further appeal, the CIT(A)
confirmed the order of the A.O. confirming that the value adopted by the
assessee for transferring the land to the firm was a collusive one and that the
provision of section 50C being a specific provision was applicable even where
provisions of section 45(3) had been invoked.

 

Upon further appeal to the
Tribunal, it was contended on behalf of the assessee that the provisions of
section 45(3) and section 50C were mutually exclusive; where section 45(3) was
applicable, section 50C would not be applicable and vice versa. It was
further submitted that section 45(3) created a deeming fiction whereby the
consideration recorded by the firm in its books was deemed to be the full value
of consideration for the purpose of computing capital gains. Section 50C was
another deeming section which empowered the A.O. to substitute the valuation
done by the stamp valuation authority as sale consideration in place of
consideration shown by the parties to the transaction. Once one deeming section
was invoked, another deeming section could not be made to nullify the effect of
the earlier deeming section. The application of section 50C in such a situation
would render section 45(3) otiose. Regarding the allegation that the assessee
had entered into a collusive transaction and accordingly had shown lower value
of consideration in the books of the firm, it was submitted that the firm would
be paying tax upon its further sale by adopting the value of land as recorded
in the books and, hence, there would not be any revenue loss.

 

On the other hand, the Revenue
supported the order of the A.O. and the CIT(A) and claimed that the form of the
transaction had to be ignored and its substance had to be considered, since the
assessee had entered into a collusive transaction.

 

The Tribunal
for the reasons recorded in the order rejected one of the contentions of the
Revenue that since section 50C required adoption of the circle rates for the
purpose of levy of the stamp duty which rates, once declared, could be
‘adopted’ for the purpose of substituting the full value of consideration for
section 48 and it was not necessary that the document for transfer of asset was
actually registered before invoking section 50C.

 

On the issue under consideration,
however, the Tribunal held that the provisions of section 50C could be invoked
even though the case was otherwise covered under section 45(3); section 50C
would override section 45(3). Section 45(3) was a general provision, while
section 50C was a special provision which would override section 45(3). In the
final analysis, however, the Tribunal rejected the action of the A.O. in
applying the provisions of section 50C on the ground of non-registration and
non-payment of the stamp duty.

 

It may be noted for the record
that the Revenue had filed a further appeal before the Allahabad High Court
against the decision of the Tribunal mainly for pleading that the transaction
was a colourable transaction executed with the intention to evade the tax
liability. And the High Court upholding the contention held that there existed all
the facts and circumstances to show prima facie that the entire
transaction of contribution to partnership was a sham and fictitious
transaction and an attempt to devise a method to avoid tax and remanded the
matter back to the Tribunal to look into this aspect of the matter, which was
an issue directly raised by the Revenue right from the stage of assessment. No
findings have been given by the High Court with respect to the issue of
applicability of section 50C to the transaction of introduction of capital
asset by the partner in the firm which is otherwise covered by section 45(3).


AMARTARA PVT. LTD.
CASE

Thereafter,
the issue came up for consideration of the Mumbai bench of the Tribunal in DCIT
vs. Amartara Pvt. Ltd. 78 ITR (Trib.)(S.N.) 46 (Mum).

 

In this
case, during the previous year relevant to A.Y. 2012-13 the assessee entered
into a limited liability partnership with the object of developing,
constructing and operating resorts, hotels and apartment hotels and / or for
carrying out such other hospitality businesses. The assessee transferred an
immovable property, being a plot of land admeasuring 6,869.959 metres situated
at Powai, Mumbai, as its capital contribution to the newly-created LLP vide
a supplementary agreement dated 29th December, 2011.

 

The said
plot of land was valued at Rs. 5.60 crores on the basis of the valuation report
obtained and it was recorded at that value in the books of the LLP. The
assessee, while computing capital gains on transfer of land into the
partnership firm in accordance with the provisions of section 45(3), had taken
the value as recorded in the books of the firm, i.e., Rs. 5.60 crores, as the
full value of the consideration deemed to have been received or accrued as a
result of transfer of capital asset to the partnership firm. The supplementary
agreement through which the said plot of land was introduced by the assessee
into the LLP was registered on 24th April, 2012 and the stamp duty
authority had determined the market value of the property for the purpose of
payment of stamp duty at Rs. 9,41,78,500.

 

The A.O.
invoked the provisions of section 50C and adopted the amount of Rs.
9,41,78,500, being the value determined by the stamp valuation authority at the
time of registration of the supplementary partnership deed, as the full value
of consideration for the purpose of computing capital gains. He observed that
the provisions of section 45(3) did not begin with a non-obstante clause
and, therefore, there was no specific mention of non-applicability of section
50C in the cases covered by section 45(3). He also relied upon the Lucknow
Tribunal decision in the case of Carlton Hotel (P) Ltd. (Supra)
for the proposition that section 50C, being a specific provision, would
override the provisions of section 45(3). The CIT(A) confirmed the order of the
A.O. by following the said decision in the case of Carlton Hotel (P) Ltd.
(Supra).

 

On further
appeal before the Tribunal, the assessee contended that sections 45(3) and
45(4) were special provisions for computation of capital gains on transfer of
capital assets between the partnership firm and the partners and that both the
provisions were deeming fictions created for the purpose of taxation of
transfers of capital assets in such special cases; importing another deeming
fiction to determine the full value of consideration in such special cases was
incorrect in view of the decision of the Hon’ble Supreme Court in the case of CIT
vs. Moon Mills Ltd. 59 ITR 574. It was submitted that the decision
rendered by the Lucknow bench of the Tribunal was per incuriam, in the
light of the decision of the Hon’ble Supreme Court in the case of CIT vs.
Moon Mills Ltd. (Supra), as per which a deeming fiction could not be
extended by importing another deeming fiction for the purpose of determination of
the full value of consideration.

 

It was also
contended on behalf of the assessee that section 50C of the Act had no
application where no consideration was received or accrued, and hence,
computing full value of consideration by applying the provisions of section 50C
in a case where there was a transfer between partners and the partnership firm
without there being any actual consideration received or accrued, was
incorrect.

 

In reply,
the Revenue heavily relied upon the said decision of the Lucknow bench of the
Tribunal in the case of Carlton Hotel (P) Ltd. (Supra) and
contended that section 50C overrode the provisions of section 45(3) once the
document of transfer was registered as per the provisions of the Registration
Act, 1908 and the stamp duty was paid for the registration of such document.

 

The Tribunal held that the
purpose of insertion of section 45(3) was to deal with cases of transfer
between a partnership firm and partners and in such cases the Act provided for
the computation mechanism of capital gains and also provides for consideration
to be adopted for the purpose of determination of full value of consideration.
Since the Act itself provided for deeming consideration to be adopted for the
purpose of section 48 of the Act, another deeming fiction provided by way of
section 50C could not be extended to compute the deemed full value of
consideration as a result of transfer of capital asset. It held that the
Lucknow bench had simply observed that the provisions of section 50C overrode
the provisions of section 45(3) but had not given a categorical finding.
Accordingly, the addition made towards the long-term capital gain by invoking
the provisions of section 50C
was deleted.

 

This decision of the Mumbai bench
of the Tribunal has been subsequently followed by the Tribunal in the cases of ACIT
vs. Moti Ramanand Sagar (ITA No. 2049/Mum/2017); ACIT vs. Kethireddy Venkata
Mohan Reddy (ITA No. 259/Hyd/2019); and ITO vs. Sheila Sen (ITA No.
554/Kol/2016).

 

OBSERVATIONS

The issue
under consideration arises due to two conflicting provisions of the Act which
can be invoked for a given transaction wherein the capital asset transferred by
a partner to his firm, as a capital contribution or otherwise, is land or
building. Section 45(3) provides for the amount recorded in the books of
accounts of the firm as deemed consideration. Section 50C provides for the
value adopted, assessed or assessable by stamp valuation authorities as deemed
consideration, if it exceeds the consideration received or accruing. Thus, both
the provisions deal with the determination of the full value of consideration
for the purpose of computation of capital gains by creating a deeming fiction.
Apart from considering the legislative intent behind both the provisions in
order to resolve the conflict between these two provisions, there are various
other aspects which are also required to be considered, like whether two
deeming fictions can operate simultaneously with respect to the same component
of the computation; whether one of these two provisions can be considered as a
general provision and the other one as a special provision whereby it can
override the general one; and which one will prevail if both the provisions are
required to be considered as special provisions.

 

Sub-section (3) was inserted in
section 45 by the Finance Act, 1987 with effect from A.Y. 1988-89. Prior to the
insertion of sub-section (3), the issue of taxability of the transfer of
capital asset by a partner to his firm was decided by the Supreme Court in the
case of Sunil Siddharthbhai vs. CIT 156 ITR 509. In this case,
the Supreme Court held that when the assessee brought his personal assets into
the partnership firm as his contribution to the capital, there was a transfer
of a capital asset within the meaning of the terms of section 45. This was
because the asset which was, till the date of such bringing in as firm’s
capital, an individual asset, after bringing it in became a shared asset. The
Supreme Court further held that the transfer of asset by the partner to the
firm as capital contribution would not necessarily result in receipt of any
consideration by the assessee so as to attract section 45 and the credit entry
made in the partner’s capital account in the books of the partnership firm did
not represent the true value of consideration. It was a notional value only,
intended to be taken into account at the time of determining the value of the
partner’s share in the net partnership assets on the date of dissolution or on
his retirement.

Therefore,
according to the Supreme Court, it was not correct to hold that the
consideration which a partner acquires on making over his personal asset to the
partnership firm as his contribution to its capital can fall within the
provisions of section 48. Since section 48 was fundamental to the computation
machinery incorporated in the scheme relating to determination of charge
provided in section 45, the Supreme Court held that such a case must be
regarded as falling outside the scope of capital gains taxation altogether.

 

It was in
this background that the legislature had introduced a specific provision so as
to bring the transfer of the capital asset by a partner to his firm to tax, as
is evident from Circular No. 495 dated 22nd September, 1987, the
extract from which is reproduced below:

 

Capital
gains on transfer of firms’ assets to partners and vice versa and by way of compulsory acquisition

24.1 One of
the devices used by assessees to evade tax on capital gains is to convert an
asset held individually into an asset of the firm in which the individual is a
partner. The decision of the Supreme Court in Kartikeya V. Sarabhai vs. CIT [1985] 156 ITR 509 has set at rest the controversy as to whether such a conversion amounts
to transfer. The Court held that such conversion fell outside the scope of
capital gains taxation. The rationale advanced by the Court is that the
consideration for the transfer of the personal asset is indeterminate, being
the right which arises or accrues to the partner during the subsistence of the
partnership to get his share of the profits from time to time and on
dissolution of the partnership to get the value of his share from the net
partnership assets.

 

24.2 With a
view to blocking this escape route for avoiding capital gains tax, the Finance
Act, 1987 has inserted new sub-section (3) in section 45. The effect of this
amendment is that profits and gains arising from the transfer of a capital
asset by a partner to a firm shall be chargeable as the partner’s income of the
previous year in which the transfer took place. For purposes of computing the
capital gains, the value of the asset recorded in the books of the firm on the
date of the transfer shall be deemed to be the full value of the consideration
received or accrued as a result of the transfer of the capital asset.

 

In view of
the above, it is clear that but for the specific provision of section 45(3),
the transfer of any capital asset by a partner to his firm could not have been
charged to tax under the head capital gains. In addition to providing for the
chargeability, section 45(3) also addresses the lacuna of the inability of
section 48 to cover such transfer within its ambit which was noticed by the Supreme
Court in the case of Sunil Siddharthbhai (Supra), by deeming the
amount recorded in the books of accounts of the firm as the full value of
consideration received or accruing as a result of such transfer.

 

Therefore,
it is obvious that section 45(3) needs to be invoked in order to charge the
capital gains tax in respect of transfer of a capital asset by a partner to his
firm. Having invoked the provisions of section 45(3) for the purpose of
chargeability, it needs to be applied in full and the alteration in the
computation mechanism as provided in that section also needs to be considered.
It would not be possible to invoke the provisions of section 45(3) only for the
purpose of creating a charge and, then, compute the capital gain in accordance
with the other provision, i.e., section 50C, by ignoring the computational
aspect of section 45(3) altogether.

 

The Mumbai
bench of the Tribunal in the case of ACIT vs. Prem Sagar (ITA No.
7442/Mum/2016) has held that both the limbs of section 45(3), i.e.,
charging provision and deeming fiction providing for the full value of
consideration, go hand in hand for facilitating quantification of the capital
gains tax. In case the quantification of the capital gains tax as envisaged in
section 45(3) is substituted by section 50C, then the charging to tax of the
transaction under consideration would in itself stand jeopardised and the
section would be rendered inoperative.

 

Having said
that the computation of capital gains needs to be made in accordance with the
provisions of section 45(3), the question may arise as to whether the amount of
consideration as decided in accordance with it can then be amended by invoking
the provisions of section 50C, in a case where the valuation adopted, assessed
or assessable by the stamp valuation authority is found to be higher than the
amount recorded in the books of the firm. For the purpose of section 50C the
comparison is required to be made between the consideration received or
accruing as a result of the transfer of the capital asset and the value
adopted, assessed or assessable by the stamp valuation authority for the
purpose of payment of stamp duty in respect of such transfer. Here, the
consideration received or accruing should be the real consideration received or
accruing, and not the consideration which is deemed to have been received or
accrued. This is because the expression ‘the consideration received or accruing
as a result of the transfer’ cannot be construed to include the consideration
deemed to have been received or accrued.

Wherever
required, the legislature has included a specific reference to something which
has been deemed to be so, in addition to the reference of the same thing in
simple terms. For example, section 9 provides for incomes which shall be deemed
to accrue or arise in India under certain circumstances. For the purpose of
including such income which is deemed to accrue or arise in India within the
scope of total income, clause (b) of section 5(1) makes specific reference to
it in addition to referring to the income which accrues or arises (in real and
not on deemed basis). The relevant clause is reproduced below:

 

(b) accrues
or arises or is deemed to accrue or arise to him in India during such year

 

There was no
need to make such a specific reference to the income which is deemed to accrue
or arise in India, if a view is taken that the income which accrues or arises
in India will in any case include the income which is deemed to accrue or arise
in India. As a corollary, the expression ‘the consideration received or
accruing as a result of the transfer’ as used in section 50C cannot include the
consideration deemed to be received or accrued in terms of the provisions of
section 45(3).

 

Further,
section 45(3) deems the amount recorded in the books of accounts of the firm as
a consideration only for the purpose of section 48. Therefore, the deeming
fiction created in section 45(3) has limited applicability and it cannot be
extended to section 50C, to deem the amount so recorded in the books of
accounts of the firm as consideration received or accruing for the purpose of
making its comparison with the valuation adopted, assessed or assessable by the
stamp valuation authorities. As a result, the provisions of section 50C cannot
be made applicable to the transfer of a capital asset by a partner to his firm
for which the true value of consideration received or accruing cannot be
determined, as held by the Supreme Court in the case of Sunil
Siddharthbhai (Supra).

 

The Supreme
Court in the case of CIT vs. Moon Mills Ltd. 59 ITR 574 has held
that one fiction cannot be imported within another fiction. Two different
provisions of the Act are providing for a fiction by deeming certain amounts as
the full value of consideration for the purpose of computation of capital gains
as per section 48. Section 45(3) deems the amount recorded in the books of the
firm as the full value of consideration and section 50C deems the value
adopted, assessed or assessable by the stamp valuation authority as the full
value of consideration. If section 50C has been made applicable over the amount
deemed to be the full value of consideration in terms of section 45(3), then it
will amount to superimposing a fiction upon a fiction – which would be contrary
to the decision of the Supreme Court.

 

In the case
of ITO vs. United Marine Academy 130 ITD 113 (Mum)(SB), a special
bench of the Tribunal has dealt with the interplay of deeming fictions as
provided in sections 50 and 50C and has observed as under:

 

For the
reasons given above and on interpretation of the relevant provisions of
sections 48, 50 and 50C, we are of the view that there are two deeming fictions
created in section 50 and section 50C. The first deeming fiction modifies the
term ‘cost of acquisition’ used in section 48 for the purpose of computing the
capital gains arising from transfer of depreciable assets, whereas the deeming
fiction created in section 50C modifies the term ‘full value of the
consideration received or accruing as a result of transfer of the capital
asset’ used in section 48 for the purpose of computing the capital gains
arising from the transfer of capital asset being land or building or both. The
deeming fiction created in section 50C thus operates in a specific field which
is different from the field in which section 50 is applicable. It is thus not a
case where any supposition has been sought to be imposed on any other
supposition of law. On the other hand, there are two different fictions created
into two different provisions, and going by the legislative intentions to create
the said fictions, the same operate in different fields. The harmonious
interpretation of the relevant provisions makes it clear that there is no
exclusion of applicability of one fiction in a case where another fiction is
applicable. As a matter of fact, there is no conflict between these two legal
fictions which operate in different fields and their application in a given
case simultaneously does not result in imposition of one supposition on another
supposition of law.

 

Thus,
insofar as transfer of an asset forming part of a block is concerned, the
Tribunal has held that both the provisions of the Act, i.e. sections 50 and
50C, can operate simultaneously. This is primarily for the reason that they
operate in different fields of the computation of capital gains. It was
categorically observed by the Tribunal that it was not a case where any
supposition has been sought to be imposed on another supposition of law.
Therefore, the inference which can be drawn indirectly on the basis of these
observations of the special bench is that two deeming fictions cannot operate
simultaneously if they operate in the same field like in the issue under
consideration.

 

It is also a
settled principle of interpretation that if a special provision is made on a
certain matter, the matter is excluded from the general provisions. This
principle is expressed in the maxims Generalia specialibus non derogant
(general things do not derogate from special things) and Generalibus
specialia derogant (special things derogate from general things).

 

However, it won’t be correct to
claim here that either of the two sections is a special one and, hence, it
overrides the other. Section 45(3) is a special provision insofar as
computation of capital gains resulting from capital contribution made by a
partner to the firm is concerned, and section 50C is a special provision
insofar as transfer of immovable property is concerned. Therefore, the issue
can better be resolved having regard to the other considerations as discussed
instead of merely relying upon these principles of interpretation.

 

In Canora
Resources Ltd., In Re 180 Taxman 220, the AAR was dealing with a case
where the transfer pricing provisions contained in sections 92 to 92F were also
becoming applicable to the transaction of the type which was covered by section
45(3). In this case, the AAR rejected the contention of the assessee that
section 45(3) being a special provision shall prevail over the general
provisions of sections 92 to 92F with regard to the transfer pricing.
Considering the purpose for which the transfer pricing provisions have been
made, the AAR held that section 45(3) would not apply to international
transactions and they should be dealt with in accordance with the transfer
pricing provisions. Insofar as such purposive interpretation is concerned with
respect to the issue under consideration, recently, the Chennai bench of the
Tribunal in the case of Shri Sarrangan Ashok vs. ITO (ITA No.
544/Chny/2019) has held that had it been the intention of the
legislature to make section 50C applicable even to the transaction of the
contribution of immovable property by a partner into the firm, the Parliament
could have repealed section 45(3) while introducing the provisions of section
50C. However, the fact that Parliament in its wisdom had retained section 45(3)
shows that Parliament intended to apply only the provisions of section 45(3) to
such transfer of capital assets by the partner to his firm.

 

The better view in our considered opinion, therefore,
is that the provisions of section 50C cannot be made applicable to a
transaction which falls within the scope of the provisions of section 45(3).

Domestic Tax Considerations Due To Covid-19

Background

The intensifying Covid-19
pandemic and the looming uncertainty on future business outlook have put the
emergency brakes on India Inc. Sudden lockdown, supply side disruption, adverse
foreign exchange rate, travel restriction as also uncertainty on vaccine to
cure the misery have added to the uncertainty, pushing Captains of India Inc.
into rescue mode. Clearly, while the immediate focus is to save the ship from
sinking, tax considerations also require due consideration in time to come.
This article focuses on some of the direct tax issues which are likely to be
faced by Indian taxpayers.

 

Deduction
of expenses incurred on Covid 19

As the pandemic increased its
spread into the country, India Inc. rose to the occasion and started supporting
various noble causes of the society in terms of supplying food, medical
supplies, setting up of quarantine centres, etc. Most of the corporates joined
hands in the national interest and contributed to PM CARES and CM Covid-19
Funds to support frontline workers and assist in the medical war. MCA, with a
noble intention, amended Schedule VII of the Companies Act, 2013 (‘Cos Act’) to
include Covid-19 expenditure as eligible CSR expenditure in compliance with CSR
law.

 

Explanation 2 to section 37(1) of
the Income-tax Act, 1961 (‘the Act’) provides that any expenditure incurred by
an assessee on the activities relating to corporate social responsibility referred
to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed
to be an expenditure incurred by the assessee for the purpose of the business
or profession.

 

The amendment to Schedule VII of
the Companies Act read with the Explanation 2 to section 37(1) of the Act
raises the following issues:

 

a)   Whether the expenditure on Covid-19 is tax deductible for an
assessee not required to comply with CSR regulations of the Companies Act,
2013?

b)   Can an assessee claim business expenditure for
Covid -19 related expenditure which he does not claim to be CSR for the purpose
of compliance with section 135 of Cos Act?

It is possible to take a view
that Explanation 2 to section 37(1) of the Act is applicable only to those
assessees who are covered by section 135 of the Companies Act. Thus, if an
assessee is not covered by the said regulation, the limitation of Explanation 2
to section 37 is not applicable. Courts have held that factors like meeting
social obligation, impact on goodwill on contribution to society, etc. meet the
test of commercial expediency and deduction has been granted1. Thus,
onus will be on the assessee to prove nexus of the expenditure with the
business and the positive impact on business to perfect the claim of deduction.
Branding of company on distribution of food and essential requirements, images
of employees wearing company branded shirts and supporting larger cause, media
reports, posting on social websites will all support the claim for deduction.

 

The issue arises in the second
category i.e. an assessee who is otherwise covered by section 135 of Companies
Act who does not claim Covid-19 related expenditure for compliance with CSR
laws. The difficulty arises as Explanation 2 to section 37(1) disallows
expenditure ‘referred to in section 135’. Referred to would mean ‘mentioned’ in
section 135 of the Companies Act. Explanation 2 to section 37(1) fictionally
deems such expenditure as not being for business purpose. Whilst argument in
favour of deduction seems a better view of the matter, it is recommended that
assessee should take fact-specific legal advise before claiming deduction.

 

Impact on lease rental

Lockdown and
social distancing are likely to have significant impact on lease rentals. The
impact may be deep for let-out properties in shopping malls and hotels.
Further, the sudden lockdown may have resulted in economic disruption of
business of the lessee, impairing its ability to pay rent. Following situations
are likely to arise:

 

a)   Lessee does not pay rent for lockdown period by invoking force
majeure, which is accepted by the lessor;

b)   Lessee invokes force majeure which is not accepted by the
lessor;

c)   Lessor and lessee defer rent for a mutually
agreed period;

d)   Lessee is unable to pay rent and vacates the
premises;

e)   Lessor is subsequently unable to find a
lessee for the property either on account of lockdown or lower rental yield;

 

In case of situation a), act of force
majeure goes to the root of the contract making the contract unworkable. On
account of the said event, a view could be taken that the property ceases to be
a let-out property. Accordingly, it may be possible for the lessor to seek
benefit of vacancy allowance u/s 23(1)(c). The said provision states that in
case actual rent received or receivable is less than deemed Annual Let out
Value (ALV) on account of vacancy then, actual rent received or receivable will
be deemed to be ALV. In this case, vacancy arises contractually. In other
words, even though goods or assets of lessee may continue to be lying in said
property but still it has to be treated as not let out, absolving the  lessee from the liability to pay rent.
Vacancy in the context in which it is used in section 23(1)(c) will need to be
interpreted as the antithesis of let out.

 

Situation b) is tricky as there
is a rent dispute during the lockdown period. Section 23(1)(b) provides that
when actual rent received or receivable is higher than ALV, then said amount
will be treated as ALV. ‘Receivable’ postulates concept of accrual. As per one
option, lessor may treat same amount as unrealised rent and offer the same in
the year of receipt u/s 25A. However, if it is required to keep rent as
receivable in books of accounts to succeed under the Contract Act, then in such
an event, tax liability will arise.

 

Situation c) involves mere
deferment of payment of rent and accordingly lessor will be required to pay tax
on rent component as it fulfils the test of receivable u/s 23(1)(b). 

 

Situation d) is a case comparable
to unrealised rent. Explanation to section 23 read with Rule 4 provides for
exclusion of such rent if the conditions prescribed in Rule 4 are complied
with.

 

Issue in case of situation e)
arises as section 23(3) permits only two houses to be treated as self-occupied.
Situation narrated in e) needs to be distinguished from a situation wherein
assessee in past years has offered income from more than two houses under the
head Income from house property. Conclusion does not change for such assessee.
Situation e) deals with a situation wherein assessee desires to actually let
out his house but could not find a tenant. In such situations, the Tribunal2  has held that even if the house remains
vacant for the entire year despite the best attempts of the assessee, then
benefit of vacancy allowance u/s 23(1)(c) should be granted to the assessee and
accordingly ALV for such property would be Nil. Against this proposition, there
is also an adverse decision in the case of Susham Singla [2016] 76
taxmann.com 349 (Punjab & Haryana)3. Perhaps a
distinguishing feature could be that in cases where vacancy allowance was
granted by the Tribunal, the assessee was able to demonstrate efforts made to
let out property.

 

Impact on business income


Revenue
recognition

Revenue recognition for computing
income under the head ?profits and gains of business or profession’ is governed
by the principles of accrual enshrined in section 4 as also ICDS IV dealing
with revenue recognition. ICDS IV permits revenue recognition in respect of
sale of goods only if the following criteria are met:

 

  •     Whether significant risks and rewards of ownership have been
    transferred to the buyer and the seller retains no effective control
  •     Evaluate reasonable certainty of its ultimate collection

 

These criteria are relevant for
revenue recognition for F.Y. 2019-20. On account of lockdown and logistics
issues, it is possible that goods dispatched could not reach the customer.
Contractually, even though the transaction may have been concluded, the seller
was obliged to deliver goods to the buyer. In such a case, because of lockdown,
goods may be in transit or in the seller’s warehouse. In such a situation,
significant risk and reward of ownership continues to be with the seller.
Accordingly, the seller may not be required to offer the said amount to tax.
Further, economic stress may change the credit profile of the customer, raising
a question on the realisability of sale proceeds of the goods sold even
pre-Covid-19 outbreak. In such a case, even though the test of accrual would be
met, since there is uncertainty in ultimate collection, the assessee may not
recognise such revenue. This criterion is also important as the customer may
invoke force majeure clause or material adverse clause and turn back
from its commitment. 

 

Section 43CB of the Act read with
ICDS IV requires the service industry to apply Percentage of Completion Method
(POCM). If duration of service is less than 90 days, the assessee can apply
Project Completion Method (PCM) and offer revenue to tax on completion of the
project. Disruption caused due to pandemic and work from home is likely to
impact numerous service contracts. Assessee will have to determine stage of
completion of contract on 31st March 2020 for each open contract at
year end to determine its chargeable income. It is equally possible that a
contract which was estimated to be completed in less than 90 days may take more
time and accordingly move from PCM to POCM basis of recognition. Thus, it is
possible that an income which was estimated to be offered to tax in F.Y.
2020-21 may partially be required to be taxed in F.Y. 2019-20, changing the
assumptions at the time of computing advance tax. An issue which judiciary is
likely to face is whether the 90 days period should be read as a rigid test or
exceptional events like Covid-19 can be excluded for computing the 90 days’
periods. 

 

Provision
for onerous contract

Ind AS 37 requires recognition of
provision for onerous contract. An onerous contract is a contract in which the
unavoidable costs of meeting the obligations under the contract exceed the
economic benefits expected to be received under it. If an entity has a contract
that is onerous, the present obligation under the contract shall be recognised
and measured as a provision.

 

Section 36(1)(xviii) of the Act
provides that mark to market (M2M) loss or other expected loss shall be
computed in accordance with ICDS. Section 40A(13) of the Act provides that no
deduction or allowance shall be allowed in respect of any M2M loss or expected
loss except as allowable u/s 36(1)(xviii). ICDS 1 provides that expected loss
shall not be recognised unless the same is in accordance with other ICDS. ICDS
X provides that no provision shall be recognised for costs that need to be
incurred to operate in the future. On co-joint reading of aforesaid law, no
deduction shall be allowed for onerous contract under normal provisions.
However, for MAT purposes, such provision will be deductible as it cannot be said
that such provision is for unascertained liability. This treatment will require
an assessee to accurately track expenses incurred on such contract in future
years and claim it as deduction in year of incurrence.

 

Liquidated
damages

Disruption in the supply chain
may result in claims or counter claims as it is possible that the assessee
would not be in a position to meet its contractual obligations. The contract
may provide for payment of liquidated damages. Courts have held that such
payment is tax deductible4.

 

Remeasurement
of provision

Lockdown and social distancing
have resulted in India Inc. rethinking on extension of warranty and service
period in respect of goods sold prior to Covid-19. This is likely to result in
change in warranty provision. Provision for warranty is tax deductible if
otherwise the requirements of ICDS X are met. Practically for companies
following Ind AS, warranty provisions are discounted to fair value. However,
ICDS X expressly prohibits deduction based on discounting to net present value
basis. This mismatch will require an assessee to accurately reconcile claims
made in the past ignoring NPV basis, revise the provision and ignore NPV
discounting for claiming deduction. This is much easier said than done.

 

Further, companies following Ind
AS are required to make provision for debtors based on Expected Credit Loss
(ECL) method. This method requires consideration of not only the historic data
but also of the future credit risk profile of debtor. In turbulent times like
these, making an estimate of the future profile of a customer is likely to be
challenging since the business outlook is uncertain. Further, the impact of
lockdown on each customer, its ability to raise finances and stay afloat
involves significant assumptions and customer-specific data. Normative
mathematical models cannot be relied upon. It is possible that ECL provision
may increase for F.Y. 2019-20. Such provision may not be tax deductible under
normal computation provisions [Explanation 1 to section 36(1)(vii)]. As regards
MAT, the issue is debatable. Gujarat High Court’s Full Bench in case of CIT
vs. Vodafone Essar Gujarat Ltd5  has held that if the provision is accounted
as reduction from debtor / asset side and not reflected separately in
liabilities side then, in such case said provision is not hit by any limitation
of Explanation 1 to section 115JB and is tax deductible.

 

Inventory
valuation

ICDS 2 permits valuation of
inventory at cost or Net Realisable Value (NRV) whichever is lower. It is
possible that on account of prolonged shutdown, disruption in supply chain,
overhaul of non-essential commodities, some of the inventory which may be lying
in warehouse or stuck in transport may no longer be marketable e.g perishable
goods, inventory with short shelf life (food products) may be required to be
disposed of. In such case, it should be possible to recognise NRV at Nil. Care
should be taken to obtain corroborative 
evidence in terms of internal technical reports, subsequent measures to
dispose of, etc. to substantiate Nil realisable value.

Fixed
Asset

The spread of Covid-19 has had a
differing impact on various nations. It is possible that some of the fixed assets
acquired could not be installed on account of cross border travel prohibitions
not only in India but across the globe. In such a case, such assets which were
earlier contemplated to start active use in F.Y. 2019-20 will miss the
deadline. In absence of satisfaction of the user test, no depreciation can be
claimed in F.Y. 2019-20. Further in terms of ICDS V – tangible fixed assets,
cost attributable to such fixed asset may also be required to be capitalised.
Further, if such asset is purchased out of borrowed funds, interest expenditure
will be required to be capitalised. Unlike Ind AS 23, ICDS IX does not suspend
capitalisation when active development is suspended. This mismatch will require
the assessee to accurately determine interest cost which is expensed for books
purpose and capitalise it as part of borrowing for tax purposes. It is equally
possible that unexpected delay may impact advance tax projections made for F.Y.
2019-20.

 

Shares and securities

The Act provides special
anti-abuse provisions in respect of dealing in shares and securities. Sections
50CB and  56(2)(x) regulate transactions
where actual consideration is less than fair market value. Rule 11UA provides a
computation yardstick to compute fair market value. The economic downturn may force
some promoters to sell their shares at less than Rule 11UA value to genuine
investors either to repay debts borrowed on pledge of shares or to raise
capital for future survival. Provisions of sections 50CB and 56(2)(x), if
invoked, may result in additional tax burden. Fortunately, Mumbai Tribunal in ACIT
vs. Subhodh Menon  relying on the
Supreme Court decision in the case of K P Varghese  read down the provision to apply only in
abusive situations.

 

Further, the pandemic may require
promoters to pump in capital into the company. Section 56(2)(viib) regulates
share infusion by a resident shareholder. The provision proposes to tax
infusion of share capital above the fair market value as computed by a merchant
banker. DCF is a commonly accepted methodology to value business. DCF requires
reasonable assumption of future cash flows, risk premium, perpetuity factor
etc. Considering that the present situation is exceptional, it may involve
significant assumptions by the valuer as also the company. Further, there will
be an element of uncertainty, especially when the business outlook is not
clear. It is possible that the actual business achievements may be at material
variance with genuine assumptions.

 

In contrast, the existing
situation may have an impact on capital infused in the past, say 2-3 years,
which were justified considering the valuation report availed from the Merchant
Banker at the said time. Tax authorities may now rely upon actual figures and question
the valuation variables used by the Merchant Banker. Tax authorities may
attempt to recompute fair value considering actual figures. In such a
situation, the onus will be on the assessee to demonstrate impact of Covid-19
on valuation assumptions made in the past. Evidence such as loss of major
customer, shutdown in major geographies, increased cost of borrowing, capacity
underutilisation will support the case of the assessee to justify valuation
done before Covid-19 breakout. 

 

Conclusion

One hopes normalcy returns soon.
Aforesaid are some of the issues which, in view of the authors, are only the
tip of the iceberg. If the pandemic deepens its curve, it is likely to result
in significant business disruption. Every impact on business has definite tax
consequences and tax professionals have a special role to play.   

 

________________________________________________

1   CIT vs. Madras Refineries Ltd., (2004) 266 ITR 170 (Mad);
Orissa Forest Development Corporation Ltd. vs. JCIT, (2002) 80 ITD 300
(Cuttack); Surat Electricity Co. Ltd. vs. ACIT, (2010) 5 ITR(Trib) 280 (Ahd)

2   Sachin R. Tendulkar vs.
DCIT [2018] 96 taxmann.com 253 (Mumbai – Trib.); Empire Capital (P.) Ltd vs.
DCIT [2018] 96 taxmann.com 253 (Mumbai – Trib.); Ms. Priyananki Singh Sood vs. ACIT [2019] 101 taxmann.com 45 (Delhi –
Trib.)

3   SLP dismissed by Supreme Court [2017] 81 taxmann.com 167 (SC)

4    PCIT vs. Green
Delhi BQS Ltd [2019] 417 ITR 162 (Delhi); CIT vs. Rambal
(P.) Ltd [2018] 96 taxmann.com 170 (Madras); PCIT vs. Mazda Ltd
[2017] 250 Taxman 510 (Gujarat) ; Haji Aziz and Abdul Shakoor Bros [1961] 41
ITR 350 (SC)

5    [2017] 397 ITR 55 (Gujarat)

6    [2019] 103 taxmann.com 15 (Mumbai)

7    [1981] 131 ITR 597 (SC)

ACCUMULATION OF INCOME U/S 11(2) – STATEMENT OF PURPOSES

ISSUE FOR CONSIDERATION

A
charitable institution registered u/s 12A or 12AA of the Income-tax Act, 1961
can claim exemption of its income from property held for charitable or
religious purposes u/s 11(1) to the extent of such income applied or deemed to
be applied for charitable or religious purposes. In addition, exemption is also
available in respect of income not so applied but accumulated or set apart u/s
11(2), for such purposes for a period not exceeding five years, by filing a
statement of such accumulation in form No. 10. Section 11(2) requires the
institution to state the purpose for which the income is being accumulated or
set apart and the period for which the income is to be accumulated or set apart
in form No 10.

 

One of the longest running
controversies for the last 29 years has been about whether the purpose required
to be stated in form No. 10 can be general in nature, such as mere reference to
or reproduction of the objects of the trust, or that the statement has to be
specific in nature. In other words, should it be held to be a sufficient
compliance where the accumulation is stated to be for any medical and / or
educational purpose, or the statement should specify that the accumulation is
for the building of a hospital or a school, or anything else. While the
Calcutta and Madras High Courts have taken a view that a mention of a specific
purpose, and not just the general objects, is necessary, a majority of other
Courts, including the Delhi, Karnataka, Punjab and Haryana, Gujarat and Andhra
Pradesh and Telangana High Courts, have taken a contrary view holding that a
mere specification of the broad objects in the statement would suffice for this
purpose.

 

THE SINGHANIA CHARITABLE
TRUST CASE

The issue first came up for
discussion before the Calcutta High Court in the case of DIT(E) vs.
Trustees of Singhania Charitable Trust 199 ITR 819.

 

In this case, the assessee, a public
charitable trust, had claimed exemption u/s 11 for A.Y. 1984-85, including for
accumulation u/s 11(2), for which purpose it had filed form No. 10. In the said
form, as purposes of accumulation of income, the assessee had listed all the charitable
objects for which it was created.

 

These were:

(i) To
assist, finance, support, found, establish and maintain any institution meant
for the relief of the poor, advancement of education and medical relief;

(ii) To open, found, establish or finance, assist and contribute to the
maintenance of hospitals, charitable dispensaries, maternity homes, children’s
clinics, family planning centres, welfare centres, schools, colleges and / or
institutions for promotion of research and education in medical science,
including surgery;

(iii) To maintain beds in hospitals and make research grants for the
promotion and advancement of medical science in India;

(iv) To help needy people in marriage, funeral and cremation of the
dead;

(v) To
found, establish, maintain and assist leper asylums or other institutions for
the treatment of leprosy;

(vi)  To open, found, establish, assist and maintain schools, colleges
and boarding houses;

(vii) To open, found, establish contribute to the maintenance of
orphanages, widows’ homes, lunatic asylums, poor houses;

(viii) To open, found, establish and assist schools, colleges and
hospitals, for the physically or mentally handicapped, spastics, the blind, the
deaf and the dumb;

(ix) To distribute dhotis, blankets, rugs, woollen clothing,
quilts or cotton, woollen, silken or other varieties of clothes to the poor;

(x) To
grant fees, stipends, scholarships, prizes, books, interest-free loans and
other aid for pursuing studies, training or research;

(xi) To establish, found and maintain libraries, reading rooms for the
convenience of the public;

(xii) To establish scholarships, teaching and research chairs in Indian
universities and contribute towards installation of capital equipment in
educational and research institutes;

(xiii) To print, publish, distribute journals, periodicals, books and
leaflets for the promotion of the objects of the society;

(xiv) To establish or support or aid in the establishment or support
of any other associations having similar objects;

(xv) To assist, support and to give monetary help to any individual in
distress, poor or poor(s) for his or their medical treatment, advancement of
education;

(xvi) To start, maintain and assist in relief measures in those parts
of India which are subjected to natural calamities such as famine, epidemics,
fire, flood, dearth of water, earthquake.

 

The resolution passed by the Board
of Trustees of the trust was to the effect that the balance of unapplied income
of the year was to be accumulated and / or set apart for application to any one
or more of the objects of the trust as set out in item numbers (i) to (xvi)
under paragraph 1 of the deed of the trust.

 

Its
assessment was completed, allowing the exemption u/s 11, including accumulation
u/s 11(2). Subsequently, a notice was issued by the Commissioner for revision
u/s 263. According to the Commissioner, section 11(2) contemplated only
specific or concrete purposes and since those were not specified by the
assessee, the assessment order was erroneous and prejudicial to the interests
of the Revenue. The Commissioner called for the revision of the order of
assessment u/s 263, setting aside the assessment order and directing the A.O.
to redo the assessment taking into account the correct position of facts and
law. The Commissioner observed that it would be a mockery of the section if, in
the application for accumulation, all the objects of the trust were listed out
and the period was mentioned as ten years, which was the maximum then
permissible under law.

 

On appeal, the Tribunal held that on
an examination of the scheme of the Act since a plurality of charitable
purposes was not ruled out under it, no objection could possibly be taken to
the assessee’s listing out all the objects of the trust in form No. 10. The Tribunal
held the act of the assessee to be in compliance with the provisions of the Act
and disagreed with the findings of the Commissioner.

 

Before the Calcutta High Court, it
was contended on behalf of the assessee that one purpose of accumulation was
interlinked with the other and, therefore, the mention of all the purposes did
not make any difference and satisfied the requirements of section 11(2).

The Calcutta High Court observed
that the Tribunal’s decision overlooked the scheme relating to the accumulation
of income for a particular future use. It noted that section 11(1) itself
provided for marginal setting apart and accumulation of up to 25% (now 15%) of
the income of the trust. According to the High Court, section 11(1)
accumulation could be taken for the broad purposes of the trust as a whole and
that is why the statute in section 11(1) did not require an assessee to state
or specify the purpose. Such setting apart u/s 11(1) for any of the purposes of
the trust was, however, a short-term accumulation, in view of the Court, not to
exceed beyond the subsequent year. The High Court noted that it was sub-section
(2) which provided for the long-term accumulation of the income where it was
obvious that the long-term accumulation thereunder should be for a definite and
concrete purpose or purposes.

 

The High Court noted that the
assessee had sought permission to accumulate not for any determinate purpose or
purposes, but for the objects as enshrined in the trust deed in a blanket or
global manner which, in its view, was definitely not in the contemplation of
section 11(2) when it was construed in its setting. The High Court held that
accepting the assessee’s contention that saving and accumulation of income for
future application of the income was for the purposes of the trust in the
widest terms so as to embrace the entirety of the objects clause of the trust
deed, would render the requirement of specification of the purpose for
acquisition in that sub-section redundant.

 

The High Court observed that the
purpose of accumulation could not tread beyond the objects clause of the trust,
the legislature could not have provided for the period of accumulation if it
did not have in mind the particularity of the purpose or purposes falling
within the ambit of the objects clause of the trust deed. The High Court was of
the view that when section 11(2) required the specification of the purpose, it
did so with the objective of calling an assessee to state some specific purpose
out of the multiple purposes for which the trust stood; had it not been so,
there would have been no mandate for such specification since, in any case, a
charitable trust could, in no circumstances, apply its income, whether current
or accumulated, for any purposes other than the objects for which it stood; the
very fact that the statute required the purpose for accumulation to be stated
implied that such a purpose be a concrete one, an itemised purpose or a purpose
instrumental or ancillary to the implementation of its object or objects; the
very requirement of specification of purpose predicated that the purpose must
have an individuality.

 

According to the High Court, the
provision of section 11(2) was a concession provision to enable a charitable
trust to meet the contingency where the fulfilment of any project within its
object or objects needed heavy outlay calling for accumulation to amass
sufficient money to implement it and, therefore, specification of purpose as
required by section 11(2) admitted of no amount of vagueness about such
purpose.

 

The
High Court observed that it was not necessary that the assessee had to mention
only one specific object; there could be a setting apart and accumulation of
income for more objects than one, but whatever the objects or purposes might
be, the assessee must specify in the notice the concrete nature of the purposes
for which the application was being made; plurality of the purposes of
accumulation might not be precluded, but it must depend on the exact and
precise purposes for which the accumulation was intended; the generality of the
objects of the trust could not take the place of the specificity of the need
for accumulation.

 

The Calcutta High Court, therefore,
remanded the matter to the Tribunal to allow the assessee to adduce fresh
evidence, whether in the form of any resolution or otherwise, showing that the
specific purpose for which the trust required the accumulation of the income
existed and, if such resolution or evidence was placed before the Tribunal, the
Tribunal was directed to consider whether the obligation cast on the assessee
u/s 11(2) had been discharged and the exemption might accordingly be granted to
the assessee.

 

This decision of the Calcutta High
Court was referred to with approval by the Madras High Court in the case of CIT
vs. M. CT. Muthiah Chettiar Family Trust 245 ITR 400, though the Court
did not decide on the issue under consideration, since the issue before it
pertained to the taxation of the unutilised accumulation u/s 11(3), and it was
conceded by the Department that it was not in a position at a later date to
challenge that the form No. 10 filed in the year of accumulation was invalid
for not having stated a specified purpose for accumulation.

 

THE HOTEL AND RESTAURANT
ASSOCIATION’S CASE

The issue subsequently came up
before the Delhi High Court in the case of CIT vs. Hotel and Restaurant
Association 261 ITR 190.

In this case, pertaining to A.Y.
1992-93, the assessee, a company registered u/s 25 of the Companies Act, 1956
was also registered u/s 12A of the Income-tax Act. For the relevant year the
assessee accumulated its income for a period of ten years for fulfilment of the
objects for which it had been created. Notice to that effect was given by
filing form No. 10, giving particulars of the income sought to be accumulated.

 

During the assessment proceedings,
the A.O. declined to take into consideration the amount so accumulated on the
ground that in form No. 10 the specific object for which the income was sought
to be accumulated was not indicated. Accordingly, exemption in respect of such
accumulation was not allowed.

 

The Commissioner (Appeals) held that
the assessee was entitled to the exemption for the accumulation since the
assessee had passed a resolution to accumulate income so as to apply the same
in India in the next ten years to achieve the objects for which it had been
incorporated, and notice of this fact had been given to the A.O. in the
prescribed format. The Tribunal confirmed the view taken by the Commissioner
(Appeals).

 

Before the High Court, it was
submitted on behalf of the Revenue that the appellate authorities had failed to
appreciate that in the prescribed form the assessee had failed to indicate the
specific purpose for which the income was sought to be accumulated and,
therefore, the statutory requirement had not been strictly complied with,
disentitling the assessee from relief u/s 11(2).

 

The Delhi High Court, disagreeing
with the Revenue’s contentions, observed that while it was true that
specification of a certain purpose or purposes was needed for accumulation of
the trust’s income u/s 11(2), the purpose or purposes to be specified could not
have been beyond the objects of the trust; plurality of purposes of
accumulation was not precluded but depended on the precise purpose for which the
accumulation was intended.

 

The Delhi High Court noted that the
appellate authorities below had recorded a concurrent finding that the income
was sought to be accumulated by the assessee to achieve the objects for which
the assessee was incorporated. It further noted that it was not the case of the
Revenue that any of the objects of the assessee company were not for charitable
purposes. The findings of fact by the Tribunal gave rise to no question of law.
The Delhi High Court therefore declined to entertain the appeal.

This decision of the Delhi High
Court was followed in subsequent decisions of the same High Court and other
High Courts in the following cases:

 

(1) DIT(E)
vs. Daulat Ram Education Society 278 ITR 260 (Del.) – in this case, out
of 29 objects stipulated in the Memorandum of Association, the assessee had
specified eight objects;

 

(2) DIT(E)
vs. Mamta Health Institute for Mother and Children 293 ITR 380 (Del.) –
in form No. 10, the purpose of accumulation was stated to be as per the  resolution passed by the assessee; and in the
resolution the purpose specified was that of financing of the ongoing
programmes and of furtherance of the objects of the society;

 

(3) Bharat
Kalyan Pratishthan vs. DIT(E) 299 ITR 406 (Del.) – in this case the
resolution was to the effect that the amount accumulated be utilised for the
purposes of the trust, where the trust had only three objects, viz., medical
relief, help to the poor and educational purposes;

 

(4) DIT
vs. Mitsui & Co. Environmental Trust 303 ITR 111 (Del.) – in form
No. 10 it was mentioned that the amount accumulated would be utilised for the
objects of the trust;

 

(5) Bharat
Krishak Samaj vs. DDIT(E) 306 ITR 153 (Del.) – here, the accumulation
was for the objects of the trust;

 

(6) CIT
vs. National Institute and Financial Management 322 ITR 694 (P & H)
– the purpose of the accumulation stated was for expenditure on the building
fund and equipment fund;

 

(7) DIT(E)
vs. NBIE Welfare Society 370 ITR 490 (Del.) – in form No. 10, the
purpose stated for accumulation was for ‘further utilisation’;

 

(8) Samaj
Seva Nidhi vs. ACIT 376 ITR 507 (AP & T) – form No. 10 stated that
the accumulation was for general objects, but by a subsequent letter it was
stated that the amount was for the welfare of Scheduled Castes, Scheduled
Tribes, Vanvasis and socially and economically weaker sections of the society
as mentioned in a specific clause of the trust deed;

 

(9) DIT(E)
vs. Envisions 378 ITR 483 (Kar.) – in this case, three out of the 14
objects were reproduced in form No. 10, viz., conduct of various activities in
the field of academics, architecture, music and literature for preservation of
heritage; to run and maintain educational or other institutions for providing
and promoting education for the poor and weaker sections of society; and to
run, maintain or assist any medical institution to grant assistance to indigent
needy people for meeting the cost of medical treatment;

 

(10) CIT(E) vs. Gokula Education Foundation 394 ITR 236 (Kar.)
– in form No. 10, the purpose of accumulation stated was to improve / develop
the buildings of the trust and to conduct educational / charitable activities;
a special leave petition against the order of the High Court has been granted
to the Income Tax Department by the Supreme Court [248 Taxman 13(SC)];

 

(11) CIT(E) vs. Ohio University Christ College 408 ITR 352 (Kar.) –
three purposes were stated in form No. 10, which were all charitable, but
details of such purposes were not given;

 

(12) CIT(E) vs. Bochasanwasi Shri Akshar Purshottam Public Charitable
Trust 409 ITR 591 (Guj.) – in form No. 10, the purpose stated was for
providing medical facilities at various centres; the resolution had specified
purposes such as for future hospital of the trust, for purchase of necessary
equipment, ambulance van, furniture and fixtures and further expenditure for
modernisation of the hospitals.

 

OBSERVATIONS

Section 11(2) of the Income -tax Act
permits accumulation or setting apart of an income of a charitable institution
which is otherwise not applied or is not deemed to have been applied for the
charitable or religious purposes during the year. The income so accumulated or
set apart for application to such purposes is not included in the total income
for the year, provided the conditions specified in section 11(2) are complied
with. These conditions are:

 

(a) a
statement is furnished, in the prescribed form and manner, to the A.O. (form
No. 10 under Rule 17), stating therein the purpose for which the income is so
accumulated or set apart and the period for which the income is to be
accumulated or set apart and which period shall not exceed five years;

(b) the
money so accumulated or set apart is invested or deposited in the specified
form or mode;

(c) the
statement in form No. 10 is furnished by the due date for furnishing the return
of income u/s 139(1);

(d) form
No. 10 is furnished electronically under the digital signature or an electronic
verification code.

 

On
an apparent reading of the provision, it is gathered that an assessee, in cases
where the income is accumulated or set apart, is required to state the purpose
of accumulation and also state the period of accumulation in form No. 10. Once
this is dutifully complied with, no other prescription is provided for in the
Act. In other words, the assessee is to state the purpose of accumulation and
the period thereafter. The law apparently does not limit the purpose of
accumulation to a single purpose and further does not require such accumulation
for a dedicated project or a task within the objects of the institution. It
also does not call for passing of a resolution or enclosing of a copy of such
resolution with form No. 10.

 

There is no disagreement amongst the
High Courts about the need for a trust to spend its income, including the
accumulated income, only for those charitable or religious purposes specified
in its objects as per the Trust Deed. While granting registration u/s 12A/12AA,
the Commissioner would already have examined whether such objects qualify as
public charitable and religious purposes. It is also not in dispute that the
accumulation can be for more than one purpose; plurality of purposes is not
prohibited; there is no prohibition on a trust accumulating its income for all
of its activities. The obvious corollary to this undisputed position is that
while stating the purpose of accumulation in form No. 10, the assessee instead
of reproducing the list of all such activities, specifies that it is for its
objects, which have already been found to be charitable or religious in nature,
that should suffice for the purposes of section 11(2).

 

The 25% (now 15%) accumulation u/s
11(1) is not a short-term accumulation only for one year but is in fact for the
life-time of the trust and this factor should not have influenced the Calcutta High
Court to hold that for the purposes of section 11(2) accumulation there was a
need to state a specific purpose and not the general one by simply referring to
the objects clause.

 

If one examines the various types of
exemption u/s 11, one can see that all of these are for any of the objects of
the trust – the spending during the year u/s 11(1), the 15% accumulation u/s
11(1), the option to spend in the subsequent year under the explanation to
section 11(1). If that be the position, the legislature cannot be said to have
intended to restrict only the accumulation u/s 11(2) to a limited part of the
objects.

 

The requirement to specify the
purposes of accumulation can perhaps have been intended to ensure that the
accumulation is spent within the specified time and to tax it u/s 11(3) if it
is not spent within that time. But that purpose would be met even if all the
objects are specified for accumulation or setting apart.

 

In any case, almost all the High
Courts, except the Calcutta and the Madras High Courts, have held that so long
as the purpose of accumulation is clear from either the resolution or
subsequent correspondence or surrounding circumstances, that should suffice as
specification of the objects. This also seems clear from the fact that while
the Supreme Court has admitted the special leave petition against the Karnataka
High Court decision in Gokula Education Foundation (Supra), it
has rejected the special leave petition against the decision of the Gujarat
High Court in the case of Bochasanwasi Shri Akshar Purshottam Public
Charitable Trust (Supra).

 

The Tribunal in the case of Associated
Electronics Research Foundation 100 TTJ 480 (Del.) has held that it
would be a sufficient compliance of section 11(2) where the purpose of
accumulation can be gathered from the minutes of the meeting wherein a decision
to accumulate is taken and such decision is recorded in the minutes.

 

In the end, the assessee, in the
cases of deficiency or failure, may consider the possibility of making up for
such deficiency or failure by prescribing the purpose of accumulation or
setting apart during the course of assessment or before or thereafter. The
Gujarat High Court in the case of Bochasanwasi Shri Akshar Purshottam
Public Charitable Trust (Supra) has permitted the institution to
specify and to state the purpose of accumulation, subsequent to the filing of
the return of income. The special leave petition filed by the Income-tax
Department has been rejected by the Supreme Court in 263 Taxman 247 (SC).

 

The Calcutta High Court view seems to require
reconsideration, or should be read in the context of the matter, and the view
taken by the other High Courts seems to be the better view. One can only hope that the Supreme Court speedily decides this long-standing controversy which
has resulted in litigation for so many trusts.

Section 56 read with sections 22 and 23 – Compensation received under an agreement entered into with a tenant granting him an option to take on lease other units which belonged to the assessee is taxable under the head Income from Other Sources

10.
[2020] 116 taxmann.com 223 Redwood
IT Services (P) Ltd. vs. ITO(10)(2)(2), (Mum.) ITA No.
1309(Mum) 2018 A.Y.:
2011-12 Date of
order: 28th February, 2020

 

Section 56 read with sections 22 and 23 –
Compensation received under an agreement entered into with a tenant granting
him an option to take on lease other units which belonged to the assessee is
taxable under the head Income from Other Sources

 

FACTS

The assessee acquired an immovable property which was divided into four
units of which two units, viz. Unit Nos. 3 and 4, were let out. In terms of the
agreement entered into by the assessee with the tenant, the assessee had
granted an option to the tenant to take the other two units, viz. Units 1 and 2,
on lease. Under the option agreement, the assessee agreed to lease the property
in future and restrained itself from leasing it to any other person during the
period for which the option was granted. In consideration of such a covenant,
the assessee received from the tenant a compensation of Rs. 33,75,000 which was
offered by him under the head Income from Other Sources.

 

The A.O. considered
the two units in respect of which option was granted to be deemed let-out units
and charged tax on their market rent, and after allowing the standard deduction
taxed a sum of Rs. 76,64,328 under the head ‘Income from House Property’.

 

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

 

HELD

The Tribunal held that for income to be assessable under the head Income
from House Property, it should be out of the property let out or deemed to be
let out for the relevant period. In this case the property is neither let out
nor vacant. The compensation cannot, therefore, be assessed under the head
Income from House Property.

 

The amount received
by the assessee is in the nature of compensation for not letting out property
to any third party for a specified period. The meaning thereof is that by
entering into an option agreement, the assessee had renounced its right to let
out Unit Nos. 1 and 2 for a period of nine months from the date of the option
agreement and any amount received in pursuance of the said agreement is in the
nature of compensation which is assessable under the head Income from Other
Sources.

 

The Tribunal held
that the A.O. as well as the CIT(A) were incorrect in coming to the conclusion
that the property is deemed to be let out and income from the said property
needs to be computed u/s 22 of the Act.

 

The Tribunal directed
the A.O. to delete the additions made towards Income from House Property.

 

This ground of appeal filed by the assessee was
allowed.

Business expenditure – Obsolescence allowance – Sections 36 and 145A of ITA, 1961 – Assessee following particular accounting policy from year to year consistent with provisions of section 145A – Concurrent finding of fact by appellate authorities that stock had been rendered obsolete – Loss allowable

1. CIT vs. Gigabyte
Technology (India) Ltd.

[2020] 421 ITR 21 (Bom.)

Date of order: 7th
January, 2020

 

Business expenditure –
Obsolescence allowance – Sections 36 and 145A of ITA, 1961 – Assessee following
particular accounting policy from year to year consistent with provisions of
section 145A – Concurrent finding of fact by appellate authorities that stock
had been rendered obsolete – Loss allowable

 

In its return, the assessee
claimed losses towards stock obsolescence in respect of laptops and
motherboards. The A.O. held that the laptops and the motherboards which had a
long shelf life could not be considered to have become obsolete and disallowed
the losses in his order passed u/s 143(3) of the Income-tax Act, 1961.

 

The Commissioner (Appeals)
allowed the appeal filed by the assessee. The Tribunal held that the obsolete
stock which was not disposed of or sold was allowable as expenditure and
dismissed the appeal filed by the Department.

 

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

 

‘i)    There were concurrent findings of fact recorded by the
Commissioner (Appeals) as well as the Tribunal that the laptops and
motherboards had been rendered obsolete. There were findings of fact in respect
of the assessee consistently following a particular accounting policy from year
to year, which was consistent with the provisions of section 145A.

 

ii)    The Tribunal was right in holding that the obsolete stock which
was not disposed of or sold was allowable as expenditure.’

REMUNERATION BY A FIRM TO PARTNERS: SECTION 194J ATTRACTED?

From the remuneration payable by a
firm to its partners in pursuance of section 40(b) of the Income-tax Act, 1961
(‘the Act’), the firm does not deduct any tax at source (hereinafter also
referred to as ‘TDS’) under any provision of the Act. This position has been
undisputedly settled and accepted by the Income-tax Department for over 25
years since the new scheme of taxation of firms and partners was brought on the
statute book by the Finance Act, 1992 from the assessment year 1993-94.

But in a recent case I came across an
overzealous officer of the Income-tax Department adopting the stand that a firm
is liable to effect TDS u/s 194J of the Act @ 10% from the remuneration payable
to its partners as, in their view, the services rendered by the partners to the
firm are in the nature of ‘managerial services’ which fall within the scope of
the term ‘technical services’ employed in section 194J. Apart from a huge demand
of tax u/s 201(1), a substantial amount of interest u/s 201(1A) is also being
charged. This is playing havoc with the taxpayers, especially when the partners
have already paid tax on their remuneration in their respective individual
returns and the credit for such tax paid allowable under the first proviso
to sub-section (1) of section 201 is being denied on procedural technicalities.

Therefore, before proceeding further,
it is fervently pleaded that to alleviate the hardships faced by the taxpayers
and to avoid unnecessary litigation, the Central Board of Direct Taxes (‘CBDT’)
needs to urgently issue a circular clarifying the position on this subject, to
be followed (if necessary) by an appropriate legislative amendment in section
194J expressly excluding such remuneration from the purview of section 194J.

 

CLEAR LEGISLATIVE INTENT

Principally, it is submitted that the
remuneration payable by a firm to its partners cannot be subjected to TDS u/s
194J. In this regard the following propositions are submitted:

(1)  Firstly,
the legislative intent has always been clear beyond doubt that under the new
scheme of taxation of firms and partners, interest and remuneration payable by
a firm to its partners are not liable to TDS since by nature, character and
quality any such payment by a firm to its partners is nothing but a share in
the profits of the firm, though called interest or remuneration and though
deductible u/s 40(b). This legislative intent is manifestly evident from the
following:

 

ACCEPTED FOR OVER 25 YEARS

(a)  When
the new scheme of taxation of firms and partners was introduced by the Finance
Act, 1992 with effect from A.Y. 1993-94, section 194DD1 was also
proposed to be inserted in the Act which provided for TDS2 both from
interest and remuneration payable by a firm to its partners. But section 194DD
was dropped during the process of the Finance Bill, 1992 becoming an Act,
because the legislature was conscious that, conceptually, under the new scheme
of taxation of firms and partners, both interest and remuneration payable by a
firm to its partners are only a mode of transferring profits from the firm to
the partners for tax. This is fortified from the statutory provision that the
remuneration (as well as interest) received by a partner from the firm is treated
as business income in the individual hands of the partner u/s 28(v)3
of the Act4;

(b)  Explanation
2 below section 15 unambiguously provides that any salary, bonus, commission or
remuneration, by whatever name called, due to, or received by, a partner from
the firm shall not be regarded as ‘salary’. Consequently, provisions of section
192 relating to TDS from salaries are not attracted. This is statutory
recognition of the principle that there cannot be an employer-employee
relationship between a firm and its partners and as such no tax is required to
be deducted from such remuneration u/s 192;

(c)  Section
194A(3)(iv), likewise, expressly provides that no tax is to be deducted at
source from the interest payable by a firm to its partners;

(d) As
a matter of fact, any firm deducting tax at source under any provision of the
Act, including section 194J, from the remuneration payable to its partners is
unheard of in India and this position has been undisputedly, ungrudgingly and
eminently accepted by the Income-tax Department for over 25 years since the new
scheme of taxation of firms and partners came on the statute book;

(e)  Section 194J was introduced in the Act by the
Finance Act, 1995 with effect from 1st July, 1995 for TDS from fees
for professional services5  and fees for technical services6.
Later, by the Finance Act, 2012 a new category was added by inserting clause
(ba) in sub-section (1) of section 194J with effect from 1st July,
2012 which mandates TDS from ‘any remuneration or fees or commission, by
whatever name called, other than those on which tax is deductible u/s 192, to a
director of a company’. Thus, whenever the legislature intended that tax should
be deducted u/s 194J from the remuneration payable, it has expressly provided
for it in so many words as is the case with clause (ba) above applicable to
remuneration payable by a company to its directors. But no such specific clause
is inserted with regard to the remuneration payable by a firm to its partners;
while inserting clause (ba), the Memorandum explaining the provisions in the
Finance Bill, 2012 ([2012] 342 ITR [St] 234, 241) visibly
acknowledges that there is no specific provision for deduction of tax on the
remuneration paid to a director which is not in the nature of salary.
Furthermore, it is also judicially held7  that prior to insertion of the above referred
clause (ba) with effect from 1st July, 2012, no tax was deductible
u/s 194J from the commission / remuneration payable by a company to its
directors. It follows, therefore, that in the absence of any such specific
clause in section 194J postulating TDS from the remuneration payable by a firm
to its partners, the legislative intent is loud and clear – that no tax is
deductible u/s 194J by a firm from such remuneration.

 

A FIRM HAS NO LEGAL EXISTENCE

(2)  A
firm and its partners are treated as separate assessable entities for the
limited purpose of assessment under the Act, but, in law, as is settled
judicially for ages, a firm has no legal existence of its own, separate and
distinct from the partners constituting it, and the firm name is only a
compendious mode of describing the partners constituting the partnership. As
such, a person cannot render services to himself and there cannot be a contract
of service between a firm and its partners. Therefore, a firm cannot be
expected or made liable to deduct tax at source u/s 194J from such remuneration.


In CIT vs. R.M. Chidambaram
Pillai [1977] 106 ITR 292 (SC) the Apex Court observed that a firm is
not a legal person even though it has some attributes of a personality; and
that in income-tax law a firm is a unit of assessment by special provisions,
but not a full person.

The Supreme Court then unequivocally
held that since a contract of employment requires two distinct persons, viz.,
the employer and the employee, there cannot be a contract of service, in
strict law, between a firm and its partners8.

 

SHARE OF PROFITS OF THE FIRM

(3)  A
partner works for the firm since he is duty-bound to do so under the deed of
partnership as well as in terms of the provisions of the Indian Partnership
Act, 19329  and therefore
there is no relationship of service provider or consultant and client between
the partners and the firm.

(4)  Under
the Indian Partnership Act, 1932 since there is a relationship of ‘mutual
agency’ among the partners, there cannot be a relationship between a firm and
its partners which could give rise to a liability to deduct tax at source u/s
194J.

(5)  Conceptually,
whatever may be the amount received by a partner from the firm, whether called
salary or remuneration, it is not expenditure of the firm (though allowed as
such u/s 40[b]), nor in the nature of compensation for services in the hands of
the partner, but it is in the nature of a share of profits from the firm as is
settled judicially, including by the Supreme Court. In CIT vs. R.M.
Chidambaram Pillai (Supra) it was categorically held that payment of
salary to a partner represents a special share of the profits of the
firm and salary paid to a partner retains the same character of the
income of
the firm.

(6)  Even
under the statutory provisions embodied in section 28(v) of the Act, both
interest and remuneration received by a partner from the firm are expressly
assessed as business income in the hands of the partner and as such interest
and remuneration both are statutorily recognised as in the nature of a share of
profits from the firm10.

 

RULE OF CONSISTENCY

(7)  Since
generally the remuneration payable to the partners is a percentage of the
profits of the firm determined at the end of the year, which keeps on varying with
the amount of profits and is not reckoned with with reference to the quantity
and quality of services rendered by the partners to the firm, the same is a
mode of transferring a share of the profits of the firm to the partners and not
a compensation for the services rendered by the partners to the firm, and hence
the question of invoking section 194J does not arise.

(8)  Inasmuch
as the position that no tax is required to be deducted by a firm from the
remuneration payable to its partners is undisputedly and consistently accepted
by the Income-tax Department for over a quarter of a century now, even the rule
of consistency11 obligates
that this position should not be disturbed by the Income-tax Department at this
stage.

(9) It
can also be contended that by nature the services rendered, if any, by a
partner to the firm do not fall within the connotation of either ‘professional
services’ or ‘technical services’ as defined and understood for the purposes of
section 194J.

(10) No tax is levied under the laws
relating to Goods and Services Tax (‘GST’) on the remuneration received by a
partner from the firm. Thus, the remuneration received by a partner from the
firm is not treated as consideration for the supply of services to the firm but
as a share of profits even under the GST laws.

One arm of the Union Government (the
Income-tax Department) cannot adopt a stand conflicting with the view accepted
by another arm of the same Union Government (GST Department). In Moouat
vs. Betts Motors Ltd. 1958 (3) All E R 402 (CA) it was held that two
departments of the government cannot, in law, adopt contrary or inconsistent
stands, or raise inconsistent contentions, or act at cross purposes. Lord
Denning in this case succinctly summed up the principle in his inimitable
style: ‘The right hand of the government cannot pretend to be unaware of what
the left hand is doing.’ To the same effect was the Supreme Court decision in M.G.
Abrol, Addl. Collector of Customs vs. M/s Shantilal Chhotelal & Co. AIR
1966 SC 197, holding, to the effect, that the customs authorities12
cannot, in law, take a stand or adopt a view which is contrary to that taken by
the licensing authority under the Export (Control) Order, 195413.
This principle of law has been consistently applied for income-tax purposes as
well in a variety of contexts under the Act14.

In view of the foregoing discussion,
it is submitted that the remuneration payable by a firm to its partners cannot
suffer TDS u/s 194J of the Act.  

__________________________________________________________________

1   Clause 74 of the Finance Bill, 1992: [1992]
194 ITR (St) 68-69

2   At the average rate of income-tax computed on the basis of the
rates in force for the financial year concerned

3   Read with section 2(24)(ve)

4      See
also CBDT Circular No. 636 dated 31st August, 1992: [1992] 198
ITR (St) 1, 42-43

5   Clause (a) of sub-section (1) of section 194J

6   Clause (b) of sub-section (1) of section 194J

7      See, among others, Dy. CIT vs. ITC
Ltd. [2015] 154 ITD 136 (Kol.) and Dy. CIT vs. Kirloskar Oil
Engines Ltd. [2016] 158 ITD 309 (Pune). See also Bharat Forge
Ltd. vs. Addl. CIT [2013] 144 ITD 455 (Pune) (pre-2012 period) (sitting
fees to directors not ‘fees for professional services’ u/s 194J)

8   While reaching this conclusion, the Supreme
Court referred to, among others, Dulichand Laxminarayan vs. CIT [1956] 29
ITR 535 (SC); CIT vs. Ramniklal Kothari [1969] 74 ITR 57 (SC); and
Addanki Narayanappa vs. Bhaskara Krishnappa AIR 1966 SC 1300

9      See sub-sections (a) and (b) of section 12
along with sub-section (a) of section 13 of the Indian Partnership Act, 1932

10  See also CBDT Circular No. 636 dated 31st
August, 1992: [1992] 198 ITR (St) 1, 42-43

11     The rule of consistency is settled by
countless judicial precedents. See, for example, Radhasoami Satsang vs.
CIT [1992] 193 ITR 321 (SC); Berger Paints India Ltd. vs. CIT [2004] 266 ITR 99
(SC); Bharat Sanchar Nigam Ltd. vs. UOI [2006] 282 ITR 273 (SC); CIT vs. Neo
Poly Pack (P) Ltd. [2000] 245 ITR 492 (Del.); CIT vs. Leader Valves Ltd. [2007]
295 ITR 273 (P & H); CIT vs. Darius Pandole [2011] 330 ITR 485 (Bom.);
and Pr. CIT vs. Quest Investment Advisors Pvt. Ltd. [2018] 409 ITR 545
(Bom.)

12  Under the Sea Customs Act, 1878

13  Issued under the Import and Export (Control)
Act, 1947

14  See, for instance, Mobile
Communication (India) P. Ltd. vs. Dy. CIT [2010] 33 DTR (Del) (Trib) 398, 416

Section 56(2)(vii)(b) dealing with receipt of immovable property for inadequate consideration will not apply to a case where the agreement for purchase was made before amendment of this section, substantial obligations discharged and rights accrued in favour of assessee but merely registration was on or after amendment of said section Interest under sections 234A and 234B is chargeable with reference to the returned income and not the assessed income

12. Bajrang Lal Naredi vs. ITO (Ranchi) Pradip Kumar Kedia (A.M.) and Madhumita Roy
(J.M.) ITA No. 327/Ran/2018 A.Y.: 2014-15 Date of order: 20th January, 2020

Counsel for Assessee / Revenue: Anand Pasari
with Nitin Pasari / Nisha Singhmarr

 

Section
56(2)(vii)(b) dealing with receipt of immovable property for inadequate
consideration will not apply to a case where the agreement for purchase was
made before amendment of this section, substantial obligations discharged and
rights accrued in favour of assessee but merely registration was on or after
amendment of said section

 

Interest under sections 234A and 234B is
chargeable with reference to the returned income and not the assessed income

 

FACTS I

The assessee, in the year under consideration, registered in his name an
immovable property on 17th June, 2013 against the actual purchase of
property done on 15th April, 2011 in financial year 2011-12. The
purchase consideration was determined at Rs. 9,10,000 at the time of agreement
for purchase in financial year 2011-12; accordingly, the payment was made at
the time of such agreement to the vendor. The registration was, however,
carried out at a belated stage on 17th June, 2013 on which date the
stamp duty valuation stood at a higher figure of Rs. 22,60,000. The A.O.
noticed the alleged under-valuation in the purchase price of the property qua
stamp duty valuation and applied provisions of section 56(2)(vii)(b) of the Act
and worked out the adjusted purchase consideration of Rs. 18,89,350. The A.O.,
accordingly, treated the difference of Rs. 9,79,350 as ‘deemed income’ having
regard to the provisions of section 56(2)(vii)(b) of the Act as amended by the
Finance Act, 2013 and applicable from assessment year 2014-15 onwards.

 

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

 

HELD I

The Tribunal noted
that it is the applicability of section 56(2)(vii)(b) of the Act as amended by
the Finance Act, 2013 and applicable to A.Y. 2014-15 which is in question. The
Tribunal observed that as per the pre-amended provisions of section
56(2)(vii)(b) of the Act, where an individual or HUF receives from any person
any immovable property without consideration, the provisions of amended section
56(2)(vii)(b) of the Act would apply. This position was, however, amended by
the Finance Act, 2013 and made applicable to A.Y. 2014-15 onwards. As per the
amended provisions, the scope of the substituted provision was expanded to
cover the purchase of immovable property for inadequate consideration as well.

 

It observed that there is no dispute that purchase transactions of
immovable property were carried out in financial year 2011-12 for which full
consideration was also parted with the seller. Mere registration at later date
would not cover a transaction already executed in the earlier years and
substantial obligations already been discharged and a substantive right accrued
to the assessee therefrom. The Tribunal held that pre-amended provisions will,
thus, apply and therefore the Revenue is debarred to cover the transactions
where inadequacy in purchase consideration is alleged. The Tribunal deleted the
addition made by the A.O. and confirmed by the CIT(A).

 

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

 

FACTS II

The second issue in
the appeal filed by the assessee was raised by filing an additional ground. The
issue for consideration of the Tribunal was whether interest u/s 234B of the
Act is chargeable on assessed income qua return income.

 

HELD II

The Tribunal noted that an identical issue had come up before the coordinate
bench of the ITAT in ITO vs. M/s Anand Vihar Construction Pvt. Ltd. ITA
No. 335/Ran/2017 order dated 28th November, 2018. Having
noted the ratio of the decision of the coordinate bench of the Tribunal,
it held that interest under sections 234A and 234B of the Act is chargeable
with reference to returned income only.

 

 

Sections 32, 37, 45, 50 – Where the business of the assessee came to a halt, expenses incurred by the assessee for maintaining its legal status and disposing of the assets are allowable u/s 37(1) of the Act Assessee owned leasehold rights in the land and a building was constructed thereon; on transfer of the same, capital gains were to be bifurcated as long-term capital gains on transfer of land u/s 45 and short-term capital gains on transfer of building u/s 50 Unabsorbed depreciation is deemed to be current year’s depreciation and it can therefore be set off against capital gains

25. [2019] 202 TTJ (Bang.) 893 Hirsh Bracelet India (P) Ltd. vs. ACIT ITA No. 3392/Bang/2018 A.Y.: 2015-16 Date of order: 3rd July, 2019

 

Sections 32,
37, 45, 50 – Where the business of the assessee came to a halt, expenses
incurred by the assessee for maintaining its legal status and disposing of the
assets are allowable u/s 37(1) of the Act

 

Assessee owned
leasehold rights in the land and a building was constructed thereon; on
transfer of the same, capital gains were to be bifurcated as long-term capital
gains on transfer of land u/s 45 and short-term capital gains on transfer of
building u/s 50

Unabsorbed
depreciation is deemed to be current year’s depreciation and it can therefore
be set off against capital gains

 

FACTS

The assessee company was engaged in the
business of manufacturing wrist watch straps. The assessee had taken land on
lease for a period of 99 years and set up a unit for designing, importing,
exporting, dealing in and manufacturing wrist watch straps. In view of
continued losses and several operational difficulties, the business of the
assessee had to be closed down. The assessee had declared capital gains on the
sale of leasehold rights in land and building as short-term capital gain in the
return of income and, after adjusting current year’s expense and depreciation,
returned a total income.

 

During the course of the assessment
proceedings, the assessee claimed that sale of leasehold rights in land would
result in long-term capital gains. But the A.O. taxed the capital gains as short-term
and did not allow set-off of brought forward business losses. Further, the A.O.
had disallowed the expenditure u/s 37(1), contending that the same could not be
allowed as there was no business in existence.

 

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

 

HELD

The various expenses incurred by the
assessee were to maintain its legal status as a company until the assets were
disposed of and the liabilities paid. The Tribunal held that it was essential
for the assessee to incur these expenses and neither the A.O. nor the CIT(A)
has doubted the incurring of the expenditure. The assessee held leasehold
rights in land and it required permission from the Government for transfer of
such rights. This permission was received by the assessee only in the previous
year, 2013-2014. Therefore, even though the business of the assessee had come
to a halt in 2010, it was necessary to maintain the legal status until all the
assets were liquidated. Thus, the expenses incurred by the assessee were to be
allowed as a deduction in computation of income.

 

The assessee had made a claim for the
bifurcation of capital gains into long-term capital gains on transfer of
leasehold rights in land and short-term capital gains on transfer of building,
being a depreciable asset, in accordance with the provisions of section 50. The
assessee was entitled to bifurcate the capital gains and the provisions of
section 50 would be made applicable in computation of capital gains arising
from transfer of building.

 

Unabsorbed depreciation is deemed to be
current year’s depreciation and the same can be set off against capital gains
under the provisions of section 71.

 

These grounds of appeal filed by the
assessee were allowed.

 

Deemed income – Section 41(1) of ITA, 1961 – Section 41(1) will not apply to waiver of loan as waiver of loan does not amount to cessation of trading liability; A.Y.: 2003-04

25. Principal CIT vs. SICOM Ltd. [2020] 116 taxmann.com 410 (Bom.) Date of order: 21st January, 2020 A.Y.: 2003-04

 

Deemed income – Section 41(1) of ITA, 1961 – Section 41(1) will not
apply to waiver of loan as waiver of loan does not amount to cessation of
trading liability; A.Y.: 2003-04

In the
assessment proceedings for the A.Y. 2003-04, the A.O. considered the issue of
waiver of loan by the Government of Maharashtra and held that an amount of Rs.
114.98 crores covered by the loan given by the Government of Maharashtra is
taxable under sections 28(iv) and 41(1) of the Income-tax Act, 1961.
Accordingly, the said amount was treated as income of the assessee for the year
under consideration and added back to its total income.

 

The CIT(A)
and the Tribunal allowed the assessee’s claim and deleted the addition.

 

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

 

‘i)    The first appellate authority had followed
the decision of this Court in Mahindra & Mahindra Ltd. (Supra)
in deleting the addition made by the A.O. on account of remission of loan. The
decision of this Court in Mahindra & Mahindra (Supra) was
contested by the Revenue before the Supreme Court in Commissioner vs.
Mahindra & Mahindra Ltd. [2018] 404 ITR 1. The issue before the
Supreme Court was whether waiver of loan by the creditor is taxable as
perquisite u/s 28(iv) of the Act or taxable as remission of liability u/s 41(1)
of the Act. The Supreme Court held as under:

(a)   Section 28(iv) of the IT Act does not apply
in the present case since the receipts of Rs 57,74,064 are in the nature of
cash or money.

(b)   Section 41(1) of the IT Act does not apply
since waiver of loan does not amount to cessation of trading liability.

 

ii)    On careful examination of the matter, we are
of the considered opinion that the decision of the Supreme Court is squarely
applicable to the facts of the present case.

 

iii)    Consequently, we do not find any merit in
the appeal to warrant admission. Appeal is accordingly dismissed.’

Section 147, Explanation 3 & Section 154 – The powers conferred on the A.O. by Explanation 3 to section 147 cannot be extended to section 154 – Any discrepancy that was not a subject matter of reassessment proceedings cannot, subsequently, upon conclusion of reassessment proceedings, be brought up by the A.O. by recourse to section 154

24 [2019] 202 TTJ (Del.) 1014 JDC Traders (P) Ltd. vs. DCIT ITA No. 5886/Del/2015 A.Y.: 2007-2008 Date of order: 11th October, 2019

 

Section 147,
Explanation 3 & Section 154 – The powers conferred on the A.O. by
Explanation 3 to section 147 cannot be extended to section 154 – Any
discrepancy that was not a subject matter of reassessment proceedings cannot,
subsequently, upon conclusion of reassessment proceedings, be brought up by the
A.O. by recourse to section 154

 

FACTS

The assessee was a company engaged in the
business of trading, export and printing. For A.Y. 2007-2008 it submitted its
return of income and the same was processed u/s 143(1) of the Act. Reassessment
proceedings were initiated against the assessee for the assessment year in
question after recording reasons for the same. Certain travel expenditure
claimed by the assessee was disallowed and addition was made for the same. On
conclusion of the reassessment proceedings and perusal of the assessment
records by the A.O., he noticed a discrepancy in the amount of stock appearing
in the statement of profit and loss and in the notes to financial accounts. The
A.O. issued a notice u/s 154 to the assessee as regards the difference. The
assessee submitted that the amount stated as closing stock at the time of
preparation of accounts had been inadvertently missed out to be corrected
post-finalisation of accounts and stock reconciliation. The assessee also
submitted that after reconciliation the mistake was detected and corrected. The
A.O. made an addition for the amount of difference in the amounts of closing
stock stated at different values.

The assessee preferred an appeal with the CIT(A).
However, the CIT(A) did not agree with its contention and stated that under the
provisions of Explanation 3 to section 147, the A.O. was justified in assessing
/ reassessing the income which had escaped assessment. Further, there was
nothing wrong in the A.O. rectifying the mistake in the order under sections
147 / 143(3). The assessee then filed an appeal with the ITAT.

 

HELD

The issue relating to the discrepancy in the
value of closing stock was not taken up by the A.O. at the time of reassessment
proceedings u/s 147. A reading of section 147 shows that it empowers the A.O.
to assess or reassess income in respect of any issue which had escaped
assessment, irrespective of the fact whether such aspect was adverted in the
reasons recorded u/s 147. The A.O. had resorted to section 154 to make addition
in respect of the issue of discrepancy in closing stock on conclusion of the
reassessment proceedings. The powers under Explanation 3 to section 147, if
extended to section 154, would empower the A.O. to make one addition after the
other by taking shelter of Explanation 3 to section 147. It was also not the
case that the A.O. had invoked section 154 with respect to the original
assessment finalised u/s 143(3).

 

Thus, the powers of Explanation 3 to section
147 cannot be extended to section 154, and the addition made by the A.O. for
discrepancy of closing stock values upon conclusion of reassessment proceedings
was beyond his jurisdiction.

 

The appeal filed by the assessee was
allowed.

 

Section 64 – Entire loss arising to wife of assessee in the business of Futures and Options (F&O) which business was started by her during the previous year with contribution from assessee in shape of gifts, was liable to be clubbed in hands of assessee in terms of Explanation 3 read in conjunction with section 64(1)(iv) – Assessee was entitled to club full loss from business of F&O in his personal income

8. [2020] 113 taxmann.com 378 (Pune)(Trib.)

Uday Gopal Bhaskarwar vs. ACIT

ITA No. 502/Pune/2019

A.Y.: 2014-15

Date of order: 20th January, 2020

 

Section 64 – Entire loss arising to wife of assessee in the
business of Futures and Options (F&O) which business was started by her
during the previous year with contribution from assessee in shape of gifts, was
liable to be clubbed in hands of assessee in terms of Explanation 3 read in
conjunction with section 64(1)(iv) – Assessee was entitled to club full loss
from business of F&O in his personal income

 

FACTS

The assessee, in the return of
income filed by him, clubbed the loss from the business of his spouse amounting
to Rs. 31,56,429 in view of the provisions of section 64. In the course of
assessment proceedings, on being called upon to justify such a claim, the
assessee submitted that during the year under consideration he gifted a sum of
Rs. 94.50 lakhs to Mrs. Priti Bhaskarwar, his wife, who started a business of
Futures and Options (F&O) on 18th September, 2013. The assessee
claimed that she incurred a loss of Rs. 31,56,429 in the business which was
clubbed in his hands.

 

The A.O. accepted the primary claim
of the assessee of his wife having incurred a loss of Rs. 31.56 lakhs in the
business of F&O, which was set up on 18th September, 2013, and further that
the loss from such business was eligible for set-off against the income of the
assessee in terms of section 64(1)(iv) read with Explanation 3 thereto. He,
however, did not accept the assessee’s contention that the entire loss of Rs.
31.56 lakhs be set off against his (the assessee’s) income. Considering the
mandate of Explanation 3 to section 64(1), the A.O. held that only that part of
the business loss incurred by the assessee’s wife could be set off against the
assessee’s income which bears the proportion of amount of investment out of the
gift on the first day of the previous year to the total investment in the
business as on the first day of the previous year.

 

He, therefore, computed the amount
of loss eligible for set-off against the assessee’s income at Rs. 9,72,563 by
multiplying Rs. 31,56,429 (loss incurred by wife in the business) with Rs.
25.00 lakhs (gifts made by the assessee to his wife up to 18th
September, 2013) as divided by Rs. 81,13,648 (opening capital as on 1st April,
2013 as increased by the gift of Rs. 25.00 lakhs given by the assessee up to 18th
September, 2013).

 

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

 

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

 

HELD

The Tribunal noted that the core of
controversy is the computation of eligible amount of loss incurred by the
assessee’s wife which is eligible for set-off against the assessee’s income.

 

On going through the mandate of
section 64(1)(vi) of the Act in juxtaposition with Explanation 3 to the
sub-section, it transpires that there can be two possible situations of
utilisation of the assets transferred by husband to wife triggering the
clubbing provision. The first situation can be where the amount of assets
received by the wife is exclusively invested in an asset and further there is
no investment by the wife in such a new asset. The full income resulting from
such an exclusive investment is liable to be clubbed with the total income of
the husband. An example of such a situation can be a wife making a fixed
deposit with a bank, etc. out of the gift of money received from her husband.
The full amount of interest income arising on such FDR is liable to be clubbed
with the income of the husband.

 

The second situation can be where
the amount of assets received by the wife as a gift from her husband is not the
exclusive investment in the business carried on by her. Rather, she has also
made separate investment in the said business. In such a situation of a common
pool of unidentifiable investments in the business, there arises difficulty in
precisely attributing the income of such a business to the investments made out
of the gift received from the husband attracting clubbing and to investments
made out of funds other than the gift received from the husband not attracting
the clubbing provision. It is in such a scenario that the prescription of
Explanation 3 comes into play by providing that the amount of income from the
combined business as relatable to the assets transferred by the husband should
be computed by taking the income from such business earned during the year as
multiplied with the amount of assets received by the wife from her husband as
invested in the business and divided by her total investment in the business,
including the amount of assets received from the husband.

 

In a nutshell, there are three
components in this formula. The first component is the income of the business,
which is to be considered for the year. The second is the amount of assets
received by the wife from her husband as invested in the business, and the
third is the total investment in the business including the amount of assets
received from the husband. The latter two figures are required to be taken as
on the first day of the previous year. Section 3 defines ‘Previous year’ to
mean ‘the financial year immediately preceding the assessment year.’ The proviso
to section 3 states that, in the case of a business newly set up in a financial
year, the previous year shall be the period beginning with the date of the
setting up of the business and ending with the said financial year. Since the
wife of the assessee started the new business of F&O on 18th
September, 2013, the extant case is, ergo, covered by the proviso
to section 3.

 

Having examined the factual position
in detail, the Tribunal held that the entire amount of loss resulting from the
business of F&O started by Mrs. Priti Bhaskarwar with the gifts received
from the assessee is liable to be clubbed in the hands of the assessee.

 

This ground of appeal filed by the assessee was
decided in favour of the assessee.

M/s JSW Steel Ltd. vs. Dy. CIT; [ITA Nos. 33, 34 & 35/Mum/2015; Date of order: 28th September, 2016; A.Y.: 2008-09; Mum. ITAT] Section 153A – Once the assessment gets abated, the original return filed u/s 139(1) is replaced by the return filed u/s 153A – It is open to both parties, i.e., the assessee and Revenue, to make claims for allowance or disallowance – (Continental Warehousing Corporation 374 ITR 645 Bom. referred)

16. The Pr. CIT-2 vs.
M/s JSW Steel Ltd. (Successor on amalgamation of JSW Ispat Steel Ltd.) [Income
tax Appeal No. 1934 of 2017] Date of order: 5th
February, 2020 (Bombay High Court)

 

M/s JSW Steel Ltd. vs.
Dy. CIT; [ITA Nos. 33, 34 & 35/Mum/2015; Date of order: 28th
September, 2016; A.Y.: 2008-09; Mum. ITAT]

 

Section
153A – Once the assessment gets abated, the original return filed u/s 139(1) is
replaced by the return filed u/s 153A – It is open to both parties, i.e., the
assessee and Revenue, to make claims for allowance or disallowance – (Continental
Warehousing Corporation 374 ITR 645 Bom. referred)

 

The assessee is a widely-held public
limited company engaged in various activities, including production of sponge
iron, galvanised sheets and cold-rolled coils through its steel plants located
at Dolve and Kalmeshwar in Maharashtra. The company filed its original return
of income on 30th September, 2008 for A.Y. 2008-09 declaring loss at
Rs. 104,17,70,752 under the provisions of section 139(1) of the Act.

 

During pendency of the assessment
proceedings, a search was conducted u/s 132 on the ISPAT group of companies on
30th November, 2010. Following the search, a notice u/s 153A was
issued. In response, the assessee filed return of income declaring total loss
at Rs. 419,48,90,102 on 29th March, 2012. In this return, the
assessee made a new claim for treating gain on pre-payment of deferred VAT /
sales tax on the Net Present Value (NPV) basis for an amount of Rs.
318,10,93,993 as ‘capital receipt’.

 

This new / fresh claim of the assessee
was disallowed by the A.O. while finalising the assessment u/s 143(3) r/w/s
153A of the Act by considering the same as ‘revenue receipt’ instead of
‘capital receipt’. The reasoning given by the A.O. was that the assessee had
availed of the sales tax deferral scheme and the State Government had permitted
premature re-payment of deferred sales tax liability on the NPV basis.
Therefore, according to the A.O., the assessee treated this as capital receipt
even though the same was credited to the assessee’s profit and loss account
being the difference between the deferred sales tax and its NPV.

 

However, the
primary question that arose before the A.O. was whether the claim which was not
made in the earlier original return of income filed u/s 139(1) could be filed
and considered in the subsequent return filed by the assessee in pursuance of
notice u/s 153A of the Act (which was consequent to the search action conducted
u/s 132). The A.O. held that the assessee could not raise a new claim in the
return filed u/s 153A which was not raised in the original return of income
filed u/s 139(1). Thereafter, the claim was disallowed and was treated as
‘revenue receipt’.

 

Aggrieved by the aforesaid order, the
assessee preferred an appeal before the CIT(A) who upheld the order passed by
the A.O.

 

Still aggrieved, the assessee filed an
appeal to the Tribunal. The Tribunal held that the assessee could lodge new
claims, deductions, exemptions or relief (which the assessee had failed to
claim in his regular return of income) which came to be filed by the assessee
under the provisions of section 153A of the Act.

 

But the Revenue, aggrieved by the order
of the ITAT, filed an appeal to the High Court. The Court held that in view of
the second proviso to section 153A of the Act, once assessment got
abated, it meant that it was open for both the parties, i.e., the assessee as
well as Revenue, to make claims for allowance, or to make disallowance, as the
case may be. That apart, the assessee could lodge a new claim for deduction,
etc. which remained to be claimed in his earlier / regular return of income.
This is so because assessment was never made in the case of the assessee in
such a situation. It is fortified that once the assessment gets abated, the
original return which had been filed loses its originality and the subsequent return
filed u/s 153A of the Act (which is in consequence to the search action u/s
132) takes the place of the original return. In such a case, the return of
income filed u/s 153A(1) would be construed to be one filed u/s 139(1) and the
provisions of the said Act shall apply to the same accordingly. If that be the
position, all legitimate claims would be open to the assessee to raise in the
return of income filed u/s 153A(1).

 

The Court further emphasised on the
judgment passed by it in the case of Continental Warehousing (Supra) which
also explains the second proviso to section 153A(1). The explanation is
that pending assessment or reassessment on the date of initiation of search if
abated, then the assessment pending on the date of initiation of search shall
cease to exist and no further action with respect to that assessment shall be
taken by the A.O. In such a situation, the assessment is required to be
undertaken by the A.O. u/s 153A(1) of the Act.

 

In view of the second proviso to
section 153A (1), once assessment gets abated, it is opened both ways, i.e.,
for the Revenue to make any additions apart from seized material, even regular
items declared in the return can be subject matter if there is doubt about the
genuineness of those items, and similarly the assessee also can lodge new
claims, deductions or exemptions or relief which remained to be claimed in the
regular return of income, because assessment was never made in the case /
situation. Hence, the appeal filed by the Revenue is liable to be dismissed.

 

DCIT-1(1) vs. M/s Ami Industries (India) Pvt. Ltd. [ITA No. 5181/Mum/2014; Date of order: 28th August, 2016; A.Y.: 2010-11; Mum. ITAT] Section 68 – Share application money – The assessee had furnished PAN, ITR of the investors to prove genuineness of the transactions – For credit worthiness of the creditors, the bank accounts of the investors showed that they had funds – Not required to prove ‘source of the source’ – Addition is justified [PCIT vs. NRA Iron & Steel 412 ITR 161 (SC) distinguished]

15. The Pr. CIT-1 vs. M/s Ami
Industries (India) Pvt. Ltd. [Income tax Appeal No. 1231 of 2017] Date of
order: 29th January, 2020 (Bombay High Court)

 

DCIT-1(1) vs. M/s Ami Industries
(India) Pvt. Ltd. [ITA No. 5181/Mum/2014; Date of order: 28th
August, 2016; A.Y.: 2010-11; Mum. ITAT]

 

Section 68 – Share application money –
The assessee had furnished PAN, ITR of the investors to prove genuineness of
the transactions – For credit worthiness of the creditors, the bank accounts of
the investors showed that they had funds – Not required to prove ‘source of the
source’ – Addition is justified [PCIT vs. NRA Iron & Steel 412 ITR 161
(SC) distinguished]

 

In the assessment proceedings, the A.O.
noted that the assessee had disclosed funds from three Kolkata-based companies
as share application money amounting to Rs. 34.00 crores (Parasmani Merchandise
Pvt. Ltd. Rs. 13.50 crores; Ratanmani Vanijya Pvt. Ltd. Rs. 2.00 crores and
Rosberry Merchants Pvt. Ltd. Rs. 18.50 crores).

The A.O. issued a
notice to the assessee on the ground that the whereabouts of the above
companies were doubtful and their identity could not be authenticated. Thus,
the genuineness of the companies became questionable.

 

After considering the reply submitted
by the assessee, the A.O. treated the aforesaid amount of Rs. 34 crores as
money from unexplained sources and added the same to the income of the assessee
as unexplained cash credit u/s 68 of the Act.

 

Aggrieved by the order, the assessee
preferred an appeal before the CIT(A). The CIT(A) held that the assessee had
discharged its burden u/s 68 by proving the identity of the creditors; the
genuineness of the transactions; and the credit worthiness of the creditors.
Consequently, the first appellate authority set aside the addition made by the
A.O.

 

Being aggrieved by the order of the
CIT(A), the Revenue filed an appeal to the Tribunal. The Tribunal noted that
the A.O. had referred the matter to the investigation wing of the Department at
Kolkata for making inquiries about the three creditors from whom share
application money was received. Though the report from the investigation wing
was received, the Tribunal noted that the same was not considered by the A.O.
despite mentioning of the same in the assessment order; besides, he had not
provided a copy of the same to the assessee. In the report by the investigation
wing, it was mentioned that the companies were in existence and had filed income
tax returns for the previous year under consideration but the A.O. recorded
that these creditors had very meagre income as disclosed in their returns of
income and, therefore, he doubted the credit-worthiness of the three creditors.

 

Finally, the Tribunal held that as per
the provisions of section 68 of the Act, for any cash credit appearing in the
books of an assessee, the assessee is required to prove the following: (a)
Identity of the creditor, (b) Genuineness of the transaction, and (c)
Credit-worthiness of the party. In this case, the assessee had already proved
the identity of the share applicants by furnishing their PAN and copies of
their IT returns filed for the A.Y. 2010-11.

 

Regarding the genuineness of the
transaction, the assessee had filed a copy of the bank accounts of the three
share applicants from which the share application money was paid and the copy
of the account of the assessee in which the said amount was deposited and which
had been received by RTGS. Regarding the credit-worthiness of the parties, it
has been proved from the bank accounts of the three companies that they had the
funds to make payments for the share application money and a copy of the
resolution passed in the meetings of their Boards of Directors. Regarding ‘the source
of the source’, the A.O. has already made inquiries through the DDI
(Investigation), Kolkata and collected all the materials required which proved
‘the source of the source’, though as per the settled legal position on this
issue the assessee need not prove ‘the source of the source’. The A.O. has not
brought any cogent material or evidence on record to indicate that the
shareholders were benamidars or fictitious persons, or that any part of
the share capital represented the company’s own income from undisclosed
sources. Accordingly, the order of the CIT(A) was upheld.

 

Aggrieved by the order of the ITAT, the
Revenue filed an appeal to the High Court. The Revenue submitted that it cannot
be said that the assessee had discharged the burden to prove the
credit-worthiness of the three parties. Further, it contented that the assessee
is also required to prove ‘the source of the source’. In this connection, the
Department placed reliance on a decision of the Supreme Court in Pr. CIT
vs. NRA Iron & Steel Pvt. Ltd.

 

The assessee submitted that from the
facts and circumstances of the case, it is quite evident that the assessee has
discharged its burden to prove the identity of the creditors, the genuineness
of the transactions and the credit-worthiness of the creditors. The legal
position is very clear inasmuch as the assessee is only required to explain the
source and not ‘the source of the source’. The decision of the Supreme Court in
NRA Iron & Steel Pvt. Ltd. (Supra) is not the case law for
the aforesaid proposition. In fact, the said decision nowhere states that the
assessee is required to prove ‘the source of the source’. Further, it is also a
settled proposition that the assessee is not required to prove ‘the source of
the source’. In fact, this position has been clarified in the recent decision
in Gaurav Triyugi Singh vs. Income Tax Officer-24(3)(1)2 dated 22nd
January, 2020.

 

The Court found that the identity of
the creditors was not in doubt. The assessee had furnished the PAN, copies of
the income tax returns of the creditors, as well as copies of the bank accounts
of the three creditors in which the share application money was deposited in
order to prove the genuineness of the transactions. Insofar as the
credit-worthiness of the creditors was concerned, the Tribunal had recorded
that the bank accounts of the creditors showed that they had funds to make
payments for share application money and, in this regard, resolutions were also
passed by the Board of Directors of the three creditors. Although the assessee
was not required to prove ‘the source of the source’, nonetheless, the Tribunal
took the view that the A.O. had made inquiries through the investigation wing
of the Department at Kolkata and collected all the materials which proved ‘the
source of the source’.

 

In NRA Iron & Steel Pvt. Ltd.
(Supra), the A.O. had made an independent and detailed inquiry,
including survey of the investor companies. The field report revealed that the
shareholders were either non-existent or lacked credit-worthiness. It is in
these circumstances that the Supreme Court had held that the onus to establish
the identity of the investor companies was not discharged by the assessee. The
aforesaid decision is, therefore, clearly distinguishable on the facts of the
present case. Therefore, the first appellate authority had returned a clear
finding of fact that the assessee had discharged its onus of proving the
identity of the creditors, the genuineness of the transactions and the
credit-worthiness of the creditors, which finding of fact stood affirmed by the
Tribunal. There are, thus, concurrent findings of fact by the two lower
appellate authorities. Under these circumstances, the appeal is dismissed.

 

Reassessment – Sections 147 and 148 of ITA, 1961 – Notice after four years – Failure to disclose material facts necessary for assessment – No duty to disclose investments – Notice for failure to disclose investment – Not valid

36. Bhavik
Bharatbhai Padia vs. ITO; [2019] 419 ITR
149 (Guj.) Date of order:
19th August, 2019 A.Y.: 2011-12

 

Reassessment –
Sections 147 and 148 of ITA, 1961 – Notice after four years – Failure to disclose
material facts necessary for assessment – No duty to disclose investments –
Notice for failure to disclose investment – Not valid

 

For the A.Y. 2011-12, the assessee-petitioner received a notice u/s 148
of the Income-tax Act, 1961 dated 30th March, 2018. The reasons
assigned by the AO for reopening are as under:

‘As per information available with this office during the year under
consideration the assessee had made investment of Rs. 50,00,000 in the pension
policies of LIC of India. The assessee has filed his return of income for the
A.Y. 2011-12 declaring total income at Rs. 72.78 lakhs. The information was
received from the Income-tax Officer (I & CI)-1, Ahmedabad on 27th
March, 2018. On a perusal of the information, it is found that the assessee has
made investment of Rs. 50,00,000 in the pension policies of LIC of India during
the F.Y. 2010-11 relevant to the A.Y. 2011-12. During the inquiries conducted
by the Income-tax Officer (I & CI), the investment of Rs. 50,00,000 made by
the assessee remains unexplained. Thus, there is an escapement of Rs. 50,00,000
and the case requires to be reopened u/s 147 of the Act.’

 

The assessee filed his objections to the notice
issued u/s 148 of the Act pointing out that he had disclosed all the income
liable to be offered and to be brought to tax in its return of income. The
assessee further pointed out in his objections that as the assessee did not
have any business income during the A.Y. 2011-12, he was not obliged to
disclose his investment of Rs. 50,00,000 in the pension policies of the LIC of
India in his return of income. The assessee further pointed out that he had
salary, income from other sources and capital gains and in such circumstances,
he was required to file form ITR-2 for the A.Y. 2011-12. It was also pointed
out that the Form ITR-2 does not include the column for the disclosure of
investments. In such circumstances, the assessee could not have been expected
to disclose his investments in his return of income. The assessee further
pointed out that his total income for the A.Y. 2011-12 was Rs. 71.50 lakhs. He
had sufficient past savings and the current year’s income to make an investment
of Rs. 50,00,000 in the LIC policies. He also pointed out to the respondent
that just because he had made an investment of Rs. 50,00,000 his case should
not be reopened, as he could be said to have made full and true disclosure of
his income. By an order dated 8th October, 2018, the AO rejected the
objections. The assessee filed a writ petition and challenged the order.

 

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

 

‘The notice for reassessment had been issued after four years on the
ground that the assessee had failed to disclose investments. It was not in
dispute that the form of return of income, i.e., ITR-2, then in force had no
separate column for the disclosure of any investment. The notice was not
valid.’

 

 

Income Declaration Scheme, 2016 – Scope of – Amount paid as advance tax can be adjusted towards amount due under Scheme

35. Alluri
Purnachandra Rao vs. Pr. CIT; [2019] 419 ITR
462 (Tel.) Date of order:
18th September, 2019 A.Ys.: 2010-11
to 2015-16

 

Income
Declaration Scheme, 2016 – Scope of – Amount paid as advance tax can be adjusted
towards amount due under Scheme

The petitioner filed the subject declaration under the Income
Declaration Scheme, 2016 in Form 1 on 30th June, 2016 for the A.Ys.
2010-11 to 2015-16 declaring undisclosed income of Rs. 40,98,706. In terms of
the Income Declaration Scheme, the petitioner was liable to pay a sum of Rs.
18,44,418 towards tax, surcharge and penalty on this undisclosed income. In
that regard, the petitioner claimed credit of a sum of Rs. 12,11,611 being his
tax deducted at source (TDS). He also claimed credit of a sum of Rs. 1,10,000,
being the advance tax / prepaid tax paid by him for the assessment year
2013-14. After adjusting the aforesaid credits, he paid the balance sum of Rs.
5,22,807 in three instalments as required.

 

The Principal Commissioner of Income Tax-6, Hyderabad, rejected the
declaration filed by the petitioner on the ground that he had failed to pay the
tax, surcharge and penalty on the undisclosed income declared by him before the
due date, i.e., 30th September, 2017. This was because he did not
give credit to the advance tax of Rs. 1,10,000 paid by the petitioner for the
A.Y. 2013-14. The petitioner filed a writ petition and challenged the order of
the Principal Commissioner.

 

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

 

‘i)   The Income Declaration
Scheme, 2016, was promulgated under sections 184 and 185 of the Finance Act,
2016 enabling an assessee to pay tax at 30% on undisclosed income along with
surcharge and penalty at 25% on the tax payable. Under section 187 of the Act,
read with Notification No. S. O. 2476(E) dated 20th July, 2016
([2016] 386 ITR [ST] 5), the tax, surcharge and penalty were to be paid in
three instalments between 30th November, 2016 and 30th
September, 2017.

 

ii)   The Central Board of Direct
Taxes issued Circular No. 25 of 2016, dated 30th June, 2016 ([2016]
385 ITR [ST] 22), furnishing clarifications on the Income Declaration Scheme;
question No. 4 thereunder was whether credit for tax deducted at source, if
any, in respect of the income declared should be allowed. The answer to this
was in the affirmative and to the effect that credit for tax deducted at source
should be allowed in those cases where the related income was declared under the
Scheme and credit for the tax had not already been claimed in the return of
income filed for any assessment year. Once the tax deducted at source relevant
for the period covered by the declaration filed under the Income Declaration
Scheme is given credit in accordance with the clarification of the Central
Board of Direct Taxes itself, there is no reason why advance tax paid for the
very same period, which has not been given credit to earlier, should not be
adjusted against the amount payable under the Scheme.

 

iii)  The assessee’s declaration
pertained to the A.Ys. 2010-11 to 2015-16. Advance tax of Rs. 1,10,000 had been
paid by him for the A.Y. 2013-14. Admittedly, there was no regular assessment
for that year, whereby the advance tax could have been adjusted. Therefore,
there was no rationale in denying the assessee credit of this amount while
computing the amount payable by him under the Income Declaration Scheme. If the
amount paid by the assessee for the A.Y. 2013-14, being a sum of Rs. 1,10,000,
were adjusted, the payments made by him on 21st November, 2016 (Rs.
1,50,000), 28th March, 2017 (Rs. 1,50,000) and 27th
September, 2017 (Rs. 2,22,807) would be sufficient to discharge his liability
in respect of the tax, surcharge and penalty payable by him towards his
undisclosed income declared under the Income Declaration Scheme. Hence the
rejection of the declaration was not valid.

 

iv)  The writ petition is
accordingly allowed setting aside the impugned proceedings dated 6th
February, 2018 passed by the Principal Commissioner of Income Tax-6, Hyderabad,
rejecting the declaration filed by the petitioner under the Income Declaration
Scheme, 2016. The said declaration shall be considered afresh by the Principal
Commissioner of Income Tax-6, Hyderabad, duly giving credit not only to the tax
deducted at source but also to the advance tax paid by the petitioner for the
A.Y. 2013-14. This exercise shall be completed expeditiously and, in any event,
not later than four weeks from the date of receipt of a copy of the order, be
it from whatever source.’

 

 

Exemption u/s 10(10AA) of ITA, 1961 – Leave salary (government employees) – Government employees enjoy protection and privileges under Constitution and other laws which are not available to other employees and government employees form a distinct class; they are governed by different terms and conditions of employment – Consequently, retired employees of PSUs and nationalised bank cannot be treated as government employees and, thus, they are not entitled to get full tax exemption on leave encashment after retirement / superannuation u/s 10(10AA)

34. Kamal Kumar
Kalia vs. UOI; [2019] 111
taxmann.com 409 (Delhi) Date of order:
8th November, 2019

 

Exemption u/s
10(10AA) of ITA, 1961 – Leave salary (government employees) – Government
employees enjoy protection and privileges under Constitution and other laws
which are not available to other employees and government employees form a
distinct class; they are governed by different terms and conditions of
employment – Consequently, retired employees of PSUs and nationalised bank
cannot be treated as government employees and, thus, they are not entitled to
get full tax exemption on leave encashment after retirement / superannuation
u/s 10(10AA)

 

The petitioners, who were employees of Public Sector Undertakings and
nationalised banks, filed a writ contending that although they were Central and
State Government employees, they were discriminated against. They were granted
complete exemption in respect of the cash equivalent of leave salary for the
period of earned leave standing to their credit at the time of their
retirement, whether on superannuation or otherwise. However, all others,
including the employees of PSUs and nationalised banks, are granted exemption
only in respect of the amount of leave salary payable for a period of ten
months, subject to the limit prescribed.

 

The Delhi High Court dismissed the writ petition and held as under:

 

‘i)   So far as the challenge to
provisions of section 10(10AA) of the Income-tax Act, 1961 on the ground of
discrimination is concerned, there is no merit therein. This is because
employees of the Central Government and the State Government form a distinct
class and the classification is reasonable having nexus with the object sought
to be achieved. The Central Government and State Government employees enjoy a
“status” and they are governed by different terms and conditions of employment.
Thus, Government employees enjoy protection and privileges under the
Constitution and other laws, which are not available to those who are not
employees of the Central and State Governments.

 

ii)   There is no merit in the
submission of the petitioner that the employees of PSUs and nationalised banks
are also rendering services for the government and such organisations are
covered by Article 12 of the Constitution of India as “State”. Merely because
PSUs and nationalised banks are considered as “State” under article 12 of the
Constitution of India for the purpose of entertainment of proceedings under
Article 226 of the Constitution and for enforcement of fundamental rights under
the Constitution, it does not follow that the employees of such public sector
undertakings, nationalised banks or other institutions which are classified as
“State” assume the status of Central Government and State Government employees.

 

iii)  Therefore, the instant
petition is rejected, insofar as the petitioners’ challenge to the provisions
of section 10(10AA) is concerned.’

 

Charitable purpose – Meaning of – Sections 2(15) and 11 of ITA, 1961 – Preservation of environment is an object of general public utility – Polluting industries setting up company for prevention of pollution – Object not to earn profit – Fact that members of company would benefit is not relevant – Company entitled to exemption u/s 11

33. CIT vs.
Naroda Enviro Projects Ltd.; [2019] 419 ITR
482 (Guj.) Date of order:
29th July, 2019 A.Ys.: 2009-10

 

Charitable
purpose – Meaning of – Sections 2(15) and 11 of ITA, 1961 – Preservation of environment
is an object of general public utility – Polluting industries setting up
company for prevention of pollution – Object not to earn profit – Fact that
members of company would benefit is not relevant – Company entitled to
exemption u/s 11

 

The assessee company was incorporated on 19th October, 1995
and was later converted into a company limited by shares incorporated u/s 25 of
the Companies Act, 1956. The assessee company was engaged in the activity of
preservation of environment by providing pollution control treatment for
disposal of liquid and solid industrial waste. The assessee company was
registered u/s 12AA of the Income-tax Act, 1961 as a charitable institution.
For the A.Y. 2009-10 the assessee had filed its return of income declaring total
income (loss) of Rs. 258 (Rupees two hundred and fifty eight only) along with
the auditor’s report u/s 12A(b) of the Act in Form 10B claiming exemption u/s
11 of the Act. The AO took the view that the assessee company is not entitled
to seek exemption u/s 11 and held as under:

 

‘i)   The assessee is carrying on
business activity under the pretext of charitable activity. The incidental
profit cannot be for all the years and not to the extent reflected in the table
given in the order.

 

ii)   The objects specified in the
memorandum of association are important but the same have to be considered with
reference to the real practice adopted for running the activity, i.e., whether
it is charitable or for the purpose of making profit. The object included in
definition of “charitable purpose” as defined in section 2(15) should be
evidenced by charity; otherwise even environment consultant will also claim
exemption u/s 11 being a trust or a company u/s 25.

 

iii) The action is carried out for
the benefit of members to discharge their onus of treatment of chemicals, etc.
with substantial charge with intention to earn profit under the shelter of
section 25 of the Companies Act.

 

iv) Hence it is held that the assessee is rendering service of pollution
control as per the norms laid down by the Gujarat State Pollution Control Board
or any other authority responsible for the regulation of pollution in relation
to any trade, commerce or business carried out by the industries located in the
industrial area of Naroda, Vatva and Odhav for a uniform cess or fee or any
other consideration, irrespective of the nature of use or application, or
retention, of the income of such activity. Since the aggregate value of
receipts are more than Rs. 10,00,000 both the provisos to section 2(15)
are applicable to the assessee company and it is not entitled for exemption.’

 

The Commissioner (Appeals) and the Tribunal held that taking an overall
view, the dominant objects of the assessee were charitable as the dominant
object was not only preservation of the environment, but one of general public
utility and, therefore, the assessee was entitled to seek exemption u/s 11 of
the Act.

 

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

 

‘i)   The assessee was a company
engaged in the activity of preservation of the environment by providing
pollution control treatment for disposal of liquid and solid industrial waste.
The benefit accrued to the members of the company. The members were none other
than the owners of the polluting industries. These members were obliged in law
to maintain the parameters as prescribed by the Gujarat Pollution Control Board
and in law for the purpose of discharge of their trade effluents, in other
words, discharge of solid and liquid waste. If they did not do so, they would
be liable to be prosecuted and their units would also be liable to be closed.

 

ii)   However, this, by itself, was
not sufficient to take the view that the company had not been set up for a
charitable purpose. The birth of this company also needed to be looked into
closely. The fact that the members of the assessee company were benefited was
merely incidental to the carrying out of the main or primary purpose and if the
primary purpose was charitable, the fact that the members of the assessee
benefited would not militate against its charitable character nor would it make
the purpose any less charitable.

iii)  Prior to the introduction of
the proviso to section 2(15) of the Act, the assessee company was
granted registration u/s 12A of the Act. From this it was clear that prior to
the introduction of the proviso to section 2(15) of the Act, the
authority, upon due consideration of all the relevant aspects, had arrived at
the satisfaction that the assessee company was established for charitable
purposes. The company continued to be recognised as a charitable institution.
The certificate issued u/s 12A, after due inquiry, was still in force.

 

iv)  The driving force was not the
desire to earn profit, but the object was to promote, aid, foster and engage in
the area of environment protection, abatement of pollution of various kinds
such as water, air, solid, noise, vehicular, etc., without limiting its scope.
In short, the main object was preservation and protection of the environment.

 

v)   The Commissioner (Appeals) and
the Appellate Tribunal had concurrently held that taking an overall view, the
dominant objects of the assessee were charitable as the dominant object was not
only preservation of the environment, but one of general public utility and,
therefore, the assessee was entitled to seek exemption under section 11 of the
Act. The Tribunal was the last fact-finding body. As a principle, this court
should not disturb the findings of fact in an appeal under section 260A of the
Act unless the findings of fact are perverse.’

 

Capital gains – Exemption u/s 54 of ITA, 1961 – Scope – Additional cost of construction incurred within stipulated time though not deposited in capital gains account – Entitled to deduction

32. Venkata Dilip Kumar vs. CIT; [2019] 419 ITR 298 (Mad.) [2019] 111 taxmann.com 180 (Mad.) Date of order: 5th November, 2019

 

Capital gains – Exemption u/s 54 of ITA, 1961 – Scope – Additional cost
of construction incurred within stipulated time though not deposited in capital
gains account – Entitled to deduction

 

The assessee had long-term capital gain on transfer of a residential
house and invested the same in a new residential house. The assessee claimed
deduction u/s 54 of the Income-tax Act, 1961, an amount of Rs. 1.5 crores being
paid to the builder for the new house. This was allowed by the AO. The assessee
had also claimed further deduction of Rs. 57.25 lakhs u/s 54 contending that
though such sum was not deposited in the capital gains deposit account, it was
utilised for the purpose of additional expenditure towards the construction
cost and that the sum was drawn out of the capital gains deposited in the same
bank branch, although in a savings bank account. The AO refused to grant
deduction u/s 54. This was confirmed by the Tribunal.

 

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

 

‘i)   Section 54 of the Income-tax
Act, 1961 deals with profits on sale of property used for residence. The
capital gains so arising in the hands of the assessee, instead of being dealt
with as income, will be dealt with by giving deduction to such capital gains,
provided the assessee satisfies the requirement contemplated under the
provision. For seeking benefit of deduction u/s 54, the assessee should have
purchased one residential house either one year before the transfer or two
years after the date of such transfer, or constructed a residential house
within a period of three years after the date of such transfer. Meeting the
expenses towards the cost of construction of the house within a period of three
years entitles an assessee to the deduction u/s 54.

 

ii)   Section 54(2) contemplates
that if the amount of the capital gains is not appropriated by the assessee
towards purchase of the new asset within one year before the date on which the
transfer of the original asset took place, or is not utilised by him for the
purchase of the new asset before the date of furnishing the return of income
u/s 139, he has to deposit the sum in an account in any such bank and utilise
in accordance with any scheme which the Central Government may, by
notification, frame in that behalf. In other words, if the assessee has not
utilised the amount of the capital gains either in full or part, such
unutilised amount should be deposited in a capital gains account to get the
benefit of deduction in the succeeding assessment years. Section 54(2) cannot
be read in isolation and on the other hand, application of section 54(2) should
take place only when the assessee fails to satisfy the requirement u/s 54(1).
While the compliance with the requirement u/s 54(1) is mandatory and if
complied with, has to be construed as substantial compliance to grant the
benefit of deduction, the compliance with the requirement u/s 54(2) could be
treated only as directory in nature. If the assessee with material details and
particulars satisfies that the amount for which deduction is sought u/s 54 is
utilised either for purchasing or constructing the residential house in India
within the time prescribed u/s 54(1), the deduction is bound to be granted
without reference to section 54(2). Mere non-compliance with a procedural
requirement u/s 54(2) itself cannot stand in the way of the assessee getting
the benefit u/s 54, if he is, otherwise, in a position to satisfy that the
mandatory requirement u/s 54(1) is fully complied with within the time limit
prescribed therein.

iii)  The
assessee had claimed that it had utilised the disputed sum towards the cost of
the additional construction within the period of three years from the date of
the transfer and therefore, if such contention were factually correct, the
assessee had to be held to have satisfied the mandatory requirement u/s 54(1)
to get the deduction.

iv)  Matter remanded to verify
whether the sum was utilised by the assessee within the time stipulated u/s
54(1) for the purpose of construction. If such utilisation was found to have
been made within such time, the Department was bound to grant deduction.’

 

[Appellate Tribunal in I.T.A. No. 5535/Mum/2014; Date of order: 11th January, 2017; A.Y.: 2003-04; Bench ‘F’ Mum.] Appeal u/s 260A – Penalty u/s 271(1)(c) – The question relating to non-striking off of the inapplicable portion in the section 271(1)(c) show cause notice goes to the root of the lis and is a jurisdictional issue – Issue can be raised first time before High Court – Penalty cannot be imposed for alleged breach of one limb of section 271(1)(c) of the Act while proceedings are initiated for breach of the other limb of section 271(1)(c) – Penalty deleted

7. Ventura Textiles Ltd. vs. CIT –
Mumbai-11 [ITA No. 958 of 2017 Date
of order: 12th June, 2020 (Bombay
High Court)

 

[Appellate
Tribunal in I.T.A. No. 5535/Mum/2014; Date of order: 11th January,
2017; A.Y.: 2003-04; Bench ‘F’ Mum.]

 

Appeal u/s 260A – Penalty u/s 271(1)(c) – The question relating to
non-striking off of the inapplicable portion in the section 271(1)(c) show
cause notice goes to the root of the lis and is a jurisdictional issue –
Issue can be raised first time before High Court – Penalty cannot be imposed
for alleged breach of one limb of section 271(1)(c) of the Act while
proceedings are initiated for breach of the other limb of section 271(1)(c) –
Penalty deleted

 

The issue involved in the
above appeal related to the imposition of penalty of Rs. 22,08,860 u/s
271(1)(c) of the Act by the A.O. on account of disallowance of Rs. 62,47,460
claimed as a deduction u/s 36(i)(vii) on account of bad debt and subsequently
claimed as a deduction u/s 37 as expenditure expended wholly and exclusively
for the purpose of business.

 

The assessee company filed
its ROI declaring total loss at Rs. 4,66,68,740 for A.Y. 2003-04. During the
assessment proceedings, it was found amongst other things that the assessee had
debited Rs. 62,47,460 under the head ‘selling and distribution expenses’ and
claimed it as bad debt in the books of accounts, thus claiming it as a
deduction u/s 36(1)(vii). Subsequently it was found that the aforesaid amount
was paid to M/s JCT Ltd. as compensation for the supply of inferior quality of
goods. Thus, the A.O. held that the amount of Rs. 62,47,460 claimed as bad debt
was not actually a debt and therefore it was not allowable as a deduction u/s 36(1)(vii).
The A.O. further held that the said claim was also not admissible even u/s
37(1), with the observation that payment made to M/s JCT Ltd. was not wholly
and exclusively for business purposes but for extraneous considerations. In
view thereof, the assessee’s claim was rejected. The A.O. initiated penalty
proceedings u/s 271(1)(c) of the Act for furnishing inaccurate particulars of
income.

The A.O. issued notice u/s
274 r/w/s 271 on the same day, i.e., on 28th February, 2006, to the
assessee to show cause as to why an order imposing penalty should not be made
u/s 271. It may, however, be mentioned that in the pertinent portion of the
notice the A.O. did not strike off the inapplicable portion.

 

The assessee had challenged
the disallowance of bad debt along with other disallowances in the assessment
order by filing an appeal before the CIT(A) who, by an order dated 14th
November, 2012, confirmed the disallowance of bad debt while deleting other
disallowances.

 

In the penalty proceedings,
the A.O. took the view that the assessee’s claim was not actually bad debt but
represented payment made to M/s JCT Ltd. which was also not incurred wholly and
exclusively for the purposes of business. Thus, by the order dated 14th
February, 2014, the A.O. held that by making an improper and unsubstantiated
claim of bad debt of Rs. 62,47,460, the assessee had wilfully reduced its
incidence of taxation, thereby concealing its income as well as furnishing
inaccurate particulars of income. Therefore, the A.O. imposed the minimum
penalty quantified at Rs. 24,99,200 which included penalty on another
disallowance.

 

The CIT(A) deleted the
penalty on the other disallowance. Regarding the penalty levied on Rs.
62,47,460 claimed as bad debt in the assessment proceedings, the CIT(A) held
that the assessee had made a wrong claim by submitting inaccurate particulars
of income by claiming bad debt which was not actually a debt and also not an
expenditure allowable u/s 37(1). Thus, it was held that the assessee had
wilfully submitted inaccurate particulars of income which had resulted in
concealment. Therefore, the penalty amount of Rs. 62,47,460 levied was upheld.

 

The Tribunal upheld the order
of the CIT(A) and rejected the appeal of the assessee. According to the
Tribunal, it was rightly held by the CIT(A) that the assessee had made a wrong
claim by submitting inaccurate particulars of income by claiming a bad debt
which was not actually a debt and also not an expenditure allowable u/s 37(1).
Therefore, the finding recorded by the CIT(A) that the assessee had wilfully
submitted inaccurate particulars of income which had resulted in concealment
was affirmed.

 

Before the High Court the
first contention was raising a question of law for the first time before the
High Court though it had not been raised before the lower authorities; the
Court referred to a series of decisions, including of the Supreme Court in
Jhabua Power Limited (2013) 37 Taxmann.com 162 (SC) and of the Bombay
High Court in Ashish Estates & Properties (P) Ltd. (2018) 96
Taxmann.com 305 (Bom.) wherein it is observed that it would not
preclude the High Court from entertaining an appeal on an issue of jurisdiction
even if the same was not raised before the Tribunal.

 

The Court further noted and
analysed the two limbs of section 271(1)(c) of the Act and also the fact that
the two limbs, i.e., concealment of particulars of income and furnishing
inaccurate particulars of income, carry different connotations. The Court further
noted that the A.O. must indicate in the notice for which of the two limbs he
proposes to impose the penalty and for this the notice has to be appropriately
marked. If in the printed format of the notice the inapplicable portion is not
struck off, thus not indicating for which limb the penalty is proposed to be
imposed, it would lead to an inference as to non-application of mind.

 

Therefore, the question
relating to non-striking off of the inapplicable portion in the show cause
notice which is in printed format, thereby not indicating therein as to under
which limb of section 271(1)(c) the penalty was proposed to be imposed, i.e.,
whether for concealing the particulars of income or for furnishing inaccurate
particulars of such income, would go to the root of the lis. Therefore,
it would be a jurisdictional issue. Being a jurisdictional issue, it can be
raised before the High Court for the first time and adjudicated upon even if it
was not raised before the Tribunal.

 

The Hon. Court relied on
decisions of SSA’s Emerald Meadows (2016) 73 Taxmann.com 241 (Karnataka);
Manjunath Cotton & Ginning Factory 359 ITR 565 (Kar.); and
Samson Pernchery (2017) 98 CCH 39 (Bom.) wherein the issue was
examined, i.e. the question as to justification of the Tribunal in deleting the
penalty levied u/s 271(1)(c). It was noted that the notice issued u/s 274 was
in a standard proforma without having struck off the irrelevant clauses
therein, leading to an inference as to non-application of mind.

 

A similar view had been taken
in Goa Coastal Resorts & Recreation Pvt. Ltd. (2019) 106 CCH 0183
(Bom.); New Era Sova Mine (2019) SCC OnLine Bom. 1032; as well as Shri
Hafeez S. Contractor (ITA Nos.796 and 872 of 2016 decided on 11th
December, 2018).

 

On the facts of the present
case, the Court noticed that the statutory show cause notice u/s 274 r/w/s 271
of the Act proposing to impose penalty was issued on the same day when the
assessment order was passed, i.e., on 28th February, 2006. The said
notice was in printed form. Though at the bottom of the notice it was mentioned
‘delete inappropriate words and paragraphs’, unfortunately, the A.O. omitted to
strike off the inapplicable portion in the notice. Such omission certainly
reflects a mechanical approach and non-application of mind on the part of the
A.O. However, the moot question is whether the assessee had notice as to why
penalty was sought to be imposed on it?

 

The Court observed that in
the present case, the assessment order and the show cause notice were both
issued on the same date, i.e., on 28th February, 2006, and if they
are read in conjunction, a view can reasonably be taken that notwithstanding
the defective notice, the assessee was fully aware of the reason as to why the
A.O. sought to impose penalty. It was quite clear that the penalty proceedings
were initiated for breach of the second limb of section 271(1)(c), i.e., for
furnishing inaccurate particulars of income. The purpose of a notice is to make
the noticee aware of the ground(s) of notice. In the present case, it would be
too technical and pedantic to take the view that because in the printed notice
the inapplicable portion was not struck off, the order of penalty should be set
aside even though in the assessment order it was clearly mentioned that penalty
proceedings u/s 271(1)(c) had been initiated separately for furnishing
inaccurate particulars of income. Therefore, this contention urged by the
appellant / assessee was rejected.

 

Having held so, the Court
went on to examine whether in the return of income the assessee had furnished
inaccurate particulars. As already discussed above, for the imposition of
penalty u/s 271(1)(c) either concealment of particulars of income or furnishing
inaccurate particulars of such income are the sine qua non. In the
instant case, the penalty proceedings u/s 271(1)(c) were initiated on the
ground that the assessee had furnished inaccurate particulars of income.

 

The Court observed that in
the assessment proceedings the explanation of the assessee was not accepted by
the A.O. by holding that the subsequent payment made to M/s JCT Ltd. would not
be covered by section 36(1)(vii) since the amount claimed as bad debt was
actually not a debt. Thereafter, the A.O. examined whether such payment would
be covered u/s 37(1) as per which an expenditure would be allowable as a
deduction if it pertains to that particular year and has been incurred wholly
and exclusively for the purpose of business. The A.O. held that the assessee’s
claim was not admissible even u/s 37(1) as the circumstances indicated that the
payments were not made wholly and exclusively for business purposes. While
disallowing the claim of the assessee, the A.O. took the view that since the
assessee had furnished inaccurate particulars of income, penalty proceedings
u/s 271(1)(c) were also initiated separately.

 

The Court noticed that in the
statutory show cause notice the A.O. did not indicate as to whether penalty was
sought to be imposed for concealment of income or for furnishing inaccurate
particulars of income, although in the assessment order it was mentioned that
penalty proceedings were initiated for furnishing inaccurate particulars of
income. In the order of penalty, the A.O. held that the assessee had concealed
its income as well as furnished inaccurate particulars of income.

 

But concealment of
particulars of income was not the charge against the appellant, the charge was
of furnishing inaccurate particulars of income. As discussed above, it is trite
that penalty cannot be imposed for alleged breach of one limb of section 271(1)(c)
while penalty proceedings are initiated for breach of the other limb of the
same section. This has certainly vitiated the order of penalty. In the appeal,
the CIT(A) took a curious view, that submission of inaccurate particulars of
income resulted in concealment, thus upholding the order of penalty. This
obfuscated view of the CIT(A) was affirmed by the Tribunal.

 

While the charge against the
assessee was of furnishing inaccurate particulars of income whereas the penalty
was imposed additionally for concealment of income, the order of penalty as
upheld by the lower appellate authorities could be justifiably interfered with,
yet the Court went on to examine whether there was furnishing of inaccurate
particulars of income by the assessee in the first place because that was the
core charge against the assessee.

 

The Court referred to the
decision of the Supreme Court in Reliance Petroproducts Pvt. Ltd. 322 ITR
158 (SC) wherein it was held that mere making of a claim which is not
sustainable in law by itself would not amount to furnishing inaccurate
particulars regarding the income of the assessee. Therefore, such claim made in
the return cannot amount to furnishing inaccurate particulars of income.

The Court noted that this
decision was followed by the Bombay High Court in CIT vs. M/s Mansukh
Dyeing & Printing Mills, Income Tax Appeal No. 1133 of 2008, decided on 24th
June, 2013. In CIT vs. DCM Ltd., 359 ITR 101, the Delhi
High Court applied the said decision of the Supreme Court and further observed
that law does not debar an assessee from making a claim which he believes is
plausible and when he knows that it is going to be examined by the A.O. In such
a case, a liberal view is required to be taken as necessarily the claim is
bound to be carefully scrutinised both on facts and in law. Threat of penalty
cannot become a gag and / or haunt an assessee for making a claim which may be
erroneous or wrong. Again, in CIT vs. Shahabad Co-operative Sugar Mills
Ltd., 322 ITR 73, the Punjab & Haryana High Court held that the
making of a wrong claim is not at par with concealment or giving of inaccurate
information which may call for levy of penalty u/s 271(1)(c) of the Act.

 

In view of the above, in the
present case it is quite evident that the assessee had declared the full facts;
the full factual matrix of facts was before the A.O. while passing the
assessment order. It is another matter that the claim based on such facts was
found to be inadmissible. This is not the same thing as furnishing inaccurate
particulars of income as contemplated u/s 271(1)(c).

 

Thus, on an overall
consideration, the appeal was allowed and the order of penalty as affirmed by
the appellate authorities was set aside. 

 

 

 

 

 

Search and seizure – Assessment u/s 153A of ITA, 1961 – Scope of section 153A – Assessee can raise new claims for deduction in return filed u/s 153A; A.Y. 2008-09

33. Principal
CIT vs. JSW Steel Ltd. [2020]
422 ITR 71 (Bom.) Date
of order: 5th February, 2020 A.Y.:
2008-09

 

Search and
seizure – Assessment u/s 153A of ITA, 1961 – Scope of section 153A – Assessee
can raise new claims for deduction in return filed u/s 153A; A.Y. 2008-09

 

The assessee is a widely-held public limited company engaged in various
activities including production of sponge iron, galvanised sheets and
cold-rolled coils through its steel plants located at Dolve and Kalmeshwar in
Maharashtra. For the A.Y. 2008-09, the assessee had filed return of income on
30th September, 2008 under the provisions of section 139(1) of the
Income-tax Act, 1961, declaring loss at Rs. 104,17,70,752. The assessee’s case
was selected for scrutiny and notice u/s 143(2) was issued on 3rd
September, 2009. During the pendency of the assessment proceedings, a search
was conducted u/s 132 of the Act on the ISPAT group of companies on 30th
November, 2010. Following the search, notice u/s 153A was issued. In response,
the assessee filed return of income declaring total loss at Rs. 419,48,90,102
on 29th March, 2012. In this return of income, the assessee made a
new claim for treating gain on prepayment of deferred value added tax / sales
tax on the net present value (NPV) basis for an amount of Rs. 318,10,93,993 as
‘capital receipt’. This new / fresh claim of the assessee was disallowed by the
A.O. while finalising the assessment u/s 143(3) read with section 153A. The
primary question that arose before the A.O. was whether the claim which was not
made in the earlier original return of income filed u/s 139(1) could be
considered in the subsequent return filed by the assessee in pursuance of
notice u/s 153A? The A.O. held that the assessee could not raise a new claim in
the return filed u/s 153A which was not raised in the original return of income
filed u/s 139(1). Thereafter, the claim was disallowed and was treated as
‘revenue receipt’.

 

The Tribunal
allowed the assessee’s claim.

 

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

 

‘i)   Section 153A of the Income-tax Act, 1961
provides for the procedure for assessment in search cases. The section starts
with a non-obstante clause stating that it is notwithstanding anything
contained in sections 147, 148 and 149. Further, clause (a) of section 153A(1)
provides for issuance of notice to the persons in respect of whom search was
conducted u/s 132 to furnish a return of income. However, the second proviso
to section 153A makes it clear that assessment relating to any assessment year
filed within a period of the six assessment years pending on the date of search
u/s 132 of the Act shall abate.

 

ii)   Thus, if on the date of initiation of search
u/s 132 any assessment proceeding relating to any assessment year falling
within the period of the six assessment years is pending, it shall stand abated
and the assessing authority cannot proceed with such pending assessment after
initiation of search u/s 132. The crucial expression is “abate”. To
“abate”, as applied to an action, is to cease, terminate, or come to an
end prematurely. Once the assessment abates, the original return which had been
filed loses its originality and the subsequent return filed u/s 153A takes the
place of the original return. In such a case, the return of income filed u/s
153A(1) would be construed to be one filed u/s 139(1) and the provisions of the
Act shall apply to it accordingly.

 

iii)  If that be the position, all legitimate claims
would be open to the assessee to raise in the return of income filed u/s
153A(1). It is open for the assessee to lodge a new claim in a proceeding u/s
153A(1) which was not claimed in his regular return of income.’

 

Loss – Set-off of – Sections 72(2), 72A and 263 of ITA, 1961 and sections 18 and 32(2) of SICA, 1985 – Amalgamation of companies – Provision for carry forward by amalgamated company of accumulated loss and unabsorbed depreciation of amalgamating company – Sick industrial company – Sanction of scheme by Board for Industrial and Financial Reconstruction implies that requirements of section 72(2) satisfied; A.Y. 2004-05

32. CIT
vs. Lakshmi Machine Works Ltd. [2020]
422 ITR 235 (Mad.) Date
of order: 13th February, 2019 A.Y.:
2004-05

 

Loss –
Set-off of – Sections 72(2), 72A and 263 of ITA, 1961 and sections 18 and 32(2)
of SICA, 1985 – Amalgamation of companies – Provision for carry forward by
amalgamated company of accumulated loss and unabsorbed depreciation of
amalgamating company – Sick industrial company – Sanction of scheme by Board
for Industrial and Financial Reconstruction implies that requirements of
section 72(2) satisfied; A.Y. 2004-05

 

Two spinning
units of a company amalgamated with the assessee under a rehabilitation scheme
under the Sick Industrial Companies (Special Provisions) Act, 1985 by an order
of sanction by the Board for Industrial and Financial Reconstruction. The
assessee claimed the carried forward loss u/s 72A of the Income-tax Act, 1961
in its return. The A.O. issued notices under sections 142(1) and 143(2) of the
1961 Act and required the assessee to show compliance with the conditions laid
down u/s 72A. The assessee submitted that it was entitled to the claim for
carry forward of loss u/s 72A by virtue of the scheme having been sanctioned by
the Board for Industrial and Financial Reconstruction which took into account the
provisions of that section as well. The A.O. agreed with the view of the
assessee and allowed the claim in his order u/s 143(3). But the Commissioner
was of the view that there was no application of mind by the A.O. while he
allowed the claim made by the assessee u/s 72A and that there were no reasons
in support thereof. Accordingly, he passed a revision order u/s 263 of the 1961
Act.

 

The Tribunal
held that the very fact that the Board for Industrial and Financial
Reconstruction had sanctioned the scheme was sufficient and no further
compliance was called for in regard to the conditions set out u/s 72A as the
provisions of the 1985 Act overrode those of the 1961 Act, and confirmed the
order of the A.O. allowing the claim of the assessee for the carry forward of
loss. Accordingly, the Tribunal set aside the order of the Commissioner passed
u/s 263.

 

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

 

‘i)   The financial viability or otherwise of the
amalgamating company has to be determined first in order to attract the
provisions of section 72A of the Income-tax Act, 1961. After the enactment of
the Sick Industrial Companies (Special Provisions) Act, 1985 and the
constitution of the Board for Industrial and Financial Reconstruction, the
question of sickness or robust health of the entity is to be determined by the
Board. It is only when the Board is satisfied that it would have entertained
applications for revival, sanctioning an appropriate scheme for rehabilitation.
Thus, a sanction by the Board for the scheme of amalgamation implies that the
requirements of section 72A have been met.

 

ii)   The view taken by the A.O. to the effect that
the claim of the assessee u/s 72A of the 1961 Act was liable to be allowed in
the light of the provisions of section 32(2) of the 1985 Act and its
interpretation by the Supreme Court was the correct one. Section 263 of the
1961 Act empowered the Commissioner to revise an order of assessment if it was
erroneous or prejudicial to the interests of the Revenue. Both conditions were
to be satisfied concurrently. The action of the A.O. though prejudicial, could
hardly be termed “erroneous” insofar as the A.O. had followed the dictum laid
down by the Supreme Court in the case of Indian Shaving Products Ltd. vs.
BIFR [1996] 218 ITR 140 (SC). Thus, in the absence of concurrent
satisfaction of the two conditions u/s 263 of the 1961 Act, the action of the
Commissioner was contrary to the statute and was therefore to be set aside.

 

iii)  The appeal filed by the Revenue is dismissed.
The substantial question of law is answered in favour of the assessee and
against the Revenue.’

Exemption u/s 10(17A) of ITA, 1961 – Award for meritorious service in public interest – Scope of section 10(17A) – Approval of State Government or Central Government – Formal approval not mandatory – Approval may be implied; A.Y. 2010-11

31. K.
Vijaya Kumar vs. Principal CIT [2020]
422 ITR 304 (Mad.) Date
of order: 26th February, 2020 A.Y.:
2010-11

 

Exemption
u/s 10(17A) of ITA, 1961 – Award for meritorious service in public interest –
Scope of section 10(17A) – Approval of State Government or Central Government –
Formal approval not mandatory – Approval may be implied; A.Y. 2010-11

 

The
petitioner has had a distinguished career in the Indian Police Service and is
at present engaged as a senior security adviser to the Union Home Ministry. In
the course of his service, he had been appointed as the Chief of the Special
Task Force (STF) leading ‘Operation Cocoon’ against forest brigand Veerappan,
leading to Veerappan’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 STF personnel for the valuable services rendered by them
as part of the team. Pursuant thereto, the petitioner had received a cash award
of Rs. 1,08,43,000 in the F.Y. 2009-10, relevant to A.Y. 2010-11. This amount
was sought to be assessed as income by the Commissioner u/s 263 of the
Income-tax Act, 1961 for which the assessee claimed exemption u/s 10(17A). The
Commissioner directed the A.O. 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).

 

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

 

‘i)   The object of section 10(17A) of the
Income-tax Act, 1961 is to reward an individual who has been recognised by the
Centre or the State for rendition of services in public interest. While clause
(i) of section 10(17A) is concerned with an award whether in cash or in kind,
instituted in public interest by the Central or any State Government or
instituted by any other body and approved by the Central Government in this
behalf, clause (ii) refers to a reward by the Central or a State Government for
such purposes as may be approved by the Central Government in this behalf in
public interest.

 

ii)   No specification or prescription has been set
out in terms of how the approval is to be styled or even whether a formal
written approval is required. Nowhere in the rules or forms is there reference
to a format of approval to be issued in this regard. That apart, one should
interpret the provision and its application in a purposive manner bearing in
mind the spirit and object for which it has been enacted. It is clear that the
object of such a reward is by way of recognition by the State of an
individual’s efforts in protecting public interest and serving society in a
significant manner. Thus, the reference to “approval” in section 10(17A) does
not only connote a paper conveying approval and bearing the stamp and seal of the
Central Government, but any material available in the public domain indicating
recognition for such services rendered in public interest.

 

iii)  The assessee had been recognised by the
Central Government on several occasions for meritorious and distinguished
services and from the information available in the public domain, it could be
seen that he was awarded the Jammu and 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. The assessee was entitled to exemption on the awards
received from the State Government. The writ petition is allowed.’

Deduction u/s 80-IB(10) of ITA, 1961 – Housing projects – Scope of section 80-IB(10) – Not necessary that developer should be owner of land – Joint venture agreement showing assessee was developer – Assessee entitled to special deduction u/s 80-IB(10); A.Y. 2010-11

30. Bashyam
Constructions P. Ltd. vs. Dy. CIT [2020]
422 ITR 346 (Mad.) Date
of order: 30th January, 2019 A.Y.:
2010-11

 

Deduction
u/s 80-IB(10) of ITA, 1961 – Housing projects – Scope of section 80-IB(10) –
Not necessary that developer should be owner of land – Joint venture agreement
showing assessee was developer – Assessee entitled to special deduction u/s
80-IB(10); A.Y. 2010-11

 

A claim for deduction u/s 80-IB(10) of the Income-tax Act, 1961 was
allowed by the Commissioner (Appeals) but denied by the Tribunal. The reason
assigned by the Tribunal for reversing the order passed by the Commissioner
(Appeals) was that the assessee could not be considered a developer of the
housing project, as a joint venture would happen only when the owner, that is,
the assessee, treated the land as stock-in-trade in its books of accounts.

 

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

 

‘i)   A plain reading of section 80-IB(10) of the
Income-tax Act, 1961 makes it clear that deduction is available in a case where
an undertaking develops and builds a housing project. The section clearly draws
a distinction between “developing” and “building”. The provision does not
require that the ownership of land must vest in the developer for it to qualify
for such deduction.

 

ii)   The joint venture agreement clearly showed
that the assessee was the developer and ETA was the builder and mutual rights
and obligations were inextricably linked with each other and undoubtedly, the
project was a housing project. Therefore, the assessee would be entitled to
claim deduction u/s 80-IB(10).’

 

Business expenditure – Disallowance u/s 40(a)(ia) of ITA, 1961 – Amounts not deductible – Payments liable to deduction of tax at source – Failure to deduct tax at source – Law applicable – Effect of amendment of section 40(a)(ia) with effect from 1st April, 2013 providing for cases where recipient has declared income in question and paid tax thereon – Amendment retrospective – Non-deduction of tax at source not causing loss to Revenue – Disallowance not applicable; A.Y. 2005-06

29. CIT
vs. S.M. Anand [2020]
422 ITR 209 (Kar.) Date
of order: 23rd August, 2019 A.Y.:
2005-06

 

Business
expenditure – Disallowance u/s 40(a)(ia) of ITA, 1961 – Amounts not deductible
– Payments liable to deduction of tax at source – Failure to deduct tax at
source – Law applicable – Effect of amendment of section 40(a)(ia) with effect
from 1st April, 2013 providing for cases where recipient has
declared income in question and paid tax thereon – Amendment retrospective –
Non-deduction of tax at source not causing loss to Revenue – Disallowance not
applicable; A.Y. 2005-06

 

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

 

‘Whether the
second proviso to section 40(a)(ia) of the Act inserted by the Finance
Act, 2012 is clarificatory and retrospective in nature and cancellation of the
disallowance u/s 40(a)(ia) by the Tribunal is justifiable where the recipient
of the amount has already discharged his tax liability therein?’

 

The
Karnataka High Court held as under:

 

‘i)   The scheme of section 40(a)(ia) of the
Income-tax Act, 1961 is aimed at ensuring that an expenditure should not be
allowed as deduction in the hands of an assessee in a situation in which income
embedded in such expenditure has remained untaxed due to tax withholding lapses
by the assessee. It is not a penalty for tax withholding lapse but a sort of
compensatory deduction restriction for an income going untaxed due to tax
withholding lapse. The penalty for tax withholding lapse per se is
separately provided for in section 271C and section 40(a)(ia) does not add to
it. The provisions of section 40(a)(ia), as they existed prior to insertion of
the second proviso thereto, went much beyond the obvious intentions of
the lawmakers and created undue hardships even in cases in which the assessee’s
tax withholding lapses did not result in any loss to the exchequer.

 

ii)   In order to cure these shortcomings of the
provision, and thus obviate the unintended hardships, an amendment in law was
made. In view of the well-settled legal position to the effect that a curative
amendment to avoid unintended consequences is to be treated as retrospective in
nature even though it may not state so specifically, the insertion of the
second proviso must be given retrospective effect from the point of time
when the related legal provision was introduced. The insertion of the second proviso
to section 40(a)(ia) is declaratory and curative in nature and it has
retrospective effect from 1st April, 2005, being the date from which
sub-clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004.

 

iii)  It was not disputed that the payments made by
the assessee to the sub-contractors had been offered to tax in their respective
returns of income, uncontroverted by the authorities. There was no actual loss
of revenue. Hence, section 40(a)(ia) was not applicable.

 

iv)  Accordingly, we answer the substantial
question of law against the Revenue and in favour of the assessee.’

 

Business expenditure – Section 37 of ITA, 1961 – General principles – Donations made by company under corporate social responsibility – Deductible u/s 37; A.Y. 2010-11

28. Principal CIT vs. Gujarat Narmada
Valley Fertilizer and Chemicals Ltd. [2020]
422 ITR 164 (Guj.) Date
of order: 16th July, 2019 A.Y.:
2010-11

 

Business
expenditure – Section 37 of ITA, 1961 – General principles – Donations made by
company under corporate social responsibility – Deductible u/s 37; A.Y. 2010-11

 

The assessee
was engaged in the business of manufacturing, sale and trading of chemical
fertilizers and chemical industrial products. The company was also engaged in
the business of information and technology. For the A.Y. 2010-11 the assessee
claimed expenditure of Rs. 17,50,36,756 u/s 37(1). Such claim was put forward
in fulfilment of its corporate social obligation and responsibility. The A.O.
disallowed the claim. The Appellate Tribunal relied on its order passed for
A.Y. 2009-10 and took the view that the assessee was entitled to claim
deduction towards the expenditure incurred for discharging its corporate social
responsibility u/s 37(1).

 

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

 

‘The word
“business” used in section 37(1) in association with the expression “for the
purposes of” is a word of wide connotation. In the context of a taxing statute,
the word “business” would signify an organised and continuous course of
commercial activity, which is carried on with the end in view of making or
earning profits. Under section 37(1), therefore, the connection has to be
established between the expenditure incurred and the activity undertaken by the
assessee with such object. The concept of business is not static. It has
evolved over a period of time to include within its fold the concrete
expression of care and concern for society at large and the people of the
locality in which the business is located in particular. It is not open to the
Court to go behind the commercial expediency which has to be determined from
the point of view of a businessman.

 

The test of
commercial expediency cannot be reduced to a ritualistic formula, nor can it be
put in a water-tight compartment. As long as the expenses are incurred wholly
and exclusively for the purpose of earning income from the business or
profession, merely because some of these expenses are incurred voluntarily,
i.e., without there being any legal or contractual obligation to incur them,
those expenses do not cease to be deductible in nature.

 

Explanation 2 to section 37(1) comes into play with effect from 1st
April, 2015. This disallowance is restricted to the expenses incurred by the
assessee under a statutory obligation u/s 135 of the Companies Act, 2013, and
there is thus now a line of demarcation between expenses incurred by the
assessee on discharging corporate social responsibility under such a statutory
obligation and under a voluntary assumption of responsibility. As for the
former, the disallowance under Explanation 2 to section 37(1) comes into play,
but for the latter there is no such disabling provision as long as the
expenses, even in discharge of corporate social responsibility on voluntary
basis, can be said to be “wholly and exclusively for the purposes of business”.

 

The assessee company was a polluting company. The assessee company was
conscious of its social obligations towards society at large. The assessee
company was a Government undertaking and, therefore, obliged to ensure
fulfilment of all the protective principles of State policy as enshrined in the
Constitution of India. The moneys had been spent for various purposes and could
not be regarded as outside the ambit of the business concerns of the assessee.
The order passed by the Appellate Tribunal was just and proper and needed no
interference in the present appeal.’

Appeal to Appellate Tribunal – Duty of Tribunal to decide appeal on merits – Rule 24 of ITAT Rules, 1963 Rectification of mistakes – Section 254 of ITA, 1961 – Order of Tribunal dismissing appeal ex parte for non-prosecution – Rejection of application for recall on ground of limitation – Not justified – Assessee granted liberty to apply for recall of order; A.Y. 2006-07

27. Golden
Times Services Pvt. Ltd. vs. Dy. CIT [2020]
422 ITR 102 (Del.) Date
of order: 13th January, 2020 A.Y.:
2006-07

 

Appeal to
Appellate Tribunal – Duty of Tribunal to decide appeal on merits – Rule 24 of
ITAT  Rules, 1963

 

Rectification
of mistakes – Section 254 of ITA, 1961 – Order of Tribunal dismissing appeal ex
parte for non-prosecution – Rejection of application for recall on ground
of limitation – Not justified – Assessee granted liberty to apply for recall of
order; A.Y. 2006-07

 

The relevant
year is the A.Y. 2006-07. In an appeal before the Income-tax Appellate Tribunal,
the petitioner company had challenged the addition of Rs. 19,00,000 which was
confirmed by the Commissioner (Appeals). The appeal was filed on 11th
December, 2014 and was heard on 30th August, 2016. The appeal was
dismissed by an order dated 18th October, 2016. In the said order,
the Tribunal, while noting that no one was present on behalf of the assessee at
the time of hearing, proceeded to dispose of the appeal, observing that notice
was sent to the assessee on 15th July, 2016 at the address mentioned
in the memo of appeal but despite that the assessee remained unrepresented. It
was further noted that the notice had come back unserved with a report that the
property was locked for quite some time. It was also noted that the earlier
notice, sent on 1st June, 2016 on the same address of the assessee,
had also been received back unserved with similar comments. The Tribunal, thus,
held that the assessee was presumably not serious in pursuing the appeal and
dismissed the same in limine. At the same time, the assessee was granted
liberty to approach the Income-tax Appellate Tribunal for a recall of the order
if it was able to show a reasonable cause for non-appearance. Thus, there was
no adjudication on the merits of the appeal.

 

On 8th February,
2018 when an inquiry was made about the status of the appeal, the petitioner
came to know that the appeal had been dismissed ex parte for
non-prosecution. Thereafter, on 8th March, 2018 an application was
filed for recall of the order dated 18th October, 2016. The petitioner
filed the application giving the grounds for non-appearance, with an
explanation that the absence was beyond its control. However, the application
was dismissed by an order dated 30th August, 2019 on the ground that
the same is barred by limitation u/s 254(2) of the Act.

 

The
petitioner filed a writ petition and challenged the order of the Tribunal. The
Delhi High Court allowed the writ petition and held as under:

 

‘i)   Rule 24 of the Income-tax (Appellate
Tribunal) Rules, 1963 mandates the Appellate Tribunal to decide the appeal on
its merits. It is the duty and obligation of the Appellate Tribunal to dispose
of the appeal on merits after giving both the parties an opportunity of being
heard. No limitation is provided in Rule 24 of the Rules.

 

ii)   Section 254(2) of the Income-tax Act, 1961
refers to suo motu exercise of the power of rectification by the
Appellate Tribunal, whereas the second part refers to rectification and
amendment on an application being made by the Assessing Officer or the assessee
pointing out the mistake apparent from the record. Section 254(2) was amended
by the Finance Act, 2016 with effect from 1st June, 2016 and the
words “four years from the date of the order” were substituted by
“six months from the end of the month in which the order was passed”.

 

iii)  Section 254(3) stipulates that the Appellate
Tribunal shall send a copy of the order passed by it to the assessee and the
Principal Commissioner. Further, Rule 35 of the Income-tax (Appellate Tribunal)
Rules, 1963 also requires that the orders are required to be communicated to
the parties. The section and the Rule mandate the communication of the order to
the parties. Thus, the date of communication or knowledge, actual or
constructive, of the orders sought to be rectified or amended u/s 254(2) of the
Act becomes critical and determinative for the commencement of the period of
limitation.

 

iv)  The appeal had been dismissed ex
parte for non-prosecution. At the same time, the assessee was granted
liberty to approach the Appellate Tribunal for recall of the order if it was
able to show a reasonable cause for non-appearance. Thus, there was no
adjudication on the merits of the appeal. The dismissal of the application for
recall of the order on the ground of limitation was not valid.

 

v)  The course adopted by the Appellate Tribunal
at the first instance, by dismissing the appeal for non-prosecution, and then
compounding the same by refusing to entertain the application for recall of the
order, cannot be sustained. We, therefore have no hesitation in quashing the
impugned order. Accordingly, the present petition is allowed. The order dated
30th August, 2019 is quashed and the matter is remanded back to the
Income-tax Appellate Tribunal with a direction that they shall hear and dispose
of I.T.A. No. 6739/Del/2014 on merits.’

FAILURE TO CLAIM DEDUCTION IN RETURN OF INCOME AND SECTION 80A(5)

ISSUE FOR CONSIDERATION

Section 80A(5)
provides for denial of deduction under sections 10A, 10AA, 10B, 10BA, or under
any of the provisions of part C of Chapter VIA (‘specified deductions’) of the
Income-tax Act in cases where the assessee fails to make a claim in the return
of income. It is usual to come across cases where assessees have failed to make
a specific claim for deduction in computing the total income and, as a
consequence, in claiming the same in the return of income, or where the
assessees try to cover up the failure by filing a revised return.

 

This disabling
provision has been introduced by the Finance (No. 2) Act, 2009 with
retrospective effect from 1st April, 2003. On introduction of the
new provision, an issue has arisen about the eligibility of an assessee to qualify
for the specified deductions in cases where the assessee has staked the claim
for the specified deduction for the first time in the revised return of income
and such return is filed beyond the time permissible in law but before the
completion of assessment. Conflicting decisions of the Tribunal are available
in the context of the new provision of section 80A(5) on the subject. The ratio
of such decisions is discussed here to highlight the difficulty and the
possible steps that may be taken to mitigate the hardship.

 

THE
OLAVANNA SERVICE CO-OP. BANK CASE

The issue arose in the case of M/s Olavanna Service Co-op. Bank ITA
No. 398/Coch/2014 dated 21st November, 2017 (unreported-Cochin).
The only issue in the appeal for assessment year 2010-11 was with regard to the
denial of deduction u/s 80P by invoking the provisions of section 80A(5). The
assessee, a co-operative bank registered under the Kerala Co-operative
Societies Act, 1969, had failed to file return of income for the A.Y. 2010-11.
The AO had issued notice u/s 142(1) requiring the assessee to file the return
of income but the assessee neither complied with the notice nor filed a return
of income. The AO initiated best judgment proceedings u/s 144 and called for
the details, at which point in time the assessee filed the return of income on
20th March, 2013 which was beyond the time limit prescribed u/s 139
and the time limit prescribed in notice u/s 142(1) and, therefore, the AO treated
the same as invalid. On the basis of the material gathered during the course of
assessment, the AO worked out the total income of the assesse from business and
in completing the assessment he disallowed the claim of deduction u/s 80P by
invoking the provisions of section 80A(5).

 

On appeal, the CIT(A) relied on the decision of the ITAT, Cochin Bench in
the case of Kadachira Service Co-op. Bank Ltd. & Ors., 153 TTJ
(Cochin) 129 wherein it was held that 
the assessee was not entitled for deduction u/s 80P for the A.Y. 2009-10
if the return of income had not been filed within the prescribed time. The
CIT(A) dismissed the appeal as, in his opinion, the factual matrix was the same
in both the cases. Against this order of the CIT(A), the assessee filed an appeal
before the Tribunal.

 

It was contended
before the Tribunal on behalf of the assessee that the assessee had filed the
return of income before the assessment proceedings were completed and,
therefore, the return filed should have been considered for the purpose of
making the assessment. It was further submitted that the AO should have
regularised the return of income u/s 148 of the Act, considering the fact that
the proceedings had been initiated on the basis of the reason to believe that
the income had escaped assessment. Further, it was submitted that since the
income had been assessed u/s 144 relying on all the materials, deeds and
documents submitted by the assessee in the course of the assessment proceedings
in response to the directions of the AO, he should have granted the deduction
as provided u/s 80P of the I.T. Act.

It was explained
that the assessee was a co-operative society coming under the classification of
Primary Agricultural Credit Society or Primary Co-operative Agricultural and
Rural Development Bank carrying on the business of banking, providing credit
facility to its members for agricultural purposes and, therefore, the claim of
exemption u/s 80P should have been allowed and that, even if it was held that
the assessee was doing banking business, proportionate exemption should have
been granted in respect of the agricultural credit facilities given to its
members, instead of disallowing the entire claim of deduction u/s 80P of the
Act.

 

The Tribunal, on
hearing both the sides, noted that a similar issue had come up for
consideration in the case of Kadachira Service Co-op. Bank Ltd. &
Ors., 153 TTJ (Cochin) 129. The relevant portion of the observations in
the said case were referred to by the Tribunal to hold that unless the Central
Government, by a notification in the official gazette, exempted the
co-operative societies from filing the returns, they had to file the return of
income and the co-operative societies could not have been under the impression
that they need not file their returns of income since their income was
exempted; a statutory liability of filing the return under the Income-tax Act
could not be disowned on the ground of a bona fide impression that no
return of income was required to be filed. It was observed that when the language
of the provision was plain and unambiguous, the language employed in the
statute was determinative of the legislative intent.

 

On examination of
section 80A(5), the Tribunal noted that the intention of the legislature in
introducing the provision was to avoid multiple deductions in respect of the
same profit and for that the legislature had imposed three conditions for
claiming deduction under sections 10A, 10AA, 10B, 10BA, or under any provisions
of part C, Chapter VIA. One of the conditions required that there should be a
claim made in the return of income. The legislature, in its wisdom, thought it
fit that implementation of these three conditions would prevent misuse and
avoid multiple claims of deduction under sections 10A, 10AA, 10B, 10BA, or under
any provisions of part C, Chapter VIA. A plain reading of the language of
sections 80A(4) and 80A(5) made clear the purpose and intent of the legislature
in a manner that did not require any further interpretation.

 

The Tribunal
examined the other provisions of the Act that provided for a deduction, to
appreciate the provisions of section 80A(5) of the Act, noting that while other
provisions required filing of return u/s 139(1), section 80A(5) did not carry
any such limitation. That being so, even if a return was filed u/s 139(4) it
would not dilute the infraction in not furnishing the return in due time as
prescribed in section 139(1). In section 80A(5) the legislature obviously
omitted to mention the words ‘in due time’. What it says is that where the taxpayer
fails to make a claim in the return of income, no deduction shall be allowed.
It does not say that the return of income shall be furnished in due time. The
return might be filed either u/s 139(1), or 139(4), or in pursuance of a notice
issued u/s 142(1) or 148 of the Act.

 

On the question of
when there was a failure on the part of the taxpayer to file return of income
within the time limit provided u/s 139(1) or 139(4), or within the time
specified in the notice u/s 142(1) or 148, the Tribunal held that the return of
income filed belatedly could not be treated as return of income.

 

While dealing with
the contention that when the return was filed before completion of the
assessment proceedings, the AO ought to have issued notice u/s 148 for regularising
the returns, the Tribunal held that the AO had no jurisdiction to issue notice
u/s 148 for assessing the income of the taxpayer. In other words, no income
could be said to have escaped assessment at that point of time. Therefore, the
contention of the assessee that notice ought to have been issued u/s 148 had no
merit at all. It referred to the decision in the case of Sun Engineering
Works (P) Ltd., 198 ITR 297, 320 (SC) to hold that proceedings u/s 147
were for the benefit of the Revenue.

 

The Tribunal held
that accepting the plea of the assessee that the deduction be allowed even
where no return was filed, would mean that a person who had not filed a return
would get benefit but a person who filed the return but failed to make a claim
either by ignorance or otherwise may not get the benefit at all. The Tribunal
was of the considered opinion that such could certainly not be the legislative
intent.

 

In conclusion, the
Tribunal held that it was a settled principle of law that in order to avail benefits
under the beneficial provision, the conditions provided by the legislature had
to be complied with, and therefore, the Tribunal was of the considered opinion
that in view of the mandatory provisions contained in section 139(1) r/w/s
80A(5) of the Act, it was mandatory for every co-operative society for claiming
deduction u/s 80P to file the return of income and to make a claim of deduction
u/s 80P in the return itself. If the return was not filed either u/s 139(1) or
139(4), or in pursuance of notice issued u/s 142(1) or 148, the taxpayer was
not entitled for any deduction u/s 80P.

 

CASE OF KAMDHENU BUILDERS AND DEVELOPERS

A similar issue was
examined in yet another case, of Kamdhenu Builders and Developers vs.
DCIT, ITA No. 7010/Mum/2010 (unreported-Mumbai) for A.Y. 2007-08 dated
27th January, 2016. The assessee in that case, a partnership firm,
was engaged in the business of building housing projects and doing real estate
development. The original return of income for A.Y. 2007-08 was filed on 18th
October, 2007 declaring total income from the housing project at Rs.
1,94,12,489. During pendency of assessment proceedings, the assessee had filed
a revised return of income on 31st August, 2009 declaring Nil
income, as the entire profit of Rs. 1,94,12,489 was claimed to be allowable as
deduction u/s 80IB(10) of the Income-tax Act. The AO had not allowed the claim
of deduction on the ground that revised return of income was furnished on 31st
August, 2009, which was beyond the date by which the revised return of
income should have been furnished as per the provisions of law u/s 139(5) of
the Income-tax Act. According to the AO, the claim of deduction u/s 80IB was
also inadmissible on account of the provision of law u/s 80A(5) of the
Income-tax Act.

 

On appeal, the
CIT(A) allowed the assessee’s claim. The Tribunal, on further appeal by the
Revenue, has largely relied upon the order of the CIT(A) and has reproduced
extensively his observations and findings in its order, some of which were as
under:

 

‘I have circumspected
the entire spectrum and circumstances of the case and considered finding of the
AO, remand report, written submission of the appellant and counter
representation vis-à-vis  provision of
law and  various decisions of the Hon’ble
ITAT, High Court and  Supreme Court  relevant to the issue. It transpires from the
assessment order and remand report of AO dated 7th June, 2010 that
Ld. AO had denied or is not willing to give deduction u/s 80IB(10) merely on
the ground of provision of law u/s 80A(5) irrespective of fulfilment of all the
conditions prescribed by the appellant to be entitled for legal claim of
deduction u/s 80IB(10) of the Act. This approach and contention of the Ld. AO
is not tenable because of obvious facts of fulfilment of all the conditions by
the appellant. There is no bar of furnishing of revised return of income u/s
80A(5) and the decision of the Hon’ble ITAT, High Courts and Supreme Court over
such issues support the appellant. Under section 80A(5), there is an insertion
of new provision of law with effect from 1st April, 2003 providing
that where the assessee failed to make claim in his  return of income for any deduction u/s 10(A),
or section 10(AA), or section 10(B), or section 10(BA), or under any provision
of Chapter VIA under the head in C – deduction in respect of certain income, no
deduction shall be allowed to him thereunder, means there is no restriction
about  the revised return of income but
there is a provision of law for claiming such deduction through return of
income only. This provision of law does not limit the date of filing of return
of income to be either as provided u/s 139(1) or 139(4) or 139(5) of the
Income-tax Act. As such, there is no ambiguity regarding interpretation or
understanding of this provision of law. The provision of section 80A(5) does
not provide that return of income through which the deduction has to be claimed
should be filed on or before the due date specified under these sections, it is
worthwhile to mention that whenever legislature intends to provide a law with
reference to the prescribed date of return of income before any specified date, it has
clearly identified and mentioned in expressed word.’

 

The CIT(A) cited
the examples of section 80AC where a return of income had to be filed prior to
due date as per section 139(1) and of section 54(2) which referred to the date
of furnishing return as per section 139 and also of section 139(3) where carry
forward of loss was permitted only if such return of loss was filed within the
time limit provided by section 139(1). He noted that for claiming any such
deduction under these sections, return of income had to be filed within the
specified date  u/s 139(1), whereas u/s
80A(5) there was no such specific limitation of date; therefore, in absence of
any specific limitation of date, the words ‘return of income’ provided u/s
80A(5) had to be construed to mean any such return of income filed prior to the
completion of assessment or a return of income filed during the assessment
proceedings, provided the original return of income was filed within  the time limit prescribed u/s 139(1).

 

He further held: ‘Obviously,
appellant complies with the provision of section 80AC of the Income-tax Act.
When the original return of income has been filed well within the due date, the
revised return filed thereafter before the completion of assessment proceedings
or assessment order is passed, it is a valid return of income to be considered
by the Assessing Officer, otherwise every purpose of giving such right to such
appellant would be frustrated. The revised return of income is essential for
removal of defects of original return. It obviously corrects shortcomings from
which it suffered. The revised return must therefore be considered as it was
originally filed vide Thakur Dharmapur Sugar Mills Ltd. vs. CIT (1973) 90
ITR 236, 239 & 240 (All.) and Gopaldas Parshottamdas vs. CIT
(1941) 9 ITR 130 (All.). It is important to point  out that when a revised return cures the
defects in the original return and does not obliterate the latter, the
assessment means on the basis of original return of income ignoring the revised
return is liable to be set aside vide CIT vs. Chitranjali (1986) 159 ITR 801
(Cal.). Similar view has also been taken in the case of CIT vs.
Bansidhar Dalal and Sons, 207 ITR 494 (Cal.).’

 

The CIT(A) observed
that an AO’s functions encompassed power as well as duty to be exercised within
the ambit of law. Relying on various court pronouncements, he observed that it
was only the true and correct total income of every person which was assessable
u/s 4 of the Act and, consequently, the tax collector was rather duty-bound to
collect the legitimate tax due on such total income – neither a penny less nor
a penny more, and the determination / assessment of total income would depend
on the relevant provisions of the Act irrespective of the nature of return
filed by any person; and that an income which was not taxable could not be
taxed merely because the assessee forgot to claim the exemption / deduction
under some mistaken belief. Rather, it was the duty of the Assessing Officer to
allow such deduction or exemption to which the assessee was entitled on the
basis of material placed on record. Therefore, the assessee was entitled to
claim deduction if such claim was made by the assessee before the completion of
assessment proceedings. He relied on the findings in the case of Anchor
Pressings (P) Ltd., 161 ITR 159 (SC) in which case the claim for
deduction u/s 80-O was made by the assessee before completion of assessment
proceedings by way of a revised return filed after expiry of period specified
u/s 139(5), it was held that the assessee was entitled to the said deduction in
computing his total income.

 

The CIT(A) relying
on the cases of Lucknow Public Educational Society, 318 ITR 223 (All.);
Gujarat Oil & Allied Industries, 109 CTR (Guj.) 272, 201 ITR 325 (Guj.); and
Berger Paints (India) Ltd., 174 CTR (Cal.)269: 254 ITR 503 (Cal.)
held that the mistake was procedural in nature. The mistake was a technical
breach and the AO was duty-bound to ask for details before denying the claim.
In the instant case, the AO had not asked any information before denying the
exemption for which the assessee was legally entitled. On the other hand, he
had rejected the second return which enclosed the necessary documents for
claiming the exemption.

 

The CIT(A) noted
with approval the decision in the case of Emerson Network Power India (P)
Ltd., 122 TTJ/27 SOT/19 DTR where it had been held that any claim made
at the time of assessment but not made in the original return, nor made by way
of valid revised return, could not be denied and the AO was obliged to give due
relief to the assessee or entertain its claim if admissible as per law, even
though the assessee had not filed the revised return, and that the legitimate
claim of the assessee should not be rejected on technical grounds. In the
background of all the decisions and facts of the case, the denial of claim of
deduction of the appellant made through revised return of income during the
course of assessment proceedings and well before the passing of assessment
order, according to the CIT(A), was not tenable in the eye of law.

 

Against the above
order of the CIT(A), the Revenue filed an appeal to the Tribunal on the
following grounds:

 

‘(i)  On the facts and circumstances of case and in
law, the Ld. CIT(A) erred in holding that the assessee is entitled to deduction
u/s 80IB(10) of Rs. 1,94,12,489 in spite of the fact that the claim for
deduction was not made in the original return and was only made in the return
filed for A.Y. 2007-08 on 31st August, 2009, which is not a valid
return in the eye of law and also cannot be treated as revised return u/s
139(5).

(ii) On the
facts and circumstances of the case and law, the Ld. CIT(A) erred in allowing
the deduction u/s 80IB(10) of Rs. 1,94,12,489 as the same is contrary to the
provisions of section 80A(5), effective from 1st April, 2003, which
does not permit allowance of deduction unless the claim for deduction is made
in the return of income.

(iii)  On the facts and circumstances of case and in
law, the Ld. CIT(A) erred in allowing the deduction u/s 80IB(10) as the same
only means that deduction can be claimed just by filling revised return u/s
139(5)… has already elapsed, in the course of assessment proceedings, which is
not at all acceptable in the light of amended provisions of section 80A(5),
vide Finance (No. 2) Bill, 2009.’

 

It was contended by
Revenue that as per the provisions of section 80A(5), effective from A.Y.
2003-04, the assessee was not entitled for deduction unless the claim of
deduction was made in the original return filed by him. On the other hand, the
assessee contended that original return was filed well within the time, and the
revised return was filed to correct the omission in the original return.
Nowhere had the AO alleged that the assessee had not complied with any of the
conditions prescribed for claim of deduction u/s 80IB(10). A legal claim, even
if not made in the original return or even in the revised return, but made by
the assessee before the AO completing the assessment, should be allowed.

 

The Tribunal in its
considered view noted that section 80A(5) only required filing of return.
Nowhere is it suggested that claim should be made in the original return and
not by way of revised return. It further noted that when the original return of
income had been filed well within the due date, the revised return filed
thereafter, before the completion of assessment proceedings, was a valid return
of income to be considered by the AO; that the assessee had been given
opportunity to file revised return u/s 139(4) for removal of any defect in the
original return; the CIT(A), considering the remand report and the written
submission of the assessee, and after applying various judicial pronouncements,
recorded a finding to the effect that the assessee had filed a revised return
claiming deduction u/s 80IB(10) before completion of assessment, and following
the judicial pronouncements laid down by the Allahabad High Court in the case
of Thakur Dharmapur Sugar Mills Ltd. 90 ITR 236, held that
revised return must be considered as it was originally filed; it was the duty
of the AO to allow legal claim if made before him and provided it fulfilled all
the conditions of the claim; nowhere had the AO alleged that the assessee has
failed to comply with any of the conditions of section 80IB(10); the only
grievance of the AO was that the claim was not made in the return filed u/s
139(1); the CIT(A) recorded a finding to the effect that both the original
return was filed well within the time limit prescribed under the law and the
revised return was filed before the AO completed the assessment, that the
assessee had fulfilled all the conditions u/s 80IB(10) and, therefore was
entitled for deduction in respect of the housing project.

 

The Tribunal noted
that the findings recorded by the CIT(A) had not been controverted by the
Department by bringing any positive material on record and the Tribunal did not
find any reason to interfere in the order of the CIT(A) in allowing the
assessee’s claim for deduction u/s 80IB(10) of the Act.

 

OBSERVATIONS

Section 80A(1)
stipulates that in computing the total income of an assessee, there shall be
allowed the deductions specified in sections 80C to 80U of the Act. Section
80A(5) reads as follows: ‘Where the assessee fails to make a claim in his
return of income for any deduction under section 10A or section 10AA or section
10B or section 10BA or under any provision of this Chapter under the heading
“C  Deductions in respect of certain
incomes”, no deduction shall be allowed to him thereunder’.

 

On a plain reading
of the provision it is clear that the disabling provision is activated only in
the case of an ultimate failure to make a claim in the return of income. The claims
though not made in the return of income u/s 139(1), would continue to be valid
as long as the claim for specified deduction is made in any of the returns
filed u/s 139(3), 139(4) and 139(5), or even in response to notices u/s 142(1)
or 148 of the Act, subject to compliance of the independent conditions of the
respective provisions under which a specified deduction is being claimed.

 

In cases where it
is necessary for the taxpayer to file the return of income within a specified
date, the legislature has inserted the words  ‘before the due date specified’ or ‘in due
time’  or ‘within the time limit’. In
section 80A(5), the legislature expressly omitted to include the words ‘within
the time limit’ or ‘before the due date specified’ or ‘in due time’. Therefore,
for the purpose of Chapter VIA the legislature intended not to make compulsory
the filing of return of income within the specified time or in due time as
provided in section 139(1) of the Act. In fact, section 80 r/w/s 139(3) of the
Income-tax Act, which provides for carry forward of losses, requires the
taxpayer to file the return of income within the time allowed u/s 139(1).

 

While introducing
section 80A(5), the legislature was well aware that not only for carry forward
of losses but also for deductions u/s 10A and 10B, the taxpayer has to file the
return of income within the time limit prescribed u/s 139(1) of the Act. In
spite of that, the legislature omitted to mention the words ‘within due time’
in section 80A(5). Therefore, the return of income filed within the time limit
provided in section 139(1) or 139(4), or the time specified in the notice u/s
142(1) or 148 can be considered as return of income. The issue, therefore, is
limited to the belated return filed beyond the time limit provided u/s 139(1)
or 139(4), or the time specified in notice u/s 142(1) or 148 of the Act.

 

The challenge
therefore is in respect of a case where no claim at all is made in the return
of income, or a case where such a claim is made in the return of income that is
filed, not under any of the above referred provisions, but before the
assessment. Nonetheless, such a challenge may also be faced in a case where the
assessee for the first time seeks to claim one of the specified deductions
before the appellate authorities. For brevity’s sake, however, the discussion
here is mainly restricted to a case where a deduction has been claimed in the
revised return of income filed beyond the permissible time but before the
assessment is completed; it is this aspect of section 80A(5) that has been
examined under the conflicting decisions discussed above.

 

The Notes to Clauses and the Explanatory Memorandum issued at the time of
introduction of the provision by the Finance (No. 2) Bill, 2009 are reported in
315 ITR (Stat) 81 and 82. The intention of the legislature in enacting sections
80A(4) and 80A(5) is to avoid multiple deduction in respect of the same profit.
The legislature prescribed three conditions in sections 80A(4) and 80A(5) which
are: (i) If a deduction in respect of any amount was allowed u/s 10A, 10AA
or 10B or 10BA or under provisions of Chapter VIA under the head  ‘C – Deductions in respect of certain
incomes’ in any assessment year, then the same deduction in respect of the same
profit & gains shall not be allowed under any other provisions of the Act
for such assessment year; (ii) The aggregate deduction under various provisions
shall not exceed the profit and gains of the undertaking or unit or enterprise
or the business profit, as the case may be; and (iii) There shall be a claim
made in the return of income. The legislature in its wisdom thought that
the above three conditions would avoid multiple deductions in respect of the
same profit. One of the conditions prescribed by the legislature in section
80A(5) is to make a claim in the return of income. The Delhi High Court in the
case of Nath Brothers Exim International Limited, 394 ITR 577
examined and upheld the constitutionality of the provision of section 80A(5).

 

A reference may also
be made to the Circular No. 37 of 2016 dated 2nd November, 2016
clarifying that an increased claim for deduction would not be denied in cases
where such increase is on account of the additions or disallowances made in
assessment of the total income. In this context, a useful reference may be made
to the decision in the case of Oracle (OFSS) BPO Services Limited, 307
CTR (Delhi) 97, which, independent of circulars, supports such a claim.
[Also see Influence, 55 taxmann.com 192 (Delhi) and E-Funds
International India (P) Limited, 379 ITR 292 (Delhi).]


In a case where the
assessee cannot claim the deduction for want of positive profits, or where the
electronic return does not permit to record the eligibility to the claim for
deduction, or where a return carries a note, as was in the case of DIC
Fine Chemicals Limited, 202 TTJ (Mum.) 378, highlighting its inability
to claim deduction for want of profits, or the inability to disclose, the
deduction should not be denied; the deduction, in such cases, on assessment,
would be well within the provision of section 80A(5) and would in any case be
saved by the said circular and the said decisions. Such cases cannot be
attributed to the failure of the assessee to claim a deduction in the return of
income.

 

The issue of the failure to claim a deduction in the return of income has
in fact been examined by the Delhi and the Bombay High Courts in the cases of Nath
Brothers, 394 ITR 577 and EBR Enterprises, 107 taxmann.com 220,
respectively. The Courts, in these cases, have held that not only the provision
of section 80A(5) is constitutional, as it is based on a reasonable
classification, but it also denies the right to claim the specified deduction
in a case where an assessee fails to claim such deduction in the return of income.
The Bombay High Court in the EBR Enterprises case specifically
disapproved the decision of the Mumbai Bench of the Tribunal in the case of Madhav
Constructions (Supra) where the Tribunal had held that the deduction
was not limited by the provisions of section 80A(5). The High Court, however,
in the very same Madhav Constructions case had refused to admit
the appeal of the Revenue against the order of the Tribunal

 

The case of the
assessee for the claim of deduction is likely to be on a better footing where a
claim is staked before the AO, before completion of assessment, by filing a
return of income, revised or otherwise. Please see Chirakkal Service
Co-op. Bank Ltd., 384 ITR 490 and The Pazhavangadikara Service
Co-op. Bank (Cochin-unreported) ITA No. 200/Coch/2018 dated 9th
July, 2018. In these cases, a claim made vide a belated return of
income, filed in response to notice u/s 148, was allowed as a deduction.

 

Outside of section
80A(5), it is a settled position in law that an AO is duty-bound to allow all
those deductions, reliefs and rebates otherwise allowable irrespective of the
claim by the assessee. This position of law articulated by the CBDT in Circular
No. 14(XL-35) of 1955 dated 11th April, 1955 has been approved by
several decisions of the courts rendered from time to time.

It is also a settled position in law that an assessee is entitled to
place a fresh claim for deduction or relief or rebate before the appellate
authorities, for the first time. Similarly, there is no bar on the AO to
entertain a claim made outside the return of income during the course of
assessment proceedings. Likewise, no special emphasis is required in stating
that a mere failure to stake a claim at a specific point of time or in a
specified format should not result in the frustration of a valid claim.

In view of the overwhelming position in law
in favour of allowance of a lawful claim, we are of the considered view that
the courts should favour an allowance of a lawful claim, even in the cases
where there is an express stipulation for denial of the benefits on the grounds
of non-compliance of a technical requirement, as long as the assessee has
finally corrected himself by compliance before the authorities. The court, in
such cases, should not only entertain the claim but is also obliged to allow
the reliefs to avoid unjust enrichment of the State.

I.Section 43(6), Explanation 2 – In Explanation 2 to section 43(6), deprecation actually allowed shall not include any unabsorbed depreciation – The WDV in the hands of the amalgamated company is to be calculated without considering the unabsorbed depreciation of the amalgamating companies, for which set-off was never allowed II.When a receipt is held to be capital in nature and not chargeable to tax under the normal provisions of the Act, the same cannot be taxed u/s 115JB of the Act as well III.Section 234B r/w/s 115JB – Interest u/s 234B cannot be levied where liability arises on account of retrospective amendment in the Act

16. [2019] 112
taxmann.com 55 (Trib.)(Mum.) ACIT vs. JSW Steel
Ltd. ITA No.
156/Bang/2011; CO No. 59/Mum/2012 A.Y.: 2006-07 Date of order: 29th
November, 2019

 

I.  Section 43(6), Explanation 2 – In Explanation
2 to section 43(6), deprecation actually allowed shall not include any
unabsorbed depreciation – The WDV in the hands of the amalgamated company is to
be calculated without considering the unabsorbed depreciation of the
amalgamating companies, for which set-off was never allowed

 

II. When a receipt is held to be capital in nature
and not chargeable to tax under the normal provisions of the Act, the same
cannot be taxed u/s 115JB of the Act as well

 

III.        Section 234B r/w/s 115JB – Interest u/s
234B cannot be levied where liability arises on account of retrospective
amendment in the Act

 

FACTS I

In the return of
income filed by the assessee for the year of amalgamation, i.e., A.Y. 2006-07,
the assessee computed WDV in respect of the assets transferred by the
amalgamating companies by reducing the amount of deprecation (‘actually
allowed’) in A.Y. 2005-06 in accordance with the provisions of Explanation (2)
to section 43(6) of the Act.

 

The AO observed
that the closing WDV of the amalgamating company becomes the WDV in the hands
of the amalgamated company and accordingly determined the WDV of the assets
acquired on amalgamation after considering normal depreciation allowed on
assets of the two amalgamating companies; consequently, he disallowed excess
depreciation of Rs. 6,81,27,607 (being 15% of the difference in the WDV of Rs.
45,41,84,048).

 

However, the AO was
of the view that Explanation (3) has to be read into Explanation (2) and
accordingly the WDV of the assets transferred on amalgamation has to be
computed after reducing the total depreciation in the hands of the amalgamated
companies.

 

Aggrieved, the
assessee preferred an appeal to the CIT(A) who allowed the appeal and directed
the AO to allow depreciation on the increased written down value of the assets.

 

Being aggrieved,
the Revenue preferred an appeal to the Tribunal.

 

HELD I

The Tribunal
observed that

(i)   the only dispute under consideration is
whether the WDV of the assets transferred on amalgamation was to be computed in
the hands of the amalgamated company considering the unabsorbed depreciation,
i.e., depreciation not given effect to, in the assessment of the amalgamating
companies;

(ii)   the provisions of Explanations (2) and (3) to
section 43(6) explains what will be the WDV of assets in the hands of the
amalgamated company in cases of amalgamation. Similarly, section 32(2) provides
for carry forward of unabsorbed depreciation and section 72A provides for carry
forward of business loss and unabsorbed depreciation in the hands of the
amalgamated company in cases of amalgamation;

(iii) on going through Explanation (2) to section
43(6), it is very clear that it speaks about depreciation ‘actually allowed’ in
relation to the said preceding year in case of the amalgamated company.

 

The Tribunal held
that in view of Explanation (2) to section 43(6) of the Act, the WDV in the
hands of the assessee as on 1st April, 2005 (the appointed date)
would be the WDV of block of assets as on 31st March, 2004 as
reduced by the depreciation ‘actually allowed’ during the said preceding year,
i.e., F.Y. 2004-05, in the hands of the amalgamating companies. Accordingly,
the WDV of assets transferred on amalgamation in the hands of the amalgamating
company has to be necessarily computed in terms of Explanation (2) to section
43(6) of the Act. In terms of this Explanation, while computing the WDV on
amalgamation, the depreciation actually allowed has to be reduced.

 

Since the case of
the AO was that Explanation (3) has to be read into Explanation (2) and,
accordingly, the WDV of assets transferred on amalgamation has to be computed
after reducing the total depreciation in the hands of the amalgamated
companies, the Tribunal found it necessary to read and comprehend as to why the
provision of section (3) to section 43(6) of the Act cannot be applied in the
facts of the present case. It held that Explanation (3) to section 43(6) states
that any depreciation which is carried forward u/s 32(2) shall be deemed to be
depreciation actually allowed. Further, it observed that Explanations (2) and
(3) to section 43(6) of the Act both used the term depreciation actually
allowed. However, as against Explanation (2), Explanation (3) to section 43(6)
of the Act operates as a deeming fiction, wherein depreciation which is carried
forward u/s 32(2) of the Act is deemed to have been actually allowed.

 

The Tribunal held
that in its view Explanation (3) being a deeming fiction, operates only in
particular conditions and in order to remove an anomaly which otherwise would
have been created under the other provisions of the Act. It held that while
interpreting Explanation (3) one needs to be aware of the intention of the
statute. These provisions, along with their intent, have been explained
elaborately by the Hon’ble Bombay High Court in the case of Hindustan
Petroleum Corporation Limited where it was held that Explanation (3) to
section 43(6) seeks to find certain anomalies which would have otherwise
existed under the Act. The intention of Explanation (3) is not simply to
nullify the provision of Explanation (2) to section 43(6), as has been read by
the AO. This is also evident from the fact that Explanation (2) has been
introduced from 1st April, 1988, whereas Explanation (3) was always
on the statute, which clearly implies that Explanation (3), which is a legal /
deeming fiction, was not introduced to nullify the impact of Explanation (2) of
the Act.

 

Accordingly, in
terms of Explanation (3) to section 43(6), in the present case, unless the
unabsorbed depreciation of the amalgamating companies is carried forward in the
hands of the amalgamated company u/s 32(2), Explanation (3) cannot be read into
Explanation (2) to simply conclude that depreciation ‘actually allowed’ also
includes unabsorbed depreciation.

 

It observed that in
view of the ratio of the decision of the Supreme Court in the case of CIT
vs. Doom Dooma India Ltd. [2009] 310 ITR 392, the words actually
allowed under Explanation (2) only mean depreciation, which has been given
effect to in the computation of income of the amalgamating companies and will
not include unabsorbed depreciation. This legal proposition, it observed, is
also supported by the decision in the case of Silical Metallurgic Ltd.
where the Hon’ble Court held that the statutory provision makes it clear that
the WDV of the asset would be the actual cost of the assets of the assessee
less depreciation allowed to the company. Any unabsorbed depreciation, which
was not set off for carry forward could not be taken into account.

 

A similar view was
taken by the Bombay High Court in the case of Hindustan Petroleum Corpn.
Ltd. and a Special Leave Petition filed against the aforesaid High
Court decision has been dismissed by the Hon’ble Supreme Court on merits in SLP
(C) No. 19054 of 2008 (SC). A similar proposition has been laid down by
the Hon’ble Madras High Court in the case of EID Parry India’s vs. CIT
[2012] 209 Taxmann 214. The Courts have, considering the applicability
of provisions of section 72A, held that deprecation actually allowed shall not
include any unabsorbed depreciation.

 

The Tribunal held
that the WDV in the hands of the amalgamated company was to be calculated
without considering the unabsorbed depreciation of the amalgamating companies,
for which set-off was never allowed. The Tribunal upheld the findings of the
CIT(A) and dismissed this ground of the appeal of the Revenue.

 

FACTS II

The assessee
received a sales tax subsidy of Rs. 36,15,49,828 from the Karnataka Government
for setting up a new industrial unit in the backward area of the state. The
refund of sales tax subsidy was routed through the profit and loss account and
hence the same was considered as part of the book profits u/s 115JB of the I.T.
Act, 1961. Subsequently, the assessee realised that sales tax subsidy being
capital receipt as held by the CIT(A), the same is not taxable under the MAT
provisions; accordingly, the issue was raised before the Tribunal and this
ground was taken by the assessee in the cross-objections filed by it.

 

HELD II

The Tribunal noted
that

(i)   the Coordinate Bench of the ITAT, Mumbai
Tribunal, in the assessee’s own case for A.Y. 2004-05 in ITA No. 923/Bang/2009,
had considered an identical issue and held that where a receipt is held to be
capital in nature not chargeable to tax under the normal provisions of the Act,
the same cannot be taxed u/s 115JB of the I.T. Act, 1961;

(ii)   the Hon’ble Kolkata High Court, in the case of
Pr. CIT vs. Ankit Metal & Power Ltd. [2019] 109 taxmann.com
93 had considered an identical issue and after considering the decision
of the Hon’ble Supreme Court in the case of Apollo Tyres Ltd. (Supra)
held that when a receipt is not in the character of income as defined u/s 2(24)
of the I.T. Act, 1961, then it cannot form part of the book profit u/s 115JB.
The Court further observed that the facts of case before the Hon’ble Supreme
Court in the case of Apollo Tyres Ltd. were altogether different,
where the income in question was taxable but was exempt under a specific
provision of the Act, and as such it was to be included as a part of book
profit; but where the receipt is not in the nature of income at all, it cannot
be included in book profit for the purpose of computation u/s 115JB.

 

The Tribunal
further noted that to a similar effect was the ratio of the following
decisions:

(a)   Sutlej Cotton Mills
Ltd. vs. Asstt. CIT [1993] 45 ITD 22 (Cal. Trib.) (SB);

(b)   Shree Cement Ltd. vs.
Addl. CIT (2015) 152 ITD 561 (Jai. Trib.);

(c)   Sipca India (P) Ltd.
vs. Dy. CIT [2017] 80 taxmann.com 87 (Kol. Trib.).

 

As regards the case
laws relied upon, on behalf of the Revenue, the Tribunal held that the Tribunal
or High Court in those cases came to the conclusion that the capital receipt is
in the nature of income, but by a specific provision the same has been exempted
and hence came to the conclusion that once a particular receipt is routed
through the profit and loss account, then it should be part of book profit and
cannot be excluded while arriving at book profit u/s 115JB of the Act, 1961.

 

The Tribunal held
that when a particular receipt is exempt from tax under the Income tax Law,
then the same cannot be considered for the purpose of computation of book
profit u/s 115JB. It directed the AO to exclude the sales tax subsidy received
by the assessee amounting to Rs. 36,15,49,828 from the book profits computed
u/s 115JB.

 

The cross-objection
filed by the assessee was allowed.

 

FACTS III

Section 234B
r/w/s 115JB – Interest u/s 234B cannot be levied where liability arises on
account of retrospective amendment in Act

 

While completing
the assessment, interest of Rs. 9,84,94,367 was levied on total income computed
u/s 115JB on account of retrospective amendment to section 115JB. In the profit
and loss account for the year ended 31st March, 2006, the assessee
had debited provision for deferred tax of Rs. 433.61 crores. In the return of
income filed for A.Y. 2006-07, the aforesaid provision was not added back while
computing book profit u/s 115JB. However, subsequently the Finance Act, 2008
made a retrospective amendment to section 115JB by inserting clause (h) in
Explanation 1 to section 115JB according to which book profits are required to
be increased by an amount of deferred tax and provision thereof; the said
amendment was made with retrospective effect from A.Y. 2001-02. Accordingly,
during the course of assessment proceedings while computing book profits u/s
115JB, the AO, in view of the insertion of clause (h) in Explanation 1 to
section 115JB by the Finance Act, 2008 with retrospective effect, added the
provision for deferred tax liability and consequently interest u/s 234B was
levied which interest arose on account of the retrospective amendment to
section 115JB.

 

Aggrieved, the
assessee preferred an appeal to the CIT(A) who allowed the appeal on the ground
that no liability can be fastened onto the assessee on the basis of
retrospective amendment to the Act.

 

HELD III

The Tribunal noted
that whether interest us/ 234B can be charged on the basis of a retrospective
amendment on recomputed book profit is no longer res integra. The
Coordinate Bench of the ITAT Bangalore Tribunal, in the assessee’s own case for
A.Y. 2005-06 in ITAT No. 924/Bang/2009, had considered an identical issue and
held that no interest can be levied u/s 234 B where liability arises on account
of retrospective amendment in the Act.

 

It observed that in the current year as well, the liability for interest
u/s 234B has arisen only on account of a retrospective amendment to the
provision of section 115JB. Accordingly, the assessee would not have
anticipated the retrospective amendment at the time of making the payments for
advance tax, but would have estimated the liability to pay advance tax on the
basis of the then existing provisions. The Tribunal found no error in the
findings recorded by the CIT(A), while deleting the interest liability u/s 234B
of the Act. The Tribunal upheld the findings of CIT(A) and rejected the ground
taken by the Revenue. This ground of appeal of the Revenue was dismissed.

Section 69C – Unexplained expenditure – Bogus purchases – Mere reliance by the A.O. on information obtained from the Sales Tax Department, or the statements of two persons made before the Sales Tax Department, would not be sufficient to treat the purchases as bogus

5. Pr. CIT-13 vs. Vaman International Pvt. Ltd. [Income tax Appeal
No. 1940 of 2017]

Date of order: 29th January, 2020

ACIT vs. Vaman International Pvt.
Ltd. [ITA No. 794/Mum/2015; Date of order: 16th November, 2016;
A.Y.: 2010-11; Bench ‘F’]

 

Section 69C – Unexplained
expenditure – Bogus purchases – Mere reliance by the A.O. on information
obtained from the Sales Tax Department, or the statements of two persons made
before the Sales Tax Department, would not be sufficient to treat the purchases
as bogus

 

The assessee is a company engaged
in the business of trading and sale of furniture and allied items on wholesale
basis. The A.O. doubted the expenditure of Rs. 4,75,42,385 stated to be on
account of purchases from two parties, viz., Impex Trading Co. (for an amount
of Rs. 2,90,80,292) and Victor Intertrade Pvt. Ltd. (Rs. 1,84,62,093). The A.O.
acted on the basis of information received from the office of the
Director-General of Income Tax (Investigation), Mumbai and from the Sales Tax
Department that in the list of bogus sales parties the names of the two
aforesaid parties were included which rendered the purchase transaction
doubtful.

 

The A.O. observed that the
assessee did not produce lorry receipts and other related documents to reflect
the movement of goods sold and purchased which were crucial for determining the
genuineness of the purchase transaction. In the absence thereof, the A.O. added
the said amounts to the total income of the assessee u/s 69C by treating the
expenditure as bogus purchases.

 

The first appellate authority
held that such addition by the A.O. could not be sustained. Accordingly, he deleted
the addition of Rs. 4,75,42,385. The Tribunal, by an order dated 16th
November, 2016, upheld the order of the first appellate authority and dismissed
the appeal of the Revenue.

 

On further appeal, the Hon. High
Court observed that section 69C deals with unexplained expenditure. But it also
contains a deeming provision which states that if an assessee incurs any
expenditure in the relevant previous year but offers no explanation about the
source of such expenditure or part thereof, or if the explanation provided is
not satisfactory to the A.O., then the amount covered by such expenditure or
part thereof shall be deemed to be the income of the assessee; and once it is
so deemed, the same shall not be allowed as a deduction under any head of
income.

 

The Court relied on the Gujarat
High Court decision in Krishna Textiles vs. CIT, 310 ITR 227  wherein it has been held that u/s 69C the
onus is on the Revenue to prove that the income really belongs to the assessee.

 

The Hon. Court observed that the
A.O. did not doubt the sales and stock records maintained by the assessee. By
submitting confirmation letters, copies of invoices, bank statements, payment
orders, payment by account payee cheques, etc., the assessee had proved that
the sales and purchases had taken place. By highlighting the fact that all the
payments against the purchases were made through banking channels by way of
account payee cheques, the first appellate authority held that the source of
expenditure was fully established by the assessee beyond any doubt. He had
further recorded that during the appellate proceedings the assessee had
furnished complete quantitative details of the items of goods purchased during
the year under consideration and their corresponding sales. Mere reliance by
the A.O. on information obtained from the Sales Tax Department, or the
statements of two persons made before the Sales Tax Department, would not be
sufficient to treat the purchases as bogus and thereafter to make the addition
u/s 69C.

 

The Tribunal also held that if
the A.O. had doubted the genuineness of the purchases, it was incumbent upon
him to have caused further inquiries in the matter to ascertain the genuineness
or otherwise of the transactions and to have given an opportunity to the
assessee to examine / cross-examine those two parties vis-a-vis the
statements made by them before the Sales Tax Department. Without causing such
further inquiries in respect of the purchases, it was not open to the A.O. to
make the addition u/s 69C of the Act. 


_____________________________________________________________________________________________________

 

 

Errata

IN THE HIGH COURTS, March 2020 

 

We regret to point out a typographical error
on Page 51 of the caption issue in respect of the following decision:

The Pr CIT -1 v/s M/s. Ami Industries (India)
P Ltd [ Income tax Appeal no 1231 of 2017 dt : 29/01/2020
(Bombay HighCourt)].

where “Addition is
not justified “ should be replaced in place of “Addition is justified” and be
read accordingly.

Condonation of delay – 458 days – Belated appeal against section 263 order before ITAT – Appeal filed after consequential assessment order and dismissal of appeal – Delay condoned on payment of costs

4. Procter & Gamble Hygiene and Healthcare Ltd. vs.
Commissioner of Income Tax-8 [Income tax Appeal No. 1210 of 2017]

Date of order: 4th February, 2020

 

Procter & Gamble Hygiene
& Healthcare Ltd. vs. CIT, Range-8 [ITA No. 4866/Mum/2015; Date of order:
30th November, 2016; A.Y.: 2008-09; Bench ‘H’ Mum.]

 

Condonation of delay – 458 days –
Belated appeal against section 263 order before ITAT – Appeal filed after
consequential assessment order and dismissal of appeal – Delay condoned on
payment of costs

 

The issue involved in the appeal
is condonation of delay in filing of the appeal u/s 254 of the Act by the
appellant before the Tribunal. The A.O. passed the assessment order on 1st
February, 2012 in which certain deductions were allowed u/s 80IC. The
CIT-8, Mumbai was of the view that the A.O. had wrongly allowed deduction u/s
80IC. He was of the further view that the assessment order so made was
erroneous and prejudicial to the interest of the Revenue. Accordingly, he
invoked jurisdiction u/s 263 and vide an order dated 31st
March, 2014 set aside the assessment order by directing the A.O. to pass a
fresh assessment order by taxing the interest income earned by the petitioner
on the amount covered by the deduction sought for u/s 80IC under the head
‘income from other sources’. The A.O. passed the consequential assessment order
dated 9th June, 2014. It was against this assessment order that the
assessee preferred an appeal before the CIT(A)-17.

 

However, by
the appellate order dated 28th August, 2015 the first appellate
authority dismissed the appeal of the assessee, holding that it was not
maintainable as the A.O. had only given effect to the directions given to him
by the CIT, relying on the decision in Herdillia Chemicals Ltd. vs. CIT
[1997] 90 Taxman 314 (Bom.). Aggrieved by this, the petitioner
preferred an appeal before the Tribunal which was registered as ITA No.
5096/Mum/2015. In the meanwhile, the assessee, having realised that the order
passed by the jurisdictional administrative commissioner u/s 263 of the Act had
remained unchallenged, belatedly filed an appeal before the Tribunal which was
registered as ITA No. 4866/Mum/2015. In the process there was a delay of 450
days. The assessee filed an application before the Tribunal for condonation of
delay in filing ITA No. 4866/Mum/2015 and in support thereof also filed an
affidavit dated 12th September, 2016 explaining the delay. The
assessee stated in its affidavit that the appellant did not prefer an appeal as
the Learned CIT had set aside the assessment so that the issues involved would
be agitated before the A.O. or the appellate authorities, i.e., against the
order of the A.O.

 

Both the appeals were heard
together and by a common order dated 30th November, 2016 both the
appeals were dismissed. The appeal ITA No. 5096/Mum/2015 was dismissed on the
ground that there was no question of any consequential assessment as per the
revision order. The assessee’s appeal was rightly dismissed by the CIT(A).

 

Insofar as
ITA No. 4866/Mum/2015 was concerned, the same was dismissed as being
time-barred as the delay in filing the appeal was not condoned. The ITAT
observed that the assessee had clearly, and presumably only on the basis of a
legal opinion, taken a conscious decision not to appeal against the revision
order. No reasonable, much less sufficient, cause had been advanced for
condonation of delay. It also stated that there was no basis for the said bona
fide belief which is stated as the reason for the assessee having not
preferred an appeal against the revision order.

 

The
Hon. High Court observed that when the Tribunal had entertained the appeal
arising out of the consequential assessment, it was not justified on the part
of the Tribunal to have rejected the appeal filed by the appellant against the
order passed by the jurisdictional administrative commissioner u/s 263 of the
Act because that was the very foundation of the subsequent assessment
proceedings. Therefore, in the interest of justice the delay in filing appeal
was condoned and the said appeal was directed to be heard on merit by the
Tribunal. The appellant was directed to pay costs of Rs. 25,000 to the
Maharashtra State Legal Services Authority.

Complaint filed u/s 276C (1) of the Act – Wilful attempt to evade tax – Appeal pending before CIT(A) – Criminal proceedings kept in abeyance

3. M/s Beaver Estates Pvt.
Ltd vs. The Assistant Commissioner of Income Tax Corporate Circle 1(1);
OP(Crl.) No. 400 of 2019

Date of order: 23rd
October, 2019

(Kerala High Court)

 

[Complaint filed CC No. 65/2015
of Additional Chief Judicial Magistrate (E&O), Ernakulam]

 

Complaint filed u/s 276C (1) of
the Act – Wilful attempt to evade tax – Appeal pending before CIT(A) – Criminal
proceedings kept in abeyance

 

In the instant case, the
prosecution was launched u/s 276C(1) of the Act for wilful attempt to evade tax
before the Additional Chief Judicial Magistrate’s Court (Economic Offences),
Ernakulam. The first petitioner is a company and the second petitioner is the
Managing Director of the said company.

 

The plea of the petitioners was
that they have filed an appeal before the statutory authority challenging the
assessment and that the decision in the appeal has got a bearing on the
prosecution against them; therefore, the criminal proceedings pending against
them may be kept in abeyance till the disposal of the appeal. The petitioners
contended that if the statutory appeal filed by them under the Act is allowed,
it would knock down the very basis of the prosecution against them and,
therefore, the criminal proceedings may be ordered to be kept in abeyance.

 

The Hon. Court noticed that
section 276C provides the punishment for wilful attempt to evade tax, penalty
or interest. Section 278B provides for offences by companies. In the instant
case, the prosecution is u/s 276C(1) for wilful attempt to evade tax. The
decision of the statutory appellate authority regarding the assessment and
computation of tax would have a bearing on the prosecution against the
petitioners.

 

The Court relied on the decision
of the Apex Court in the case of K.C. Builders vs. Assistant Commissioner
of Income Tax (2004) 2 SCC 731 wherein it held that the levy of
penalties and prosecution u/s 276C are simultaneous and, hence, once the penalties
are cancelled on the ground that there is no concealment, the quashing of
prosecution u/s 276C is automatic. In the instant case, the prosecution is u/s
276C(1) for wilful attempt to evade tax. The decision of the statutory
appellate authority regarding the assessment and computation of tax would have
a bearing on the prosecution against the petitioners.

 

Similarly, in Commissioner
of Income Tax vs. Bhupen Champak Lal Dalal AIR 2001 SC 1096, the Court
had observed that the prosecution in criminal law and proceedings arising under
the Act are undoubtedly independent proceedings and, therefore, there is no
impediment in law for the criminal proceedings to proceed even during the
pendency of the proceedings under the Act. However, a wholesome rule will
have to be adopted in matters of this nature where courts have taken the view
that when the conclusions arrived at by the appellate authorities have a
relevance and bearing upon the conclusions to be reached in the case,
necessarily one authority will have to await the outcome of the other
authority.

 

The Department relied on the
decision of the Apex Court in Sasi Enterprises vs. Assistant Commissioner
of Income Tax (2014) 5 SCC 139. The Court held that the decision in Sasi
Enterprises (Supra) has got no application to the present case because
the prosecution against the petitioners is for committing the offence u/s 276C
and not for the offence u/s 276CC.


The
Court held that the decision of the statutory appellate authority regarding the
assessment and computation of tax would have a bearing on the prosecution
against the petitioners for wilful attempt to evade tax. Therefore, the
Additional Chief Judicial Magistrate (Economic Offences), Ernakulam was
directed to keep in abeyance all further proceedings against the petitioners in
the criminal case till the disposal of the appeal filed before the Commissioner
of Income Tax (Appeals), Kochi.

Search and seizure (presumption u/s 132[4A]) – Section 132(4A) of ITA, 1961 – No addition could be made on account of undisclosed income only on basis of presumptions u/s 132(4A) without recording any findings as to how loose sheets found during search were linked to assessee – In absence of corroborative evidence, Tribunal was not justified in reversing finding of CIT(A)

18. Ajay Gupta vs. CIT

[2020] 114 taxmann.com 577 (All.)

Date of order: 13th November, 2019

 

Search and seizure (presumption u/s 132[4A]) – Section 132(4A) of ITA, 1961 – No addition could be made on account of undisclosed income only on basis of presumptions u/s 132(4A) without recording any findings as to how loose sheets found during search were linked to assessee – In absence of corroborative evidence, Tribunal was not justified in reversing finding of CIT(A)

 

The residential premises of the assessee were searched u/s 132 of the Income-tax Act, 1961 on 28th February, 2000. Pursuant to a notice u/s 158BC, the assessee filed return of income declaring NIL undisclosed income. The A.O. assessed the undisclosed income at Rs. 65,33,302.

 

The CIT (Appeals) partly allowed the appeal of the assessee. The CIT (Appeals) deleted the addition of Rs. 5,58,870 made by the A.O. on account of papers found during the search. The Tribunal reversed the order of the CIT (Appeals) and restored that of the A.O. The appeal by the assessee was admitted on the following questions of law:

 

‘1. Whether the presumption u/s 132(4A) of the Income-tax Act can be raised in the assessment proceedings?

 

2. Whether, apart from section 132(4A) of the Act, the burden to explain the documents seized from the possession of the assessee during search is upon him, and if it is so, then has he discharged the burden?’

 

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

 

‘i) It is not in dispute that two loose papers were found during search from the premises of assessee, however, during block assessment proceedings, the assessee had denied the documents and statement was recorded by Deputy Director of Investigation; he had submitted that he had no concern with the said documents so seized. Further, the A.O. while passing the assessment order, had only on basis of the loose papers found during search made addition to the undisclosed income of the assessee while the entries of said papers remained uncorroborated.

 

ii) This Court, in the case of CIT vs. Shadiram Ganga Prasad, 2010 UPTC 840, has held that the loose parchas found during search at the most could lead to a presumption, but the Department cannot draw inference unless the entries made in the documents so found are corroborated by evidence.

 

iii) As section 132(4A) of the Act provides that any books of accounts, documents, money, bullion, jewellery or other valuable articles or things found in possession of, or in control of any person in course of search may be presumed to be belonging to such person, and further, if the contents of such books of accounts and documents are true. But this presumption is not provided in absolute terms and the word used is “may” and not “shall”, as such the Revenue has to corroborate the entries made in the seized documents before presuming that transactions so entered were made by the assessee. Presumption so provided is not in absolute terms but is subject to corroborative evidence.

 

iv) In the present case, the Tribunal only on basis of presumption u/s 132 (4A) of the Act, reversed the finding of CIT (Appeals) without recording any finding as to how the loose sheets which were recovered during search were linked with the assessee. In the absence of corroborative evidence, the Tribunal was not justified in reversing the finding by the CIT (Appeals).

 

v) In view of the above, we are of the considered view that the order passed by the Tribunal reversing the finding of CIT (Appeals) in regard to deletion of the addition made of Rs. 5,58,870 and restoring the order of the A.O. on mere presumption is unsustainable. The order dated 12th March, 2010 is set aside to that extent and the matter is remitted back to the Tribunal to decide afresh as far as addition of Rs. 5,58,870 is concerned, within a period of three months from today.’

Revision – Business loss – Allowable (as share trading) – Section 28(i) r.w.s. 263 of ITA, 1961 – Assessee company, engaged in business of financing and trading in shares – During assessment, A.O. before accepting assessee’s claim of operational loss in share trading, verified demat accounts, sale, purchase and closing stocks of assessee company and inquired about said loss – Show cause notice u/s 263 for revising assessment could not be issued on the basis that said accounts were to be examined

17. Principal CIT vs. Cartier Leaflin (P) Ltd.

[2019] 112 taxmann.com 63 (Bom.)

[2020] 268 Taxman 222 (Bom.)

Date of order: 15th October, 2019

A.Y.: 2011-12


Revision – Business loss – Allowable (as share trading) – Section 28(i) r.w.s. 263 of ITA, 1961 – Assessee company, engaged in business of financing and trading in shares – During assessment, A.O. before accepting assessee’s claim of operational loss in share trading, verified demat accounts, sale, purchase and closing stocks of assessee company and inquired about said loss – Show cause notice u/s 263 for revising assessment could not be issued on the basis that said accounts were to be examined

 

The assessee was engaged in the business of financing and trading in shares. In its return of income, the assessee declared a total loss of Rs. 11.29 crores. In assessment, the A.O. made a few additions / disallowances which resulted in the assessee’s taxable income reaching Rs. 35.50 crores. Subsequently, the Principal Commissioner opined that the amount of Rs. 8.79 crores shown under ‘other operating losses’ seemed to be a trading loss incurred by the assessee company out of its business of financial and capital market activities, which was its main business activity. He opined that on perusal of the assessment records, it was noticed that no examination of the books of accounts, transaction accounts of the share trading activity carried out by the assessee company vis-a-vis the demat accounts was carried out by the A.O. and that the entire operating loss as mentioned was accepted without any verification or proper application of mind. He, thus, held that the assessment order passed by the A.O. appeared to be erroneous and prejudicial to the interest of Revenue. Notice u/s 263 of the Income-tax Act, 1961 was issued by the Principal Commissioner.

 

On the assessee’s appeal, the Tribunal noted that from the records available it was evident that complete details in support of the claim of operating loss of Rs. 8.79 crores were made available by the assessee company to the A.O. In fact, the manner in which the operating loss was arrived at was submitted in a tabulated form along with item-wise details of all transactions during the assessment proceedings. Thus, the Tribunal concluded that the show cause notice u/s 263 by the Principal Commissioner was issued without examining the assessment records and the view taken by the A.O. after examination of exhaustive details and evidence was a possible view. The Tribunal held that the notice u/s 263 is not valid.

 

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

‘i) The finding of fact in the order of the Tribunal is that the proceedings u/s 263, on the face of it, have been initiated without examination of records before the A.O. is not shown to be perverse. It is clear that the show cause notice proceeds on the basis that the books of accounts, transaction accounts of share trading carried out by the assessee vis-a-vis demat accounts have not been examined by the A.O. during the course of assessment proceedings. However, in the assessment order dated 28th March, 2014 itself, the A.O. had recorded that he examined the demat account in order to verify the share trading activities claimed by the assessee. Moreover, before passing the assessment order, sale, purchase and closing stocks were also examined by the A.O.

 

ii) Thus, the basis to invoke section 263 factually did not exist as there was due inquiry by the A.O. during the assessment proceedings leading to the assessment order. Thus, it is amply clear that the A.O. had applied his mind while accepting the claim of the assessee of operating loss of Rs. 8.79 crores making the proceedings u/s 263 bad in law. In any event, the view taken on facts by the A.O. is a possible view and the same is not shown to be bad.

 

iii) In the above view, the question as proposed does not give rise to any substantial question of law. Thus, not entertained. And appeal is, therefore, dismissed.’

I – Section 115JB – Provision for leave encashment is not to be added back to the book profit for computation u/s 115JB as it is an ascertained liability determined on actuarial basis II – Provision for wealth tax was not to be reduced from book profit to be computed u/s 115JB

6. [2020] 114 taxmann.com 538 (Mum.)(Trib.)

Caprihans India Ltd. vs. DCIT

ITA No. 4252/Mum/2011

A.Y.: 2005-06

Date of order: 23rd December, 2019

 

I – Section 115JB – Provision for leave encashment is not to
be added back to the book profit for computation u/s 115JB as it is an
ascertained liability determined on actuarial basis

 

II – Provision for wealth tax was not to be reduced from
book profit to be computed u/s 115JB

 

FACTS I

While assessing the total income of the assessee u/s 153C
r.w.s. 143(3) of the Act, the A.O. for the purpose of computing book profits
added the amount of provision for leave encashment of Rs. 15,30,070 on the
ground that it was an unascertained liability. He held that the liabilities
pertaining to leave encashment were not ascertained by the end of the financial
year, therefore the assessee had made a provision for the same.

 

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 where,
relying on the ratio of the decision of the Punjab & Haryana High
Court in the case of CIT vs. National Hydro Electric Power Corporation
Ltd. [2010] 45 DTR 117 (P&H) it was contended that the provision
for leave encashment was made in the books on actuarial basis, therefore the
same could not be held to be in the nature of a provision for an unascertained
liability.

 

HELD I

The Tribunal held that if a business liability had 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 observed that this view is fortified by the judgment of
the Hon’ble Supreme Court in the case of Bharat Earth Movers vs. CIT
[2000] 245 ITR 428 (SC). In the said case, it was observed by the
Hon’ble Apex Court that what should be certain is the incurring of the
liability and the fact that the same is capable of being estimated with
reasonable certainty, although the actual quantification may not be possible.
The Apex Court had observed that the provision for meeting the liability for
encashment of earned leave by the employees is not a contingent liability and
is admissible as a deduction.

 

In view of the above, the Tribunal held that as the provision
for leave encashment had been made by the assessee on actuarial basis,
therefore the same being in the nature of an ascertained liability could not
have been added by the A.O. for the purpose of determining the ‘book profit’
u/s 115JB. This ground of appeal of the assessee was allowed.

 

FACTS II

The assessee, while computing the ‘book profit’ u/s 115JB had
added back the amount of the wealth tax provision. On appeal, the assessee by
way of a specific ground had assailed the addition of the provision for wealth
tax while computing the ‘book profit’ u/s 115JB. However, the CIT(A) declined
to accept the aforesaid claim. Observing that the said provision was covered
u/s 115JB, the CIT(A) had upheld the view taken by the A.O.

 

Aggrieved, the assessee preferred an appeal to the Tribunal
where it was contended that as the provision for wealth tax does not fall
within any of the items of the ‘Explanation’ to section 115JB, the same could
not be added back while computing the ‘book profit’ under the said statutory
provision. In support of the aforesaid contention, reliance was placed on the
order of the ITAT, Kolkata, Special Bench in the case of JCIT vs. Usha
Martin Industries Ltd. [2007] 104 ITD 249 (SB).

 

HELD II

The Tribunal observed that an addition to the
‘book profit’ which during the period relevant to the year under consideration
was computed as per Part II of Schedule VI of the Companies Act, 1956 could be
made only if the same was permissible as per Item No. (a) to (k)
of the Explanation to section 115JB. As contemplated in clause (a) of
the ‘Explanation’ to this section, ‘the amount of Income-tax paid or payable,
and the provision therefor’ was liable to be added for computing the ‘book
profit’ u/s 115JB. However, as there was no such provision for making the
addition with regard to wealth tax, the A.O. could not have added the same for
computing the ‘book profit’ of the assessee company u/s 115JB. It observed that
its view is fortified by the order of the ITAT, Kolkata, Special Bench in the
case of JCIT vs. Usha Martin Industries Ltd. [2007] 104 ITD 249 (SB).
The Tribunal directed the A.O. to rework the ‘book profit’ u/s 115JB after
deleting the provision for wealth tax. This ground of appeal of the assessee
was allowed.

Return of income – Filing of, in electronic form (set-off and carry-forward of losses) – Section 139D r.w.s. 72 of ITA, 1961 and Rule 12 of ITR, 1962 – Procedure of filing electronic return as per section 139D r.w. Rule 12 cannot bar assessee from making claim which he was entitled to – Assessee was directed to make representation before CBDT where he was not able to reflect set-off available in terms of section 72 in prescribed return of income in electronic form

16. Samir Narain Bhojwani
vs. Dy.CIT

[2020] 115 taxmann.com 70
(Bom.)

Date of order: 22nd
October, 2019

A.Y.: 2019-20

 

Return of income – Filing of, in
electronic form (set-off and carry-forward of losses) – Section 139D r.w.s. 72
of ITA, 1961 and Rule 12 of ITR, 1962 – Procedure of filing electronic return
as per section 139D r.w. Rule 12 cannot bar assessee from making claim which he
was entitled to – Assessee was directed to make representation before CBDT
where he was not able to reflect set-off available in terms of section 72 in
prescribed return of income in electronic form

 

The assessee was obliged u/s 139D
of the Income-tax Act, 1961 read with Rule 12 of the Income-tax Rules, 1962 to
file his return of income electronically with his digital signature. However,
he was not able to reflect in the prescribed return of income in electronic
form the set-off available in terms of section 72, i.e., setting off of current
year’s business income against the carry-forward loss from the earlier years.
This was because the return which was filed electronically required certain
columns to be filled in by the petitioner while the other columns were
self-populated. The assessee was thus unable to change the figures and make a
claim for set-off u/s 72 in the present facts. This resulted in excess income
being declared, resulting in an obligation to pay more tax on income which in
terms of section 72 was allowed to be set off against carried-forward losses of
earlier years.

 

Therefore, the assessee filed a
writ petition under Article 226 of the Constitution of India and sought a
direction from the High Court to the Respondent No. 1, the A.O., and Respondent
No. 2, the CBDT, to accept the petitioner’s return of income for A.Y. 2019-20
in paper form u/s 139(1) of the Act and the same be taken up for assessment in
accordance with the Act.

 

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

 

‘i) The claim sought to be urged by the assessee,
viz., set-off of business profits of this year offered to tax under the head
“capital gain” being set off against carried-forward loss is prima facie
supported by the decisions of the Tribunal in the case of M.K. Creations
vs. ITO [IT Appeal No. 3885 (Mum.) of 2014, dated 7th April, 2017]
and in ITO vs. Smart Sensors & Transducers Ltd. [2019] 104 taxmann.com
129/176 ITD 104 (Mum.–Trib.). It is also not disputed by the Revenue
that the return of income in electronic form is self–populated, i.e., on
filling in some entries, the other entries in the return are indicated by the
system itself. Thus, the petitioner is unable to make a claim which according
to him he is entitled to in law. In case the petitioner is compelled to file in
the prescribed electronic form, it could be declared by the A.O. as defective
(if all entries are not filled), or raise a demand for tax on the basis of the
declared income u/s 143(1), or if the assessment is taken to scrutiny u/s
143(3), then the petitioner will not be entitled to raise a claim of set-off
u/s 72 during the assessment proceedings. This, in view of the decision of the
Hon’ble Supreme Court in the case of Goetze (India) Ltd. vs. CIT [2006]
157 Taxman 1/284 ITR 323 wherein it has been held that if a claim is
not made by the assessee in its return of income, then the A.O. would have no
power to entertain a claim otherwise than by way of revised return of income.
The revised return of income, if the petitioner attempts to file it, would
result in the petitioner not being able to make the claim for which the revised
return is filed as the revised return of income would also have to be filed in
the prescribed electronic form which does not provide for such an eventuality.
Thus, for the purposes of the subject assessment year if the return of income
is filed electronically, it (the assessee) would have given up, at least before
the A.O., his claim to benefit of section 72; this, whether the return of
income is processed u/s 143(1) or undergoes scrutiny u/s 143(3).

 

ii) The purpose and object of e-filing of return is simplicity and
uniformity in procedure. However, the above object cannot in its implementation
result in an assessee not being entitled to make a claim of set-off which he
feels he is entitled to in accordance with the provisions of the Act. The
allowability or disallowability of the claim is a subject matter to be
considered by the A.O. However, the procedure of filing the return of income
cannot bar an assessee from making a claim under the Act to which he feels he
is entitled.

 

iii) It is true that in terms of Rule 12 of the Rules the returns are
to be filed by the petitioner only electronically and he is bound by the Act
and the Rules, thus (the Department) cannot accept the paper return. However,
in terms of section 139D, it is for the CBDT to make rules providing for filing
of returns of income in electronic form. This power has been exercised by the
CBDT in terms of Rule 12 of the Rules. However, the form as prescribed does not
provide for (the) eventuality that has arisen in the present case and may also
arise in other cases. Thus, this is an issue to be brought to the notice of the
CBDT, which would in case it finds merit in this submission, issue necessary
directions to cover this gap.

 

iv) In the normal course, the petitioner would have been directed to
file representation with the CBDT making a demand for justice, before
considering issuing of a writ of mandamus. However, in the peculiar
facts of this case, the petitioner is required to file return of income by 31st
October, 2019. It is only when the petitioner was in the process of
filing his return electronically that he realised that he is unable to make a
claim of set-off u/s 72, even though the claim itself is prima facie
allowable in view of the decisions of the Tribunal in M.K. Creation
(Supra) and Smart Sensors & Transducers Ltd. (Supra). In the
absence of the petitioner filing its return of income on or before 31st
October, 2019, the petitioner is likely to face penal consequences. The issue
raised is a fundamental issue, which needs to be addressed by the CBDT.

 

v) Therefore, it would be appropriate that the petitioner make a
representation on the above issue to the CBDT, who would then consider it in
the context of the facts involved in the instant case and issue necessary
guidelines for the benefit of the entire body of assessees if the petitioner is
right in his claim that the prescribed return of income to be filed
electronically prohibits an assessee from making its claim. However, in the
meantime, the petitioner, without prejudice to his rights and contentions, would
file the return of income in electronic form on the system before the last
date. Besides, (he would) also file his return of income for the subject
assessment year in paper form with the A.O. before the last date. This return
of income in paper form would be accepted by the A.O. without prejudice to the
Revenue’s contention that such a return cannot be filed.

 

vi) In the meantime, till such time as the
CBDT takes a decision on the petitioner’s representation, the Revenue would not
act upon the electronically filed return of income so as to initiate any
coercive recovery proceedings.’

Recovery of tax – Stay of demand pending first appeal – Section 220(6) of ITA, 1961 and CBDT Circular No. 530 dated 6th March, 1989 – The Circular stating that a stay of demand be granted if there are conflicting views of High Court can be extended to conflicting views of different Benches of Tribunal as well

15. General Insurance
Corporation of India vs. ACIT

[2019] 111 taxmann.com 412
(Bom.)

[2019] 267 Taxman 596 (Bom.)

Date of order: 14th
October, 2019

A.Y.: 2017-18

 

Recovery of tax – Stay of demand
pending first appeal – Section 220(6) of ITA, 1961 and CBDT Circular No. 530
dated 6th March, 1989 – The Circular stating that a stay of demand
be granted if there are conflicting views of High Court can be extended to
conflicting views of different Benches of Tribunal as well

 

For the A.Y. 2017-18, the
assessee filed an appeal against the assessment order. The assessee also filed
an application for stay of demand u/s 220(6) of the Income-tax Act, 1961. The
assessee was directed to deposit 20% of tax demand during pendency of appellate
proceedings.

 

The assessee filed a writ
petition challenging the order and claimed that the assessee is entitled to
unconditional stay till disposal of appellate proceedings in view of the fact
that there were conflicting decisions of co-ordinate Benches of the Tribunal so
far as the merit of the assessee’s case was concerned. The Bombay High Court
allowed the writ petition and held as under:

 

‘i) The CBDT Circular No. 530 dated 6th March, 1989 states that stay
of demand be granted where there are conflicting decisions of the High Court.
This principle can be extended to the conflicting decisions of the different
Benches of the Tribunal. Thus, in the above facts a complete stay of the demand
on the above head, i.e., Item No. 1 of the above chart, was warranted in the
petitioner’s favour.

ii) Therefore, unconditional stay was to be granted to assessee till
disposal of appellate proceedings.’

Reassessment – Sections 147, 148 and 151 of ITA, 1961 – Where A.O. issued reassessment notice on basis of sanction granted by Chief Commissioner – Since Chief Commissioner was not specified officer u/s 151(2) to grant such sanction, impugned notice was to be quashed

14. Miranda Tools (P) Ltd.
vs. ITO

[2020] 114 taxmann.com 584
(Bom.)

Date of order: 14th
November, 2019

A.Y.: 2014-15

 

Reassessment – Sections 147, 148
and 151 of ITA, 1961 – Where A.O. issued reassessment notice on basis of
sanction granted by Chief Commissioner – Since Chief Commissioner was not
specified officer u/s 151(2) to grant such sanction, impugned notice was to be
quashed

 

The petitioner is a company
engaged in the business of manufacture and marketing of fabrics. The petitioner
filed its return of income for the A.Y. 2014-15 on 22nd September,
2014 declaring NIL income. The assessment was completed u/s 143(3) of the
Income-tax Act, 1961 by an order dated 1st September, 2016.
Thereafter, on 26th February, 2019, the A.O. issued a notice u/s 148
of the Act on the ground that he has reason to believe that the income
chargeable to tax in respect of share application money for the relevant
assessment year has escaped assessment. The petitioner submitted its
objections. The A.O. rejected the objections.

 

The assessee filed a writ
petition and challenged the reopening of the assessment. The Bombay High Court
allowed the writ petition and held as under:

 

‘i) As per the provisions of section 151(2) of the Act, a sanction to
issue notice for reopening u/s 148 of the Act has to be given by the Joint
Commissioner of Income Tax in case the reassessment is sought to be done before
(or within) four years. Under section 2(28C) of the Act, a Joint
Commissioner also means Additional Commissioner of Income Tax. In the present
case, the A.O. submitted a proposal to the Principal Chief Commissioner of Income
Tax for reopening the assessment u/s 148 on 6th February, 2019.

 

ii) The question arises whether the sanction granted by the Chief
Commissioner of Income Tax would fulfil the requirement of section 151. It has
long been settled that when the statute mandates the satisfaction of a
particular authority for the exercise of power, then it has to be done in that
manner only. Adopting this principle, the Division Benches of this Court in the
cases of Ghanshyam K. Khabrani vs. Asstt. CIT [2012] 20 taxmann.com
716/210 Taxman 75 (Mag.)/346 ITR 443 and CIT vs. Aquatic Remedies
(P) Ltd. [2018] 96 taxmann.com 609/258 Taxman 357/406 ITR 545 have held
that sanction for issuance of reopening notice has to be obtained from the
authority mentioned in section 151 and not from any other officer, including a
superior officer. In the present case the Chief Commissioner of Income tax is
not the officer specified in section 151 of the Act. There is thus a breach of
requirement of section 151(2) of the Act regarding sanction for issuance of
notice u/s 148 of the Act. Consequently, the impugned notice and the impugned
order cannot be sustained in law. The petitioner, therefore, is entitled to
succeed.

 

iii) Accordingly, the impugned notice dated
26th February, 2019 and the impugned order dated 15th
July, 2019 are quashed and set aside.’

Charitable or religious trust – Registration procedure (Deemed registration) – Sections 12AA and 13 of ITA, 1961 – Where Commissioner (Exemption) did not decide application u/s 12AA within six months from date on which matter was remitted by Tribunal, registration u/s 12AA(2) would be deemed to be granted to assessee society; A.Ys.: 2010-11 to 2014-15

24. CIT(E) vs. Gettwell Health and Education Samiti [2020] 115 taxmann.com 66 (Raj.) Date of order: 15th March, 2019 A.Ys.: 2010-11 to 2014-15

 

Charitable
or religious trust – Registration procedure (Deemed registration) – Sections
12AA and 13 of ITA, 1961 – Where Commissioner (Exemption) did not decide
application u/s 12AA within six months from date on which matter was remitted
by Tribunal, registration u/s 12AA(2) would be deemed to be granted to assessee
society; A.Ys.: 2010-11 to 2014-15

 

The assessee
is a society registered under the Rajasthan Societies Registration Act, 1958 vide
registration certificate dated 3rd January, 2008. Its main object is
to provide medical facilities in the State of Rajasthan. The assessee is
running a hospital at Sikar in the name of Gettwell Hospital & Research
Centre. The assessee filed an application in Form 10A seeking registration u/s
12AA of the Income-tax Act, 1961 on 19th January, 2010. The
Commissioner of Income Tax (Exemptions) [‘the CIT(E)’] rejected that
application by an order dated 23rd July, 2010. By an order dated 22nd
July, 2011, the Tribunal set aside the order dated 23rd July, 2010
and remanded the matter back to the CIT(E) on the ground that it had not
communicated the A.O.’s report to the assessee and therefore restored the issue
of registration back on the file of the CIT(E) with a direction that the
assessee should be given an opportunity before deciding the issue of
registration and should be confronted with all the materials which are
considered adverse to the assessee. After remand of the matter, the CIT(E)
passed a fresh order on 9th October, 2015 and rejected the
application of the assessee, holding that the assessee was running the hospital
for the benefit of the family members of Shri B.L. Ranwa and there was no
charity in it.

 

The Tribunal allowed the assessee’s appeal.

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

 

‘i)    The Tribunal also noted that once the matter
was remanded back to the CIT(E) then the limitation for passing the order /
decision cannot be more than the limitation provided for deciding the
application u/s 12AA of the Act. There is no dispute that as per the provisions
of section 12AA(2) of the Act the limitation for granting or refusing the
registration is prescribed as before the expiry of six months from the end of
the month in which the application was received. Relying on the judgment of the
Supreme Court in CIT vs. Society for the Promotion  of Education [2016] 67 taxmann.com 264/238
Taxman 330/382 ITR 6 which upheld the judgment of the Allahabad High
Court and judgment of this Court in CIT vs. Sahitya Sadawart Samiti
[2017] 88 taxmann.com 703/396 ITR 46 (Raj.), the Tribunal held that
once the limitation prescribed u/s 12AA of the Act expired and the
consequential default on the part of the CIT(E) in deciding the application,
would result in deemed grant of registration is a settled proposition.

 

ii)    Therefore, it has been held
by the Tribunal that the judgment of the CIT(E) is reversed on merits and
registration would stand granted to the assessee by prescription of law made in
section 12AA(2) of the Act. The Tribunal in this behalf relied on the judgment
of the Lucknow Bench of the Tribunal in Harshit Foundation vs. CIT [2013]
38 taxmann.com 309/60 SOT 147 (URO) in which case it was held that
where the Commissioner does not pass any order even after six months from the
receipt of the Tribunal’s order remitting the matter to him, the registration
will be deemed to have been granted.

 

iii)    This is subject to exercise
of the Commissioner’s power u/s 12AA(3) of the Act in appropriate cases.

iv)   In view of the above, we
hardly find any justification in admitting this appeal as in our considered
view it does not raise any question of law, much less substantial question of
law. The appeal is therefore dismissed.’

 

Charitable purpose – Section 2(15) r/w sub-sections 11, 12 and 13 of ITA, 1961 – Where India Habitat Centre, inter alia set up with primary aim and objective to promote habitat concept, was registered as a charitable trust, principle of mutuality for computation of its income was not required to be gone into as income was to be computed as per sections 11, 12 and 13; A.Y.: 2012-13

23. CIT (Exemption) vs. India Habitat Centre [2020] 114 taxmann.com 84 (Del.) Date of order: 27th November, 2019 A.Y.: 2012-13

 

Charitable purpose – Section 2(15) r/w sub-sections 11, 12 and 13 of
ITA, 1961 – Where India Habitat Centre, inter alia set up with primary
aim and objective to promote habitat concept, was registered as a charitable
trust, principle of mutuality for computation of its income was not required to
be gone into as income was to be computed as per sections 11, 12 and 13; A.Y.:
2012-13

 

For the A.Y.
2012-13, the assessee filed its return of income on 28th September,
2012 in the status of ‘Trust’, declaring ‘Nil income’. Its assessment was
framed u/s 143 (3) of the Income-tax Act, 1961, computing total income as Rs.
5,86,85,490 and holding that the activities of the assessee are hybrid in
nature; they were partly covered by provisions of section 11 read with section
2(15), and partly by the principle of mutuality. It was held by the A.O. that
since the assessee is not maintaining separate books of accounts, income cannot
be bifurcated under the principle of mutuality or otherwise. The entire surplus
in I&E account, amounting to Rs. 5,83,92,860, was treated as taxable income
of the assessee.

The CIT(Appeals) allowed the appeal of the assessee by relying upon the
judgment of the Delhi High Court in the assessee’s own case dated 12th
October, 2011 for A.Ys. 1988-89 to 2006-07 and the decision of the Hon’ble
Supreme Court in the case of Radha Soami Satsang vs. CIT [1992] 193 ITR
321/60 Taxman 248. The Tribunal confirmed the decision of the
CIT(Appeals).

 

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

 

‘i)    The fundamental question is
that if the assessee has taken the plea of mutuality, whether it could be
deprived of the benefit of section 2(15) of the Act. On this aspect, the A.O.
has proceeded to classify the assessee’s activities as ?hybrid”, holding that
part of the activities are covered by provisions of section 11 r/w section
2(15) and part by principle of mutuality. The CIT(A), after examining the records,
has given a categorical finding that the activities of the centre fall within
the meaning of the definition of ?charitable activities” as provided u/s 2(15)
of the Act.

 

ii)    Applying the test of profit motive, it was
held that the surpluses generated by the assessee are not being appropriated by
any individual or group of individuals. Merely because the assessee is charging
for certain goods and services it does not render such activities as commercial
activities, and the fact that the A.O. has accepted that the assessee is
promoting public interest as provided in the proviso to section 2(15),
there cannot be any doubt that the assessee should be regarded as a charitable
organisation and given the full benefit of exemption provided to such
organisations under the Act. Relying on this premise, it has been held that
since the assessee has not generated any surpluses from anyone, members or
non-members, it was not correct to say that the assessee has claimed relief
partly as charitable organisation and partly as mutual association.

 

iii)    Further, it was rightly
held that the principle of mutuality becomes superfluous in view of the fact
that the activities were held to be charitable. Applying the principle of
consistency, the CIT(A) held that there is no fundamental change in the nature of
activities of the assessee for the period prior to A.Y. 2008-09 and subsequent
years. The ITAT has confirmed the findings of the CIT(A). Though the principles
of res judicata are not applicable to the income tax proceedings,
however, at the same time, one cannot ignore the fact that there is no dispute
with respect to the consistency in the nature of activities of the assessee.
All the income tax authorities have held that the assessee is a charitable
institution and this consistent finding of fact entitles the assessee to have
its income computed under sections 11, 12 and 13 of the Act.

 

iv)   In this background, we find
no ground to disentitle the assessee to the benefits of section 2(15) of the
Act. This being the position, we find no perversity in the impugned decision
and, therefore, no question of law, much less substantial question of law,
arises for consideration. As a result, the appeal of the Revenue is dismissed.’

Sections 144C(1), 143(3) – For the period prior to 1st April, 2020 in case of an eligible assessee, draft assessment order u/s 143(3) r.w.s. 144C(1) is not required to be passed in cases in which no variation in returned income or loss is proposed Mere issuance of draft assessment order, when it was legally not required to be issued, cannot end up enhancing the time limit for completing the assessment u/s 143(3)

2.       [2020]
115 taxmann.com 78 (Mum.)

IPF India Property Cyprus (No. 1) Ltd. vs. DCIT

ITA No. 6077/Mum/2018

A.Y.: 2014-15

Date of order: 25th February, 2020

 

Sections 144C(1), 143(3) – For the period prior to 1st April,
2020 in case of an eligible assessee, draft assessment order u/s 143(3) r.w.s.
144C(1) is not required to be passed in cases in which no variation in returned
income or loss is proposed

 

Mere issuance of draft assessment order, when it was legally
not required to be issued, cannot end up enhancing the time limit for
completing the assessment u/s 143(3)

 

FACTS

The A.O., for A.Y. 2014-15, passed a draft assessment order
u/s 143(3) r.w.s. 144C(1) even when no variation was proposed therein to the
income or loss returned by the assessee.

 

The assessee challenged the correctness of the DRP’s order
dated 26th July, 2018 in the matter of assessment u/s 144(C)(1)
r.w.s. 143(3) of the Act. It contended that the A.O. had erred in passing a
draft assessment order u/s 143(3) r.w.s. 144C(1) of the Act, even when no
variation has been proposed therein to the income or loss returned by the
assessee and in passing the final assessment order u/s 143(3) of the Act, after
the due date provided u/s 153 of the Act, thus making the final assessment
order illegal, bad in law and non-est.

 

HELD

The Tribunal observed that the short question for
adjudication is whether or not the A.O. was justified in passing a draft
assessment order on the facts of the case, and whether the fact that the A.O.
chose to issue the draft assessment order even though he was not required to do
so, would result in affecting the normal time limit within which the normal
assessment order u/s 143(3) is to be issued. It also observed that there are no
variations in the returned income and the assessee income.

 

The controversy is thus confined to the question as to what
will be the rate on which income returned by the assessee is to be taxed. While
the assessee has claimed taxation @ 10% under article 11(2) of the India-Cyprus
DTAA, the A.O. has declined the said treaty protection on the ground that the
assessee was not beneficial owner of the said interest and, accordingly,
brought the income to tax @ 40% thereof. The Tribunal observed that there is,
quite clearly, no variation in the quantum of income.

 

The Tribunal observed that the assessee before it is a
non-resident company incorporated, and fiscally domiciled, in Cyprus.
Accordingly, in terms of section 144C(15)(b)(ii), the assessee is an eligible
assessee but then there is no change in the figure of income returned by the
assessee vis-a-vis the income assessed by the A.O. It held that there
is, therefore, no question of a draft assessment order being issued in this
case. It noted that the Finance Bill, 2020 proposes to make the issuance of
draft assessment orders in the case of eligible assessees mandatory even when
there is no variation in the income or loss returned by the assessee, but then
this amendment seeks to amend the law with effect from 1st April,
2020. Since the amendment is being introduced with effect from that date, the
Tribunal held that it is beyond any doubt that so far as the period prior to 1st
April, 2020 is concerned, in the cases in which no variations in the returned
income or loss were proposed, the draft assessment orders were not required to
be issued. The Tribunal upheld the plea of the assessee on this point.

 

The Tribunal noted that if no draft assessment order was to
be issued in this case, the assessment would have been time-barred on 31st
December, 2017 but the present assessment order was passed on 17th
August, 2018. It held that since no draft assessment order could have been
issued in this case, as the provisions of section 144C(1) could not have been
invoked, the time limit for completion of assessment was available only up to
31st December, 2017. The mere issuance of a draft assessment order,
when it was legally not required to be issued, cannot end up enhancing the time
limit for completing the assessment u/s 143(3). The Tribunal held the
assessment order to be time-barred.

 

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

Sections 23, 24(b) – Where assessee is receiving rent from his own son and daughter who are financially independent, property is both a self-occupied and a let-out property – Consequently, interest claim cannot be allowed in full and shall have to be suitably proportioned, restricting the interest claim relatable to the self-occupied part thereof to Rs. 1.50 lakhs

1.       [2020]
115 taxmann.com 179 (Mum.)

Md. Hussain Habib Pathan vs. ACIT

ITA No. 4058/Mum/2013

A.Y.: 2009-10

Date of order: 5th March, 2020

 

Sections 23, 24(b) – Where assessee is receiving rent from
his own son and daughter who are financially independent, property is both a
self-occupied and a let-out property – Consequently, interest claim cannot be
allowed in full and shall have to be suitably proportioned, restricting the
interest claim relatable to the self-occupied part thereof to Rs. 1.50 lakhs

 

The children of the assessee were financially independent;
so instead of just transferring some money to their father, they wanted it to
be regarded (by mutual agreement) as rent – They believed that thus he would
receive funds in the shape of rent and that would also help meet their father’s
(the assessee’s) interest burden and help him with some tax savings – It was to
be regarded as a genuine arrangement in order to minimise assessee’s tax
liability

 

FACTS

The assessee claimed a loss of Rs. 15,32,120 qua his
residential house property in Mumbai. He claimed that he had incurred interest
on borrowed capital of Rs. 21,62,120 which was adjusted against rental income
of Rs. 9,00,000; this (rent), on a field inquiry, was found by the A.O. to be
from the assessee’s major son and major daughter residing in the said property
along with other family members of the assessee.

 

The A.O. was of the view that nobody would charge rent (for
residence) from his own son and daughter, particularly considering that both
are unmarried and living together with their family at its self-owned abode.
The arrangement was therefore regarded as merely a tax-reducing device adopted
by the assessee and liable to be ignored. Treating the house property as a
self-occupied property, the A.O. restricted the claim of interest u/s 24(b) to
Rs. 1,50,000.

 

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

 

Aggrieved, the assessee preferred an appeal to the Tribunal
where he contended that there is nothing to show that the arrangement, which is
duly supported by written agreements furnished in the assessment proceedings,
is fake or make-believe. Rental income cannot be overlooked or disregarded
merely because it arises from close family members. However, on a query from
the Bench, the counsel for the assessee was not able to state the status, i.e.,
self-occupied or rented, of the said premises for the earlier or subsequent
years, though he submitted that this is the first year of the claim of loss. He
was also unable to tell the Bench about the area let out, i.e., out of the
total area available, inasmuch as other family members, including the assessee,
were also residing in the same premises.

 

The Revenue’s case, on the other hand, was of no cognisance
being accorded to an arrangement which is against human probabilities and
clearly a device to avoid tax.

 

HELD

The Tribunal observed that the arrangement is highly unusual,
particularly considering that the rent is in respect of a self-owned property
(i.e., for which no rent is being paid), which constituted the family’s
residence, and with the assessee’s son and daughter both being unmarried.
However, the Bench felt that that may not be conclusive in the matter. Being a
private arrangement not involving any third party, not informing the
co-operative housing society was also found to be of not much consequence. It also
observed that the Revenue has rested on merely doubting the genuineness of the
arrangement without probing the facts further. What was the total area, as well
as its composition / profile? How many family members, besides the assessee
(the owner) and the two ‘tenants’, were resided thereat? Has the area let out
been specified, allowing private space (a separate bedroom each) to the son and
the daughter who would in any case be also provided access to or use of the
common area – specified or not so in the agreement/s, viz. kitchen, balcony,
living area, bathrooms, etc.? How had the rent been received, in cash or
through a bank and, further, how had it been sourced, whether from the assessee
(or any other family member), or from the capital / income of the ‘tenants’?
Why was there no attempt even to inquire whether the arrangement was a
subsisting / continuing one, or confined to a year or two, strongly suggestive
in the latter case of a solely tax-motivated exercise?

 

The Tribunal held that it could, however, well be that the
assessee’s major son and daughter are financially independent (or substantially
so), with independent incomes, sharing the interest burden of their common
residence with their father. As such, instead of transferring funds to him have
decided by mutual agreement to give the amounts as rent as that would, apart
from meeting the interest burden to that extent, also allow tax saving to the
assessee-father. A genuine arrangement cannot be disregarded just because it
results in or operates to minimise the assessee’s tax liability. The Tribunal
found itself in agreement with the assessee’s claim inasmuch as there was
nothing on record to further the Revenue’s case of the arrangement not being a
genuine one, but just that it was an unusual one.

 

However, on quantum the Tribunal found the stand of the
assessee infirm. It held that the house property, that is, the family residence
of the Pathan family, was both a self-occupied and a let-out property in view
of the rent agreements. It observed that the interest claimed (Rs. 21.62 lakhs)
is qua the entire property, which therefore cannot be allowed in full
against the rental income, which is qua only a part of the house
property. The assessee’s interest claim therefore cannot be allowed in full and
shall have to be suitably proportioned, restricting the interest claim
relatable to the self-occupied part thereof to Rs. 1.50 lakhs as allowed. The
assessee shall provide a reasonable basis for such allocation as well as the
working of the area let out. It observed that it may well be that in view of
the joint residence, no area (portion) is specified in the rent agreements. The
number of family members living jointly; their living requirements – which may
not be uniform; fair rental value of the property; etc. are some of the
parameters which could be considered for the purpose. The Tribunal directed the
A.O. to adjudicate thereon per a speaking order, giving definite reasons for
being in disagreement, whether in whole or in part, with the assessee’s claim
within a reasonable time.

 

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

VVF Ltd. vs. DCIT-39; [ITA. No. 9030/Mum/2010; Date of order: 31st August, 2016; A.Y.: 2007-08; Bench: F; Mum. ITAT] Section 37 – Business expenditure – Salary paid to director – The expenditure may be incurred voluntarily and without any necessity – So long as it is incurred for the purposes of business, the same is allowable as deduction

The Pr. CIT-3 vs. VVF Ltd.
[Income tax Appeal No. 1671 of 2017]

Date of order: 4th
March, 2020

(Bombay High Court)

 

VVF Ltd. vs. DCIT-39; [ITA. No.
9030/Mum/2010; Date of order: 31st August, 2016; A.Y.: 2007-08;
Bench: F; Mum. ITAT]

 

Section 37 – Business expenditure
– Salary paid to director – The expenditure may be incurred voluntarily and
without any necessity – So long as it is incurred for the purposes of business,
the same is allowable as deduction

 

A search and seizure action u/s
132(1) of the Act was carried out by the Department in the case of the assessee
and its group associates, including its directors, on 3rd January,
2008. In A.Y. 2002-03, the A.O. made an addition of Rs. 13,00,000 which
represented the salary paid to Shri Faraz G. Joshi, its Director.

 

The A.O. disallowed the salary
paid to Shri Joshi primarily relying on a statement recorded during the course
of the search u/s 132(4) of the Act. The A.O. noted that in the course of the
search it was gathered that Shri Joshi was not attending office on a day-to-day
basis and no specific duties were assigned to him except some consultation.

 

The assessee had pointed out
before the A.O. that Shri Joshi was a whole-time Director and was performing
his duties as Director of the assessee-company and was being paid remuneration
in accordance with the limits prescribed under the Companies Act, 1956.

 

The A.O. disagreed with the
assessee and concluded that the payment made to Shri Joshi in the form of
salary was an expenditure not expended wholly and exclusively for the purposes
of business and, therefore, disallowed the same u/s 37(1) of the Act.

 

The CIT(A) also sustained the
action of the A.O. by noting that Shri Joshi had specifically admitted in the
statement recorded at the time of the search that he was not attending office
for the last six years and no specific duties were assigned to him.

 

The Tribunal held that the
assessee has appropriately explained the statement rendered by Shri Joshi. His
answer has to be understood in the context of the question raised. In this
context, attention has been drawn to the relevant portion of the statement,
which reads as under:

 

‘Q.9: What is the nature of
business conducted by the company, i.e., M/s VVF Ltd.?

A.9:  The company deals in Oleo-Chemicals. We also
work on contract basis for Jhonson & Jhonson (sic)
& Racket – Colman (sic). (Johnson & Johnson; Reckitt-Coleman.)

Q.10: Who looks after the day to
day activity of that company and what are the duties assigned to you?

A.10: I am not aware about the
person who looks after the day to day business activity. Since last 6 years I
am not attending the office nor any duty is assigned to me except
consultation.’

 

It has been explained that the
answer by Shri Joshi was in response to the question put to him which was as to
whether he was involved in the day-to-day management of the company. It was in
this context that the answer was given. However, it is sought to be pointed out
that the said Director was rendering consultation and advisory services which,
in fact, is the role of a Director. Therefore, it has to be understood that
services were indeed being rendered by the said Director to the assessee
company. The Tribunal observed that the overemphasis by the Revenue on the
wordings of the reply of Shri Joshi has led to a wrong conclusion.

 

Further, Shri
Joshi was one of the two main Directors of the assessee company and that
historically such salary payments had been allowed as a deduction. In fact,
there is no negation to the plea of the assessee that for A.Ys. 2009-10 to
2012-13, such salary payments stood allowed and such assessments have been
completed even after the search carried out on 3rd January, 2008. It
is judicially well settled that it is for the assessee to decide whether any
expenditure should be incurred in the course of carrying on of its business. It
is also a well-settled proposition that expenditure may be incurred voluntarily
and without any necessity and so long as it is incurred for the purposes of
business, the same is allowable as deduction even though the assessee may not
be in a position to show compelling necessity of incurring such expenditure. In
support of the aforesaid proposition, reliance can be placed on the judgment of
the Hon’ble Supreme Court in the case of Sasoon J. David & Co. P.
Ltd., 118 ITR 261 (SC).

 

Being aggrieved, the Revenue
filed an appeal to the High Court. The Court held that in response to the
specific query the answer given by Shri Joshi was quite reasonable and no
adverse inference could be drawn therefrom. Besides, the Tribunal also found that
in all the assessments made up to the date of the search, the salary payment to
Shri Joshi was allowed. Even post-search, from A.Y. 2009-10 onwards where
assessments have been made u/s 143(3) of the Act, salary paid to Shri Joshi was
not disallowed.

 

The Supreme Court in the case of Sassoon
J. David & Co. Pvt. Ltd. vs. CIT (Supra), examined the expression
‘wholly and exclusively’ appearing in section 10(2)(xv) of the Income tax Act,
1922 which corresponds to section 37 of the Act. Sub-section (1) of section 37
says 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’.

 

It was observed that the expression ‘wholly
and exclusively’ appearing in the said section does not mean ‘necessarily’.
Ordinarily, it is for the assessee to decide whether any expenditure should be
incurred in the course of his business. Such expenditure may be incurred
voluntarily and without any necessity. If it is incurred for promoting the
business and to earn profits, the assessee can claim deduction u/s 10(2)(xv)
even though there was no compelling need for incurring such expenditure. The
fact that somebody other than the assessee is also benefited by the expenditure
should not come in the way of an expenditure being allowed by way of deduction
u/s 10(2)(xv) of the Act. In the light of the above, the Revenue appeal was
dismissed.

 


M/s Sunshine Import and Export Pvt. Ltd. vs. DCIT; [ITA No. 4347/Mum/2015; Date of order: 9th September, 2016; Bench: B; A.Y.: 2008-09 to 2010-11; Mum. ITAT] Section 133A – Survey – Statement of directors of company recorded u/s 133A – No incriminating evidence and material – No evidentiary value – Any admission made in course of such statement cannot be made basis of addition

The Pr. CIT-4 vs. M/s Sunshine Import and Export Pvt. Ltd. [Income
tax Appeal Nos. 937, 1121 & 1135 of 2017]

Date of order: 4th March, 2020

(Bombay High Court)

 

M/s Sunshine Import and Export
Pvt. Ltd. vs. DCIT; [ITA No. 4347/Mum/2015; Date of order: 9th September,
2016; Bench: B; A.Y.: 2008-09 to 2010-11; Mum. ITAT]

 

Section 133A – Survey – Statement
of directors of company recorded u/s 133A – No incriminating evidence and
material – No evidentiary value – Any admission made in course of such
statement cannot be made basis of addition

 

The assessee is engaged in the
business of manufacturing and trading in precious and semi-precious stones and
jewellery. It has two Directors, Shri Paras Jain and Shri Saurabh Garg. A
survey u/s 133A of the Act was carried out in respect of the assessee. During
the post-survey proceedings, the statement of one of the Directors, Shri
Saurabh Garg, was recorded. He was reported to have stated that the assessee
company provided only bill entries and there was no actual transaction of
purchase and sale. Subsequently, the statement of the other Director, Shri
Paras Jain, was also recorded. From the latter statement, the A.O. came to the
conclusion that he was a person of no means and drew the inference that the
assessee was engaged in the activity of issuing accommodation bills for the
sale and purchase of diamonds, apart from acting as a dummy for importers.
Holding the transactions as not reliable, the A.O. rejected the books of
accounts of the assessee company. He assessed 2% as the rate of commission of
the assessee on account of import purchases, i.e., for acting as a dummy. That
apart, commission @ 0.75% on sales bills was also assessed.

 

The CIT(A) confirmed the action
of the A.O., whereupon the assessee filed an appeal to the Tribunal.

 

The Tribunal held that the
assessee is mainly engaged in the import of diamonds and their sale in local
markets to exporters. The import of diamonds is done through customs
authorities and banking channels in India. The import of diamonds undergoes the
appraisal process by appraisers appointed by the custom authorities. The officers
appointed by the Government of India verify physically each and every parcel of
diamonds in order to ascertain the quality, quantity, rate, value and place of
origin against the declaration made by the importers. Further, all the
transactions of purchase, sales, import are made through account payee cheques
and not a single payment is made to any party by way of cash. All the purchase
and sales transactions are carried out with reputed parties in the diamond
trade and all the payments received from debtors are through account payee
cheques; similarly, all payments to creditors are through account payee
cheques.

 

As such, the A.O. cannot
allegedly consider the import of goods as providing accommodation bills in the
market when physical delivery of goods was confirmed by the other arm of
government, i.e., the custom authorities. From the record it is noted that the
sales were made to reputed exporters who are assessed to tax and their
identities are known to the Income Tax Department. The customers are registered
under state VAT laws. The company has received payments against sales proceeds
by account payee cheques. The company has also purchased from local parties to
whom payment was made by account payee cheques. To discharge the onus of
proving the transactions as genuine and to substantiate that all purchases and
sales made are genuine, the assessee has submitted various documents and
submissions; copies of bank statement for the relevant year; ledger copies of
various purchases from parties for A.Y. 2008-09 and 2009-10; photo copies of
purchase invoices of parties for A.Y. 2008-09 and 2009-10; the relevant copies
of the daily stock register; confirmation from various sale parties; details of
interest received from various parties; details of unsecured loans along with
confirmation; and so on. These documents prove that the assessee is not engaged
in issuing accommodation bills and acting as a dummy for importing diamonds.
Thus, the contention of the A.O. that the bills issued by the assessee are all
accommodation bills is wrong. Just on the basis of one recorded statement he
cannot reach the conclusion that the assessee has issued accommodation bills
and reject the books of accounts of the assessee.

 

Being aggrieved by the order of
the ITAT, the Revenue filed an appeal to the High Court. The Court held that in
arriving at such a finding, the Tribunal had noted that the survey party did
not find any incriminating evidence and material that could establish the stand
taken by the A.O. There was no disputing the fact that no incriminating
evidence was found on the day of the survey. It was also noted that merely on
the basis of the statement of one of the directors, Shri Saurabh Garg, and
that, too, recorded after 20 to 25 days of the survey, could not be sufficient
for bringing into assessment and making any addition to the income without
further supporting or corroborative evidence. The statement recorded u/s 133A
of the Act not being recorded on oath, cannot have any evidentiary value and no
addition can be made on the basis of such a statement.

 

In CIT
vs. S. Khader Khan Son 300 ITR 157, the Madras High Court had concluded
that a statement recorded u/s 133A of the Act has no evidentiary value and that
materials or information found in the course of survey proceedings could not be
a basis for making any addition; besides, materials collected and statements
obtained u/s 133A would not automatically bind the assessee. This was affirmed
by the Supreme Court by dismissing the civil appeal of the Revenue in CIT
vs. S. Khader Khan Son (Supra). In view of the above, the Revenue
appeal fails and is accordingly dismissed.

Settlement of cases – Section 245D of ITA, 1961 – Proceedings for settlement are not adjudicatory proceedings – Assessee disputing liability but offering to pay additional tax – No non-disclosure of full and true facts – Order of Settlement Commission accepting offer of assessee is valid

8. Principal CIT vs.
Shreyansh Corporation

[2020] 421 ITR 153 (Guj.)

Date of order: 7th
October, 2019

A.Y.: 2004-05

 

Settlement of cases – Section
245D of ITA, 1961 – Proceedings for settlement are not adjudicatory proceedings
– Assessee disputing liability but offering to pay additional tax – No
non-disclosure of full and true facts – Order of Settlement Commission accepting
offer of assessee is valid

On an application for settlement
after considering the issues put forth by the Principal Commissioner in the
report u/r 9 of the Income-tax Rules, 1962 and the rejoinders of the assessees
and the documents submitted along with the statement of facts and the
submissions of the respective parties, the Settlement Commission noted that
insofar as the addition to partner’s capital was concerned, the assessees had
submitted affidavits made by M and the two assessees and it was further stated
that if at any stage these affidavits were found to be false, it may be treated
as a misrepresentation of facts u/s 245D(6) of the Act and the consequences as
u/s 245D(7) of the Act may follow in the case of the two assessees. The
Settlement Commission further noted that the assessees had offered additional
income for bringing quietus to certain issues in the spirit of a
settlement.

 

Taking into account all the facts
and discussions on record, the Settlement Commission was of the view that the additional
income offered during the section 245D(4) proceedings by the applicant’s letter
dated 8th June, 2018 over the additional income disclosed in the
settlement applications could be accepted with reference to the income
disclosed in the settlement applications. It further noted that the
Commissioner and the A.O. also did not make any further submissions. The
Settlement Commission accordingly settled the cases of the assessees on the
terms and conditions set out in the order.

 

The Principal Commissioner filed
writ petitions and challenged the order of the Settlement Commission. The
Gujarat High Court dismissed the petitions and held as under:

 

‘i)    The proceedings before the Settlement Commission are in the
nature of settlement between the parties and are not strictly speaking
adjudicatory proceedings. On a perusal of the order passed by the Settlement
Commission it was abundantly clear that the assessees had not accepted the
liability of 5% of trading expenses but in the spirit of settlement offered to
pay the amount computed by the A.O. with a view to bring quietus to the
matter and buy peace of mind. The offer to pay such amounts in addition to the
amounts disclosed in the applications u/s 245C of the Act could not be said to
be disclosure of any further amounts under that section as they had been
offered only to bring about a settlement.

 

ii)    The fact that the assessees had offered to pay such amounts, the
liability whereto they had not accepted, could not be termed as non-disclosure
of full and true facts in the applications u/s 245C of the Act.


iii)  Under the circumstances, considering
the amounts so offered by way of settlement, which were quite meagre
considering the overall disclosure made, there was no infirmity in the order
passed by the Settlement Commission warranting interference in exercise of
powers under article 226 of the Constitution of India’.

Revision – Section 264 of ITA, 1961 – Application for revision – Powers of Commissioner – Powers u/s 264 are very wide – Mistake in computation of income and revised return barred by limitation – Commissioner finding that mistake was inadvertent and claim for deduction bona fide – Order rejecting application for revision is not valid Income-tax – General principles – Effect of Article 265 of the Constitution of India – No tax collection except by authority of law

7. Sharp Tools vs. Principal
CIT

[2020] 421 ITR 90 (Mad.)

Date of order: 23rd
October, 2019

A.Y.: 2013-14

 

Revision – Section 264 of ITA,
1961 – Application for revision – Powers of Commissioner – Powers u/s 264 are
very wide – Mistake in computation of income and revised return barred by
limitation – Commissioner finding that mistake was inadvertent and claim for
deduction bona fide – Order rejecting application for revision is not
valid

 

Income-tax – General principles –
Effect of Article 265 of the Constitution of India – No tax collection except
by authority of law

 

The assessee
filed its return of income for the A.Y. 2013-14. It then received an intimation
u/s 143(1) of the Income-tax Act, 1961 accepting the returned income.
Thereafter, the assessee realised that a mistake had inadvertently crept in
while filling up the quantum in column 14(i) of the return. Therefore, on 9th
January, 2016, the assessee filed a revised return rectifying the mistake. The
return was not processed by the Central Processing Centre, since it was
considered as a revised return filed beyond the specified time u/s 139(5) of
the Act. The assessee made an application to the A.O. for rectification u/s
154. The A.O. rejected the plea,  stating
that the claim was belated. Thereafter, the assessee filed a revision petition
u/s 264. Though the Principal Commissioner found that the mistake was inadvertent
and that the claim was bona fide, he rejected the revision petition.

 

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

‘i)    A careful perusal of section 264 of the Income-tax Act, 1961
would show that it empowers the Principal Commissioner or the Commissioner to
exercise the revisional jurisdiction over “any order” other than the
order to which section 263 applies. Such power is wider and confers on such
authority the responsibility to set things right wherever he finds that an
injustice has been done to the assessee. Before passing any order u/s 264 of
the Act, it is open to the authority to make such inquiry or cause such inquiry
to be made. However, such order should not be prejudicial to the assessee.

 

ii)    Article 265 of the Constitution of India specifically states that
no tax shall be levied or collected except by authority of law. Therefore, both
the levy and collection must be with the authority of law, and if any levy or
collection is later found to be wrong or without authority of law, certainly
such levy or collection cannot withstand the scrutiny of the Constitutional
provision and would be in violation of article 265 of the Constitution of
India.

 

iii)   A mere typographical error committed by the
assessee could not cost it payment of excess tax as collected by the Revenue.
The denial of repayment of such excess collection would amount to great
injustice to the assessee. Even though the statute prescribes a time limit for
getting the relief before the A.O. by way of filing a revised return, there was
no embargo on the Commissioner to exercise his power and grant the relief u/s
264. The order rejecting the application for revision was not valid.

 

iv)    Accordingly, this writ petition is
allowed and the impugned order is set aside. Consequently, the matter is
remitted back to the respondent for considering the claim of the petitioner and
to pass appropriate orders in the light of the observations and findings
rendered supra. The respondent shall, accordingly, pass such fresh order
within a period of six weeks from the date of receipt of a copy of this order.’

Recovery of tax – Company in liquidation – Recovery from director – Section 179 of ITA, 1961 – Where A.O. issued a notice u/s 179 against assessee director of a company seeking to recover tax dues of the company, since such notice was totally silent regarding fact that tax dues could not be recovered from company and, further, there was no whisper of any steps being taken against company for recovery of outstanding amount, impugned notice u/s 179 against director was to be set aside

6. Ashita Nilesh Patel vs.
ACIT

[2020] 115 taxmann.com 37
(Guj.)

Date of order: 20th
January, 2020

A.Ys.: 2011-12 to 2014-15

 

Recovery of tax – Company in
liquidation – Recovery from director – Section 179 of ITA, 1961 – Where A.O.
issued a notice u/s 179 against assessee director of a company seeking to
recover tax dues of the company, since such notice was totally silent regarding
fact that tax dues could not be recovered from company and, further, there was
no whisper of any steps being taken against company for recovery of outstanding
amount, impugned notice u/s 179 against director was to be set aside

 

The assessee was a director in
the company TPPL which failed to make payment of outstanding tax demand of
certain amount. The A.O. observed that it was noticed from the records of the
company that there were no recoverable assets in the name of the assessee
company. In such circumstances, proceedings u/s 179 of the Income-tax Act, 1961
were initiated by way of issuing of notice to the assessee treating her as
jointly and severally liable for payment of such tax.

 

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

 

‘i)    Section 179(1) provides for the joint and several liability of
the directors of a private company, wherein the tax dues from such company in
respect of any income of any previous year cannot be recovered. The first
requirement, therefore, to attract such liability of the director of a private
limited company is that the tax cannot be recovered from the company itself.
Such requirement is held to be a pre-requisite and necessary condition to be
fulfilled before action u/s 179 can be taken. In the context of section 179
before recovery in respect of the dues from a private company can be initiated
against the directors, to make them jointly and severally liable for such dues,
it is necessary for the Revenue to establish that such recovery cannot be made
against the company and then alone can it reach to the directors who were
responsible for the conduct of the business during the previous year in
relation to which liability exists.

 

ii)    There is no escape from the fact that the perusal of the notice
u/s 179 reveals that the same is totally silent as regards the satisfaction of
the condition precedent for taking action u/s 179, viz., that the tax dues
cannot be recovered from the company. In the show cause notice, there is no
whisper of any steps having been taken against the company for recovery of the
outstanding amount. Even in the impugned order, no such details or information
has been stated.

 

iii)   In the circumstances referred to above, the question is whether
such an order could be said to be sustainable in law. The answer has to be in
the negative. At the same time, in the peculiar facts and circumstances of the
case and, more particularly, when it has been indicated by way of an additional
affidavit-in-reply as regards the steps taken against the company for the
recovery of the dues, one chance is to be given to the Department to undertake
a fresh exercise so far as section 179 is concerned. If the show cause notice
is silent including the impugned order, the void left behind in the two
documents cannot be filled by way of an affidavit-in-reply. Ultimately, it is
the subjective satisfaction of the authority concerned that is important and it
should be reflected from the order itself based on some cogent materials.

 

iv)   The impugned notice as well as the
order is hereby quashed and set aside. It shall be open for the respondent to
issue fresh show cause notice for the purpose of proceeding against the writ
applicant u/s 179.’

Income – Business income – Section 41 of ITA, 1961 – Remission or cessation of trading liability – Condition precedent for application of section 41 – Assessee must have obtained benefit in respect of liability – Mere change of name in books of accounts not sufficient – Interest liability of State Government undertaking on government loans converted by order of State Government into equity share capital – No cessation of liability – Section 41 not applicable

5. CIT vs. Metropolitan
Transport Corporation (Chennai) Ltd.

[2020] 421 ITR 307 (Mad.)

Date of order: 9th
July, 2019

A.Y.: 2001-02

 

Income – Business income –
Section 41 of ITA, 1961 – Remission or cessation of trading liability –
Condition precedent for application of section 41 – Assessee must have obtained
benefit in respect of liability – Mere change of name in books of accounts not
sufficient – Interest liability of State Government undertaking on government
loans converted by order of State Government into equity share capital – No
cessation of liability – Section 41 not applicable

 

The assessee was a wholly-owned
Tamil Nadu Government undertaking, operating transport services. The assessee
had taken over the assets and liabilities of the transport services, which were
previously run by the Tamil Nadu State Government. The State Government treated
a part of the net worth of the undertaking as its share capital and the balance
as loan, on which the assessee claimed and was allowed interest payable year
after year as deduction u/s 37 of the Income-tax Act, 1961. The Government of
Tamil Nadu took a decision and issued G.O. (Ms). No. 18, dated 7th
March, 2001 converting the interest outstanding of Rs. 8,264.17 lakhs payable
by the assessee company on 31st October, 2000 into equity shares.
The A.O. held that the sum of Rs. 8,264.17 lakhs was assessable u/s 41(1) of
the Act.

 

The Tribunal held that the amount
was not assessable u/s 41.

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

 

‘i)    It is a prerequisite condition before having recourse to section
41 of the Income-tax Act, 1961 that the assessee must have either obtained the
amount in respect of the loss, expenditure or trading liability incurred
earlier by it, or it should have received any benefit in respect of such
trading liability by way of remission or cessation thereof. The objective is to
tax the amount or benefit received by the assessee, thereby making him pay back
the benefit availed of earlier by him by way of claiming loss, expenditure or
liability in respect of that amount. Remission is a positive conduct on the
part of the creditor. Mere change of nomenclature in the books of accounts
without anything more brings no benefit to the assessee and its liability to
pay to the creditor does not get extinguished. The treatment given in
accounting entries does not give rise to a taxable event. To invoke section 41
of the Act, the initial burden is on the Revenue to establish cessation or
remission of liability.

 

ii)    When there was no writing off of liabilities and only the
sub-head under which the liability was shown in the account books of the
assessee was changed, there could be no cessation of liability. When the
assessee company was liable to pay and it continued to remain liable even after
change of entries in the books of accounts, no benefit would accrue to the
assessee company merely on account of change of nomenclature, and consequently
the question of treating it as profit and gain would not arise.

 

iii)   For all the above reasons, the appeal
filed by the Revenue is dismissed and the substantial question of law is
answered against the Revenue.’

Search and seizure – Block assessment – Sections 132, 158BC, 292CC of ITA, 1961 – Validity of search must be established before block assessment – Computation of income should be based on undisclosed income discovered during search; B.P. 1991-92 to 1998-99

40. Ramnath Santu
Angolkar vs. Dy. CIT [2020] 422 ITR 508 (Kar.) Date of order: 27th November, 2019 B.P.: 1991-92 to 1998-99

 

Search and seizure – Block assessment – Sections
132, 158BC, 292CC of ITA, 1961 – Validity of search must be established before
block assessment – Computation of income should be based on undisclosed income
discovered during search; B.P. 1991-92 to 1998-99

 

The appellant is an individual dealing in real estate and is engaged in
the activity of providing service to landowners for getting compensation in
case of land acquisition for promoting housing schemes, land development and
selling of plots on behalf of the owners on commission or service charges. The
appellant filed his return of income for the A.Ys. 1991-92 to 1998-99. The
aforesaid returns were processed u/s 143(1). On 19th November, 1998,
a search u/s 132 of the Act was conducted in the residential premises of the
appellant and a notice u/s 158BC was issued to the appellant by which he was
required to file his return of income. In response to the aforesaid notice, the
appellant filed the return of income for the block period, i.e., 1st April,
1988 to 19th November, 1998 and declared an additional income of Rs.
4,53,156. Thereafter, a notice u/s 143(2) was issued to the appellant and he
was directed to produce all the details. The A.O. passed an order of assessment
on 28th November, 2000 u/s 158BC(c) and determined undisclosed
income of the appellant at Rs. 1,63,54,846.

 

Being aggrieved, the appellant filed an appeal before the Commissioner
of Income-tax (Appeals). The appeal was decided by an order dated 23rd
August, 2002 which was partly allowed. The Revenue being aggrieved by this
order, filed an appeal before the Income-tax Appellate Tribunal. The appellant
filed a cross-objection in the aforesaid appeal, to the extent that the appeal
was decided against the appellant. The Tribunal by an order dated 18th
January, 2007, set aside the order of the Commissioner of Income-tax (Appeals)
and remitted the matter to the Commissioner of Income-tax (Appeals) and
directed the issues to be adjudicated afresh by affording an opportunity of
hearing to the parties in accordance with law. The Commissioner thereafter, by
an order dated 30th May, 2008, decided the appeal and partly allowed
the appeal filed by the appellant. The appellant and the Revenue being
aggrieved by this order, again filed appeals before the Tribunal. The Tribunal,
by an order dated 9th September, 2011, partly allowed both the
appeals.

 

The appellant filed an appeal before the High Court and raised the
following questions of law:

 

‘(1) Whether the assessment order passed for the block period u/s
158BC(c) of the Act in the name of the individual, when the warrant of
authorisation issued in the joint name of the appellant and others is valid in
law on the facts and circumstances of the case?

 

(2) Whether the authorities below ought to have examined the validity of
the search and then only proceeded to initiate block assessment proceedings on
the facts and circumstances of the case?

 

(3) Whether the Tribunal was justified in law in holding that there is
no merit to challenge the action of the A.O. to assess u/s 158BC of the Act
when the conditions precedent are not existing as much as for computation of
income u/s 158BC shall be restricted to seized material on the facts and
circumstances of the case?’

 

The Karnataka High Court held as under:

 

‘i)   Section 292CC of the
Income-tax Act, 1961 merely provides that it shall not be necessary to issue an
authorisation u/s 132 or make a requisition u/s 132A separately in the name of
each person. However, it is pertinent to note that where an authorisation is
made in the name of more than one person, the section does not provide that the
names of such persons need not be mentioned in the warrant of authorisation.

 

ii)   The authorities are under an
obligation to examine the validity of the search and only thereafter proceed to
initiate the block assessment proceedings.

 

iii)  From a perusal of section
158BC it is evident that while computing the undisclosed income for the block
period, the evidence found as a result of search or requisition of books of
accounts or other books of accounts and such other material or information as
is available with the A.O. and relatable to such evidence, has to be taken into
consideration. In other words, it is evident that the computation of
undisclosed income should be based on such evidence which is seized during the
search which is not accounted in the regular books of accounts.

 

iv)  The assessment order passed
for the block period u/s 158BC(c) of the Act in the name of the individual,
when the warrant of authorisation was issued in the joint names of the assessee
and others, was not valid in law. Moreover the authorities ought to have
examined the validity of the search and only then proceeded to initiate block
assessment proceedings on the facts and circumstances of the case.

 

v)   From a
perusal of the material on record, it was evident that there was no seizure
with regard to the A.Ys. 1988-89 and 1989-90 during the course of the search
and seizure operations. However, the A.O. while computing the undisclosed
income had taken into account the income in respect of these years also and
thus the order passed by the A.O. was in violation of section 158BC(c). The
order of block assessment was not valid.’

Income – Accounting – Section 145 of ITA, 1961 – Rejection of accounts and estimate of income – Discretion of A.O. must be exercised in a judicious manner

4. Rameshchandra Rangildas
Mehta vs. ITO

[2020] 421 ITR 109 (Guj.)

Date of order: 15th July,
2019

A.Y.: 2011-12

 

Income – Accounting – Section 145
of ITA, 1961 – Rejection of accounts and estimate of income – Discretion of
A.O. must be exercised in a judicious manner

 

For the A. Y. 2011-12 the
appellant had filed his return of income on 15th September, 2011
declaring total income at Rs. 5,34,342. The case was selected for scrutiny and notice
u/s 143(2) of the Income-tax Act, 1961 was issued dated 31st July,
2012. The appellant filed his revised return of income on 30th
March, 2012, declaring a total income of Rs. 7,44,070 and claimed refund of Rs.
23,26,700. According to the appellant, he derived income from civil contracts
(labour job works). The appellant showed gross business receipts of Rs.
12,00,02,100 and a net profit of Rs. 5,37,942. The refund of Rs. 23,26,700 out
of the prepaid taxes contained tax deducted by M/s PACL Limited against the
payment for labour. The appellant showed labour receipts for income account of
Rs. 12,00,02,100.

 

The A.O., relying on the
statement of the appellant recorded u/s 131 of the Act and the information
received subsequent to the search in the case of M/s PACL India Limited, came
to the conclusion that the dealings of the appellant with M/s PACL India
Limited were accommodation entries. The A.O. issued show cause notice dated 14th
March, 2014 calling upon the appellant to show cause as to why the labour
receipt income of Rs. 12,00,02,100 should not be treated as income from other
sources u/s 56 of the Act. The appellant, vide his reply dated 21st
March, 2014, explained that he had only received commission of Rs. 0.30 on Rs.
100, i.e., Rs. 3,60,000 on Rs. 12,00,02,100 which had already been included in
the net profit and reflected in the profit and loss account. The A.O. rejected
the books of accounts u/s 145(3) of the Act and estimated the income at 10% of
the gross receipts; he made an addition of Rs. 1,20,00,210 as income from other
sources u/s 56 of the Act.

 

The appellant submitted before
the Commissioner of Income-tax (Appeals) that the estimation of net profit at
10% was on the higher side and he had received commission at 0.45% only. He
also pointed out that the returned income included the profit of Rs. 4,13,742
from the labour contract receipts and set-off should have been granted against
the addition of commission income by the A.O. The Commissioner (Appeals)
estimated the commission at Rs. 24,00,042, i.e., 2% on the basis that the same
is 6.7% of the tax benefit derived by PACL India Limited, i.e., 30%, and the
same was a reasonable estimate. The Commissioner (Appeals) took the view that
the set-off of only the net income from the fictitious contract receipts could
be granted. Further, he reduced the interest income and retail sales from the
net profit to grant the set-off. The set-off granted by the Commissioner
(Appeals) came to only Rs. 1,46,942 [Rs. 5,37,942 (net profit) – Rs. 1,20,000
(interest income) – Rs. 2,71,000 (retail sales)]. Thus, the Commissioner
(Appeals) partly confirmed the addition to the extent of Rs. 22,53,100.

 

Being dissatisfied with the order
passed by the Commissioner (Appeals), the Department preferred an appeal before
the Income-tax Appellate Tribunal. The appellant preferred cross-objection. The
Appellate Tribunal confirmed the order of the Commissioner (Appeals).

 

Dissatisfied with the order
passed by the Appellate Tribunal, the appellant filed an appeal before the High
Court and proposed the following substantial question of law:

 

‘Whether in the facts and
circumstances of the case, the Income-tax Appellate Tribunal was right in law
in confirming addition of Rs. 22,53,100 on account of alleged commission income
at 2% without there being any evidence or material on record for making such
estimate?’

 

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

 

‘i)    Section 145 of the Income-tax Act, 1961 gives power to the A.O.
to reject the assessee’s accounts. Although sub-section (3) of section 145
gives him the discretion to make an assessment in the manner provided in
section 144, yet this discretion cannot be exercised arbitrarily. The question
to determine in every such case is whether there is any material for the basis
adopted by the A.O. or the Tribunal, as the case may be, for computing the
income of the assessee. The material which is irrelevant or which amounts to
mere guesswork or conjecture is no material.

 

ii)    The A.O. thought it fit to estimate 10% commission for providing
accommodation entries to the tune of Rs. 12,00,02,100. The Commissioner
(Appeals) took the view that the estimation of commission at 10% by the A.O. is
one-third of the benefit, which could be termed as excessive and not a
reasonable estimate. The Commissioner (Appeals), without there being anything on
record, thought it fit to take the view that the estimate by the assessee at 3%
translated to 1% of the benefit derived, which could be termed too low, and in
such circumstances, estimated it at 2%, which would translate to about 6.7% of
the benefit alleged to have been derived by P. This was nothing but pure
guesswork without there being any material or basis for arriving at the same.
The Tribunal was not right in law in confirming the addition.

 

iii)   Ordinarily, we would not have entertained the appeal of the
present nature having regard to the fact that the income has been assessed
based on estimation. However, the way the authorities have proceeded with the
guesswork, it cannot be approved.

 

iv)   In view of the above, this tax appeal
succeeds and is hereby allowed. The question of law is answered in favour of
the assessee and against the Revenue. The impugned order passed by the
Income-tax Appellate Tribunal is hereby quashed and set aside.’

Charitable purpose (objects of general public utility) – Section 2(15) r.w.s. 12A of ITA, 1961 – Where assessee association was engaged in primary aim and objective to organise and arrange all licensed third party administrators (TPAs) to be members of trust for mutual betterment of TPA business, merely because certain benefits accrued to TPA members and certain objects of trust were for advancement of business of TPA, it would not ipso facto render trust to be non-charitable

3. CIT (Exemption) vs.
Association of Third Party Administrators

[2020] 114 taxmann.com 534
(Delhi)

Date of order: 20th
January, 2020

 

Charitable purpose (objects of
general public utility) – Section 2(15) r.w.s. 12A of ITA, 1961 – Where
assessee association was engaged in primary aim and objective to organise and
arrange all licensed third party administrators (TPAs) to be members of trust
for mutual betterment of TPA business, merely because certain benefits accrued
to TPA members and certain objects of trust were for advancement of business of
TPA, it would not ipso facto render trust to be non-charitable

 

On 12th December, 2005
the assessee association of third party administrators (ATPA) filed an
application seeking registration u/s 12A of the Income-tax Act, 1961. The said
application was rejected by the Director (Exemption) holding that certain
objects of the trust were not charitable and trustees had discretion in
applying the trust’s income to any of the objects. The Director (Exemption)
held that the assessee ATPA was aiming at industry status for third party
administrator (TPA) business and was working for mutual benefit of its members.

 

The Tribunal allowed the appeal
in favour of the assessee and directed the Commissioner (Exemption) to provide
registration to the assessee u/s 12AA of the Act.

 

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

 

‘i)    At the initial stage of registration, it is
to be examined whether the proposed activities of the assessee can be
considered charitable within the meaning of section 2(15). On an application
for registration of a trust or institution made under section 12AA, the
Principal Commissioner or Commissioner shall call for such documents or
information from the trust or institution as he thinks necessary in order to
satisfy himself about the genuineness of the activities of the trust or
institution; and the compliance of such requirements of any other law for the
time being in force by the trust or institution, as are material for the
purpose of achieving its objects, and he may also make such inquiries as he may
deem necessary in this behalf. Once he is satisfied about the objects of the
trust or institution and the genuineness of its activities, he shall pass an
order under the said provision. On this aspect the tax authorities have looked
into the aims and objects of the trust.

 

ii)    The primary or dominant object of the trust satisfies the
conditions laid down u/s 2(15). Even if some ancillary or incidental objects
are not charitable in nature, the institution would still be considered as a
charitable organisation. Merely because some facilities were beyond its main
object, that by itself would not deprive the institution of the benefits of a
charitable organisation. If the primary purpose of advancement of objects is
for general public utility, the institution would remain charitable, even if
there are incidental non-charitable objects for achieving the said purpose.

 

iii)   Merely because the objects of the trust are for the advancement of
the business of TPA, it would not ipso facto render the trust to be
non-charitable. The objects of the trust are not exclusively for the promotion
of the interests of the TPA members. The objects were to provide benefit to the
general public in the field of insurance and health facilities. In the course
of carrying out the main activities of the trust, the benefits accruing to the
TPA members cannot, by itself, deny the institution the benefit of being a
charitable organisation.

 

iv)     For
the foregoing reasons, there is no substantial question of law arising.
Accordingly, the appeal is dismissed.’

Business expenditure – Disallowance of expenditure relating to exempted income – Section 14A of ITA, 1961 – Disallowance cannot exceed exempt income earned – Tribunal restricting disallowance to extent offered by assessee – Proper

2. Principal CIT vs. HSBC Invest Direct (India) Ltd.

[2020] 421 ITR 125 (Bom.)

Date of order: 4th
February, 2019

A.Y.: 2009-10

 

Business
expenditure – Disallowance of expenditure relating to exempted income – Section
14A of ITA, 1961 – Disallowance cannot exceed exempt income earned – Tribunal
restricting disallowance to extent offered by assessee – Proper

 

The assessee
is a limited company. In the return of income filed for the A.Y. 2009-10, the
question of making disallowance to the expenditure claimed by the assessee in
terms of section 14A of the Income-tax Act, 1961 read with Rule 8D of the
Income-tax Rules, 1962 came up for consideration. During the assessment in the
appellate proceedings, the assessee offered restricted disallowance of Rs. 1.30
crores. The Department contended firstly that the statutory auditors in the
report had made a disallowance of Rs. 2.53 crores u/s 14A of the Income-tax
Act, 1961, and secondly that in view of the assessee’s income which was exempt,
the disallowance had to be made under Rule 8D of the Income-tax Rules, 1962.
The Tribunal accepted the assessee’s voluntary offer of disallowance of
expenditure.

 

The Revenue filed an appeal
against the judgment of the Income-tax Appellate Tribunal, raising the
following question for consideration:

 

‘(i) Whether the order of the
Tribunal is perverse in law as it ignored the disallowance computed by the
auditors of the assessee which was in accordance with section 14A of the
Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962?’

 

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

‘i) The disallowance of expenditure incurred to earn the exempt
income could not exceed the exempt income earned. The ratio of the decisions in
the cases of Cheminvest Ltd. vs. CIT [2015] 378 ITR 33 (Delhi) and
CIT vs. Holcim India (P) Ltd. (I.T.A. No. 486 of 2014 decided on 5th
September, 2014) would include a facet where the assessee’s exempt
income was not nil, but had earned exempt income which was more than the
expenditure incurred by the assessee in order to earn such income.

 

ii) The order of the Tribunal which
restricted the disallowance of the expenditure to the extent voluntarily
offered by the assessee was not erroneous.’

Section 56 r/w Rule 11UA – Fair Market Value of shares on the basis of the valuation of various assets cannot be rejected where it has been demonstrated with evidence that the Fair Market Value of the assets is much more than the value shown in the balance sheet

22. [2019] 75 ITR (Trib.) 538 (Del.) India Convention & Culture Centre (P)
Ltd. vs. ITO ITA No. 7262/Del/2017 A.Y.: 2014-15 Date of order: 27th September,
2019

 

Section 56 r/w Rule 11UA – Fair Market
Value of shares on the basis of the valuation of various assets cannot be
rejected where it has been demonstrated with evidence that the Fair Market
Value of the assets is much more than the value shown in the balance sheet

 

FACTS

The assessee company issued 70,00,000 equity
shares of Rs. 10 each at a premium of Rs. 5 per share. The assessee company had
changed land use from agricultural to institutional purposes owing to which the
value of the land increased substantially. It contended before the ITO to
consider the Fair Market Value (FMV) of the land instead of the book value for
the purpose of Rule 11UA. However, the ITO added the entire share premium by
invoking section 56(2)(viib). He computed the FMV of shares on the basis of
book value instead of FMV of land held by the assessee company while making an
addition u/s 56(2)(viib) r/w Rule 11UA.

 

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

 

HELD

The Tribunal observed that the assessee took
refuge of clause (ii) of Explanation (a) to section 56(2)(viib). The counsel
for the assessee argued that the lower authorities have wrongly computed the fair
market value of the shares on the basis of the book value ignoring the fair
market value of the land held by the company; since the assessee had obtained
permission of the competent authority for change of land use from
‘agricultural’ to ‘institutional’ for art, culture and convention centre, its
market value increased substantially. The Tribunal, convinced by the fact of
increase in market value of land, held that valuation of the shares should be
made on the basis of various factors and not merely on the basis of financials,
and the substantiation of the fair market value on the basis of the valuation
done by the assessee simply cannot be rejected where the assessee has
demonstrated with evidence that the fair market value of the asset is much more
than the value shown in the balance sheet.

 

The Tribunal allowed the appeal filed by the
assessee.

 

Section 68 r/w/s 194J – Merely because an amount is reflected in Form 26AS, it cannot be brought to tax in the hands of the assessee where an error was made by a third person

21 [2019] 75 ITR (Trib.) 364 (Mum.) TUV India (P) Ltd. vs. DCIT ITA No. 6628/Mum/2017 A.Y.: 2011-12 Date of order: 20th August, 2019

 

Section 68 r/w/s 194J – Merely because an
amount is reflected in Form 26AS, it cannot be brought to tax in the hands of
the assessee where an error was made by a third person

 

FACTS

The assessee filed return of income,
claiming Tax Deducted at Source (TDS) of Rs. 6.02 crores whereas TDS appearing
in the AIR information was Rs. 6.33 crores. During the course of scrutiny
assessment, the ITO concluded that the assessee had not disclosed income
represented by the differential TDS of Rs. 30.88 lakhs. The income was
calculated by extrapolating the differential TDS amount (ten per cent of TDS
u/s 194J) and was taxed as undisclosed income in the hands of the assessee.

 

Aggrieved, the assessee preferred an appeal
to the CIT(A), claiming that the difference was mainly due to the error made by
one of the clients by wrongly furnishing Permanent Account Number (PAN) of the
assessee instead of that of one of their (other) clients. The assessee produced
all possible evidence to prove that the same was on account of a genuine error
made by its client. The CIT(A) deleted the addition partially and confirmed the
rest of the difference, on the ground that the same was irreconcilable.

 

Aggrieved, the assessee preferred an appeal
to the Tribunal.

 

HELD

The Tribunal observed that the assessee’s
client had erroneously quoted the assessee’s PAN in its TDS return owing to
which higher TDS was reflected in the assessee’s Form 26AS. However, the
assessee duly filed all the details to explain the difference between the TDS
amounts before the ITO during remand proceedings as well as before the CIT(A).

 

It produced evidence by way of emails
exchanged with its client to prove that the error took place while filing TDS
returns by the client. It also filed a revised TDS return as well as ledger
account of the client in the assessee’s books, as well as reconciliation
statements, and offered party-wise explanations. Thus, the assessee discharged
its primary onus as cast under the Income Tax laws.

 

Neither the ITO nor the CIT(A) conducted
necessary inquiries despite having all information in their possession
submitted by the assessee during appellate / remand proceedings.

 

It further observed that the assessee has no
control over the database of the Income-tax Department as is reflected in Form
No. 26AS and the best that the assessee could do is to offer bona fide
explanations for the differential which the assessee did in this case during
appellate / remand proceedings. The CIT(A) / ITO ought to have conducted
necessary inquiries to unravel the truth, but asking the assessee to do the
impossible is not warranted. No defects in the books of accounts are pointed
out by the authorities below nor were the books of accounts rejected by them.
No cogent incriminating material was brought on record by the authorities below
as evidence / to prove that the assessee has received / earned any income
outside its books of accounts.

 

Another important aspect which the Tribunal
considered was that though the principle of res judicata was not applicable
to assessment proceedings under Income tax law, from the assessment orders for
other assessment years indications can be drawn as to the behaviour pattern of
the taxpayer and modus operandi of the taxpayer adopted to defraud
Revenue / conceal income, if any. No such incriminating information is brought
on record by Revenue. Therefore, considering the totality of facts as well as
on the touchstone of preponderance of probabilities, the Tribunal held that no
additions to the income are warranted in the hands of the assessee on account
of the above difference.

 

The ground of appeal filed by the assessee
was allowed.

 

Revision – Section 263 of ITA, 1961 – Diversion of income by overriding title – Interpretation of Will – Testator’s direction to executor of Will to sell property and pay balance to assessee after payment to trusts and expenses – Expenses and payments to trusts stood diverted before they reached assessee – Order of A.O. after due inquiry accepting assessee’s offer to tax amount of sale consideration – Revision erroneous; A.Y. 2012-13

39. Kumar Rajaram vs. ITO(IT) [2020] 423 ITR 185 (Mad.) Date of order: 5th August, 2019 A.Y.: 2012-13

 

Revision – Section 263 of ITA, 1961 –
Diversion of income by overriding title – Interpretation of Will – Testator’s
direction to executor of Will to sell property and pay balance to assessee
after payment to trusts and expenses – Expenses and payments to trusts stood
diverted before they reached assessee – Order of A.O. after due inquiry
accepting assessee’s offer to tax amount of sale consideration – Revision
erroneous; A.Y. 2012-13

 

The assessee was a non-resident. During the
A.Y. 2012-13 he derived income from capital gains and interest income assessed
under the head ‘Other sources’. The assessee’s father bequeathed land and
residential property to him under a Will and testament with directions to the
executor of the Will. The executor was to give effect to the terms and
conditions of the Will and dispose of his properties as stated by him in the
Will. The executor was entitled to professional fees and all expenses for the
due execution of the Will from and out of the estate of the deceased testator.
The executor was to arrange to sell the property after a period of one year
from the date of his demise so as to accommodate his wife for her stay and
distribute the sale proceeds in favour of four charitable institutions
specifying the amount to be paid to each of them after incurring the necessary
expenses towards stamp duty, fees to the executor, etc. The balance sale
consideration was to be paid to the assessee who was to repatriate, according
to the Reserve Bank of India Rules, the amount so received for the education of
his children.

 

Accordingly, the assessee received a sum of
Rs. 8,19,50,000. The A.O. issued notices under sections 143(2) and 142(1) along
with a questionnaire. In response to the notice u/s 142(1), the assessee
submitted the details including the last Will and testament executed by his
father, a copy of the sale deed, the legal opinion obtained from his counsel
regarding the eligibility for exclusion of the payments to the charitable
institutions and remuneration to the executor in computing the long-term
capital gains on sale of the property. The A.O. accepted the claim of the
assessee in respect of the expenses and passed an order u/s 143(3) and accepted
the sale consideration as mentioned by the assessee in his return of income.
However, the plea raised by the assessee with regard to the indexation of the
cost was not accepted and the A.O. allowed indexation only from the financial
year 2011-12 in accordance with Explanation (iii) in section 48.

 

The Commissioner issued a notice u/s 263
proposing to disallow the exclusion of the sum of Rs. 68,02,500 being the
payment made to the charitable institutions and the sum of Rs. 8,02,500 being
the professional fees of the executor of the Will and the other expenditure
incurred in connection with the sale of the property. The Commissioner
disallowed the exclusion of Rs. 68,02,500 and directed the A.O. to re-compute
the total income and the tax thereon.

 

The Tribunal affirmed the order of the
Commissioner that the exclusion of the payments made by the assessee by
applying the diversion of income by overriding the title could not be allowed
and that there was no evidence for professional fee, commission paid, etc.

 

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

 

‘i) The Commissioner could not have invoked
the power u/s 263. While issuing the show cause notice u/s 263 he did not rely
upon any independent material or on any interpretation of law but on perusal of
the records and was of the view that the expenditure could not be allowed as
deduction u/s 48(i). The Commissioner had conducted a roving inquiry and
substituted his view for that of the view taken by the A.O. who had done so
after conducting an inquiry into the matter and after calling for all documents
from the assessee, one of which was the last Will and testament executed by the
assessee’s father.

 

ii) The A.O. after perusal of the copy of
the last Will and testament of the assessee’s father, the sale deed of the
property and the legal opinion given by the counsel for the assessee, had taken
a stand and passed the order. Therefore, it could not be stated that the A.O.
did not apply his mind to the issue. It was not the case of the Commissioner
that there was a lack of inquiry or inadequate inquiry.

 

iii) The testator bequeathed only a portion
of the sale consideration left over after effecting payments directed to be
made by him. The use of the expression “absolutely” occurring in the Will was
to disinherit the testator’s third wife from being entitled to any portion of
the funds and all that the testator stated was not to sell the property for one
year till his wife vacated the house. The sale deed recorded that the
stepmother of the assessee had in unequivocal terms agreed to the sale and had
vacated the property and granted no objection for transfer of the property.
There was a specific direction to the executor to pay specific sums of money to
the charitable institutions, clear the property tax arrears, claim his
professional fee, meet the stamp duty expenses and pay the remaining amount to
the assessee. The order passed by the Commissioner was erroneously confirmed by
the Tribunal.

 

iv) The Tribunal erred in holding that the
exclusion of payment to charities by applying the principle of diversion of
income by overriding title could not be allowed. The assessee at no point of
time was entitled to receive the entire sale consideration. The sale was to be
executed by the executor of the Will who was directed to distribute the money
to the respective organisations, defray the expenses, pay the property tax,
deduct his professional fee and pay the remaining amount to the assessee.
Therefore, to interpret the Will in any other fashion would be doing injustice
to the intention of the testator and the interpretation given by the
Commissioner was wholly erroneous. The intention of the testator was very clear
that the assessee was not entitled to the entire sale consideration. The
testator did not bequeath the property but part of the sale consideration which
was left behind after meeting the commitments mentioned in the Will to be truly
and faithfully performed by the executor of the Will. The major portion of the
sale consideration on being received from the purchaser of the property stood
diverted before it reached the assessee and under the Will there was no
obligation cast upon the assessee to receive the sale consideration and
distribute it as desired by the testator.

 

v) The
assessee had produced the copies of the receipts signed by the respective
parties before the A.O. who was satisfied with them in the absence of any fraud
being alleged with regard to the authenticity of those documents. The order of
the Tribunal in not allowing the sum of Rs. 8,02,500 being expenditure incurred
in connection with the sale alleging that there was no evidence when the
evidence in support was on record, was not justified and the expenditure was
allowable u/s 48(i). The Commissioner could not have revised the assessment by
invoking section 263.’

 

 

Reassessment – Sections 124(3), 142(1), 143(3), 147, 148 of ITA, 161 – Notice u/s 148 – Assessment proceedings pursuant to notice u/s 142(1) pending and time for completion of assessment not having lapsed – Issue of notice u/s 148 not permissible – That assessee had not objected to jurisdiction of A.O. not relevant; A.Ys. 2011-12

38. Principal CIT vs. Govind Gopal Goyal [2020] 423 ITR 106 (Guj.) Date of order: 15th July, 2019 A.Y.: 2011-12

 

Reassessment – Sections 124(3), 142(1),
143(3), 147, 148 of ITA, 161 – Notice u/s 148 – Assessment proceedings pursuant
to notice u/s 142(1) pending and time for completion of assessment not having
lapsed – Issue of notice u/s 148 not permissible – That assessee had not
objected to jurisdiction of A.O. not relevant; A.Ys. 2011-12

 

The Directorate of Revenue Intelligence
received information that the assessee had undervalued the import price of polyester films during the A.Y. 2011-12. At the relevant point of time, it was noticed that the assessee had not filed
his return of income for the A.Y. 2011-12. Therefore, a notice dated 1st December, 2011 u/s
142(1) was issued against the assessee to furnish his return of income for the A.Y. 2011-12 by 9th December, 2011. The assessee did not file his return of income and submitted a letter dated 3rd January, 2012,
stating that his books of accounts and other records were seized by the Directorate of Revenue Intelligence and that he had
applied to be provided with a copy of the books of accounts and other records
and informed the A.O. that he would file his return of income once he was
provided with the books and other records. While the assessment proceedings
initiated u/s 142(1) were pending, the A.O. issued a notice dated 16th January,
2013 u/s 148 against the assessee to file his return of income for the A.Y.
2011-12. The assessment proceedings were completed, making an addition on
account of unexplained expenditure u/s 69C and estimating the net profit.

 

The Tribunal held that when the assessment
proceedings were already initiated by issuing of notice u/s 142(1) calling for
the return of income, no notice u/s 148 should have been issued and the
assessment was required to be completed within the time limit allowed u/s
143(3) or section 144.

 

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

 

‘i) It is settled law that unless the return
of income filed by the assessee is disposed of, notice for reassessment u/s 148
cannot be issued, i.e., no reassessment proceedings can be initiated so long as
the assessment proceedings are pending on the basis of the return already filed
(and) are not terminated.

 

ii) If an assessment is pending either by
way of original assessment or by way of reassessment proceedings, the A.O.
cannot issue a notice u/s 148.

 

iii) Section 142(1) and section 148 cannot
operate simultaneously. There is no discretion vested with the A.O. to utilise
either of them. The two provisions govern different fields and can be exercised
in different circumstances. If income escapes assessment, then the only way to
initiate assessment proceedings is to issue a notice u/s 148.

 

iv) Income
could not be said to have escaped assessment u/s 147 when the assessment proceedings
were pending. If the notice had already been issued u/s 142 and the proceedings
were pending, a return u/s 148 could not be called for. The Tribunal had
applied the correct principle of law and had passed the order holding that the
assessment order passed u/s 143(3) read with section 147 was bad in law and
could not be sustained. Section 124(3) which stipulates a bar to any contention
about lack of jurisdiction of an A.O. would not save the illegality of the
assessment in the assessee’s case.’

 

Settlement of cases – Section 245C of ITA, 1961 – Black Money Act, 2015 – Jurisdiction of Settlement Commission – Undisclosed income of non-resident Indians – Charge under Black Money Act only from A.Y. 2016-17 – Pending reassessment proceedings order of Settlement Commission for A.Y. 2004-05 to 2015-16 – Order of Settlement Commission is valid

47. Principal CIT vs.
IT Settlement Commission; [2020] 420 ITR 149
(Guj.) Date of order: 8th
November, 2019 A.Ys.: 2004-05 to
2015-16

 

Settlement of cases –
Section 245C of ITA, 1961 – Black Money Act, 2015 – Jurisdiction of Settlement
Commission – Undisclosed income of non-resident Indians – Charge under Black
Money Act only from A.Y. 2016-17 – Pending reassessment proceedings order of
Settlement Commission for A.Y. 2004-05 to 2015-16 – Order of Settlement
Commission is valid

 

A search and seizure operation came to
be carried out at the residential and business premises of the B group of
companies of which the assessees were directors. Pursuant to the search,
notices under sections 148 and 153A of the Income-tax Act, 1961 were issued to
the three assessees for the A.Ys. 2005-06 to 2013-14, 2004-05 to 2015-16, and
2004-05 to 2015-16, respectively. In response thereto, the assessees filed
income tax returns disclosing undisclosed foreign income and assets.
Thereafter, they filed separate applications u/s 245C of the 1961 Act before
the Settlement Commission disclosing additional undisclosed foreign income and
assets. The Settlement Commission passed an order on 30th January,
2019 settling the cases and granting reliefs. On 18th February,
2019, the A.O. passed orders giving effect to the order of the Settlement
Commission and determined the additional tax payable and issued notices of
demand u/s 156 of the Act on the same day. Each of the assessees paid the
additional tax payable.

 

On a writ petition filed by the Department
on 30th May, 2019 challenging the orders passed by the Settlement
Commission as without jurisdiction since the Settlement Commission had no
jurisdiction to pass an order under the 1961 Act in relation to undisclosed
foreign income and assets covered under the 2015 Act, the Gujarat High Court
dismissed the petition and held as under:

 

‘i)   On a conjoint reading of sections 3 and 2(9)
of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of
tax Act, 2015, it is clear that undisclosed foreign income or assets become
chargeable to tax from the A.Y. 2016-17. However, when undisclosed foreign
assets become chargeable to tax from the A.Y. 2016-17 onwards, the date of
acquisition of such assets may relate to any assessment year prior to the A.Y.
2016-17. Therefore, even after the coming into force of the 2015 Act, insofar
as assessment years prior to the A.Y. 2016-17 are concerned, the undisclosed
foreign income would be chargeable to tax under the relevant provisions of the
Income-tax Act, 1961.

 

ii)   What sub-section (3) of section 4 of the 2015
Act provides is that what is included as income and asset under the 2015 Act
cannot be included in the total income under the 1961 Act. The said sub-section
does not contain a non obstante clause ousting the applicability of the
1961 Act, insofar as undisclosed foreign income and assets are concerned. The
2015 Act is a taxing statute and provides for stringent penalties and
prosecution and it is by now well settled that a taxing statute must be
interpreted in the light of what is clearly expressed. The second proviso
to section 147 of the 1961 Act does away with the limitation of four years as
provided in the first proviso to section 147 in the case of undisclosed
foreign income. By virtue of clause (c) of sub-section (1) of section 149, the
time limit for reopening of assessments has been extended to sixteen years in
respect of any asset, including financial interest in any entity located
outside India, so that the bar applies for periods beyond sixteen years in such
cases. Clearly, therefore, the scheme of the Income-tax Act, 1961 is not meant
to tax only disclosed foreign income but also undisclosed foreign income.

 

iii)  It was an admitted position that the
residential status of two of the assessees was non-resident for the A.Y.
2016-17 and for the third for the A.Y. 2014-15 onwards. Thus, when the 2015 Act
came into force, the assessees were not residents. It could not be said that
the assessees fell within the ambit of the expression ‘assessee’ as defined
under clause (2) of section 2 of the 2015 Act as it stood prior to its
amendment by the Finance (No. 2) Act of 2019. The expression ‘assessee’ was
amended on 1st August, 2019, albeit with retrospective effect
from 1st July, 2015, and as on the date when the Settlement
Commission passed the order, namely, 30th January, 2019, the
assessees were not ‘assessees’ within the meaning of such expression as
contemplated u/s 2(2) of the 2015 Act and were, therefore, not covered by the
provisions of that Act. The search proceedings were conducted after the 2015
Act came into force and, consequently, the notices under sections 148 and 153A
of the 1961 Act were also issued after the 2015 Act came into force. The fact
that these notices under sections 148 and 153A of the 1961 Act were issued in
respect of undisclosed foreign income or assets could be substantiated on a
perusal of the reasons recorded for reopening the assessment for the A.Y.
2000-01.

 

The Revenue authorities were well aware
of the fact that the provisions of the 2015 Act covered undisclosed foreign
income only from the A.Y. 2016-17 onwards and, therefore, categorically
submitted to the jurisdiction of the Settlement Commission and requested it to
proceed further pursuant to the applications made by the assessees u/s 245C of
the Income-tax Act, 1961. It was only for this reason that notices under the
2015 Act were issued only for the A.Ys. 2017-18 and 2018-19. The A.O. had
issued notices under sections 148 and 153A of the 1961 Act for different
assessment years. Therefore, proceedings for assessment or reassessment as
contemplated under clauses (i) and (iiia) of the Explanation to clause (b) of
section 245A had commenced and were pending before the A.O. when the
applications u/s 245C of the 1961 Act came to be made. Therefore, the
requirements of the provisions of section 245C of the 1961 Act were duly
satisfied when the applications thereunder came to be made by the assessees.
Upon receipt of the applications made u/s 245C of the 1961 Act, the Settlement
Commission proceeded further in accordance with the provisions of section 245D
of the 1961 Act. At the stage when it was brought to its notice that notices
u/s 10 of the 2015 Act had been issued to the assessees, the Settlement
Commission gave ample opportunity to the Revenue to decide what course of
action it wanted to adopt, and it was the Revenue which categorically invited
an order from the Settlement Commission in respect of the undisclosed foreign
income and assets disclosed before it.

 

The record of the case showed that the
requirements of section 245D of the 1961 Act had been duly satisfied prior to
the passing of the order u/s 245D(4). The proceedings before the Settlement
Commission were taken in connection with notices issued under sections 148 and
153A of the 1961 Act and it was, therefore, that the Settlement Commission had
the jurisdiction to decide the applications u/s 245C of that Act, which related
to the proceedings in respect of those notices. If it was the case of the
Revenue that the undisclosed foreign income and assets of the assessees were
covered by the provisions of the 2015 Act, the notices under sections 148 and
153A of the 1961 Act, which mainly related to undisclosed foreign income, ought
to have been withdrawn and proceedings ought to have been initiated under the
relevant provisions of the 2015 Act. The Settlement Commission had the
jurisdiction to decide the applications u/s 245C.

 

iv)  The Settlement Commission, after considering
the material on record, had given a finding of fact to the effect that there
was a full and true disclosure made by the assessees and that there was no
wilful attempt to conceal material facts. If for the reason that issues which
pertained to past periods could not be reconciled due to lack of further
evidence, the assessees, with a view to bring about a settlement, agreed to pay
a higher amount as proposed by the Revenue, it certainly could not be termed a
revision of the original disclosure made u/s 245C of the 1961 Act, inasmuch as,
there was no further disclosure but an acceptance of additional liability based
on the disclosure already made before the Settlement Commission.

 

v)   Another aspect of the matter was that it was
an admitted position that prior to the presentation of the writ petition, the
order of the Settlement Commission came to be fully implemented. This was not
mentioned in the writ petition. Therefore, there was suppression of material
facts. The order passed by the Settlement Commission was valid.’

 

Refund – Withholding of refund – Sections 143(2) and 241A of ITA, 1961 – Discretion of A.O. – Scope of section 241A – A.O. must apply his mind before withholding refund – Mere issue of notice for scrutiny assessment for a later assessment year not a ground for withholding refund

46. Maple Logistic P.
Ltd. vs. Principal CIT; [2020] 420 ITR 258
(Del.) Date of order: 14th
October, 2019 A.Ys.: 2017-18 and
2018-19

 

Refund – Withholding
of refund – Sections 143(2) and 241A of ITA, 1961 – Discretion of A.O. – Scope
of section 241A – A.O. must apply his mind before withholding refund – Mere
issue of notice for scrutiny assessment for a later assessment year not a
ground for withholding refund

 

The petitioner, by way of writ petition
under Articles 226 and 227 of the Constitution of India, sought a writ in the
nature of mandamus directing the respondent to refund the income tax
amount on account of excess deduction of tax at source in respect of the
assessment years 2017-18 and 2018-19 and other consequential directions to
adjust the outstanding amount of tax deducted at source and the goods and
services tax payable by the petitioner-company against the pending refund
amount without charging of any interest for the delayed payments. The Delhi
High Court allowed the writ petition and held as under:

 

‘i)   U/s 241A of the Income-tax Act, 1961 the
legislative intent is clear and explicit. The processing of return cannot be
kept in abeyance merely because a notice has been issued u/s 143(2) of the Act.
Post-amendment, sub-section (1D) of section 143 is inapplicable to returns
furnished for the assessment year commencing on or after 1st April,
2017. The only provision that empowers the A.O. to withhold the refund in a
given case at present is section 241A. Now refunds can be withheld only in
accordance with this provision. The provision is applicable to such cases where
refund is found to be due to the assessee under the provisions of sub-section
(1) of section 143, and also a notice has been issued under sub-section (2) of
section 143 in respect of such returns. However, this does not mean that in
every case where a notice has been issued under sub-section (2) of section 143
and the case of the assessee is selected for scrutiny assessment, the
determined refund has to be withheld. The Legislature has not intended to
withhold the refunds just because scrutiny assessment is pending. If such had
been the intent, section 241A would have been worded so. On the contrary,
section 241A enjoins the A.O. to process the determined refunds, subject to the
caveat envisaged u/s 241A.

 

ii)   The language of section 241A envisages that
the provision is not resorted to merely for the reason that the case of the
assessee is selected for scrutiny assessment. Sufficient checks and balances
have been built in under the provision and have to be given due consideration
and meaning. An order u/s 241A should be transparent and reflect due
application of mind. The A.O. is duty-bound to process the refunds where they
are determined. He cannot deny the refund in every case where a notice has been
issued under sub-section (2) of section 143. The discretion vested with the
A.O. has to be exercised judiciously and is conditioned and channelised. Merely
because a scrutiny notice has been issued that should not weigh with the A.O.
to withhold the refund. The A.O. has to apply his mind judiciously and such
application of mind has to be found in the reasons which are to be recorded in
writing. He must make an objective assessment of all the relevant circumstances
that would fall within the realm of ‘adversely affecting the Revenue’. The
power of the A.O. has been outlined and defined in terms of section 241A and he
must proceed giving due regard to the fact that the refund has been determined.

 

iii)  The fact that notice u/s 143(2) has been
issued would obviously be a relevant factor, but that cannot be used to
ritualistically deny refunds. The A.O. is required to apply his mind and
evaluate all the relevant factors before deciding the request for refund of
tax. Such an exercise cannot be treated to be an empty formality and requires
the A.O. to take into consideration all the relevant factors. The relevant
factors, to state a few, would be the prima facie view on the grounds
for the issuance of notice u/s 143(2), the amount of tax liability that the
scrutiny assessment may eventually result in vis-a-vis the amount of tax refund
due to the assessee, the creditworthiness or financial standing of the assessee,
and all factors which address the concern of recovery of revenue in doubtful
cases. Therefore, merely because a notice has been issued u/s 143(2), it is not
a sufficient ground to withhold refund u/s 241A and the order denying refund on
this ground alone would be laconic. Additionally, the reasons which are to be
recorded in writing have to also be approved by the Principal Commissioner, or
Commissioner, as the case may be, and this should be done objectively.

 

iv)  The reasons relied upon by the Revenue to
justify the withholding of refund were lacking in reasoning. Except for
reproducing the wording of section 241A of the Act, they did not state anything
more. The order withholding the refund was not valid.’

 

Reassessment – Sections 147 and 148 of ITA, 1961 – Validity of notice u/s 148 – Conditions precedent for notice – Amount assessed in block assessment – Addition of amount deleted by Commissioner (Appeals) – Notice to reassess same amount not valid

45. Audhut Timblo vs.
ACIT; [2020] 420 ITR 62 (Bom.) Date of order: 27th
November, 2019 A.Ys.: 2002-03

 

Reassessment
– Sections 147 and 148 of ITA, 1961 – Validity of notice u/s 148 – Conditions
precedent for notice – Amount assessed in block assessment – Addition of amount
deleted by Commissioner (Appeals) – Notice to reassess same amount not valid

 

Pursuant to a search
action u/s 132 of the Income-tax Act, 1961, block assessment order u/s 158BC
was passed by the A.O. on 27th September, 2002 making an addition of
Rs. 10.33 crores as unexplained cash credits. The Commissioner (Appeals), by an
order dated 13th July, 2006, deleted the addition of Rs. 10.33
crores. On 13th September, 2006, the Department appealed against the
order of the Commissioner to the Appellate Tribunal. On 18th
October, 2006, the Department issued notice invoking the provisions of section
147 / 148 of the Act stating that this very income of Rs. 10.33 crores had
escaped assessment and therefore reassessment or reopening of assessment was
proposed for the A.Y. 2002-03.

 

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

‘i)   The A.O. can reopen an assessment only in
accordance with the express provisions in section 147 / 148 of the Income-tax
Act, 1961. Section 147 clothes the A.O. with jurisdiction to reopen an
assessment on satisfaction of the following: (a) the A.O. must have reason to
believe that (b) income chargeable to tax has escaped assessment and (c) in
cases where the assessment sought to be reopened is beyond the period of four
years from the end of the relevant assessment year, then an additional
condition is to be satisfied, viz., there must be failure on the part of the
assessee to fully and truly disclose all material facts necessary for assessment.

 

ii)   Since there was full disclosure and, in fact,
the amount had even become the subject matter of the assessment both u/s 158BC
and u/s 143(3), there could have been no reason to believe that the income
chargeable to tax had indeed escaped assessment. The notice of reassessment was
not valid.’

Penalty – Concealment of income – Search and seizure – Immunity from penalty – Effect of section 271AAA of ITA, 1961 – Assessee admitting undisclosed income during search proceedings and explaining source – No inquiry regarding manner in which income was earned – Immunity cannot be denied because of absence of such explanation

44. Principal CIT vs. Patdi Commercial and Investment Ltd.; [2020] 420 ITR 308 (Guj.) Date of order: 17th September, 2019 A.Y.: 2011-12

 

Penalty – Concealment
of income – Search and seizure – Immunity from penalty – Effect of section
271AAA of ITA, 1961 – Assessee admitting undisclosed income during search
proceedings and explaining source – No inquiry regarding manner in which income
was earned – Immunity cannot be denied because of absence of such explanation

 

The Tribunal deleted the penalty u/s
271AAA of the Income-tax Act, 1961. On appeal by the Revenue, the Gujarat High
Court upheld the decision of the Tribunal and held as under:

 

‘i)   Section 271AAA of the Income-tax Act, 1961
provides for penalty in cases of search. Sub-section (2) specifies that such
penalty will not be imposed if the following three conditions are satisfied:
(i) in the course of the search, in a statement under sub-section (4) of
section 132, the assessee admits the undisclosed income and specifies the
manner in which such income has been derived; (ii) the assessee substantiates
the manner in which the undisclosed income was derived; and (iii) pays the tax
together with interest, if any, in respect of the undisclosed income. In
accordance with the settled legal position, where the Revenue has failed to
question the assessee while recording the statement u/s 132(4) of the Act as
regards the manner of deriving such income, it cannot raise a presumption
regarding it.

 

ii)   Both the Commissioner (Appeals) as well as
the Tribunal had recorded concurrent findings of fact that during the course of
search the director of the assessee company had admitted undisclosed income of
Rs. 15 crores as unaccounted cash receivable for the year under consideration,
i.e., F.Y. 2010-11. The director of the assessee in his statement had explained
that the income was earned out of booking / selling shops and had specified the
buildings. Thereafter, the assessee could not be blamed for not substantiating
the manner in which the disclosed income was derived. The cancellation of
penalty by the Tribunal was justified.’

 

 

Capital gains – Unexplained investment – Sections 50C and 69 of ITA, 1961 – Sale of immovable property – Difference between stamp value and value shown in sale deed – Effect of section 50C – Presumption that stamp value is real one – Section 50C enacts a legal fiction – Section 50C cannot be applied to make addition u/s 69

43. Gayatri
Enterprises vs. ITO; [2020] 420 ITR 15
(Guj.) Date of order: 20th
August, 2019 A.Y.: 2011-12

 

Capital gains – Unexplained
investment – Sections 50C and 69 of ITA, 1961 – Sale of immovable property –
Difference between stamp value and value shown in sale deed – Effect of section
50C – Presumption that stamp value is real one – Section 50C enacts a legal
fiction – Section 50C cannot be applied to make addition u/s 69

 

The assessee purchased a piece of land.
He disclosed the transaction in his returns for the A.Y. 2011-12. This was
accepted by the A.O. Subsequently, the order was set aside in revision and an
addition was made to his income u/s 69 of the Income-tax Act, 1961 on the
ground that there was a difference between the value of the land shown in the
sale deed and the stamp duty value. The order of revision was upheld by the
Tribunal.

 

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

 

‘i)   Section 50C was introduced in the Income-tax
Act, 1961 by the Finance Act, 2002 with effect from 1st April, 2003
for substituting the valuation done for the stamp valuation purposes as the
full value of the consideration in place of the consideration shown by the
transferor of the capital asset, being land or building, and, accordingly,
calculating the capital gains u/s 48. Under section 50C when the stamp duty
valuation of a property is higher than the apparent sale consideration shown in
the instrument of transfer, the onus to prove that the fair market value of the
property is lower than such valuation by the stamp valuation authority is on
the assessee who can reasonably discharge this onus by submitting necessary
material before the A.O., such as valuation by an approved valuer. Thereafter,
the onus shifts to the A.O. to show that the material submitted by the assessee
about the fair market value of the property is false or not reliable. Section
50C enacts a legal fiction which is confined to what is stated in the
provision. The provisions of section 50C cannot be applied for the purpose of
making an addition u/s 69.

ii)   Section 50C will apply to the seller of the
property and not to the purchaser. Section 69B does not permit an inference to
be drawn from the circumstances surrounding a transaction of sale of property
that the purchaser of the property must have paid more than what was actually
recorded in his books of accounts for the simple reason that such an inference
could be very subjective and could involve the dangerous consequence of a
notional or fictional income being brought to tax contrary to the strict
provisions of Article 265 of the Constitution of India which must be
“taxes on income other than agricultural income”.

 

iii)  There was nothing on record to indicate what
the price of the land was at the relevant time. Even otherwise, it was a pure
question of fact. Apart from the fact that the price of the land was different
from that recited in the sale deed unless it was established on record by the
Department that, as a matter of fact, the consideration as alleged by the
Department did pass to the seller from the purchaser, it could not be said that
the Department had any right to make any additions. The addition was
not justified.’

 

 

Business expenditure – Disallowance u/s 40(a)(ia) of ITA, 1961 – Payments liable to deduction of tax at source – Charges paid by assessee to banks for providing credit card processing services – Bank not rendering services in nature of agency – Charges paid to bank not in nature of commission within meaning of section 194H – Disallowance u/s 40(a)(ia) not warranted

42. Principal CIT vs.
Hotel Leela Venture Ltd.; [2020] 420 ITR 385
(Bom.) Date of order: 18th
December, 2018 A.Y.: 2009-10

 

Business expenditure
– Disallowance u/s 40(a)(ia) of ITA, 1961 – Payments liable to deduction of tax
at source – Charges paid by assessee to banks for providing credit card
processing services – Bank not rendering services in nature of agency – Charges
paid to bank not in nature of commission within meaning of section 194H –
Disallowance u/s 40(a)(ia) not warranted

 

The assessee was in the hospitality
business. For the A.Y. 2009-10, the A.O. found that the assessee had not
deducted tax u/s 194H of the Income-tax Act, 1961 on payments made by it to
banks for processing of credit card transactions and disallowed the
corresponding expenditure u/s 40(a)(ia).

 

The Commissioner (Appeals) deleted the
disallowance and the Tribunal upheld his order.

 

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

 

‘i)   The Tribunal had not committed any error in holding
that the bank did not act as an agent of the assessee while it processed the
credit card payments and, therefore, the charges collected by the bank for such
services did not amount to commission within the meaning of section 194H. The
Tribunal was justified in upholding the deletion of disallowance made u/s
40(a)(ia) by the Commissioner (Appeals).

 

ii)   No question of law arose.’

 

 

Assessment – Notice u/s 143(2) of ITA, 1961 – Limitation – Date of filing of original return u/s 139(1) has to be considered for purpose of computing period of limitation under sub-section (2) of section 143 and not date on which defects actually came to be removed u/s 139(9)

 41. Kunal Structure
(India) (P) Ltd. vs. Dy. CIT; [2020] 113
taxmann.com 577 (Guj.) Date of order: 24th
October, 2019

 

Assessment – Notice
u/s 143(2) of ITA, 1961 – Limitation – Date of filing of original return u/s
139(1) has to be considered for purpose of computing period of limitation under
sub-section (2) of section 143 and not date on which defects actually came to
be removed u/s 139(9)

 

The petitioner is a company registered
under the Companies Act, 2013. For the A.Y. 2016-17, the petitioner had filed
its return of income u/s 139(1) of the Income-tax Act, 1961 on 10th
September, 2016. Thereafter, the petitioner received an intimation of defective
return u/s 139(9) on 17th June, 2017. The petitioner received a
reminder on 5th July, 2017 granting him an extension of 15 days to
comply with the notice issued u/s 139(9) of the Act and accordingly, the time
limit for removal of the defects u/s 139(9) of the Act stood extended till 20th
July, 2017. The petitioner removed the defects on 7th July, 2017
within the time granted. Subsequently, the return was processed under
sub-section (1) of section 143 of the Act on 12th August, 2017,
wherein the date of original return is shown to be 10th September,
2016. Thereafter, the impugned notice u/s 143(2) of the Act came to be issued
on 9th August, 2018, informing the petitioner that the return of
income filed by it for A.Y. 2016-17 on 7th July, 2017 has been
selected for scrutiny calling upon the petitioner to produce any evidence on
which it may rely in support of its return of income.

 

The petitioner filed a writ petition
under Articles 226 and 227 of the Constitution of India and challenged the
notice u/s 143(2) dated 9th August, 2018 and the proceedings
initiated pursuant thereto. The Gujarat High Court allowed the writ petition
and held as under:

 

‘i)   On a plain reading of sub-section (2) of
section 143 of the Act, it is apparent that the notice u/s 143(2) must be
served on the assessee within a period of six months from the end of the
financial year in which such return is furnished. Thus, if, after furnishing a
return of income, the assessee does not receive a notice under sub-section (2)
of section 143 of the Act within the period referred to in the sub-section, the
assessee is entitled to presume that the return has become final and no
scrutiny proceedings are to be started in respect of that return. It is only
after the issuance of notice under sub-section (2) of section 143 of the Act
that the A.O. can proceed further under sub-section (3) thereof to make an
assessment order. Therefore, the notice u/s 143(2) of the Act is a statutory
notice, upon issuance of which the A.O. assumes jurisdiction to frame the
scrutiny assessment under sub-section (3) of section 143 of the Act.
Consequently, if such notice is not issued within the period specified in
sub-section (2) of section 143 of the Act, viz., before the expiry of six months
from the end of the financial year in which the return is furnished, it is not
permissible for the A.O. to proceed further with the assessment.

 

ii)   In the facts of the present case, the
petitioner filed its return of income under sub-section (1) of section 139 of
the Act on 10th September, 2016. Since the return was defective, the
petitioner was called upon to remove such defects, which came to be removed on
7th July, 2017, that is, within the time allowed by the A.O.
Therefore, upon such defects being removed, the return would relate back to the
date of filing of the original return, that is, 10th September, 2016
and consequently the limitation for issuance of notice under sub-section (2) of
section 143 of the Act would be 30th September, 2017, viz., six
months from the end of the financial year in which the return under sub-section
(1) of section 139 came to be filed. In the present case, it is an admitted
position that the impugned notice under sub-section (2) of section 143 of the
Act has been issued on 9th August, 2018, which is much beyond the
period of limitation for issuance of such notice as envisaged under that
sub-section. The impugned notice, therefore, is clearly barred by limitation
and cannot be sustained.

 

iii)  For the foregoing reasons, the petition
succeeds and is, accordingly, allowed. The impugned notice dated 9th August,
2018 issued under sub-section (2) of section 143 of the Act and all proceedings
taken pursuant thereto are hereby quashed and set aside.’

 

Appellate Tribunal – Powers of (scope of order) – Section 254 r/w/s/ 144 of ITA, 1961 – Where remand made by Tribunal to A.O. was a complete and wholesale remand for framing a fresh assessment, A.O. could not deny to evaluate fresh claim raised by assessee during remand assessment proceedings

40. Curewel
(India) Ltd. vs. ITO; [2020] 113
taxmann.com 583 (Delhi) Date of order:
28th November, 2019 A.Y.: 2002-03

 

Appellate Tribunal – Powers of (scope of order) – Section 254 r/w/s/ 144
of ITA, 1961 – Where remand made by Tribunal to A.O. was a complete and
wholesale remand for framing a fresh assessment, A.O. could not deny to
evaluate fresh claim raised by assessee during remand assessment proceedings

 

For the A.Y.
2002-03, the A.O. passed best judgment assessment u/s 144 of the Income-tax
Act, 1961 without examining the books of accounts of the assessee. The Tribunal
set aside the said assessment and remanded the matter to the A.O. to pass a
fresh order after considering the documents and submissions of the assessee.
During remand assessment, the assessee raised a fresh claim regarding
non-taxability of income arising from write-off of liability by Canara Bank
which was earlier offered as taxable income. The A.O. rejected the said claim
holding that in remand proceedings the assessee could not raise a fresh claim.

 

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

 

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

 

‘i)   The remand made by the
Tribunal to the A.O. vide order dated 10th March, 2011 was a
complete and wholesale remand for framing a fresh assessment. The remand was
not limited in its scope and was occasioned upon the Tribunal finding the
approach of the A.O. and the CIT(A) to be excessive, harsh and arbitrary. The
earlier assessment had been framed on the basis of best judgment without
examining the books of accounts of the assessee, which the assessee has claimed
were available.

ii)   That being the position, the
A.O. ought to have evaluated the claim made by the assessee for write-off of
liability by Canara Bank in its favour amounting to Rs. 1,36,45,525 and should
not have rejected the same merely on the ground of it being raised for the
first time. The reliance placed by the Tribunal on Saheli Synthetics (P)
Ltd. (Supra) is misplaced in the light of the scope and nature of
remand in the present case. The findings returned by the Tribunal in paragraphs
8, 9 and 12 of the impugned order are erroneous since the Tribunal has not
appreciated the scope and nature of the remand ordered by it by its earlier
order dated 10th March, 2011.

 

iii)  We, therefore, answer the
questions framed aforesaid in favour of the assessee and set aside the impugned
order. Since the A.O. has not evaluated the appellant’s claim regarding
non-taxability of income arising from write-off of liability by Canara Bank in
its favour amounting to Rs. 1,36,45,525 on merits, we remand the matter back to
the A.O. for evaluation of the said claim on its own merits.’

Rakesh Kumar Agarwal vs. ACIT-24(1); [ITA. No. 2881/Mum/2015; Date of order: 14th May, 2015; A.Y.: 2010-11; Mum. ITAT] Section 263 – Revision of orders prejudicial to Revenue – No revenue loss – Assessment was completed after detailed inquiry – Revision on same issue is not valid

17. The Pr. CIT-10 vs. Rakesh Kumar
Agarwal [Income tax Appeal No. 1740 of 2017] Date of order: 22nd January
2020 (Bombay High Court)

 

Rakesh Kumar Agarwal vs. ACIT-24(1);
[ITA. No. 2881/Mum/2015; Date of order: 14th May, 2015; A.Y.:
2010-11; Mum. ITAT]

 

Section 263 – Revision of orders
prejudicial to Revenue – No revenue loss – Assessment was completed after
detailed inquiry – Revision on same issue is not valid

 

The assessee is a builder and sells
plots of land on short-term as well as on long-term basis. For the A.Y. under
consideration, the assessee filed a return of income showing total income of
Rs. 7,47,25,768. During the assessment proceedings u/s 143 (3) of the Act, the
A.O. inquired into the accounts of the assessee and analysed the various claims
that had been made. The assessment proceedings were concluded by determining
the total assessed income of the assessee at Rs. 7,66,68,582.

 

However, the CIT invoked jurisdiction
u/s 263 of the Act on various discrepancies in the assessment order. Taking the
view that the order was erroneous inasmuch as it was prejudicial to the
interest of Revenue, the Commissioner of Income Tax set aside the assessment
order u/s 263 of the Act and directed the A.O. to pass a fresh order in the
light of the discussions made in the order passed u/s 263.

 

Aggrieved by this, the assessee
preferred an appeal before the Tribunal. The Tribunal took the view that the
CIT was not justified in invoking jurisdiction u/s 263 of the Act and set aside
the said order, allowing the appeal. Of the three issues, the Tribunal held
that the first issue did not result in any revenue loss and, therefore,
assumption of jurisdiction u/s 263 of the Act was not justified.

 

On the second issue relating to
non-disclosure of unaccounted cash of Rs. 6,85,000, the Tribunal held that the
said amount was already disclosed in the return of income filed by the
assessee. The said sum of Rs. 6.85 lakhs is part of the gross total amount of
Rs. 7,83,17,777. At the end of the assessment, the said amount was taxed by the
A.O. under the head ‘income from other sources’. Therefore, the Tribunal stated
that the Commissioner of Income Tax was not justified in treating the said
amount as part of undisclosed income and assuming jurisdiction u/s 263 when it
was already disclosed and assessed.

 

On the third issue, as regards
applicability of section 45(2), the Tribunal noticed that the CIT had accepted
applicability of the said provision and, therefore, it was held that there is
no error in the order of the A.O.

 

The Tribunal further held that an
inquiry was made by the A.O. into the disclosures made during the course of the
assessment proceedings by the assessee. When the issue was inquired into by the
A.O., the Commissioner ought not to have invoked jurisdiction u/s 263 of the
Act.

 

Being aggrieved by the order of the
ITAT, the Revenue filed an appeal to the High Court. The Court held that on a
thorough consideration of the matter and considering the provisions of section
263 of the Act, the impugned order passed by the Tribunal does not suffer from
any error or infirmity to warrant interference. The Department’s appeal was
dismissed.

 



Principal Officer (condition precedent) – Section 2(35) of ITA, 1961 – Where neither service of notice nor hearing of petitioner before treating petitioner as a Principal Officer was involved, and connection of petitioner with management and administration of company was also not established, A.O. could not have named petitioner as Principal Officer

13. A. Harish Bhat vs. ACIT (TDS)

[2019] 111 taxmann.com 210 (Karn.)

Date of order: 17th October, 2019

F.Ys.: 2009-10 to 2012-13

 

Principal Officer (condition
precedent) – Section 2(35) of ITA, 1961 – Where neither service of notice nor
hearing of petitioner before treating petitioner as a Principal Officer was
involved, and connection of petitioner with management and administration of
company was also not established, A.O. could not have named petitioner as
Principal Officer

 

The petitioner was treated as a
Principal Officer of the company Kingfisher Airlines for the F.Ys. 2009-10 to
2012-13 u/s 2(35) of the Income-tax Act, 1961. The petitioner filed a writ
petition and challenged the order.

 

He contended
that to come within the ambit of key management personnel, the petitioner had
to be either Managing Director or the Chief Executive Officer, whole-time
director / company secretary / chief financial officer / or in any way be
connected with the management or administration of the company. The Revenue, on
the other hand, justifying the said order, submitted that the petitioner was
the treasurer of the U.B. Group of Companies during the relevant financial
years and hence he was treated as Principal Officer. Further, neither a
personal hearing nor an order was necessary to treat the person as a Principal
Officer. It was sufficient if a notice of the intention of the A.O. of treating
any person as Principal Officer was issued. The petitioner assailed the order
of the Commissioner on the ground that the objections submitted by the
petitioner to the notice had not been duly considered and hence sought to set
aside the said order.

 

The Karnataka High Court allowed
the writ petition and held as under:

‘i) The impugned order deserves to be set aside for the reason that a
Principal Officer, as contemplated u/s 2(35), used with reference to a local
authority or a company or any other public body or any association of persons
or any body of individuals, means the secretary, treasurer, manager or agent of
the authority, company, association or body, or any person connected with the
management or administration of the local authority, company, association or
body upon whom the A.O. has served a notice of his intention of treating him as
the Principal Officer thereof.

 

ii) It is clear that to treat any person as a Principal Officer, such
person should be connected with the management or administration of the local
authority / company or association or body. Such connection with the management
or administration is the basis for treating any person as a Principal Officer.
Such connection has to be established or to be supported with substantial
material to decide the connection of any person with the management or
administration. Without disclosing the basis, no person can be treated as a
“Principal Officer” of the company recognising him as the Key Management Personnel
of the company. The details of such information on the basis of which the Key
Management Personnel tag is made, have to be explicitly expressed in the notice
of the intention of treating any person as a Principal Officer by the A.O.
Neither in the show cause notice nor in the order impugned was such a
connection of the petitioner with the management or administration of the
company Kingfisher Airlines Limited established. The phrase “Key Management
Personnel” of the company has a wide connotation and the same has to be
supported with certain material; unless such connection is established, no
notice served on the petitioner would empower the respondent authority to treat
the petitioner as a “Principal Officer”.

 

iii) In the instant case, the question inasmuch as
(sic) neither service of notice nor hearing of the petitioner before
treating the petitioner as a Principal Officer is involved. The fulcrum of
dispute revolves around the aspect whether the petitioner is the person
connected with the management or administration of the company. Such finding
has to be supported by substantial material and has to be reflected in the
notice issued u/s 2(35) to treat a person as a Principal Officer of the company
which will have wider consequences. The said aspect is lacking in the present
order impugned. Merely on surmises and conjectures, no person shall be treated
as a Principal Officer.

 

iv) The writ petition is to be allowed. The
impugned order is to be quashed.’

Section 45 – Amount received by assessee in its capacity as a partner of a firm from the other partners on account of reduction in profit-sharing ratio of the assessee, is a capital receipt not chargeable to tax

9. [2019] 116 taxmann.com 385 (Mum.) Anik Industries Ltd. vs. DCIT ITA No. 7189/Mum/2014 A.Y.: 2010-11 Date of order: 19th March, 2020

 

Section 45 – Amount received by assessee in
its capacity as a partner of a firm from the other partners on account of
reduction in profit-sharing ratio of the assessee, is a capital receipt not
chargeable to tax

 

FACTS

The assessee was a partner in a partnership firm, namely
M/s Mahakosh Property Developers (the ‘firm’). The assessee was entitled to a
30% share in the profits of the firm. During the year, the assessee received a
sum of Rs. 400 lakhs on account of surrender of 5% share of profit (from 30% to
25%.) This sum was not included in the computation of total income on the
ground that the firm was reconstituted and a right was created in favour of the
existing partners. The existing partners whose share was increased, paid
compensation of Rs. 400 lakhs to the assessee.

The assessee relied
upon the decision of the Hon’ble Madras High Court in A.K. Sharfuddin vs.
CIT (1960 39 ITR 333) for the proposition that compensation received by
a partner from another partner for relinquishing rights in the partnership firm
would be capital receipt and there would be no transfer of asset within the
meaning of section 45(4) of the Act. Reliance was placed on other decisions
also to submit that the provisions of sections 28(iv) and 41(2) shall have no application
to such receipts.

 

The A.O. held that
the said payment was nothing but consideration for intangible asset, i.e., the
loss of share of partner in the goodwill of the firm. Therefore, this amount
was to be charged as capital gains in terms of the decision of the Ahmedabad
Tribunal in Samir Suryakant Sheth vs. ACIT (ITA No. 2919 &
3092/Ahd/2002) and the decision of the Mumbai Tribunal in Shri
Sudhakar Shetty (2011 130 ITD 197). Finally, the said amount was
brought to tax as capital gains u/s 45(1).

 

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

 

Aggrieved, the
assessee preferred an appeal to the Tribunal,

 

HELD

The Tribunal
observed that the only issue that fell for its consideration was whether or not
the compensation received by an existing partner from other partners for
reduction in profit-sharing ratio would be chargeable to tax as capital gains
u/s 45(1).

 

As per the
provisions of section 45(1), any profits or gains arising from the transfer of
a capital asset effected in the previous year shall be chargeable to capital
gains tax. The Tribunal noted that the answer to the aforesaid question lies in
the decision of the Hon’ble Karnataka High Court in CIT vs. P.N.
Panjawani (356 ITR 676) wherein this question was elaborately examined
in the light of various judicial precedents.

 

The Tribunal noted
that the decision of the Karnataka High Court in P.N. Panjawani (Supra) also
takes note of the fact that the firm is not recognised as a legal entity but
the Income-tax Act recognises the firm as a distinct legally assessable entity
apart from its partners. A clear distinction has been made between the income
of the firm and the income of the partner. It is further noted that there is no
provision for levying capital gains on consideration received by the partner
for reduction in the share in the partnership firm. Upon perusal of paragraph
22 of the decision, it is quite discernible that the factual matrix is
identical in the present case. The aforesaid decision has been rendered after
considering the various case laws on the subject as rendered by the Hon’ble
Apex Court. The Tribunal found the decision to be applicable to the given
factual matrix.

 

The Tribunal held
that the compensation received by the assessee from the existing partners for
reduction in the profit-sharing ratio would not tantamount to capital gains
chargeable to tax u/s 45(1). It deleted the addition made and allowed the
appeal filed by the assessee.

PROSECUTION UNDER THE INCOME TAX ACT, 1961 – LIABILITY OF DIRECTORS

INTRODUCTION

It has been
observed of late that the Income Tax Department has become very aggressive in
initiating prosecution proceedings against assessees for various offences under
the Income-tax Act, 1961. As per a CBDT press release dated 12th
January, 2018, during F.Y. 2017-18 (up to end-November, 2017) prosecution
complaints increased by 184%, complaints compounded registered a rise of 83%
and convictions marked an increase of 269% compared to the corresponding period
of the previous year. Even the Courts have adopted a proactive approach. In Ramprakash
Biswanath Shroff vs. CIT(TDS) [2018] 259 Taxmann 385 (Bom)(HC), where
the assessee filed a petition contending that Form No. 16 had not been issued
by his employer in time, the Court suggested the Income Tax Department also
invoke section 405 of the Indian Penal Code, 1860 which is a non-cognisable offence.

      

When the offence is
committed by a company, an artificial juridical person, it is observed that
prosecution is launched against all the directors, including independent
directors, in a mechanical manner. As per section 2(47) r/w/s 149 of the
Companies Act, 2013, independent director means a director other than a
Managing Director, or a whole-time director, or a nominee director. Thus, an
independent director is not responsible for the day-to-day affairs of the
company.

 

Recently, the Court
of Sessions at Greater Mumbai, in the case of Eckhard Garbers vs. Shri
Shubham Agrawal, Criminal Revision application No. 267 of 2019 dated
16th December, 2019, quashed prosecution proceedings
launched against Mr. Eckhard Garbers, an independent director and a foreign
national. This decision has received wide publicity in view of several
prosecution proceedings launched against directors who had no role in the
day-to-day affairs of the company. This article looks at the said decision in
addition to analysing section 278B which deals with prosecution against a
person/s in charge of or responsible for the conduct of the business of a
company.

The provisions
regarding the liability of the directors and other persons for offences
committed by the company are enumerated under various Acts such as Industries
(Development and Regulation) Act; Foreign Exchange Regulation Act; MRTP Act;
Securities Contracts (Regulations) Act; Essential Commodities Act; Employees’
Provident Funds and Miscellaneous Provisions Act; Workmen’s Compensation Act;
Payment of Bonus Act; Payment of Wages Act; Environment (Protection) Act; Water
(Prevention and Control of Pollution) Act; Minimum Wages Act; Payment of
Gratuity Act; Apprentices Act; Central Excise and Salt Act; Customs Act, 1961;
Negotiable Instruments Act; etc. The provisions of these Acts are somewhat
identical in nature. Even section 137 of the CGST Act is identical to the
provisions of section 278B of the Income-tax Act, 1961. Hence, when the
provisions qua the directors’ liability are considered under the
Income-tax Act, 1961, or the GST Act, it is also pertinent to note the law as
laid down under other Acts by the Courts.

 

SCHEME
OF THE INCOME TAX ACT, 1961

 

PROVISIONS OF
SECTION 278B

As per sub-section
(1) of section 278B, where an offence under this Act has been committed by a
company, every person who, at the time the offence was committed, was in charge
of, and was responsible to, the company for the conduct of the business of the
company as well as the company shall be deemed to be guilty of the offence and
shall be liable to be proceeded against and punished accordingly. The proviso
to sub-section (1) provides that nothing contained in this sub-section shall
render any such person liable to any punishment if he proves that the offence
was committed without his knowledge or that he had exercised all due diligence
to prevent the commission of such offence.

 

Sub-section (2)
provides that notwithstanding anything contained in sub-section (1), where an
offence under this Act has been committed by a company and it is proved that
the offence has been committed with the consent or connivance of, or is
attributable to any neglect on the part of, any director, manager, secretary or
other officer of the company, such director, manager, secretary or other
officer shall also be deemed to be guilty of that offence and shall be liable
to be proceeded against and punished accordingly.

 

As per sub-section
(3) where an offence under this Act has been committed by a person, being a
company, and the punishment for such offence is imprisonment and fine, then,
without prejudice to the provisions contained in sub-section (1) or sub-section
(2), such company shall be punished with fine and every person referred to in
sub-section (1), or the director, manager, secretary or other officer of the
company referred to in sub-section (2), shall be liable to be proceeded against
and punished in accordance with the provisions of this Act. The Explanation to
section 278B provides that for the purposes of section 278B, (a) ‘company’
means a body corporate and includes (i) a firm; and (ii) an association of
persons or a body of individuals whether incorporated or not; and (b)
‘director’, in relation to (i) a firm means a partner in the firm; (ii) any
association of persons or body of individuals, means any member controlling the
affairs thereof.

 

LEGISLATIVE
HISTORY AND ANALYSIS OF THE SECTION

Section 278B was
inserted by the Taxation Laws (Amendment) Act, 1975 reported in [1975]
100 ITR 33 (ST) w.e.f. 1st October, 1975. The object and
scope of this section was explained by the Board in its Circular No. 179 dated
30th September, 1975 reported in [1976] 102 ITR 26 (ST).

 

Under sub-section
(1) the essential ingredient for implicating a person is his being ‘in charge
of’ and ‘responsible to’ the company for the conduct of the business of the
company. The term responsible is defined in the Blacks Law dictionary to mean
accountable. Hence, the initial burden is on the prosecution to prove that the
accused person/s at the time when the offence was committed were ‘in charge of’
and ‘was responsible’ to the company for its business, and only when the same
is proved that the accused persons are required to prove that the offence was
committed without their knowledge, or that they had exercised all due diligence
to prevent the commission of such offence.

 

Both the
ingredients ‘in charge of’ and ‘was responsible to’ have to be satisfied as the
word used is ‘and’ [Subramanyam vs. ITO (1993) 199 ITR 723 (Mad)(HC)]. Under
sub-section (2) emphasis is on the holding of an offence and consent,
connivance or negligence of such officer irrespective of his being or not being
actually in charge of and responsible to the company in the conduct of the
business. Apart from this, while all the persons under sub-section (1) and
sub-section (2) are liable to be proceeded against, it is only persons covered
under sub-section (1) who, by virtue of the proviso, escape punishment
if they prove that the offence was committed without their knowledge or despite
their due diligence. From the language of both the sub-sections it is also
clear that the complaint must allege that the accused persons were responsible
to the firm / company for the conduct of its business at the time of the
alleged commission of the offence to sustain their prosecution. [Jai
Gopal Mehra vs. ITO (1986) 161 ITR 453 (P&H)(HC)].

 

Insertion of
sub-section (3) by the Finance (No. 2) Act, 2004 w.e.f. 1st October,
2004 [2006] 269 ITR 101 (ST) was explained by Circular No. 5
dated 15th July, 2005 reported in [2005] 276 ITR 151 (ST).
The said amendment was brought to resolve a judicial controversy as to whether
a company, being a juristic person, can be punished with imprisonment where the
statute refers to punishment of imprisonment and fine. The Apex Court in Javali
(M.V.) vs. Mahajan Borewell and Co. (1998) 230 ITR 1(SC) held that a
company which cannot be punished with imprisonment can be punished with fine
only. However, in a subsequent majority decision in the case of ACIT vs.
Veliappa Textiles Ltd. (2003) 263 ITR 550 (SC) it was held that where
punishment is by way of imprisonment, then prosecution against the company
would fail. In order to plug loopholes pointed out by the Apex Court in Veliappa
Textiles (Supra), sub-section (3) was introduced whereby the company
would be punished with fine and the person/s in charge of or conniving officers
of the company would be punished with imprisonment and fine. It is also to be
noted that the legal position laid down in the case of Veliappa Textiles
(Supra) was overruled by the Apex Court decision rendered in Standard
Chartered Bank vs. Directorate of Enforcement (2005) 275 ITR 81 (SC).

 

NATURE
OF LIABILITY

The principal
liability u/s 278B is that of the company. The other persons mentioned in
sub-section (1) and sub-section (2) are vicariously liable, i.e., they could be
held liable only if it is proved that the company is guilty of the offence
alleged.

 

The Apex Court in Sheoratan
Agarwal vs. State of Madhya Pradesh AIR 1984 SC 1824 while dealing with
the provisions of section 10 of the Essential Commodities Act which are similar
to section 278B, has held that the company alone may be prosecuted. The
person-in-charge only may be prosecuted. The conniving officer may individually
be prosecuted.

 

The Apex Court in Anil
Hada vs. Indian Acrylic Ltd. A.I.R. 2000 SC 145 while dealing with
section 141 of the Negotiable Instruments Act, held that where the company is
not prosecuted but only persons in charge or conniving officers are prosecuted,
then such prosecution is valid provided the prosecution proves that the company
was guilty of the offence.

 

The Supreme Court
in Aneeta Hada vs. Godfather Travels and Tours Private Limited (2012) 5
SCC 661 held that the director or any other officer of the company
cannot be prosecuted without impleadment of the company unless there is some legal
impediment and the doctrine of lex non cogit ad impossibilia (the law
does not compel a man to do that which is impossible) gets attracted.

 

STRICT
CONSTRUCTION

The Supreme Court in the case of Girdharilal Gupta vs. D.N. Mehta,
AIR 1971 SC 2162 has held that since the provision makes a person who
was in charge of and responsible to the company for the conduct of its business vicariously liable for an offence committed by the company, the
provision should be strictly construed.

 

MENS REA

Section 278B is a
deeming provision and hence it does not require the prosecution to establish mens
rea on the part of the accused. In B. Mohan Krishna vs. UOI 1996
Cri.L.J. 638 AP it is held that exclusion of mens rea as a
necessary ingredient of an offence is not violative of Article 14 of the
Constitution.

 

DIRECTORS
WHO ARE SIGNATORY TO AUDITED BALANCE SHEET

In Mrs.
Sujatha Venkateshwaran vs. ACIT [2018] 96 taxmann.com 203 (Mad)(HC) it
was held as under: ‘Since assessee had subscribed her signature in profit and
loss account and balance sheet for relevant assessment year which were filed
along with returns, the Assessing Officer was justified in naming her as
principal officer and accordingly she could not be exonerated for offence under
section 277.’

IMPORTANT
JUDICIAL PRECEDENTS

In the case of Girdhari Lal Gupta (Supra),
the Supreme Court construed the expression, ‘person in charge and responsible
for the conduct of the business of the company’ as meaning the person in
overall control of the day-to-day business of the company. In arriving at this
inference, the Supreme Court took into consideration the wordings pertaining to
sub-section (2) and observed:

 

‘It mentions
director, who may be a party to the policy being followed by a company and yet
not be in charge of the business of the company. Further, it mentions manager,
who usually is in charge of the business but not in overall charge. Similarly,
the other officers may be in charge of only some part of business’.

 

The Apex Court in State
of Karnataka vs. Pratap Chand & Ors. (1981) 2 SCC 335 has, while
dealing with prosecution of partners of a firm, held that ‘person in charge’
would mean a person in overall control of day-to-day business. A person who is
not in overall control of such business cannot be held liable and convicted for
the act of the firm.

 

In Monaben
Ketanbhai Shah & Anr. vs. State of Gujarat & Ors. (2004) 7 SCC 15 (SC)
the Apex Court, while dealing with the provisions of sections 138 and 141 of
the Negotiable Instruments Act, 1881, observed that when a complaint is filed
against a firm, it must be alleged in the complaint that the partners were in
active business. Filing of the partnership deed would be of no consequence for
determining this question. Criminal liability can be fastened only on those who
at the time of commission of offence were in charge of and responsible for the
conduct of the business of the firm. The Court proceeded to observe that this
was because of the fact that there may be sleeping partners who were not
required to take any part in the business of the firm, and / or there may be
ladies and others who may not know anything about such business. The primary
responsibility is on the complainant to make necessary averments in the
complaint so as to make the accused vicariously liable. In Krishna Pipe
and Tubes vs. UOI (1998) 99 Taxmann 568 (All) it was held that sleeping
partners cannot be held liable for offence/s.

 

In Jamshedpur
Engineering & Machine Manufacturing Co. Ltd. & Ors. vs. Union of India
& Ors. (1995) 214 ITR 556 (Pat.)(HC), the High Court of Patna
(Ranchi Bench) held that no vicarious liability can be fastened on all
directors of a company. If there are no averments in the complaint that any
director was ‘in charge of’ or ‘responsible for’ the conduct of business,
prosecution against those directors cannot be sustained.

 

Justice Mathur,
while dealing with the liability of non-working directors in R.K.
Khandelwal vs. State [(1965) 2 Cri.L.J. 439 (AH)(HC)], very succinctly
stated as under:

 

‘In companies there can be directors who are not in charge of, and
responsible to the company for the conduct of the business of the company.
There can be directors who merely lay down the policy and are not concerned
with the day-to-day working of the company. Consequently, the mere fact that
the accused person is a director of the company shall not make him criminally
liable for the offences committed by the company unless the other ingredients
are established which make him criminally liable. To put it differently, no
director of a company can be convicted of the offence under section 27 of the
Act [The Drugs Act, 1940] unless it is proved that the sub-standard drug was
sold with his consent or connivance or was attributable to any neglect on his
part, or it is proved that he was a person in charge of and responsible to the
company, for the conduct of the business of the company.’

 

In Kalanithi
Maran vs. UOI [2018] 405 ITR 356 (Mad)(HC), while dealing with the
liability of the Non-Executive Chairman of the Board of Directors of the
company for the offence of non-deposit of TDS, it was held that merely because
the petitioner is the Non-Executive Chairman, it cannot be stated that he is in
charge of the day-to-day affairs, management and administration of the company.

 

The Court held in Chanakya
Bhupen Chakravarti and Ors. vs. Rajeshri Karwa and Ors. (4th
December, 2018) (Del)(HC) Crl. M.C. 3729/2017 that ‘there is some
distinction between being privy to what were the affairs of the company and
being responsible for its day-to-day affairs or conduct of its business.’

 

In Pooja
Ravinder Devidasani vs. State of Maharashtra & Anr. (2014) 16 SCC 1 (SC),
the Supreme Court ruled thus: ‘17. Non-Executive Director is no doubt a
custodian of the governance of the company but is not involved in the
day-to-day affairs of the running of its business and only monitors the
executive activity.’

 

In Mahalderam
Team Estate Pvt. Ltd. vs. D.N. Pradhan [(1979) 49 Comp. Cas. 529 (Cal)(HC)],
it was held that a director of a company may be concerned only with the policy
to be followed and might not have any hand in the management of its day-to-day
affairs. Such person must necessarily be immune from such prosecutions.

 

In the case of Om
Prakash vs. Shree Keshariya Investments Ltd. (1978) 48 Comp. Cas. 85 (Del)(HC),
the Court had held that a distinction has to be made between directors who are
on the board purely by virtue of their technical skill or because they
represented certain special interests, and those who are in effective control
of the management and affairs, and it would be unreasonable to fasten liability
on independent directors for defaults and breaches of the company where such
directors were appointed by virtue of their special skill or expertise but did
not participate in the management. This view has been followed by the Division
Bench of the Bombay High Court in the case of Tri-Sure India Ltd. [(1983)
54 Comp. Cas. 197 (Bom)(HC).

 

In S.M.S.
Pharmaceuticals Ltd. vs. Neeta Bhalla & Anr. [2005] 148 Taxmann 128 (SC)
the Court, while dealing with provisions of section 141 of the Negotiable
Instruments Act which is similar to section 278B, laid down the following
important law relating to the liability of directors:

 

(a)   It is necessary to specifically aver in a
complaint u/s 141 that at the time the offence was committed, the person
accused was in charge of, and responsible for, the conduct of business of the
company. This averment is an essential requirement of section 141 and has to be
made in a complaint. Without this averment being made in a complaint, the
requirements of section 141 cannot be said to be satisfied.

(b)   Merely being a director of a company is not
sufficient to make the person liable u/s 141 of the Act. A director in a
company cannot be deemed to be in charge of and responsible to the company for
the conduct of its business. The requirement of section 141 is that the person
sought to be made liable should be in charge of and responsible for the conduct
of the business of the company at the relevant time. This has to be averred as
a fact as there is no deemed liability of a director in such cases.

(c)   The Managing Director or Joint Managing
Director would be admittedly in charge of the company and responsible to the
company for the conduct of its business. When that is so, holders of such
positions in a company become liable u/s 141 of the Act. By virtue of the
office they hold as Managing Director or Joint Managing Director, these persons
are in charge of and responsible for the conduct of the business of the
company. Therefore, they get covered u/s 141.

In Madhumilan
Syntex Ltd. vs. UOI (2007) 290 ITR 199 (SC) the assessee had deducted
TDS but credited the same to the account of the Central Government after the
expiry of the prescribed time limit, thereby constituting an offence u/s 276B
r/w/s/ 278B. A show-cause notice was issued against the company as well as its
four directors as ‘principal officers’. The accused pleaded the ground of
‘reasonable cause’. However, sanction for prosecution was granted as a
complaint was filed against the appellants on 26th February, 1992 in the Court of the Additional
Chief Judicial Magistrate (Economic Crime), Indore. The accused filed
applications u/s 245 of the Cr.PC, 1973 (the Code) for discharge from the case
contending that they had not committed any offence and the provisions of the
Act had no application to the case. It was alleged that the proceedings
initiated were mala fide. In several other similar cases, no prosecution
was ordered and the action was arbitrary as also discriminatory. Moreover,
there was ‘reasonable cause’ for delay in making payment and the case was
covered by section 278AA of the Act. The directors further stated that they
could not be treated as ‘principal officers’ u/s 2(35) of the Act and it was
not shown that they were ‘in charge’ of and were ‘responsible for’ the conduct
of the business of the company. No material was placed by the complainant as to
how the directors participated in the conduct of the business of the company
and for that reason, too, they should be discharged.

 

However the prayers
of the accused were rejected. Against this rejection a revision petition was
filed, which was also rejected. And against this, a criminal petition was filed
before the High Court, which was also dismissed. Hence, the accused approached
the Supreme Court. The following important points of law were laid down by the
Apex Court:

 

1.    Wherever a company is required to deduct tax
at source and to pay it to the account of the Central Government, failure on
the part of the company in deducting or in paying such amount is an offence
under the Act and has been made punishable;

2.    From the statutory provisions, it is clear
that to hold a person responsible under the Act it must be shown that he / she
is a ‘principal officer’ u/s 2(35) of the Act or is ‘in charge of’ and
‘responsible for’ the business of the company or firm. Where necessary
averments have been made in the complaint, initiation of criminal proceedings,
issuance of summons or framing of charges cannot be held illegal and the Court
would not inquire into or decide the correctness or otherwise of the
allegations levelled or averments made by the complainant. It is a matter of
evidence and an appropriate order can be passed at the trial;

3.    No independent and separate notice that the
directors were to be treated as principal officers under the Act is necessary
and when in the show-cause notice it was stated that the directors were to be
considered as principal officers under the Act and a complaint was filed, such
complaint can be entertained by a Court provided it is otherwise maintainable;

4.   Once a statute requires to pay tax and
stipulates the period within which such payment is to be made, the payment must
be made within that period. If the payment is not made within that period,
there is a default and appropriate action can be taken under the Act;

5.     It is true that the Act provides for
imposition of penalty for non-payment of tax. That, however, does not take away
the power to prosecute the accused persons if an offence has been committed by
them.

 

Though the Apex
Court did not go into the merits of the case and decided the issue in respect
of the maintainability of the criminal complaint, the decision has given a
clear warning to corporates and their principal officers on the need for strict
adherence to time schedules in the matter of payment of taxes, especially Tax
Deducted at Source.

 

Analysis of
recent decision of Court of Sessions at Greater Mumbai in the case of Eckhard
Garbers vs. Shri Shubham Agrawal, criminal revision application No. 267 of 2019
dated 16th December, 2019

 

FACTS
OF THE CASE

The facts of the
case as can be culled out from the order are as under:

(i)    The Income Tax Department had filed criminal
case bearing C.C. No. 231/SW/2018 against the company, its six directors and
Chief Financial Officer on the ground that the company had deducted income tax
by way of TDS from various parties but the said amount was not immediately
credited to the Central Government; subsequently, after a delay of between one
and eleven months, the said amount was credited to the Government; as such,
offences punishable u/s 276B r/w/s 278B of the Income Tax Act, 1961 were
attracted.

(ii)    The learned Additional Chief Metropolitan
Magistrate, 38th Court, Ballard Pier, Mumbai, by order dated 24th July,
2018, issued process against the accused persons for offences punishable u/s
276B r/w/s 278B of the Income Tax Act, 1961.

(iii)   Being aggrieved by the said order of issue of
process, the applicant / accused No. 7, i.e., Eckhard Garbers, had preferred
criminal revision application before the Sessions Court. He contended that he
is a foreign national and as such he was just a professional and an independent
director. He has not participated in the day-to-day business of the company and
was not in charge of such day-to-day business; as such, as per section 278B of
the Act, he is not liable for criminal proceedings.

 

FINDINGS
OF THE SESSIONS COURT

(a)   The averments regarding the position and the
liability of the accused persons, especially Mr. Eckhard, are vague in nature.
There is nothing in the complaint showing how each of the accused / directors
were in charge of and responsible for the day-to-day business of the accused
No. 1 / Company. The averment in the complaint is as under:

‘8. It is further
respectfully submitted that the accused are… the directors. The accused are
also liable for the said acts of omission and contravention committed by the
accused and therefore they are also liable to be prosecuted and to be punished
for the act committed by the accused… u/s 276B of the I.T. Act, 1961.’

 

(b)   There must be detailed averment showing how
the particular director / accused was participating in the day-to-day conduct
of the business of the company and that he was in charge of and responsible to
the company for its business and if such averments are missing, the Court
cannot issue process against such director. The Sessions Court, while coming to
the said conclusion, has relied on the following two decisions:

 

# Hon’ble Supreme
Court in the case of Municipal Corporation of Delhi vs. Ram Kishan
Rohtagi and others reported in AIR 1983 SC 67. In paragraph 15 of the
judgment, it is observed by their Lordships as under:

‘15. So far as the
manager is concerned, we are satisfied that from the very nature of his duties
it can be safely inferred that he would undoubtedly be vicariously liable for
the offence, vicarious liability being an incident of an offence under the Act.
So far as the directors are concerned, there is not even a whisper nor a shred
of evidence nor anything to show, apart from the presumption drawn by the
complainant, that there is any act committed by the directors from which a
reasonable inference can be drawn that they could also be vicariously liable.
In these circumstances, therefore, we find ourselves in complete agreement with
the argument of the High Court that no case against the directors (accused Nos.
4 to 7) has been made out ex facie on the allegations made in the
complaint and the proceedings against them were rightly quashed.’

 

# In Homi
Phiroze Ranina vs. State of Maharashtra [2003] 263 ITR 6 636 (Bom)(HC)
while dealing with the liability of non-working directors, the Bombay High
Court held as follows:

‘11. Unless the
complaint disclosed a prima facie case against the applicants / accused
of their liability and obligation as principal officers in the day-to-day
affairs of the company as directors of the company u/s 278B, the applicants
cannot be prosecuted for the offences committed by the company. In the absence
of any material in the complaint itself prima facie disclosing
responsibility of the accused for the running of the day-to-day affairs of the
company, process could not have been issued against them. The applicants cannot
be made to undergo the ordeal of a trial unless it could be prima facie
showed that they are legally liable for the failure of the company in paying
the amount deducted to the credit of the company. Otherwise, it would be a
travesty of justice to prosecute them and ask them to prove that the offence is
committed without their knowledge. The Supreme Court in the case of Sham
Sundar vs. State of Haryana AIR 1989 SC 1982 held as follows:

 

… It would be a
travesty of justice to prosecute all partners and ask them to prove under the proviso
to sub-section (1) that the offence was committed without their knowledge. It
is significant to note that the obligation for the accused to prove under the proviso
that the offence took place without his knowledge or that he exercised all due
diligence to prevent such offence arises only when the prosecution establishes
that the requisite condition mentioned in sub-section (1) is established. The
requisite condition is that the partner was responsible for carrying on the
business and was during the relevant time in charge of the business. In the
absence of any such proof, no partner could be convicted…’ (p. 1984).

 

(c)   The Chief Finance Officer, who
was responsible for the day-to-day finance matters, including recovery of TDS
from the customers and to deposit it in the account of the Central Government,
was prima facie responsible for the criminal prosecution for the alleged
default committed, but certainly the Director, who is not in charge of and not
responsible for the day-to-day business of the company is not liable for
criminal prosecution, unless it is specifically described in the complaint as
to how he is involved in the day-to-day conduct of the business of the company.

 

CONCLUSION

From the analysis
of the provisions of section 278B it could be seen that the scope and the exact
connotation of the expression ‘every person who at the time the offence was
committed was in charge of, and was responsible to, the company for the conduct
of the business of the company’ assumes a very important role. If a person,
i.e., the director or an executive of the company falls within the purview of
this expression, he would be liable for the offence of the company and may be
punished for the same. If, on the other hand, the person charged with an
offence is not the one who falls within the ambit of that expression, the court
will relieve him of the accusation. Therefore, the essential question that
arises is as to who are the persons in charge of, and responsible to, the
company for the conduct of the business of the company. It should be noted that
the onus of proving that the person accused was in charge of the conduct of the
business of the company at the time the contravention took place lies on the
prosecution.

 

Another essential
aspect is that the complaint must not only contain a bald averment that the
director is responsible for the offence, but the averment must show how the
director who is treated as accused has participated in the day-to-day affairs
of the company. If such an averment is not found and the Magistrate has issued
process and taken cognisance of the complaint, then the accused director can
file a revision application before the Courts of Session. The director can also
file a Writ Petition before the High Court by invoking the provisions of
section 482 of the Cr.PC. The Bombay High Court in Prescon Realtors and Infrastructure
Pvt. Ltd. and Anr vs. DCIT & Anr WP/59/2019 dated 7th August,
2019 has stayed the proceedings before the trial court against the
company and its directors as self-assessment taxes were ultimately paid by the
company. Thus, in genuine cases the Bombay High is entertaining the Writ
Petitions challenging the processes issued by the Magistrate.

 

Where the directors
have resigned, or were not involved in the day-to-day affairs of the company,
the directors can also file discharge application u/s 245 of the Cr.PC before
the Magistrate Court. However, one must note that as per section 280C, offences
punishable with imprisonment extending to two years or fine, or both, will be
tried as summons cases and not warrant cases. There is no provision of discharge
in summons triable cases. Hence, in such cases the process may be challenged by
filing revision before the Sessions Court or by filing a Writ Petition before
the Bombay High Court.

 

The companies must
clearly cull out the responsibilities of directors, Chief Financial Officers,
accountants, etc. so that tax defaults can be appropriately attributed to the
right person in the company and all the key persons of the company don’t have
to face the brunt of prosecution.

ASSUMPTION OF JURISDICTION U/S 143(2) OF THE INCOME TAX ACT, 1961

Putting one to notice is one of the most
fundamental aspects of law and adjudication. As we are aware, in scrutiny
proceedings the Assessing Officer (AO), in order to ensure that the assessee
has not understated income or not claimed excessive loss, can call the assessee
to produce evidence to support the return of income filed. To assume proper
jurisdiction, the AO has to satisfy two conditions provided in section 143(2)
of the Income Tax Act (the Act). This section states that where a return of
income has been furnished, the AO shall, if he considers it necessary or
expedient to ensure that the assessee has not understated income or has
computed excessive loss, serve on the assessee a notice requiring him to
adduce evidence in support of his return of income. The proviso to
section 143(2) of the Act states that no notice under the sub-section shall
be served on the assessee after the expiry of six months from the end of
the month in which the return is furnished. It is pertinent to note that the
section, including the proviso, has not gone through any material
changes over the years.

 

It is clear from the above that it is
incumbent upon the AO to serve a notice u/s 143(2) and the proviso puts
a further limit on the AO to serve the notice within six months from the end of
the month in which the return of income was furnished. Now, one does not
require any authority to support the proposition that when the legislature has
used the word ‘shall’, it has not left any discretion with the AO and that it
is mandatory for him to follow such procedure. The issue eventually boils down
to interpretation of the word ‘serve’ and whether mere issuance of notice u/s
143(2) is sufficient compliance.

 

SECTIONS AND RULES
DEALING WITH SERVICE UNDER THE ACT

At this point it would be useful to go
through section 282 of the Act as it stood prior to the amendment brought in by
the Finance (No. 2) Act, 2009; it stated that ‘a notice or requisition under
this Act may be served on the person therein named either by post or as if it
were a summons issued by a court under the Code of Civil Procedure, 1908’. Therefore,
notice could have been served either through post or as if it were summons
under the Code of Civil Procedure, 1908 (CPC). It would be pertinent to note
that Order 5 of the CPC deals with issue and service of summons. In Order 5 of
the CPC, Rules 9 to 20 are of relevance and Rules 17 and 20 are of some
importance for the discussion herewith.

 

Rule 17 of Order 5 of the CPC reads as
follows: ‘Where the defendant or his agent or such other person as aforesaid
refuses to sign the acknowledgement… the serving officer shall affix a copy of
the summons on the outer door or some other conspicuous part of the house in
which the defendant ordinarily resides or carries on business or personally
works for gain, and shall then return the original to the Court from which it
was issued, with a report endorsed thereon or annexed thereto stating that he
has so affixed the copy, the circumstances under which he did so, and the name
and address of the person (if any) by whom the house was identified and in
whose presence the copy was affixed.’

 

The Rule
provides that if the defendant or his agent refuses to sign the
acknowledgement, then the serving officer can affix a copy of the summons on
the outer door or any conspicuous part of the house and shall return the
original to the Court (in our case the AO) with a report saying under what
circumstances he affixed the copy on the outer door.

 

Rule 20 of Order 5 of the CPC reads as
under: ‘(1) Where the Court is satisfied that there is reason to believe
that the defendant is keeping out of the way for the purpose of avoiding
service, or that for any other reason the summons cannot be served in the
ordinary way, the Court shall order the summons to be served by affixing a copy
thereof in some conspicuous place in the Courthouse, and also upon some
conspicuous part of the house (if any) in which the defendant is known to have
last resided or carried on business or personally worked for gain, or in such
other manner as the Court thinks fit.

(2) Effect of service substituted by
order of the Court shall be as effectual as if it had been made on the defendant personally.’

From a reading of the above Rule it is
evident that if the Court (in our case the AO) is satisfied that there is
reason to believe that the defendant is keeping out of the way for the purpose
of avoiding service, the Court shall order the summons to be served by affixing
a copy thereof in some conspicuous place. The aforesaid provisions are relevant
to appreciate the point that the Act sufficiently provides remedy to a
situation where the assessee is being evasive in receiving notices either in
order to frustrate the attempts of the AO to serve the notices within the time
limit prescribed under the Act and, as a consequence, to vitiate the entire
proceedings, or to stall the assessment proceedings. Further, the aforesaid
position will not change even under the amended provisions of section 282 of
the Act, as I will point out below.

 

The Act also deals with how the notice has
to be delivered to the person mentioned therein. Under the amended section
282(2) of the Act, the Board has been empowered to make rules providing for the
addresses to which a communication referred to in sub-section (1) may be delivered.
In view of the same, Rule 127 of the Rules was inserted. Further, the first proviso
states that if the assessee specifically intimates to the AO that notice shall
not be served on the addresses mentioned in sub-clauses (i) to (iv) of Rule
127(1) of the Rules (address in PAN database and return of income of the year
in consideration, or previous year, or in the MCA database) where the assessee
furnishes in writing any other address for the purpose of communication. The
second proviso states that if the communication could not be served on
the addresses mentioned in clauses (i) to (iv) of Rule 127(2) of the Rules as
well as the address mentioned in the first proviso as provided by the
assessee, then the AO shall deliver or transmit the document, inter alia,
to the address available with any banking company, or co-operative bank, or
insurance company, or post-master general, or address available in government
records, or with any local authority mentioned in section 10(20) of the Act. As
evident, the Rules have provided enough avenues to the AO to achieve the same.

 

The question which one would have to
consider is what would be the position when the assessee has not intimated the
AO of the new address and the notice issued on an old address comes back unserved
and, thereafter, the time limit to issue further notice has expired?

 

In my opinion, considering the sheer avenues
available with the AO in view of Rule 127 of the Rules, it was incumbent upon
the AO to serve or communicate the notice on any of the addresses provided
therein. The argument with respect to passing of time limit and, therefore, the
AO could not serve notice on the assessee, would not exonerate the AO from
making endeavours much before the passing of the time limit. If the assessee has
to be vigilant enough to meet deadlines, compliances and its rights and
contentions, equally, the AO, with all the resources at its disposal in today’s
technologically advanced environment, is expected to serve notices within the
time limit provided under the Act. If the AO issues a notice at the fag end of
the period of limitation and thereafter the service of the notice is called
into question, in my opinion, as stated above, it may not absolve the AO from
his duty to serve it within time for the simple reason that proceedings ought
to have been initiated a bit earlier on a conservative basis. Further, if, at
the same time, the conduct of the assessee is not forthcoming or is evasive,
the Courts, in my opinion, surely would step in to do justice.

 

Further, instances have come to light with
regard to E-assessment proceedings where the AO, rather than serving the
notices on the email address provided by the assessee, is merely uploading the
notices on the e-filing income tax portal of the assessee; this, in my opinion,
would also not be valid service of notice. The Rules mandate, as discussed
above, that the electronic record has to be communicated to the assessee on his
email address and not merely uploaded.

 

After dealing with the sections on modes of
service, it would be suitable to deal with sections mandating service of notice
in addition to section 143(2) of the Act. Section 292BB, which states that
where an assessee has appeared in any proceedings relating to an assessment,
then it shall be deemed that any notice which was required to be served upon
the assessee has been duly served upon him in time in accordance with the
provisions of the Act and such assessee shall be precluded from taking any
objection in any proceedings, inter alia, on the ground that the notice
was not served upon him on time. However, nothing contained in the section
would apply where the assessee raises that objection before the completion of
the assessment itself. The provision impliedly, or rather expressly, recognises
the fact that valid service of notice within the time limit prescribed under
the requisite provisions has been given utmost importance under the Act and
failure to service it within the stipulated time limit would vitiate the entire
proceedings.

 

Reference can also be made to section
153C(2) to demonstrate that the legislature has been emphasising the point of
service of notice u/s 143(2) and recognising a distinction between service and
issuance of notice. The section provides that where the incriminating material
as mentioned in 153(1) has been received by the AO of the assessee after the
due date of filing of return of the assessment year in which search was carried
out and no notice u/s 143(2) has been served and the time limit to serve the notice
has also expired before the date of receiving the incriminating material, then
the AO shall issue notice as per the manner prescribed u/s 153A.

 

Therefore, what the section provides is, all
other conditions remaining constant, if notice u/s 143(2) has been issued but
not served and the time limit for serving the notice has also expired, then the
AO can proceed as per the procedure provided u/s 153A. Therefore, the
legislature itself has again made a distinction between issue of notice and
service of notice u/s 143(2) and put beyond the pale of doubt that the
requirement as provided u/s 143(2) is of service of notice and not mere
issuance. It would also be relevant to take note of section 156, which also
puts an embargo of service of the notice of demand. Further, as I point out in
paragraph (vii) below, service of notice is a precondition to assume valid
jurisdiction.

 

A FEW DECISIONS OF THE
SUPREME COURT / THE COURT

The Supreme Court, in the context of section
156, dealt with the issue whether the subsequent recovery proceedings would
stand vitiated when no notice of demand had been served on the assessee. In the
case of Mohan Wahi vs. CIT (248 ITR 799), the Court, following
the decision in the case of ITO vs. Seghu Setty (52 ITR 528)
rendered in the context of the Income-tax Act, 1922 (1922 Act), held that the
use of the term ‘shall’ in section 156 implies that service of demand notice is
mandatory before initiating recovery proceedings and constitutes the foundation
for recovery proceedings and, therefore, failure to serve the notice of demand
would render the subsequent recovery proceedings null and void.

 

Reference can also be made to the Three-Judge
Bench decision of the Supreme Court in the case of Narayana Chetty
vs. ITO (35 ITR 388) wherein the Court, dealing with section 34
(providing power to reopen an assessment) of the 1922 Act, held that service of
the notice is a precondition and it is not a procedural irregularity. A similar
analogy, in my submission, can be drawn with regard to section 143(2) as well –
that section 143(2) mandates service of notice on the assessee and the said
notice also forms the bedrock of assessment proceedings, therefore, mere
issuance is not sufficient.

 

Further, I would like to point out the
decision of the Supreme Court in the case of R.K. Upadhyaya vs. Shanabhai
P. Patel (166 ITR 163)  where the
Court has made a distinction between issuance of notice and service of notice.
However, prior to dealing with the same it is appropriate to discuss the
decision of the Supreme Court in the case of Bansari Debi vs. ITO (53 ITR
100). The controversy in that is as follows: Section 34(1)(b) of the
1922 Act provided that the AO may, at any time within eight assessment years
from the end of the assessment year of which reopening is sought to be done,
reopen the assessment by serving a notice on the assessee. The aforesaid
section was amended by section 4 of the Indian Income tax (Amendment) Act, 1959
(Amending Act) which, inter alia, provided that no notice issued u/s 34(1)
can be called into challenge before any court of law on the ground that the
time limit for issuing the notice had expired. The assessee raised a plea that
when the notice is issued within a period of eight years but served beyond the
period of eight years, it would not be saved by the Amending Act, as it only
dealt with issuance of notice.

 

The Court, rejecting the argument of the
assessee, held that the purpose of bringing the Amending Act was to save the
validity of the notice; if a narrow interpretation of ‘issue’ is given, then
the Amending Act would become unworkable as the time limit prescribed in
34(1)(b) of the 1922 Act was only with regard to service of notice. Therefore,
to advance the purpose of the legislature, which was to save the validity of
notices beyond the time prescribed under the 1922 Act, the Court held that the
word ‘issue’ has to be interpreted as the word ‘service’. The Court held that a
wider meaning of the word ‘issue’ would be consistent with the provisions of
the Act as well. In conclusion, the Court in the aforesaid case held that
‘issue’ can be interchangeably used with ‘service’.

 

Thereafter, in the context of the 1961 Act,
the Supreme Court in the case of R.K. Upadhyaya (Supra)
was again called upon to decide whether service and issue can be used
interchangeably. The controversy before the Court was that the notice u/s 148
was issued by registered post prior to the date of limitation; however, it was
served after the period of limitation. The assessee / respondent before the
Court argued that though section 149 states that the no notice shall be issued
beyond the period of limitation and section 148 provides that reassessment
cannot be done without service of the notice u/s 148, in view of the decision
of Bansari Debi (Supra), ‘issue’ used in section 149 shall be
interpreted to mean ‘serve’; therefore, service beyond the period of limitation
is not valid in law.

 

The Supreme Court rejected the argument by
holding that the scheme of the 1961 Act is materially different from the 1922
Act. A clear distinction has been made between ‘issue of notice’ and ‘service
of notice’ under the 1961 Act. The Court held that section 148 provides service
of notice as a condition precedent to making the assessment and section 149
provides for issuance of notice before the period of limitation; therefore,
there is a clear distinction between the two. The decision in the case of Bansari Debi (Supra) could not be applied for the purpose of
interpreting the provisions of reopening under the 1961 Act.

 

In my view of the aforesaid decisions as
well as the provisions of the Act, it can be contended that service of notice
u/s 143(2) is a condition precedent for assuming jurisdiction u/s 143. The
legislature has made a clear distinction between the term ‘issue’ and ‘service’
and it is manifested from sections 148 and 149 of the Act. Therefore, the two
terms cannot be used interchangeably.

 

CIRCULARS /
INSTRUCTIONS ISSUED BY THE BOARD

Reference can also be made to Instruction
No. 1808 dated 8th March, 1989 which deals with the then
newly-inserted proviso u/s 143(2). The proviso is identically
worded as the new proviso, the only difference being the time limit for
service of the notice. The instruction which the Board gave to the authorities
is as follows:

 

‘4. It may be noted that, under the
aforesaid provision, it is essential that a notice under section 143(2) of the
Act is served on the assessee within the statutory time limit, and mere issue
of the notice within the statutory period will not suffice’. The instruction clearly states that mere issuance of notice within
the statutory period will not suffice, it has to be served. Similar
instructions have been given by the Board for selection of cases u/s 143(2)(i)
vide Instruction No. 5 dated 28th June, 2002. A similar instruction
has been given in the General Direction issued by the Board vide Notification
No. 3265 (E) 62/2019 dated 12th September, 2019 with regard to the
new scheme of E-assessment, which has been brought with much fanfare.

 

In view of the aforesaid interpretation
given by the Board through various circulars and instructions that notice u/s
143(2) has to be served, it would not be open to Revenue to contend otherwise
that mere issuance of notice would suffice the requirement of the section. Considering
the aforesaid provisions, the dictum of the Supreme Court in the aforesaid
decisions and the interpretation given by the Board itself, it would be safe to
conclude that issuance of notice u/s 143(2) will not meet the requirement of
assuming valid jurisdiction to initiate proceedings u/s 143.

 

RECENT DECISION OF THE
SUPREME COURT

However, the Supreme Court recently,
in the case of Pr. CIT vs. M/s I-ven Interactive Ltd. (418 ITR 662),
has apparently altered the aforesaid position. The Court has not only put a
burdensome finding on the assessee but has also given a distinctive
interpretation of law which I would like to discuss.

 

Facts

The assessee filed its return of income
online on 28th November, 2006 for 2006-07 and also filed a hard copy
on 5th December, 2006. In the return of income, the assessee had
mentioned its new address. Thereafter, a notice u/s 143(2) was issued on 5th
October, 2007 at the old address, picked up from the PAN database of the
assessee. Though it is not coming out very clearly from the facts as narrated
by the Court in its order, the question of law before the Bombay High Court as
well as the grounds of appeal raised before the Tribunal proceeds on the footing
that the notice was indeed served on the associate entity of the assessee
within the time limit prescribed under the proviso to section 143(2).
Another notice u/s 143(2) was issued on 25th July, 2008 at the
address available in the PAN database. The assessment order was passed u/s
143(3) on 24th December, 2008.

 

The assessee challenged the order before the
Commissioner of Income tax (Appeals) (CIT[A]), inter alia, on the ground
that the notice u/s 143(2) issued on 5th October, 2007 was not
served on the assessee and the subsequent notices were served beyond the time
limit prescribed u/s 143(2). The CIT(A), vide order dated 23rd December,
2010, allowed the appeal holding that the AO passed the order without assuming a valid jurisdiction u/s 143(2).

 

Revenue challenged the order of the CIT(A)
before the Income tax Appellate Tribunal (the Tribunal) which, vide its order
dated 19th January, 2015, confirmed the order of the CIT(A). The
Tribunal, affirming the finding of the CIT(A), inter alia, held that the
assessee had, during the course of the assessment proceedings, brought to the
notice of the AO that the notice u/s 143(2) dated 5th October, 2007
was not served on the appellant, therefore, the proceedings u/s 143(3) were bad
in law.

 

Revenue challenged the order of the Tribunal
before the Bombay High Court in ITA No. 94 of 2016. The Bombay High Court,
dismissing the appeal, noted that the AO had, in fact, served at the new
address the assessment order u/s 143(3) on 30th November, 2006 for
assessment year 2004-05 which was very much prior to the notice u/s 143(2)
dated 5th October, 2007 and 25th July, 2008. The Bombay
High Court noted that the assessee, in the course of the assessment
proceedings, had raised the issue of valid service of notice u/s 143(2) and, therefore,
the Tribunal rightly held that in view of the proviso to section 292BB,
notice not being served within time was invalid.

 

Arguments before the Supreme Court

It was submitted that as there was no
intimation by the assessee to the AO of change of address, the notice u/s
143(2) was sent to the assessee at the available address as per the PAN
database. In view of these facts, the AO was justified in sending the notice
u/s 143(2) on the old address. Once the notice has been issued and sent to the
available address as per the PAN database, it is sufficient compliance of
provisions u/s 143(2).

 

The assessee argued that the AO was aware
about the new address and, therefore, the notice u/s 143(2) ought to have been
served at the new address only. But the notice u/s 143(2) was, in fact, served
on the old address and, therefore, the same was never served on the assessee.
Further, the subsequent notice was served beyond the time limit provided u/s
143(2). The assessee further relied on the decision of the Supreme Court in the
case of ACIT vs. Hotel Blue Moon (321 ITR 362) to submit that
notice u/s 143(2) has to be served within the time limit prescribed under the proviso
to section 143(2).

 

The assessee further argued that the AO was
aware about the change of address, which is evident from the fact that the AO
had sent assessment orders for the assessment years 2004-05 and 2005-06 to the
new address.

 

Conclusion of the Supreme Court

The Court held that as there was no
intimation of change of address to the AO, the AO was justified in issuing the
notice u/s 143(2) on the address available in the PAN database. The Court
further held that mere mentioning of the new address in the return of income
without specifically intimating the AO with respect to the change of address
and without getting the PAN database changed is not adequate. In the absence of
any specific intimation, the AO was justified in issuing the notice at the
address available in the PAN database, especially in view of the return being
filed under the e-filing scheme. The Court noted that the notices u/s 143(2)
are issued on selection of cases generated under the automated system of the
Department which picks up the address of the assessee from the PAN database.

 

The Court, thereafter, held that once a notice
is issued within the time limit prescribed as per the proviso to section
143(2), the same can be said to be sufficient compliance of section 143(2).
Actual service of the notice upon the assessee is immaterial. The Court gave
such an interpretation to the proviso because, in its wisdom, it felt
that in a case it may happen that though the notice is sent within the period
prescribed, the assessee may avoid actual service of the notice till the expiry
of the period prescribed. The Court further held that in the decision relied
upon by the assessee in the case of Hotel Blue Moon (Supra) also,
it was observed that issuance of notice u/s 143(2) within the time limit
prescribed under the proviso to section 143(2) is necessary.

 

With regard to the argument of the assessee
that the AO was aware of the change of address in view of the fact that the AO
himself had issued assessment orders for earlier assessment years, i.e. 2004-05
and 2005-06 on the new address, the Court held that the matter had been
adequately explained by the Revenue. In view of the aforesaid findings, the
Court set aside the order of the Bombay High Court and remanded the matter back
to the file of the CIT(A) to decide the issue on merits.

 

Analysis of the aforesaid decision

The Court came to the aforesaid conclusion
that issuance of a notice is sufficient and service is immaterial majorly on
the point that an assessee may deliberately avoid service of notice within the
time limit in order to stall the assessment proceedings. The remedy for the situation
envisaged by the Court has been adequately provided under the Act itself as
pointed out in paragraph (ii) above, that if the assessee is evasive then there
are various modes of effecting service which would be considered as valid forms
of service. Further, the Act has made clear the requirement of service of the
notice, and not mere issuance, as discussed in paragraph (vi) above. The Court
in its previous decisions has also opined that service of notice is a
precondition for assuming valid jurisdiction and also brought out distinction
between issue and service of notice and how it has been used distinctively
under the Act, which we have seen in aforesaid paragraph (viii). In fact,
Revenue itself has interpreted that service of notice is the most crucial point
of assuming jurisdiction u/s 143(2) which we have seen in paragraph (ix) above.

 

In my submission, it was not open to the
Revenue to contend otherwise. Further, reference can also be made to the
decision of the Supreme Court Three-Judge Bench in the case of UCO
Bank vs. CIT (237 ITR 889) in which the Court dealt with a somewhat
similar issue. To a previous Three-Judge Bench of the Supreme Court, a CBDT
Circular was not pointed out which was in consonance with the provisions of the
Act and the concept of income. The Court held that circulars are issued for the
purpose of proper administration of the Act, to mitigate the rigours of the
application of provisions of the statute, in certain situations by applying
interpretation beneficial to the assessee, and circulars are not meant for
contradicting or nullifying any provision of the law. Such circulars are
binding on the Revenue and when one such circular was not put before the
earlier Three-Judge Bench of the Supreme Court in a correct perspective, the
same would be contrary to the ratio laid down by the decision of the Constitutional
Bench in the case of Navnitlal Jhaveri vs. AAC (56 ITR 198). In
my opinion, this can be similarly submitted with regard to the aforesaid
circulars referred to in paragraph (vi) as well.

 

Obiter vs.
ratio of the decision

One more aspect
which I would like to highlight with regard to the aforesaid decision and that
can be kept in mind is that the notices were served on the associate of the
assessee within the time limit provided under the proviso to section
143(2) and that may have prompted the Court to reach the aforesaid conclusion.
Looking at it from another angle, we can wonder whether the interpretation
given by the Court is the ratio of the judgment or an obiter dictum?
It is well settled that even the obiter of the Court is binding
throughout the country and no authority is required to support that
proposition. The only point of distinction would be that when the obiter of
the Court contradicts the ratio of a previous decision, then the ratio
laid down in the previous decision has to be followed and not the obiter.

 

In this regard, I would draw attention to
the decision rendered by the Punjab and Haryana High Court in the case
of Sirsa Industries vs. CIT (178 ITR 437). Even there, the High
Court was dealing with a question in which seemingly a Three-Judge Bench
decision of the Supreme Court in the case of Chowringhee Sales
Bureau vs. CIT (87 ITR 542) had taken a view contrary to the decision
of the Division Bench in the case of Kedarnath Jute Mfg. Co. Ltd.
vs. CIT (82 ITR 363). The facts of the case are noteworthy. The
assessee was following the mercantile system of accounting and claimed
deduction of sales tax payable by taking a view that the liability had accrued
and therefore deduction could be claimed. The AO sought to reopen the
assessment to deny deduction claimed on mercantile basis by taking the view
that in the case of Chowringhee Sales (Supra), the Supreme Court
held, even though that party was following the mercantile system of accounting,
that ‘a party would be entitled to claim deduction as and when it passes it
on to the government’. The High Court held that the Supreme Court in the
case of Chowringhee Sales (Supra) was considering a different
issue and not the allowability or non-allowability of sales tax payable and,
therefore, it cannot be said that there is a conflict between the decision of
the Three-Judge Bench in the case of Chowringhee Sales (Supra)
and the decision of the Division Bench in the case of Kedarnath Jute Mfg.
(Supra), which allowed deduction of sales tax liability on the basis of
accrual of liability. In view of the same, the High Court quashed the reopening
notices.

 

The facts of the case before the Court in
the case of I-ven Interactive, as narrated above, show that the notice was
served on the associate of the assessee within the time limit provided under
the proviso to section 143(2). Therefore, it is possible to argue that
the Court was called upon to decide only on the point as to whether or not
notice u/s 143(2) served on the associate of the assessee on the old address of
the assessee was a valid service u/s 143(2). Consequently, mere issuance of
notice u/s 143(2) was sufficient compliance of the provision of section 143(2)
was merely an observation made by the Court.

 

Considering the aforesaid provisions of the
Act, the decisions of the Court itself which the Court did not have the
occasion to deal with sufficiently, as well as the CBDT Circulars, in my
opinion it is still an arguable case that mere issuance of notice u/s 143(2) is
not a sufficient compliance of the provisions of section 143(2). Inversely,
whether service of notice should have been read as issuance of notice has not
been foreclosed.

 

With regard to the second important finding
which the Court had given, that merely mentioning the new address in the return
of income would not suffice, a specific intimation has to be filed with the AO
bringing to his notice the change of address as well as an application for
change of address has to be made in the PAN database. From 2nd
December, 2015 (the date from which Rule 127 of the Rules was inserted), the
Act has implicitly recognised the fact that once an address is mentioned in the
return of income, the AO is aware about that address and, thereby, notice can
be served on the said address as well in a given scenario. The second proviso,
inserted from 20th December, 2017, sheds some light on the
controversy dealt with by the Court. Therefore, in my view, after insertion of
Rule 127 of the Rules, failure to specifically bring to the AO’s notice would
not enable the AO to shirk his responsibility of serving the notice to the
assessee.

 

I have tried to comprehensively deal with
the aspect of issue vs. service as well as what would be the consequences of a
notice coming back unserved. In future on account of electronic transmission of
notices as well as e-assessments, service of notice would throw up innumerable
fresh challenges. It would be interesting to see how the Courts deal with the
same.

 

INCOME-TAX E-ASSESSMENTS – YESTERDAY, TODAY & TOMORROW

INTRODUCTION

The Government of
India has, over the last few years, taken various steps to reduce human
interface between the tax administration and the taxpayers and to bring in
consistency and transparency in various tax administrative matters through the
use of Information Technology. This has been very pronounced in the matter of
scrutinies being conducted by tax officers under the Income-tax Act, 1961 (the
Act). This article traces the history of E-assessments and takes a peep into
what the coming days will bring.

 

RECENT
HISTORY

When we look at the
recent past, one of the initial impacts of technology in the income tax
scrutiny assessment procedures was the implementation of the Computer-Assisted
Scrutiny Selection (CASS) scheme for selection of cases. The process of
selection of cases based on scrutiny on random basis was gradually dispensed
with and was replaced by a system-based centralised approach. Under CASS, the
selection of income tax returns for the purpose of scrutiny was based on a
detailed analysis of risk parameters and 360-degree data profiling of the
taxpayers.

 

The CASS
substantially reduced the manual intervention in the selection process of cases
for assessment proceedings. Nonetheless, some cases were manually picked up by
the taxmen on the basis of pre-determined revenue potential-based parameters.

 

The CASS provided
greater transparency in the selection procedures as the guidelines of selection
were placed in the public domain for wider information of taxpayers. The entire
process was made quite transparent and scientific.

 

In order to address
the concerns of taxpayers with respect to undue harassment and to ensure proper
tax administration, the Board, by virtue of its powers u/s 119 of the Act and
in supersession of earlier instructions / guidelines that in cases selected for
scrutiny during the Financial Year 2014-15 under CASS, on the basis of either
AIR data or CIB information or for non-reconciliation with Form 26AS data,
ensured that the scope of inquiry should be limited to verification of those
particular aspects only. The Assessing Officers (AOs) were instructed to
confine their questionnaire and subsequent inquiry or verification only to the
specific point(s) on the basis of which the particular return was selected for
scrutiny.

 

Apart from this,
the reason(s) for selection of cases under CASS were displayed to the AOs in
the Assessment Information System (AST) application and notices for selection
of cases of scrutiny u/s 143(2) of the Act, after generation from AST, were
issued to the taxpayers with the remark ‘Selected under Computer-Aided Scrutiny
Selection (CASS)’.

 

PILOT
PROJECT

In order to further
improve the assessment procedures and usher in a paperless environment, the
Department rolled out the E-assessment procedures via a pilot project wherein
the AOs conducted their inquiry by sending queries and receiving responses
thereto through e-mails.

 

The cases covered under the pilot project were initially those which had
been selected for scrutiny on the basis of AIR (Annual Information Return) /
CIB (Central Information Branch) information or non-reconciliation of tax with
Form 26AS data. However, the Department ensured that the consent of the
taxpayers was sought for their scrutiny assessment proceedings to be carried
out under the newly-introduced E-assessment proceedings and only willing
taxpayers were considered under the pilot run.

 

New Rule 127 was
inserted by the Income Tax (Eighteenth Amendment) Rules, 2015 w.e.f. 2nd
December, 2015 which gave the framework for issue of notices and other
communication with the assessee. It prescribes the rule for addresses
(including address of electronic mail or electronic mail message) to which
notices or any other communication may be delivered.

 

Between the years
2016 and 2018, the CBDT progressively amended rules, notified various
procedures and issued the required guidelines to increase the scope of
E-proceedings on the basis of the pilot study. Notification No. 2/2016 dated 3rd
February, 2016 and Notification No. 4/2017 dated 3rd April, 2017
were very important and provided the procedures, formats and standards for
ensuring secured transmission of electronic communications.

 

The Finance Act,
2016 introduced section 2(23C) in the Act to provide that the term ‘hearing’
includes communication of data and documents through electronic mode.
Accordingly, to facilitate the conduct of assessment proceedings
electronically, CBDT issued a revised format of notice(s) u/s 143(2) of the
Act.

 

The scope of
E-assessment proceedings was extended vide Instruction No. 8/2017 dated 29th
September, 2017 to cover all the cases which were getting barred by limitation
during the financial year 2017-18 with the option to the assessees to
voluntarily opt out from ‘E-proceedings’.

 

The CBDT later
issued Instruction No. 1/2018 dated 12th February, 2018 through
which the proceedings scheme was stretched to cover all the pending scrutiny
assessment cases. However, exceptions were carved out for certain types of
proceedings such as search and seizure cases, re-assessments, etc., where the
assessments were done through the personal hearing process. Further, there
remained an option to object to the conduct of E-assessment.

 

Thereafter,
Instruction No. 03/2018 dated 20th August, 2018 issued by the Board
carved out the way for all cases where assessment was required to be framed u/s
143(3) during the year 2018-19. It provided that assessment proceedings in all
such cases should mandatorily be through E-assessment

 

NEW
E-ASSESSMENT SCHEME

In September, 2019
the CBDT notified the ‘E-Assessment Scheme, 2019’ (scheme) laying down the
framework to carry out the ‘E-assessments’. As anticipated, the scheme was
churned out with the intention to bring about a 360-degree change in the way
tax assessments will be carried out in future.

 

The scheme is in line with the recommendations of the Tax Administration
Reforms Commission (TARC) which was formed with the intention to review the
application of Tax Policies and Tax Laws in the context of global best
practices and to recommend measures for reforms required in tax administration
in order to enhance its effectiveness and efficiency. An extract of the TARC
report is as under:

‘Currently, the
general perception among taxpayers is that the tax administration is focused on
only one dimension – that of revenue generation. This perception gains strength
from the manner in which goals are set at each functional unit of both the
direct and indirect tax departments. These goals, in turn, drive the
performance of individual tax officials. Therefore, the whole system of goal
setting, performance assessment, incentivisation and promotion appears to be
focused on only this dimension. This single-minded revenue focus can never meet
the criteria of the mission and values mentioned above. What is required is a
robust framework that is holistic in its approach to issues of performance
management.’

 

As the phrase
‘faceless’ suggests, under this scheme a taxpayer will not be made aware of the
AO who would be carrying out the assessment in his case. It could be an officer
located in any part of the country.

 

The prime objective
of the Government in introducing the E-Assessment Scheme, 2019 has admittedly
been to eliminate the interface between the taxpayers and the tax department
and to impart greater transparency and accountability. The scheme would also
help in optimising the utilisation of resources of the tax department, be it
human or technical, through economies of scale and functional specialisation.
The scheme envisages a team-based assessment with dynamic jurisdiction. It is
also intended to ensure the tax assessments are technically sound and that
consistent tax positions are taken on various issues to avoid prolonged and
unnecessary litigations for both the taxpayer as well as the tax officers.

 

The then Hon’ble
Finance Minister, the late Mr. Arun Jaitley, said in his Union Budget speech
for the financial year 2018-19:

 

‘E-assessment

We had
introduced E-assessment in 2016 on a pilot basis and in 2017 extended it to 102
cities with the objective of reducing the interface between the department and
the taxpayers. With the experience gained so far, we are now ready to roll out
the E-assessment across the country which will transform the age-old assessment
procedure of the income tax department and the manner in which they interact
with taxpayers and other stakeholders. Accordingly, I propose to amend the
Income-tax Act to notify a new scheme for assessment where the assessment will
be done in electronic mode which will almost eliminate person to person contact
leading to greater efficiency and transparency.’

In the above
background, two new sub-sections, (3A) and (3B), were introduced in section 143
of the Act enabling the Central Government to come out with a scheme for the
faceless electronic assessments which was finally notified as ‘E-Assessment Scheme, 2019’ vide Notification No. 61/2019
and 62/2019, dated 12th September, 2019 to conduct
E-assessments with effect from 12th September, 2019.

 

The scheme has laid out a functional structure of the E-assessment
centres at the national and the regional levels. The framework also provides
for specialised units in the Regional E-assessment Centre for carrying out
specific functions related to various aspects of an assessment. The proposed
structure is depicted as under:

 

 

The functions of
these centres and units set up under the scheme are discussed below:

 

NATIONAL E-ASSESSMENT CENTRE (NeAC)

NeAC will be an
independent office and a nodal point which would oversee the work of the
E-assessment scheme across the country. All the communications between the
income tax department and the taxpayers would be made through the NeAC, which
will enable the conduct of tax assessment in a centralised manner.

 

On 7th
October, 2019 the Revenue Secretary, Mr. Ajay Bhushan Pandey, inaugurated the
NeAC in Delhi. He stated that the setting up of the NeAC of the Income Tax
Department is a momentous step towards the larger objectives of better taxpayer
service, reduction of taxpayer grievances in line with the Prime Minister’s
vision of ‘Digital India’ and promotion of the Ease of Doing Business.

 

The NeAC in Delhi
will be headed by the Principal Chief Commissioner of Income Tax (Pr.CCIT) and
would coordinate between the different units in the tax department for
gathering information, coordination of assessment, seeking technical inputs on
tax positions, verification and review of the information submitted by
taxpayers, review of draft orders framed by the assessment units, etc.

 

REGIONAL
E-ASSESSMENT CENTRE

The Regional
E-assessment centre would comprise of (a) Assessment unit, (b) Review unit, (c)
Technical unit, and (d) Verification unit. Eight Regional E-assessment Centres
(ReAC) have already been set up in Delhi, Mumbai, Chennai, Kolkata, Ahmedabad,
Pune, Bengaluru and Hyderabad. Each of these ReACs will be headed by a Chief
Commissioner of Income Tax (CCIT).

 

(a) Assessment
units

Assessment units
under the E-Assessment Scheme will perform the function of making assessments,
which will include identification of points or issues material for the
determination of any liability (including refund) under the Act, seeking
information or clarification on points or issues so identified, analysis of the
material furnished by the assessee or any other person, and such other
functions as may be required for the purposes of making assessment. In simple
terms, the Assessment units will largely perform the functions of an AO.

 

(b) Verification
units

Verification units,
as the name suggests, will carry out the function of verification, which
includes inquiry, cross-verification, examination of books of accounts,
examination of witnesses and recording of statements, and such other functions
as may be required for the purposes of verification. This may also include site
visits for examining and verifying facts for carrying out assessments.

 

(c) Technical
units

Technical units
will play the role of experts by providing technical assistance which includes
any assistance or advice on legal, accounting, forensic, information
technology, valuation, transfer pricing, data analytics, management or any
other technical matter which may be required in a particular case or a class of
cases under this scheme. This apparently will include the functions of a
Transfer Pricing Officer in a transfer pricing assessment.

 

(d) Review units

The Review units
would perform the function of review of the draft assessment order, which
includes checking whether the relevant and material evidence has been brought
on record, whether the relevant points of fact and law have been duly
incorporated in the draft order, whether the issues on which addition or
disallowance that should be made have been discussed in the draft order,
whether the applicable judicial decisions have been considered and dealt with
in the draft order, checking for arithmetical correctness of modifications
proposed, if any, and such other functions as may be required for the purposes
of review.

 

As notified in
Notification No. 61/2019, the Assessment units, Verification units, Technical
units and Review units will have the authorities of the rank of Additional /
Joint Commissioner, or Additional / Joint Director, or Assistant / Deputy
Director, or Assistant / Deputy Commissioner, amongst other staff /
consultants.

 

The CBDT vide
Notification No. 77/2019 has already notified 609 tax officers to play the role
of Assessment, Technical, Verification and Review Units. As per the said
notification, these officers will concurrently exercise the powers and
functions of the AO to facilitate the conduct of E-assessment proceedings in
respect of returns furnished u/s 139 or in response to notice under sub-section
(1) of section 142 of the said Act during any financial year commencing on or
after the 1st day of April, 2018.

 

The E-Assessment
Scheme also provides for levy of penalty for non-compliance of any notice,
direction and order issued under the said scheme on any person including the
assessee. Such penalty order after providing adequate opportunity of being
heard to the assessee, will be passed by the NeAC.

 

After the
completion of assessment proceedings, the NeAC would transfer all the
electronic records of the case to the AO having jurisdiction over such case to
perform all the other functions and proceedings such as imposition of penalty,
collection and recovery of demand, rectification of mistake, giving effect to
appellate orders, submission of remand report, etc. which are otherwise
performed by an AO.

 

The notification
has also carved out an exception for cases wherein the NeAC may, at any stage
of the assessment, if considered necessary, transfer the case to the AO having
jurisdiction over such case.

 

DIGITAL
SERVICE OF NOTICE / RECORDS

All notices or records
or any other communication will be delivered to the assessee by electronic
means, viz. by placing it on the E-proceeding tab available on the income-tax
E-filing portal account of the assessee, or by sending it to the e-mail address
of the assessee or his authorised representative, or by uploading on the
assessee’s mobile application.

 

Notice or any
communication made to any person other than the assessee would be sent to his
registered e-mail address. It also provides that any delivery would also have
to be followed by a real-time alert to the addressee.

 

The date and time
of service of notice will be determined in accordance with the provisions of
section 13 of the Information Technology Act, 2000. As per the said section,
the time of receipt of an electronic record shall be, if the addressee has
designated a computer resource for the purpose of receiving electronic records,
the time when the electronic record enters the designated computer resource,
otherwise, the time when the electronic record is retrieved by the addressee.

 

E-RESPONSE
TO NeAC

Under this scheme, the assessee, in response to notice or any other
communication received from the NeAC, shall file his response only through the
E-proceedings tab on his income-tax e-filing portal account. Any other person
can respond to the NeAC using his registered e-mail address.

PERSONAL HEARINGS

Generally, no personal hearings will be required between the assessee /
authorised representative and the income tax department in the course of the
E-assessment proceedings under this scheme. However, in the following cases,
the assessee by himself or through his authorised representative will be
entitled for hearings which will be conducted exclusively through video
conferencing:

 

(i)   Where a modification is proposed in the draft
assessment order, the assessee or his authorised representative in response to
show-cause notice may request a hearing;

(ii)   In the case of examination or recording of the
statement of the assessee or any other person (other than statement recorded in
the course of survey u/s 133A of the Act).

 

APPELLATE
PROCEEDINGS

The E-Assessment
Scheme has clarified regarding the filing of appeals u/s 246A of the Act
against the E-assessment orders passed by NeAC, which shall be filed with the
Commissioner (Appeals) having jurisdiction over the jurisdictional AO in such
case.

 

ISSUES
IN E-ASSESSMENT SCHEME

The E-Assessment
Scheme, 2019 is not a separate code by itself. It is a part of the existing
statute and therefore the scheme must gel well with the existing statute. Any
conflict there would create legal friction and attract litigation on the
validity of the very assessment.

 

Provision of the
newly-inserted sub-sections (3A), (3B) and (3C) to section 143 of the Act:

 

‘(3A) The
Central Government may make a scheme, by notification in the Official Gazette,
for the purposes of making assessment of total income or loss of the assessee
under sub-section (3) so as to impart greater efficiency, transparency and
accountability by

(a) eliminating
the interface between the Assessing Officer and the assessee in the course of
proceedings to the extent technologically feasible;

(b) optimising
utilisation of the resources through economies of scale and functional
specialisation;

(c) introducing
a team-based assessment with dynamic jurisdiction.

(3B) The Central
Government may, for the purpose of giving effect to the scheme made under
sub-section (3A), by notification in the Official Gazette, direct that any of
the provisions of this Act relating to assessment of total income or loss shall
not apply or shall apply with such exceptions, modifications and adaptations as
may be specified in the notification:

Provided that no
direction shall be issued after the 31st day of March, 2020.

(3C) Every
notification issued under sub-section (3A) and sub-section (3B) shall, as soon
as may be after the notification is issued, be laid before each House of
Parliament.’

 

The entire
E-Assessment Scheme, 2019 is born out of the provision of sub-section (3A) of
section 143 of the Act which empowers the Government to make a scheme for the
purposes of making assessments under sub-section (3) of section 143(3) of the
Act. Thus, although the assessments u/s 144, section 147 and section 153A etc.
are carried out conjointly u/s 143(3) of the Act, it appears from the scheme
that such assessment originating from the said sections would currently be
outside the ambit of the said scheme.

 

The E-Assessment
Scheme is based on the concept of dynamic jurisdiction. The Notifications No.
72 and 77 of 2019 have specified various income tax authorities in the NeAC (9)
and ReAC (609) which have been empowered with the concurrent powers and
functions of an AO in respect of returns furnished u/s 139 and section 142(1)
of the Act during the financial year commencing on or after 1st
April, 2018.

 

At this point, it is relevant to refer to the provisions of section 120
of the Act which deals with the jurisdiction of income tax authorities.
Sub-section (5) of the said section deals with concurrent jurisdiction. It
empowers the Board to allow concurrent jurisdiction in respect of any area or
persons or class of persons or incomes or classes of income or cases or classes
of cases, if considered necessary or appropriate. Under the scheme, the Board
has already allowed concurrent jurisdiction to over 600 income tax authorities.
Whether this is in line with the provision of section 120(5) of the Act is the
question that perhaps will be answered by the Courts in course of time.

 

The scheme in its holistic structure, despite having multiple units,
viz. Verification unit, Review unit, NeAC, Technical unit, still leaves the
entire discretion to complete the assessment to the Assessment unit. The
suggestions of the other units like the Technical unit which also appears to be
performing the functions of a Transfer Pricing Officer will not be binding on
the Assessment unit. This deviates from the existing provision of section 92CA
of the Act.

Under sub-section
(3B) of the Act, the Government has also been authorised to come out with such
notifications till 31st March, 2020 which may be necessary to give
effect to the E-Assessment Scheme by making exceptions, modifications and
adaptations to any provision of the Act. It still remains to be evaluated
whether this would amount to excessive delegation of power as the power to make
law is the jurisdiction of the Parliament. It is only the implementation of
such law that lies with the Government. Vide this provision, the Government is
allowed to make changes in the Act merely by way of notification. Although the
intention behind such provision is to ensure smooth implementation of the
scheme, one cannot deny the fact that there is also a possibility of it being
misused.

 

Although
sub-section (3C) of section 143 of the Act requires all such the notifications
to be tabled before each House of Parliament, it has not specified any
time-frame. Further, it does not necessitate discussion of such notifications
in the Parliament, which could prompt insightful debates and allow the Houses
to make necessary changes in the notifications. Thus, this provision appears to
be more routine in nature. Also, this arguably endows the power to make law to
the Board.

 

Section 144A of the
Act allows an assessee to approach the jurisdictional Joint Commissioner of
Income-tax requesting his authority to examine the case and issue necessary
directions to the AO for completion of assessment. With the advent of the
E-Assessment Scheme, this provision will more likely lose its relevance as all
the specified income tax authorities under the scheme, including Joint
Commissioners, will concurrently hold the power and perform the functions of an
AO.

 

The scheme provides
for review of assessment orders by the Review unit if considered necessary by
the NeAC. The Review unit, upon perusal of the draft assessment order, would
share its suggestions. However, the scheme does not provide that such
suggestions would be mandatory for the Assessment unit to follow while passing
the final draft assessment order.

 

At present, the
scheme covers only limited scrutiny cases as all the notices issued u/s 143(2)
of the Act in accordance with the scheme must, as mentioned in the Notification
Nos. 61 and 62 of 2019, have to specify the issue/s for selection of cases for
assessment. However, it is seen in some cases that such issues mentioned in
notices u/s 143(2) of the Act have been very general and vague; for example,
‘business expenses’, ‘import and export’,
etc. Thus, it needs to be seen whether such issues can even be termed as
specific if they are not broad and are imprecise.

 

Further, it does not visualise conversion of limited scrutiny cases to
complete scrutiny cases. However, it allows the NeAC to transfer cases to the
jurisdictional assessing officer at any given point of time during the course
of assessment. Needless to say but upon transfer, the jurisdictional assessing
officer can take necessary recourse under the Act for conversion of a case to
complete scrutiny. Further, it would require compliance of provision of section
127 of the Act for transfer of cases to the jurisdictional assessing officer.

 

An assessee under the circumstances specified in the scheme will be
allowed to represent his case in person or through his authorised representative
via video conferencing which will be attended by the Verification unit. It will
be interesting to see whether a recording of the discussion is forwarded to the
Assessment unit to avoid any spillage of information in the process.

 

The scheme provides for the Assessment unit to share with the NeAC, along
with the draft assessment order, details of penalty proceedings to be initiated
therein, if any. NeAC is then authorised to issue show cause on the assessee
for levy of penalty under the Act. It will have to be seen who, under this
scheme, will be considered to record satisfaction for levy of penalty. If such
satisfaction is held to be recorded by the Assessment unit, a show-cause notice
issued by the NeAC will be held as invalid since as per the current settled
position of laws, recording of satisfaction and issue of show cause notice for
levy of penalty have to be carried out by the same AO.

 

At present, the provision of section 264 empowers the Pr. Commissioner of
Income Tax or the Commissioner of Income Tax to call for and examine the record
of any assessment proceedings carried out by any income tax authority
subordinate to him, other than cases to which the provision of section 263
applies, and pass such order not being prejudicial to the assessee. With the
advent of faceless E-assessments, it would be interesting to see whether such
an order u/s 264 is passed by the Pr. Commissioner of Income Tax or the
Commissioner of Income Tax having jurisdiction over the Assessment unit, or the
one having jurisdiction over the jurisdictional assessing officer. As yet, the
scheme has not visualised such circumstances.

 

The provision of section 144C requires mandatory passing of a draft
assessment order in the case of foreign companies and cases involving transfer
pricing assessment. In such cases, the assessee has the option to choose to
file an application before the dispute resolution panel and it is only after
the direction of the dispute resolution panel that the final assessment order
is passed by the AO. It is quite clear that the scheme currently does not have
scope for carrying out assessment in these cases.

 

CONCLUSION

The scheme has been launched by the Government on 7th October,
2019 and 58,322 cases have already been selected for assessment under it in the
first phase by issue of e-notices on taxpayers for the cases related to tax
returns filed u/s 139 of the Act since 1st April, 2018.

 

There is no doubt that the scheme has conceptualised a complete paradigm
shift in the way assessments will be carried out in future. The assessments
have been centralised and made faceless. Exchange of communication between
taxpayers and the tax department as well as amongst the income tax authorities
in the tax department has been centralised. The allocation of cases by the NeAC
would be based on the automated allocation system. Thus, it goes without saying
that both the taxpayers and the tax department will need to gear up their
systems to adapt to the scheme.

DEPRECIATION ON GOODWILL ARISING DUE TO AMALGAMATION

ISSUE FOR CONSIDERATION
Depreciation is allowable u/s 32(1) on buildings, machinery, plant or furniture, being tangible assets, and also on knowhow, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets, acquired on or after 1st April, 1998. The Supreme Court in the case of CIT vs. Smifs Securities Ltd. 348 ITR 302 has held for assessment year 2003-04 that the goodwill acquired on amalgamation (being excess of consideration paid over the value of net assets acquired) by the amalgamated company would fall under the expression ‘any other business or commercial right of a similar nature’ and qualify to be treated as an intangible asset eligible for depreciation while computing business income. This was decided by the Supreme Court on the basis of the undisputed factual finding as recorded by the lower authorities that such a difference constituted goodwill and that the assessee in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee had increased.
The sixth proviso to section 32(1)(ii) provides that the aggregate depreciation allowable to the transferor and transferee, in any previous year, in the case of succession or amalgamation or demerger shall not exceed the deduction allowable at prescribed rates, as if such succession or amalgamation or demerger has not taken place and the deduction on account of depreciation shall be apportioned between the transferor and the transferee in the ratio of number of days for which the assets were used by them.
While the Supreme Court has held that the goodwill arising on account of amalgamation falls within the scope of the ‘intangible assets’ and it is entitled for depreciation u/s 32(1), an issue has arisen subsequently as to whether the depreciation on such goodwill can be denied to the amalgamated company by applying the sixth proviso to section 32(1)(ii) on the ground that no such goodwill was held by the amalgamating company. While the Bangalore bench of the Tribunal has held that the amalgamated company was not eligible for depreciation on goodwill due to the restriction placed in the said sixth proviso, the Hyderabad bench of the Tribunal has taken a contrary view, holding that the depreciation was available on such goodwill to an amalgamated company in spite of the restriction of the sixth proviso.

THE UNITED BREWERIES LTD. CASE
The issue first came up for consideration before the Bangalore bench of the Tribunal in the case of United Breweries Ltd. vs. Addl. CIT, TS-553-ITAT-2016 (Bang.). In this case, during the previous year relevant to A.Y. 2007-08, the assessee’s wholly-owned subsidiary, Karnataka Breweries & Distillery Ltd. (KBDL), got amalgamated with the assessee as per the order of the High Court. The shares of the said company were acquired by the assessee in the preceding year for a consideration of Rs. 180.52 crores. The goodwill amounting to Rs. 62.30 crores was shown as arising on account of the amalgamation, being the excess of purchase consideration over fair value of tangible assets and other net current assets received from the amalgamating company. Accordingly, depreciation of Rs. 15.57 crores was claimed by the assessee.
The AO, in the first place, disputed the method of valuing the assets and disallowed the depreciation on the goodwill on the ground that there was no goodwill if proper valuation was assigned to the tangible asset and land. Apart from that, the AO relied upon the sixth proviso (then fifth proviso) to section 32(1) (ii). He noted that the goodwill on which depreciation was being claimed by the assessee arose only on amalgamation and the amalgamating company had no goodwill on which depreciation was allowed to it. Under such circumstances, there would not be any deduction of depreciation on goodwill in the hands of the amalgamated company. Prior to the amalgamation, KBDL could not have claimed any depreciation on such goodwill that came into existence only on amalgamation as it did not own any such goodwill nor was it eligible for depreciation on such goodwill.
The CIT(A), while concurring with the decision of the AO, observed that the value of the goodwill recorded in the books of KBDL was only Rs. 7.45 crores while it had been shown by the assessee at Rs. 62.30 crores. The CIT(A) also questioned the valuation of goodwill in view of the fact that KBDL had not earned sufficient profits in the past to justify the goodwill on the basis of average of profits. The CIT(A) also concurred with the view of the AO that the assessee was not entitled to depreciation in view of the sixth (then fifth) proviso to section 32(1)(ii).
Before the Tribunal, the assessee submitted that the issue of depreciation on goodwill was covered by the judgment of the Supreme Court in the case of Smifs Securities Ltd. (Supra). Insofar as the valuation was concerned, it was contended that when the assessee had produced the valuation report valuing the tangible asset, then without giving the correct value by the AO, the rejection of the valuation report was not justified. Without giving any counter valuation, the claim of depreciation could not have been rejected only by doubting the valuation of the assessee. Insofar as the sixth proviso to section 32(1)(ii) was concerned, it was submitted that it did not apply when the assets were introduced in the books of the assessee at the balancing figure, being the excess consideration over the value of the tangible assets. It was further contended that in none of the cases decided by the Supreme Court as well as the High Courts the Revenue had ever raised the objection of rejecting the claim of depreciation by applying the fifth (now sixth) proviso to section 32(1) of the Act. Therefore, the Revenue could not have raised the objection in the assessee’s case only when it was not raised in the other cases before the courts in the past.
The Revenue, apart from resting its case on the valuation as well as the said proviso to section 32(1)(ii), also relied upon Explanation 3 to section 43(1) and submitted that the AO had the power to examine the valuation of the assets acquired by the assessee if these assets were already in use for business purpose. If the AO was satisfied that the main purpose of transfer of such assets was the reduction of the liability to income tax, then the actual cost of the asset to the assessee was to be such an amount as the AO determined. Therefore, it was claimed that the AO had rightly determined the valuation of the goodwill at NIL. The Tribunal rejected the contention of the assessee that the AO could not have disturbed the valuation of the goodwill in cases where it represented a differential amount between the consideration paid for acquisition of shares and the FMV of the tangible assets. It held that if such claim of goodwill and depreciation was allowed, then it would render the provisions of Explanation 3 to section 43(1) redundant; in every case of transfer, succession or amalgamation, the party would claim excessive depreciation by assigning arbitrary value to the goodwill. However, the Tribunal held that the AO was at fault in choosing to examine the valuation of goodwill alone; the AO ought to have examined the valuation of all the assets taken over by the assessee under the amalgamation and thereby should have determined the actual cost of all the assets to the assessee for the purpose of claim of depreciation.
The Tribunal further held that by virtue of the said proviso to section 32(1)(ii), the depreciation in the hands of the assessee was allowable only to the extent that was otherwise allowable if such succession or amalgamation had not taken place. Therefore, the assessee, being amalgamated company, could not claim or be allowed depreciation on the assets acquired in the scheme of amalgamation of an amount more than the depreciation which was allowable to the amalgamating company. Insofar as the decision of the Supreme Court in the case of Smifs Securities Ltd. (Supra) was concerned, the Tribunal observed that the said ruling of the Supreme Court was only on the point whether the goodwill fell in the category of intangible assets and the said judgment would not override the provisions of the said proviso to section 32(1)(ii), which restricted the claim of depreciation in the cases specified thereunder. Accordingly, the issue of allowability of depreciation on goodwill was decided against the assessee.
THE MYLAN LABORATORIES LTD. CASE
The issue again arose recently, in the case of Mylan Laboratories Ltd. vs. DCIT TS-691-ITAT-2019 (Hyd.). In this case, during the previous year relevant to A.Y. 2014-15, the assessee had acquired Agila Specialities Ltd. (ASPL) along with its wholly-owned subsidiary, Onco Therapies Ltd. (OTL), vide a share purchase agreement on 5th December, 2013 immediately followed by the merger of both the companies with the assessee under the scheme effective from 6th December, 2013. The assessee, by applying the principles of ‘purchase method of accounting’, considered the difference between the amount of investment (Rs. 4,386 crores) and the fair value / tax WDV value of net assets which was negative (being Rs. -106 crores) as goodwill arising on amalgamation. This goodwill of Rs. 4,492 crores was grouped under the Intangible Assets block as goodwill, and depreciation at half of the eligible rate of 25% was claimed by the assessee, since the assets were put to use for less than 180 days.
The AO disallowed the depreciation on goodwill by relying upon the decision of the Bangalore bench of the Tribunal in the case of United Breweries Ltd. (Supra). The CIT(A) confirmed the order of the AO.
Before the Tribunal, apart from relying upon the decision of the Supreme Court in the case of Smifs Securities Ltd. (Supra) and several other decisions of the High Court holding the goodwill as eligible for depreciation, the assessee also submitted that the sixth proviso to section 32(1)(ii) was only a mechanism of allocation of depreciation otherwise allowable on the WDV of assets owned by the amalgamating company, whereby such depreciation got allocated between the amalgamating and the amalgamated company in the year of amalgamation, and had no applicability for any new asset arising on account of the amalgamation in the hands of the amalgamated company. It was contended on behalf of the assessee that the sixth proviso was introduced to curb the practice of claiming depreciation on the same assets by both the predecessor company and the successor company in the case of a merger or succession, as was evident from the Memorandum explaining the provisions of the Finance Bill, 1996. Therefore, the said proviso should not be made applicable to the goodwill arising by virtue of the amalgamation.
The assessee also submitted that a similar issue was raised before the Hon’ble Kolkata High Court in the appeal by the Revenue in the case of Smifs Securities Ltd. ITA No. 116 of 2010 for the year, i.e., A.Y. 2001-02, and the said question was not pressed by the Department, by conceding that it was covered by the decision of the Supreme Court in the case of Smifs Securities Ltd. (Supra). It was submitted that the Revenue had not filed any appeal before the Supreme Court against the decision in the said case and once the Revenue had chosen not to challenge a particular decision, it was bound by the said decision. In this regard, reliance was placed on the decision of the Supreme Court in the case of Narendra Doshi, 254 ITR 606 [SC].
The Revenue, on the other hand, supported the orders of the lower authorities and submitted that the net assets acquired were valued at Rs. -106.8 crores after reducing the liabilities. Thus, when the net asset value was negative, there could not have been any goodwill. It was also pleaded that the amalgamation of whollyowned subsidiary would not lead to transfer of assets u/s 2(47) and therefore, claiming of goodwill as arising out of a transaction not regarded as transfer would be a case of making profit out of oneself. Additionally, it was also claimed that the valuation of the enterprise for purchase of shares could not be equated to the valuation for amalgamation.
On the basis of the arguments raised by both the sides, the Hyderabad bench of the Tribunal ruled in favour of the assessee, holding that the deduction of depreciation on goodwill could not be denied. The reliance placed by the Revenue on the sixth proviso to section 32(1)(ii) did not find favour with the Tribunal. The Tribunal referred to the accounting principles as laid down in AS-14 and observed that, in case of amalgamation in the nature of purchase, the consideration paid in excess of the net value of assets and liabilities of the amalgamating company was to be treated as goodwill. Such goodwill was held to be eligible for depreciation u/s 32(1) by relying upon the decision of the Supreme Court in the case of Smifs Securities Ltd. (Supra).
OBSERVATIONS
 
The issue under consideration moves in a narrow compass. Depreciation is allowable in computing the total income by virtue of section 32 on compliance with the conditions of the said provision. One of the conditions is that the asset in question should be acquired and owned by the assessee claiming the depreciation. On satisfaction of the conditions prescribed, the depreciation can be denied only with an express provision for denial of the claim. The provisos to section 32 have the effect of restricting the amount of depreciation, or of sharing it, or denying it in the stated circumstances. We do not find that any of the provisos, including the sixth proviso, denies the claim of depreciation in cases of an amalgamation. In the circumstances for a valid claim of depreciation, the amalgamated company should satisfy the compliance of the main conditions, namely, acquisition and ownership, besides use. Once they are satisfied, the claim could be denied only by an express provision and not by a roundabout or convoluted reading of the sixth proviso that has been inserted much later in the day to ensure that in the year of transfer both the transferor and the transferee do not claim the ‘full’ depreciation; it is introduced to ensure the sharing of the amount of depreciation in the year of transfer, nothing less, nothing more.
In the absence of the sixth proviso, it was not possible to deny the claim of depreciation in full by both the transferor  and the transferee, a position that had been confirmed by the courts. Reference can be made to CIT vs. Fluid Controls Mfg. Co. 286 ITR 86 (Guj.), Sita Ram Saluja vs. ITO 1 ITD 754 (Chd.).
The sixth proviso does not deal with the case of an asset that comes into existence and / or is acquired for the first time in the course of amalgamation. It also does not deal with an asset on which one of the parties could not have claimed the deduction for depreciation. Goodwill of the kind being discussed here is one such asset on which it was never possible for the amalgamating company to have claimed depreciation, and therefore it is fruitless to apply the sixth proviso to such a situation or claim.
The enabling provision therefore is the main provision of section 32(1), and once the terms therein stand satisfied, the claim cannot be denied or even be reduced without an express provision to do so. In our considered opinion, there is nothing in the sixth proviso to facilitate the denial of the claim altogether. In the absence of the disabling provision, it is not fair on the part of the Revenue to frustrate the claim otherwise held to be lawful by the Apex Court.
The sixth proviso can have an application, in cases of amalgamation, only where some asset which was owned by the amalgamating company is acquired by the amalgamated company in the course of the amalgamation and the acquiring company is seeking to claim depreciation thereon.
There is no dispute as to whether the goodwill arising on the amalgamation falls within the ambit of business or commercial rights, being intangible assets eligible for depreciation. The only dispute is about the applicability of the sixth proviso to section 32(1)(iia) and invocation thereof by the Revenue so as to deny the benefit of depreciation on such goodwill to the amalgamated company. The sixth proviso to section 32(1)(ii) reads as under:
‘Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or knowhow, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv) of section 47 or section 170, or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them.’
The aforesaid proviso was originally inserted as the fourth proviso by the Finance (No. 2) Act, 1996. The rationale behind insertion of this proviso can be gathered from the Circular No. 762 dated 18th February, 1998, the relevant extract from which is reproduced below:
‘The third proviso to sub-section (1) of section 32 provides that the depreciation allowance will be restricted to fifty per cent of the amount calculated at the prescribed rates in cases where assets acquired by an assessee during the previous year are put to use for the purpose of business or profession for a period of less than one hundred and eighty days in that previous year. Thus, in cases of succession in business and amalgamation of companies, the predecessor in business and the successor or amalgamating company and amalgamated company, as the case may be, are entitled to depreciation allowance on the same assets, which in the aggregate may exceed the depreciation allowance admissible for a previous year at the rates prescribed in Appendix-I of the Income-tax Rules, 1962. An amendment has, therefore, been made to restrict the aggregate deduction for this allowance in a year in such cases to the amount computed at the prescribed rates. It has also been provided that the allowance shall be apportioned in the ratio of the number of days for which the asset is put to use in such cases.’
From the Circular as well as the language of the proviso it becomes clear that the restriction placed is applicable only when it is otherwise possible to claim depreciation on the same asset by both the companies, i.e., the amalgamating company as well as the amalgamated company. In order to trigger the sixth proviso, there has to be an asset, tangible or intangible, on which both the companies could have claimed the depreciation u/s 32(1) in the year of amalgamation. This proviso should not be made applicable to any such asset on which only one of the two companies could have claimed the depreciation otherwise. The goodwill being an offshoot of the amalgamation, the question of claiming depreciation thereon by the amalgamating company does not arise at all.
There can be a case where the amalgamated company is disentitled to claim depreciation on the assets acquired through the amalgamation, even without applying the sixth proviso to section 32(1)(ii). For instance, where the assets acquired through the amalgamation are recognised as inventories of the amalgamated company, though they were depreciable assets of the amalgamating company or where the corresponding income generated from such assets falls outside the scope of business income of the amalgamated company and, therefore, depreciation on such assets cannot be allowed to it on such assets u/s 32(1). In such cases, the question is whether the aggregate depreciation can be determined ignoring the amalgamation and the portion of it can be claimed in the hands of the amalgamated company on the basis of number of days for which the assets were used by it merely by relying upon the sixth proviso to section 32(1)(ii)? The answer obviously is no. This leads us to the conclusion that the sixth proviso to section 32(1)(ii) applies only in a situation where both the companies are eligible to claim the depreciation on the same assets for the year of amalgamation and not otherwise.
Further, this proviso has a limited applicability only to the year in which the succession or amalgamation takes place and it does not apply to the subsequent years. There is no probability of claiming depreciation by two entities in the subsequent years on the same assets exceeding the depreciation otherwise allowable, for the obvious reason that the predecessor or the amalgamating company will cease to own the asset or exist by virtue of the succession or the amalgamation as the case may be. Therefore, if a view is taken that the depreciation on goodwill arising on account of the amalgamation cannot be allowed only because of the sixth proviso to section 32(1)(ii), then it will result into denial of depreciation only for the year of amalgamation and not for subsequent years. It would be quite illogical to consider the amalgamated company as ineligible for depreciation on such goodwill only for the first year and, then, allow it to claim the depreciation from the second year onward.
The better view therefore is the one propounded by the Hyderabad bench of the Tribunal in the case of Mylan Laboratories Ltd. (Supra) that the depreciation should be granted to the amalgamated company on the goodwill recognised by it, being the excess of consideration over the appropriate values of net assets acquired, starting from the year of amalgamation itself.

Sections 2(14), 2(47), 45, 56 – Giving up of a right to claim specific performance by conveyance in respect of an immovable property amounts to relinquishment of capital asset. It is not necessary that in all such cases there should have been a lis pending between the parties and in such lis the right to specific performance has to be given up. The payment of consideration under the agreement of sale, for transfer of a capital asset, is the cost of acquisition of capital gains. Amount received in lieu of giving up the said right constitutes capital gains and is exigible to tax

16. [2020] 117
taxmann.com 520 (Bang.)(Trib.) Chandrashekar
Naganagouda Patil vs. DCIT ITA No.
1984/Bang/2017 A.Y.: 2012-13 Date of order: 29th
June, 2020

 

Sections 2(14),
2(47), 45, 56 – Giving up of a right to claim specific performance by
conveyance in respect of an immovable property amounts to relinquishment of
capital asset. It is not necessary that in all such cases there should have
been a lis pending between the parties and in such lis the right
to specific performance has to be given up. The payment of consideration under
the agreement of sale, for transfer of a capital asset, is the cost of
acquisition of capital gains. Amount received in lieu of giving up the
said right constitutes capital gains and is exigible to tax

 

FACTS

The assessee, an
individual, entered into an agreement dated 9th February, 2005 to
purchase a vacant site in Amanikere village, Bangalore for a consideration of
Rs. 27,60,000. He paid an advance of Rs. 2,75,000 and agreed to pay the balance
at the time of registration of sale deed. The vendor of the property was
required to make out a marketable title to the property. Under clause 8 of the
agreement, the assessee had a right to enforce the terms by way of specific
performance.

 

On 8th
February, 2011, Mr. Channakeshava as vendor, along with the assessee as a
confirming party, sold the property to a third party for a consideration of Rs.
82,80,000. The preamble to the sale deed stated that the assessee has been
added as a confirming party as he was the agreement holder who had a right to
obtain conveyance of the property from the owner. Out of the consideration of
Rs. 1,200 per sq. feet, a sum of Rs. 500 per sq. feet was to be paid to the
vendor, Mr. Channakeshava, and Rs. 700 per sq. feet was to be paid to the
assessee.

 

The assessee
considered the sale consideration of Rs. 48,30,000 so received under the head
capital gains. The A.O. was of the view that under the agreement dated 9th
February, 2005, the assessee did not have any right over the property except a
right to get refund of advance paid. Accordingly, he taxed Rs. 45,55,000 under
the head income from other sources.

 

Aggrieved, the
assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O.
by observing that the assessee did not file any suit for specific performance
and did not have any right over the capital asset.

 

Aggrieved, the
assessee preferred an appeal to the Tribunal.

 

HELD

The Tribunal noted that
the Karnataka High Court has in the case of CIT vs. H. Anil Kumar [(2011)
242 CTR 537 (Kar.)] held that the right to obtain a conveyance of
immovable property falls within the expression `property of any kind’ used in
section 2(14) and consequently it is a capital asset. The Tribunal held that
the right acquired under the agreement by the assessee has to be regarded as
‘capital asset’. Giving up of the right to claim specific performance by
conveyance in respect of an immovable property amounts to relinquishment of the
capital asset. Therefore, there was a transfer of capital asset within the
meaning of the Act. The payment of consideration under the agreement of sale,
for transfer of a capital asset, is the cost of acquisition of the capital
asset. Therefore, in lieu of giving up the said right, any amount
received constitutes capital gain and it is exigible to tax. It is not
necessary that in all such cases there should have been a lis between
the parties and in such lis the right to specific performance has to be
given up. The Tribunal held that the CIT(A) erred in holding that the assessee
did not file a suit for specific performance and therefore cannot claim the
benefit of the ratio laid down by the Hon’ble Karnataka High Court in
the case of H. Anil Kumar (Supra).

 

The Tribunal
allowed the appeal filed by the assessee.

 

Reopening of assessment – Beyond four years – Information from Investigation Wing – Original assessment completed u/s 143(3) – Primary facts disclosed – Reasons cannot be substituted

8. Gateway
Leasing Pvt. Ltd. vs. ACIT (1)(2) & Ors. [Writ Petition No. 2518 of 2019] A.Y.: 2012-13 Date of order: 11th March, 2020 (Bombay High Court)

[Appellate
Tribunal in I.T.A. No. 5535/Mum/2014; Date of order: 11th January,
2017; A.Y.: 2003-04; Bench ‘F’ Mum.]

 

Reopening of assessment – Beyond four years
– Information from Investigation Wing – Original assessment completed u/s
143(3) – Primary facts disclosed – Reasons cannot be substituted

 

The petitioner is a company registered under
the Companies Act, 1956 engaged in the business of financing and investing
activities as a non-banking financial company registered with the Reserve Bank
of India.

 

Through this petition, the petitioner sought
quashing of the notice dated 31st March, 2019 issued u/s 148 of the
Act by the ACIT Circle 1(1)(2), Mumbai as well as the order dated 26th
August, 2019 passed by the DCIT Circle 1(1)(2), Mumbai, rejecting the
objections raised by the petitioner to the re-opening of its assessment.

 

For the A.Y. 2012-13 the petitioner had
filed return of income on 20th September, 2012 declaring total
income of Rs. 90,630. Initially, the return was processed u/s 143(1) of the
Act. But the case was later selected for scrutiny. During the course of
assessment proceedings, details of income, expenditure, assets and liabilities
were called for and examined. After examination of these details, the A.O.
passed an order u/s 143(3).

 

On 31st March, 2019 the A.O.
issued a notice u/s 148 stating that he had reasons to believe that the
petitioner’s income chargeable to tax for the A.Y. 2012-13 had escaped
assessment within the meaning of section 147. The petitioner sought the reasons
for issuing the said notice. It also filed return of income u/s 148, returning
the income at Rs. 90,630 as originally assessed by the A.O. u/s 143(3). By a
letter dated 31st May, 2019, the A.O. furnished the reasons for
re-opening of the assessment.

 

It was stated that information was received
from the Investigation Wing (I/W) of the Income Tax Department that a search
and seizure action was carried out on the premises of one Mr. Naresh Jain which
revealed that a syndicate of persons was acting in collusion and managing
transactions in the stock exchange, thereby generating bogus long-term capital
gains / bogus short-term capital loss and bogus business loss entries for
various beneficiaries.

 

From the materials gathered in the course of
the said search and seizure action, it was alleged that the petitioner had traded
in the shares of M/s Scan Steel Ltd. and was in receipt of Rs. 23,98,014 which
the A.O. believed had escaped assessment within the meaning of section 147. It
was also alleged that the petitioner had failed to disclose fully and truly all
material facts necessary for the assessment for the A.Y. 2012-13 for which the
notice u/s 148 was issued.

 

The petitioner submitted objections to
re-opening of assessment proceedings on 26th June, 2019. Referring
to the reasons recorded, it was contended on behalf of the petitioner that the
original assessment was completed u/s 143(3) where all the details of purchase
and sale of shares of M/s Scan Steels Ltd., also known as Clarus Infrastructure
Realties Ltd. (earlier known as Mittal Securities Finance Ltd.), were disclosed.
While denying that the petitioner had any dealing with the parties whose names
cropped up during the said search and seizure action, it was stated that the
purchase and sale of shares were done by the petitioner through a registered
broker of the Bombay Stock Exchange. Payment for the purchase of the shares was
made by cheque through the BSE at the then prevailing market price. Thus, there
was no apparent reason to classify the receipt of Rs. 23,98,014 as having
escaped assessment. Therefore, it was contended that the decision to re-open
assessment was nothing but change of opinion, which was not permissible in law.

 

The A.O. by his letter dated 26th
August, 2019 rejected the objections raised by the petitioner and stated that
the petitioner had furnished the details of purchase and other material facts
before the A.O. and the latter, in his assessment order, had totally relied on
the said submissions and accepted the same without cross-verification. It was
further stated that the challenge to the impugned notice was untenable.
Besides, the Act provided for a host of remedial measures in the form of
appeals and revisions. Finally, the Department justified issuance of the
impugned notice and re-opening of the assessment and made a reference to the
report of the I/W. As per the I/W, the petitioner had diluted its income by
adopting manufactured and pre-arranged transactions which were never disclosed
to the A.O. Such action was a failure on the part of the petitioner to make
full and true disclosure of all material facts. The petitioner’s contention
that all primary facts were disclosed were thus disputed. That apart, it was
contended that the Pr. CIT-1 had applied his mind and thereafter granted
approval to the issuance of notice u/s 148.

 

In its rejoinder, the petitioner submitted
that all details about the purchase and sale of shares of Mittal Securities
Ltd. were furnished. The A.O. was not required to give findings on each issue
raised during the course of the assessment proceedings. The A.O. had applied
his mind and granted relief to the petitioner in the assessment order.
Normally, when the submission of an assessee is accepted, no finding is given in
the assessment order.

 

The Hon’ble Court, after referring to
various decisions, observed that the grounds or reasons which led to formation
of the belief that income chargeable to tax has escaped assessment must have a
material bearing on the question of escapement of income of the assessee from
assessment because of his failure or omission to disclose fully and truly all
material facts. Once there exist reasonable grounds for the ITO to form the
above belief that would be sufficient to clothe him with jurisdiction to issue
notice.

 

However, sufficiency of the grounds is not
justifiable. The expression ‘reason to believe’ does not mean a purely
subjective satisfaction on the part of the ITO. The reason must be held in good
faith. It cannot be merely a pretence. It is open to the Court to examine
whether the reasons for the formation of the belief have a rational connection
with or a relevant bearing on the formation of the belief and are not
extraneous or irrelevant. To this limited extent, initiation of proceedings in
respect of formation of the belief that income chargeable to tax has escaped
assessment must have a material bearing on the question of escapement of income
of the assessee from assessment because of his failure or omission to disclose
fully and truly all material facts.

 

The Court further observed that it would be
evident from the material on record that the petitioner had disclosed the above
information to the A.O. in the course of the assessment proceedings. All
related details and information sought by the A.O. were furnished. Several
hearings took place in this regard after which the A.O. had concluded the
assessment proceedings by passing the assessment order u/s 143 (3). Thus it
would appear that the petitioner had disclosed the primary facts at its
disposal for the purpose of assessment. He had also explained whatever queries
were put to it by the A.O. with regard to the primary facts during the
hearings.

 

In such circumstances, it cannot be said that the petitioner did not
disclose fully and truly all material facts necessary for the assessment.
Consequently, the A.O. could not have arrived at the conclusion that he had
reasons to believe that income chargeable to tax had escaped assessment. In the
absence of the same, the A.O. could not have assumed jurisdiction and issued
the impugned notice u/s 148 of the Act. That apart, the A.O. has tried to
traverse beyond the disclosed reasons in the affidavit which is not
permissible. The same cannot be taken into consideration while examining the validity
of the notice u/s 148. The reasons which are recorded by the A.O. for re-opening an
assessment are the only reasons which can be considered when the formation of
the belief is impugned; such reasons cannot be supplemented subsequently by
affidavit(s). Therefore, in the light of the discussions, the attempt by the
A.O. to re-open the concluded assessment is not at all justified and
consequently the impugned notice cannot be sustained and the impugned order
dated 26th August, 2019 is also quashed.

 

Industrial undertaking – Special deduction u/s 80-IA(4) – Industrial undertaking engaged in production of power – Meaning of ‘power’ in section 80-IA(4) – Power would include steam; A.Y. 2011-12

37. Principal CIT vs. Jay Chemical Industries Ltd. [2020] 422 ITR 449 (Guj.) Date of order: 17th February, 2020 A.Y.: 2011-12

 

Industrial undertaking – Special deduction
u/s 80-IA(4) – Industrial undertaking engaged in production of power – Meaning
of ‘power’ in section 80-IA(4) – Power would include steam; A.Y. 2011-12

 

For the A.Y. 2011-12 the assessee had
claimed deduction of Rs. 32,51,080 u/s 80-IA(4) of the ITA, 1961. This claim
was on account of the operation of the captive power plant. The assessee showed
income from sale of power to the tune of Rs. 1,23,10,500 and the sale of vapour
at Rs. 6,59,77,170. The A.O. took the view that ‘vapour’ would not fall within
the meaning of ‘power’.

 

The Commissioner (Appeals) and the Tribunal
allowed the assessee’s claim.


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

 

‘i) Section 80-IA(4) of the Income-tax Act,
1961 provides for special deduction to industrial undertakings engaged in the
production of power. The word “power” should be understood in common parlance
as “energy”. “Energy” can be in any form, mechanical, electricity, wind or
thermal. In such circumstances, “steam” produced by an assessee can be termed
as power and would qualify for the benefits available u/s 80-IA(4).

 

ii) Steam had
to be considered as “power” for the purpose of deduction u/s 80-IA(4).’

Deemed income – Section 41(1)(a) of ITA, 1961 – Remission or cessation of liability – Condition precedent – Assessee, a co-operative society, obtaining loan from National Dairy Development Board for which state government stood guarantee on payment of commission – Commission claimed by assessee as revenue expenditure in earlier assessment years – State government writing off liability and allowing it to be treated as capital grant to be used only for capital and rehabilitation purposes – Assessee continues to remain liable to repay those amounts – No remission or cessation of liability u/s 41(1)(a) – Cannot be treated as deemed income u/s 41(1)(a); A.Y. 2004-05

36. Principal CIT
vs. Rajasthan Co-Operative Dairy Federation Ltd. [2020] 423 ITR 89 (Raj.) Date of order: 23rd July, 2019 A.Y.: 2004-05

 

Deemed income – Section 41(1)(a) of ITA,
1961 – Remission or cessation of liability – Condition precedent – Assessee, a
co-operative society, obtaining loan from National Dairy Development Board for
which state government stood guarantee on payment of commission – Commission
claimed by assessee as revenue expenditure in earlier assessment years – State
government writing off liability and allowing it to be treated as capital grant
to be used only for capital and rehabilitation purposes – Assessee continues to
remain liable to repay those amounts – No remission or cessation of liability
u/s 41(1)(a) – Cannot be treated as deemed income u/s 41(1)(a); A.Y. 2004-05

 

The assessee, a
co-operative society involved in milk and milk product processing, secured a
loan from the National Dairy Development Board for which the government of
Rajasthan stood guarantor subject to payment of commission of Rs. 25 lakhs per annum.
This was claimed as expenditure by the assessee for several years up to the
A.Y. 2004-05. The amount remained outstanding and was shown as payable to the
government of Rajasthan. The state later wrote off that liability and allowed
it to be treated as a capital grant to be used only for capital and
rehabilitation purposes. The A.O. was of the view that the transaction, i.e.,
cessation of liability, involved the utilisation of receipts which had been
treated as revenue all along and, therefore, treated it as deemed income u/s
41(1)(a) of the Income-tax Act, 1961 for the A.Y. 2004-05.

 

The Commissioner (Appeals) allowed the
appeal and held that the amount payable to the government was to be treated as
capital grant to be used for rehabilitation or capital requirement of the
assessee and could not be used for any further distribution of dividend or
revenue expenditure, and that it was not a case of remission or cessation of
the liability as envisaged u/s 41(1)(a). The Tribunal concurred with the view
of the Commissioner (Appeals) and dismissed the appeal filed by the Department.

 

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

 

‘Both the Commissioner (Appeals) and the
Tribunal had rendered concurrent findings on the facts. The record also
supported their findings in that the loan utilised by the assessee was for
capital purposes and the loan was given by the National Dairy Development
Board. The assessee continued to remain liable to repay those amounts. The
state, instead of fully writing off the amounts, had imposed a condition that
they would be utilised only for capital or rehabilitation purposes. This was
therefore a significant factor, i.e., the writing off was conditional upon use
of the amount in the hands of the assessee which was for the purpose of
capital. No question of law arose.’

Assessment – Notice u/s 143(2) of ITA, 1961 – Limitation – Notice calling for rectification of defects in return u/s 139(9) – Rectification within time allowed in notice – Not a case of revised return but of corrected return which relates back to date of original return – Limitation for notice u/s 143(2) runs from date of original return, not date of rectified return; A.Y. 2016-17

35. Kunal Structure (India) Private Ltd. vs. Dy.CIT [2020] 422 ITR 482 (Guj.) Date of order: 24th October, 2019 A.Y.: 2016-17

 

Assessment
– Notice u/s 143(2) of ITA, 1961 – Limitation – Notice calling for
rectification of defects in return u/s 139(9) – Rectification within time
allowed in notice – Not a case of revised return but of corrected return which
relates back to date of original return – Limitation for notice u/s 143(2) runs
from date of original return, not date of rectified return; A.Y. 2016-17

 

For
the A.Y. 2016-17, the petitioner company had filed its return of income u/s
139(1) on 10th September, 2016. Thereafter, the petitioner received
an intimation of defective return u/s 139(9) of the Act on 17th
June, 2017. The petitioner received a reminder on 5th July, 2017
granting him an extension of fifteen days to comply with the notice issued u/s
139(9) and accordingly, the time limit for removal of the defects u/s 139(9) of
the Act stood extended till 20th July, 2017. The petitioner removed
the defects on 7th July, 2017 within the time granted. Subsequently,
the return was processed u/s 143(1) on 12th August, 2017 wherein the
date of original return is shown to be 10th September, 2016.
Thereafter, the impugned notice u/s 143(2) of the Act came to be issued on 9th
August, 2018, informing the petitioner that the return of income filed by it for the A.Y. 2016-17 on 7th
July, 2017 has been selected for scrutiny.

 

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

 

‘i)  A study of the provisions of section 139 of
the Income-tax Act, 1961 shows that under sub-section (1) thereof, an assessee
is required to file return on or before the due date. If one looks at the
language employed in sub-sections (1), (3) and (5) of section 139, a common
thread in all the sub-sections is that the assessee is required to file a
return of income under those sub-sections. However, from the language employed
in sub-section (9) of section 139 of the Act, it does not require any return to
be filed by the assessee. All that the section says is that the assessee is
required to be given an opportunity to rectify the defect in the return filed
by him within the time provided, failing which such return would be treated as
an invalid return.

 

ii)  Unlike sub-section (5) of section 139 of the
Act which requires an assessee to file a revised return of income in case of
any omission or wrong statement in the return of income filed under sub-section
(1) thereof, sub-section (9) of section 139 of the Act does not require an
assessee to file a fresh return of income, but requires the assessee to remove
the defects in the original return of income filed by him within the time
provided therein. Once the defects in the original return of income are
removed, such return would be processed further under the Act. In case such
defects are not removed within the time allowed, such return of income would be
treated as an invalid return.

 

iii) There is a clear distinction between a revised
return and a correction of return. Once a revised return is filed, the original
return must be taken to have been withdrawn and substituted by a fresh return
for the purpose of assessment. There is no concept of corrected return of
income under the Act. Therefore, in effect and substance, what the notice under
sub-section (9) of section 139 does is to call upon the assessee to remove the
defects pointed out therein. Therefore, mere reference to the expression “corrected
income” in the notice under sub-section (9) of section 139 of the Act does not
mean that a fresh return of income has been filed under that sub-section. The
action of removal of the defects would relate back to the filing of the
original return of income and, accordingly, it is the date of filing of the
original return which has to be considered for the purpose of computing the
period of limitation under sub-section (2) of section 143 of the Act and not
the date on which the defects actually came to be removed.

 

iv) The assessee filed its return of income under sub-section (1) of
section 139 on 10th September, 2016. Since the return was defective,
the assessee was called upon to remove such defects, which came to be removed
on 7th July, 2017, that is, within the time allowed by the A.O.
Therefore, upon such defects being removed, the return would relate back to the
date of filing of the original return, that is, 10th September, 2016
and consequently the limitation for issuance of notice under sub-section (2) of
section 143 of the Act would be 30th September, 2017, viz., six
months from the end of the financial year in which the return under sub-section
(1) of section 139 was filed. The notice under sub-section (2) of section 143
of the Act had been issued on 9th August, 2018, which was much
beyond the period of limitation for issuance of such notice as envisaged under
that sub-section. The notice, therefore, was barred by limitation and could not
be sustained.’

 

 

Assessment – Notice u/s 143(2) of ITA, 1961 – Limitation – Defective return – Rectification of defects – Relates back to date of original return – Time limit for issue of notice u/s 143(2) – Not from date of rectification of defects but from date of return – Return filed on 17th September, 2016 and return rectified on 12th September, 2017 – Notice u/s 143(2) issued on 10th August, 2018 – Barred by limitation; A.Y. 2016-17

34. Atul Projects India (Pvt.) Ltd. vs. UOI [2020] 422 ITR 478
(Bom.) Date of order: 2nd
January, 2019 A.Y.: 2016-17

 

Assessment
– Notice u/s 143(2) of ITA, 1961 – Limitation – Defective return –
Rectification of defects – Relates back to date of original return – Time limit
for issue of notice u/s 143(2) – Not from date of rectification of defects but
from date of return – Return filed on 17th September, 2016 and
return rectified on 12th September, 2017 – Notice u/s 143(2) issued
on 10th August, 2018 – Barred by limitation; A.Y. 2016-17

 

For
the A.Y. 2016-17, the assessee filed its return on 17th October,
2016 and it was found to be defective. The A.O. issued a notice u/s 139(9) of
the Income-tax Act, 1961 and called upon the assessee to remove the defects
which the assessee did within the permitted period on 12th
September, 2017. Yet another notice was issued by the Department on 19th
September, 2017 u/s 139(9) which stated that the return filed on 12th
September, 2017 in response to the directions for removing the defects, was
also considered to be defective. On 29th September, 2017, the
assessee electronically represented to the Department that there was no defect
in the return but this communication was not responded to by the Department. On
10th February, 2018, the A.O. passed an order u/s 143(1).
Thereafter, on 10th August, 2018, the A.O. issued a notice u/s
143(2) for scrutiny assessment u/s 143(3).

 

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

 

‘i)
The date of filing of the return would be the date on which it was initially
presented and not the date on which the defects were removed. The assessee had
filed its return of income on 17th October, 2016 and it was found to
be defective. The Department had called upon the assessee to remove the
defects, which the assessee did on 12th September, 2017. On a
representation by the assessee, the Department did not raise this issue further
and thus had impliedly accepted the assessee’s representation that there were
no further defects after the assessee had removed the defects on 12th
September, 2017. The notice dated 10th August, 2018 issued u/s
143(2) was barred by limitation.

 

ii) In the result, the impugned
notice dated 10th August, 2018 is set aside.’

Section 199/205 – Assessee cannot be made to suffer because of non-deposit of tax deducted with the government by the deductor – Under section 205, the assessee / deductee cannot be called upon to pay the tax – Credit for the tax deducted at source has to be allowed in the hands of the deductee irrespective of whether or not the same has been deposited by the deductor to the credit of the Central government

4. Aricent
Technologies Holdings Ltd. vs. Addl. CIT (Delhi)

Sushma
Chawla (J.M.) and Dr. B.R.R. Kumar (A.M.)

ITA. No.
5708/Del/2019

A.Y.:
2015-16

Date of
order: 23rd December, 2019

Counsel
for Assessee / Revenue: Ajay Vohra, Neeraj Jain and Anshul Sachar / Sanjay I.
Bara

 

Section 199/205 – Assessee cannot be
made to suffer because of non-deposit of tax deducted with the government by
the deductor – Under section 205, the assessee / deductee cannot be called upon
to pay the tax – Credit for the tax deducted at source has to be allowed in the
hands of the deductee irrespective of whether or not the same has been
deposited by the deductor to the credit of the Central government

 

FACTS

The assessee in its
return of income had claimed credit to the extent of Rs. 18,79,68,945. The
A.O., upon completion of the assessment u/s 144 r.w.s. 143(3), allowed the
credit of TDS of Rs. 16,57,18,029. Thus, credit for TDS was short-granted to
the extent of Rs. 2,22,50,916.

 

The assessee had, along with the
return of income, furnished complete details including the names of the
parties, the amount paid by them and the tax deducted at source in respect of
the TDS of Rs. 18.79 crores.

 

HELD

The Tribunal observed that the issue
which has arisen in the present ground of appeal is against the short credit of
tax deducted at source. It noted that the assessee had furnished the party-wise
details of the amounts aggregating to Rs. 18.79 crores deducted out of payments
due to the assessee, which are also furnished as part of the Paper Book.

 

It also noted that the grievance of
the assessee is two-fold. First of all, it was pointed out that in case
subsequent to the processing of the assessment order, if changes are made in
the Form No. 26AS by the parties who had deducted tax at source out of the
payment made to the assessee, then the credit of the same should be allowed to
the assessee. The Tribunal held that it found merit in the plea of the assessee
though the AR for the assessee has not filed any evidence in this regard. But
in case necessary evidence is available, then it is the duty of the A.O. to
allow the claim as per Revised Form No. 26AS.

 

As regards the next stand of the
assessee, that in case the deductor deducts tax at source, i.e. withholds tax
out of payments due / paid to the assessee but does not deposit the tax
withheld by it, then why should the assessee suffer? The Tribunal held that

(i) Under
section 199(1) it is provided that if tax has been deducted at source in
accordance with the provisions of Chapter XVII and paid to the Central
government, the same shall be treated as payment of tax on behalf of the person
from whose income the deduction was made; and

(ii) Under
section 205 it is further provided that where the tax has been deducted at
source by the deductor out of the payments due to the deductee, then such
deductee cannot be held liable for payment of such tax which was deducted at
source by the deductor.

 

Once tax has been deducted then the
deductor is liable to deposit the same into the credit of the Central
government. Such amount which is withheld by the deductor out of the amount due
to the deductee, i.e., the person to whom the payments are made, then the said
deduction shall be treated as payment of tax on behalf of the person from whom
such deduction was made as per the provisions of section 199(1).

 

It also observed that there are
provisions under the Act dealing with the recovery of tax at source from the
person who has withheld the same. In terms of section 205 of the Act, the
assessee / deductee cannot be called upon to pay tax to the extent to which tax
had been deducted from the payments due.

 

Consequently, it follows that credit
for such tax deducted at source, which is deducted from the account of the
deductee by the deductor, is to be allowed as taxes paid in the hands of the
deductee irrespective of the fact whether or not the same has been deposited by
the deductor to the credit of the Central government.

 

The
deductee in such circumstances cannot be denied credit of tax deducted at
source on its behalf. It held that where the assessee is able to furnish the
necessary details with regard to tax deduction at source out of the amounts due
to it, then the action which follows is allowing the credit of such tax
deducted at source to the account of the deductee.

 

In
case where the deductor deposits the tax deducted at source to the credit of
the Central government and the deduction reflects in Form No. 26AS, may be on a
later date, then it is incumbent upon the assessee to produce the necessary
evidence in this regard and it is also the duty of the A.O. to allow such
credit of tax deducted at source as taxes paid in the hands of the deductee
assessee.

 

It observed that its view is
supported by the ratio laid down by the Bombay High Court in Yashpal
Sahani vs. Rekha Hajarnavis, Assistant Commissioner of Income-tax [(2007) 165
taxman 144 (Bom.)] and the Gujarat High Court in the case of Sumit
Devendra Rajani vs. Assistant Commissioner of Income-tax [(2014) 49 taxmann.com
31 (Gujarat)].

 

Applying the same parity of reasoning
in the decision of the Bombay High Court in Pushkar Prabhat Chandra Jain
vs. Union of India [(2019) 103 taxmann.com 106 (Bombay)], the Tribunal
directed the A.O. to allow the credit of tax deducted at source in the hands of
the assessee where the assessee produces the primary evidence of the same being
deducted tax at source out of the amount due to it.

 

This ground of appeal filed by the assessee was allowed.

Income from undisclosed sources – Section 69 of ITA, 1961 – Addition on basis of statement made by partner of assessee u/s 108 of Customs Act, 1962 – No other corroborative evidence – Addition not justified

12. Principal CIT vs. Nageshwar Enterprises

 [2020] 421 ITR 388 (Guj.)

Date of order: 3rd February, 2020

A.Y.: 2007-08

 

Income from undisclosed sources –
Section 69 of ITA, 1961 – Addition on basis of statement made by partner of
assessee u/s 108 of Customs Act, 1962 – No other corroborative evidence –
Addition not justified

 

In the course of a search
conducted by the Customs Department, a partner of the assessee in his statement
recorded on oath admitted before the Directorate of Revenue Intelligence the
undervaluation of goods, part of which pertained to A.Y. 2007-08, the year of
search. He admitted that the undervalued amount was paid in cash to the sellers
which were foreign companies. During the assessment the A.O. rejected the
submissions of the assessee and made additions on account of unaccounted
investment and unaccounted purchases.

 

The
Commissioner (Appeals) found that the A.O. did not make further inquiries and
that the only evidence with him was in the form of a confessional statement of
the partner of the assessee recorded on oath u/s 108 of the Customs Act, 1962
and that in the absence of any corroborative evidence or finding, no addition
could be made merely on the basis of the admission statement. The Tribunal
found that the addition was made based on the show cause notice issued by the
Revenue Intelligence, that the statement was retracted by the partner and that
the Customs Excise and Service Tax Appellate Tribunal had dropped the
proceedings initiated against the assessee. The Tribunal held that in the
absence of any documentary evidence no addition could be made on the action of
a third party, i.e., the Directorate of Revenue Intelligence.

 

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

‘i) The Tribunal was correct in holding that no addition could be made
on the basis of the action of the third party, i.e., the Directorate of Revenue
Intelligence. The Department could not start with the confessional statement of
the assessee. The confessional statement had to be corroborated with other
material on record.

 

ii) The appellate authorities had
concurrently recorded a finding that except the statement of the partner
recorded u/s 108 of the Customs Act, 1962, there was no other evidence. No
question of law arose.’

Income – Exemption u/s 10(24) of ITA, 1961 – Registered trade union – Amount received on settlement of dispute between company and its workers disbursed to workers – Amount not assessable in hands of trade union

11. Gujarat Rajya Kamdar Sabha Union Machiwadi vs. ITO

[2020] 421 ITR 341 (Guj.)

Date of order: 7th January, 2020

A.Y.: 2009-10

 

Income – Exemption u/s 10(24) of
ITA, 1961 – Registered trade union – Amount received on settlement of dispute
between company and its workers disbursed to workers – Amount not assessable in
hands of trade union

 

The assessee was a registered
trade union. Its managing committee passed a unanimous resolution that as a
result of a compromise arrived at between the assessee and a company in the
Labour Court, whatever amount was received from the company would be fully
distributed to the workers of the company. In such circumstances a settlement
was arrived at on 15th May, 2008, which was reduced into writing in
the form of a memorandum of settlement between the company, i.e, the employer,
and the assessee. In view of the settlement, the assessee received payment of
Rs. 60,96,818. The amount was assessed in the hands of the assessee as income
for the A.Y. 2009-10.

 

The Tribunal upheld the
assessment and the addition.

 

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

 

‘i) Once the factum of settlement was not disputed coupled with
the factum of receipt of a particular amount from the company, and the
amount had been distributed amongst the employees, the case would squarely
stand covered u/s 10(24) of the Income-tax Act, 1961. Though the contribution
from the employer was received as per the settlement agreement, it was only
incidental to the activities of the services of the assessee in resolving the
dispute between the member workers and the employer with the intention of
advancement of welfare of the members.

 

ii) The amount was not assessable as income of the assessee.’

Income – Accrual of (time of accrual of income) – Section 5 of ITA, 1961 – Where assessee sold a land during relevant assessment year and as per MOU part of sale consideration was payable by purchaser on completion of assessee’s obligation under MOU – Assessee having not met conditions of MOU during relevant year, such amount was not taxable in relevant assessment year

10. Principal CIT vs. Rohan
Projects

[2020] 113 taxmann.com 339
(Bom.)

Date of order: 18th
November, 2019

A.Y.: 2012-13

 

Income – Accrual of (time of
accrual of income) – Section 5 of ITA, 1961 – Where assessee sold a land during
relevant assessment year and as per MOU part of sale consideration was payable
by purchaser on completion of assessee’s obligation under MOU – Assessee having
not met conditions of MOU during relevant year, such amount was not taxable in
relevant assessment year

 

The assessee
is engaged in the business termed Promoter and Developer. It had sold land to
M/s Symboisis which transaction took place in the previous year relevant to the
A.Y. 2012-13. The land was sold under  a
Memorandum of Understanding (MOU) dated 2nd February, 2012 for a
total consideration of Rs. 120 crores. However, the assessee offered only a sum
of Rs. 100 crores for tax in the return for the A.Y. 2012-13. This was because
the MOU provided that a sum of Rs. 20 crores would be paid by the purchaser
(M/s Symboisis) on execution of the sale deed after getting the plan sanctioned
and on inclusion of the name of the purchaser in the 7/12 extract. However, as
the assessee was not able to meet the conditions of the MOU during the subject
assessment year, the sum of Rs. 20 crores, according to the assessee, could not
be recognised as income for the subject assessment year. The A.O. did not accept
this and held that the entire sum of Rs. 120 crores is taxable in the subject
assessment year.

 

The Tribunal, after recording the
above facts and relying upon the decision of the Supreme Court in Morvi
Industries Ltd. vs. CIT [1971] 82 ITR 835, held that the income accrues
only when it becomes due, i.e., it must also be accompanied by corresponding
liability of the other party to pay the amount. On facts it was found that the
amount of Rs. 20 crores was not payable in the previous year relevant to the subject
assessment year as the assessee had not completed its obligation under the MOU
entirely. Moreover, it also found that Rs. 20 crores was offered to tax in the
subsequent assessment year and also taxed. Thus, the Tribunal allowed the
assessee’s appeal.

 

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

‘Whether on the facts and in the
circumstances of the case and in law, the Tribunal was justified in holding
that a sum of Rs. 20 crores is not taxable in the subject assessment year?’

 

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

 

‘i) We note that the finding of fact arrived at by the Tribunal that
the respondent was not able to comply (with) its obligations under the MOU in
the previous year relevant to the subject assessment year so as to be entitled
to receive Rs. 20 crores is not shown to be perverse. In fact, the issue is
covered by the decision of the Apex Court in the case of CIT vs. Shoorji
Vallabdas & Co. [1962] 46 ITR 144 wherein it is held that “Income
tax is a levy on income. No doubt, the Income-tax Act takes into account two
points of time at which the liability to tax is attracted, viz., the accrual of
the income or its receipt; but the substance of the matter is the income; if
income does not result at all, there cannot be a tax ” So also in Morvi
Industries Ltd. (Supra), the Supreme Court has held that income accrues
when there is a corresponding liability on the other party. In the present
facts, in terms of the MOU there is no liability on the other party to pay the
amounts.

 

ii) In any event, the amount of Rs. 20 crores has been offered to tax
in the subsequent assessment year and also taxed. This Court, in the case of CIT
vs. Nagri Mills Co. Ltd. [1958] 33 ITR 681 (Bom.) has observed as
follows:

 

“3. We have often wondered why
the Income-tax authorities, in a matter such as this where the deduction is
obviously a permissible deduction under the Income-tax Act, raise disputes as
to the year in which the deduction should be allowed. The question as to the
year in which a deduction is allowable may be material when the rate of tax
chargeable on the assessee in two different years is different; but in the case
of income of a company, tax is attracted at a uniform rate, and whether the
deduction in respect of bonus was granted in the assessment year 1952-53 or in
the assessment year corresponding to the accounting year 1952, that is, in the
assessment year 1953-54, should be a matter of no consequence to the
Department; and one should have thought that the Department would not fritter
away its energies in fighting matters of this kind. But, obviously, judging
from the references that come up to us every now and then, the Department
appears to delight in raising points of this character which do not affect the
taxability of the assessee or the tax that the Department is likely to collect
from him whether in one year or the other.”

 

Nothing has been shown to us as
to why the above observation will not apply to the present facts.

 

iii) In the aforesaid circumstances, the
view taken by the Tribunal on facts is a possible view and calls for no
interference. In any event the tax on the amount of Rs. 20 crores has been paid
in the next year. Therefore, the proposed question does not give rise to any
substantial question of law. Hence, not entertained. The appeal is, therefore,
dismissed.’

DCIT (OSD)-8(2) vs. Hotel Leela Venture Ltd.; Date of order: 28th July, 2016; [ITA No. 617/Mum/2014; A.Y.: 2009-10; Mum. ITAT] Section 115JB of the Act – MAT – Forward foreign exchange contract entered into by assessee could not be considered as contingent in nature as it creates a continuing binding obligation on date of contract against assessee

14. The Pr. CIT-10 vs. Hotel Leela Venture Ltd. [Income tax Appeal No.
1097 of 2017] Date of order: 5th November, 2019 (Bombay High Court)

 

DCIT (OSD)-8(2) vs. Hotel Leela Venture Ltd.; Date of order: 28th
July, 2016; [ITA No. 617/Mum/2014; A.Y.: 2009-10; Mum. ITAT]

 

Section 115JB of the Act – MAT – Forward foreign exchange contract
entered into by assessee could not be considered as contingent in nature as it
creates a continuing binding obligation on date of contract against assessee

The assessee is
a company engaged in the business of five star deluxe hotels. The AO made an
addition of Rs. 10,47,08,044 to the book profit on account of foreign currency
transaction difference.

 

Being aggrieved
by the order, the assessee filed an appeal to the CIT(A). The CIT(A) partly
allowed the appeal, deleting the addition on the ground that the liability was
not a contingent liability.

 

Aggrieved by
the order of the CIT(A), the Revenue filed an appeal to the Tribunal. The
Tribunal found that after considering various judicial pronouncements, the
CIT(A) reached the conclusion that the said liability is not contingent. As per
the CIT(A), a contingent liability depends purely on occurrence and
non-occurrence of an event, whereas if an event has already taken place, which
in the present case is of entering into a contract and undertaking of
obligation to meet the liability, and only the consequential effect of the same is to be determined, then it cannot
be said that it is in the nature of a contingent liability.

 

After applying
the proposition of law laid down by the Hon’ble Supreme Court in the cases of Woodward
Governor India and Bharat Earth Movers, the CIT(A)
recorded a finding to the effect that it was not a contingent liability. Accordingly,
the appeal of the Revenue was dismissed.

 

Being aggrieved
by the order of the ITAT, the Revenue filed an appeal to the High Court. The
Court held that the Tribunal and the CIT(A) had held that the forward foreign
exchange contract entered into by the assessee to buy or sell foreign currency
at an agreed price at a future date cannot be considered as contingent in
nature as it creates a continuing binding obligation on the date of the
contract against the assessee. The view taken by the Tribunal was correct, that
in the present case where an obligation was undertaken to meet a liability and
only the consequential effect was to be determined, it could not be said that
the amount in question was in the nature of contingent liability.

 

Further, the
Revenue sought to urge an additional question of law to the effect that the
Tribunal erred in not treating the amount of Rs. 10,47,08,044 as capital
expenditure for computation of book profit u/s 115JB of the Act when this
amount was treated by the AO and accepted by the assessee as a capital
expenditure.

 

The Court
observed that this point was not urged before the Tribunal nor had it found
reference in the present appeal memo. The appeal was filed before the Tribunal
on the sole ground of the amount in question being a contingent liability. In
view of such a single, focused approach before the Tribunal, the decision of
the Tribunal was restricted only to that ground.

 

The argument of
Revenue that there was only a mistake in choosing the words, that instead of
capital expenditure, the words contingent liability were used, cannot be
accepted because the reason for the amount being treated as contingent in
nature had also been specified in the said ground, stating that the loss was on
account of foreign exchange fluctuation. It is not permissible for the
appellant to urge the said question for the first time before the Court and
that, too, during the course of the oral arguments.

 

Accordingly,
the appeal was dismissed.  

 

 

 

 

Sections 11, 12, 139, 148 – A failure on the part of the Trust to file its return of income u/s 139(4A) cannot lead to withdrawal of exemption under sections 11 and 12 – Having filed a return of income u/s 139, subsequently, where a return is furnished in response to notice u/s 148, it replaces the return filed u/s 139, including section 139(4A), and all the other provisions of the Act including sections 11 and 12 are applicable – There was no time limit prescribed for submission of return of income and audit report in respect of a Trust whose income before claiming the exemption exceeded the basic exemption limit Clause (ba) to Section 12A, which prescribes time limit for submission of return of income and audit report to be time available u/s 139(1), is effective from A.Y. 2018-19 and is prospective in its application

23. [2019] 202 TTJ (Del.) 928 United Educational Society vs. JCIT ITA Nos.
3674 & 3675/Del/2017 and 2733 & 2734/Del/2018 A.Ys.: 2006-2007 to 2009-2010 Date of order: 28th June, 2019

 

Sections 11, 12, 139, 148 – A failure on
the part of the Trust to file its return of income u/s 139(4A) cannot lead to
withdrawal of exemption under sections 11 and 12 – Having filed a return of
income u/s 139, subsequently, where a return is furnished in response to notice
u/s 148, it replaces the return filed u/s 139, including section 139(4A), and
all the other provisions of the Act including sections 11 and 12 are applicable
– There was no time limit prescribed for submission of return of income and
audit report in respect of a Trust whose income before claiming the exemption
exceeded the basic exemption limit

 

Clause (ba) to Section 12A, which
prescribes time limit for submission of return of income and audit report to be
time available u/s 139(1), is effective from A.Y. 2018-19 and is prospective in
its application

 

FACTS

The assessee was an educational society. The
A.O. had received information about huge investments made by the society in
land and building; however, no return of income had been filed. The A.O. issued
notice u/s 148, in response to which the assessee filed return of income
showing ‘nil’ income after application of section 11. There were two sets of
financial statements prepared, one for the purpose of obtaining loan and
another filed along with the return. In view of this, the A.O. ordered a
special audit to be carried out u/s 142(2A). Based on the report of the special
auditor, the A.O. made a computation of the total income of the society by
disallowing the benefit of exemption u/s 11. The income was assessed under the
head ‘Profits & Gains of Business or Profession’ and the assessee was
assessed in the status of an AOP.

 

Aggrieved, the assessee preferred an appeal
to the CIT(A) who gave partial relief to the assessee.

 

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

 

HELD

The A.O. had denied the benefit of exemption
of section 11 to the assessee on account of the fact that the assessee had not
filed its return of income pursuant to section 139(4A). The assessee was a
society which had been granted registration u/s 12A; it engaged in activities
which were within the meaning of charitable purpose, and once so registered,
the computation of income had to be made in accordance with the provisions of
sections 11 and 12.

 

The fact that the assessee had filed its
return in response to notice issued u/s 148 and not under the provisions of
section 139(4A) cannot be a reason for not granting the benefit of exemption.
Once a return of income is submitted under the provisions of section 148, it
replaces the return filed u/s 139 and all other provisions of the Act,
including sections 11 and 12, become applicable as if it was a return filed
under the provisions of section 139. For a return filed under the provisions of
section 148, the relevant provisions of section 139 have to be applied along
with the procedure for assessment and computation of income, without
restricting it to exclude any procedure. Therefore, the trust was entitled to
claim the exemption u/s 11 in computation of income.

 

Clause (b) of section 12A mandates that
provisions of sections 11 and 12 shall not apply unless the accounts are
audited and a return is filed along with the audited accounts. Thus, as and
when computation was done these conditions had to be complied with. The issue
of whether or not the return was filed in time is not relevant for clause (b)
of section 12A.

 

The Finance Act, 2017 has amended section
12A and a new clause has been inserted specifying the time limit in case of such
trusts to furnish their return of income and audit report within the time
specified in section 139(4A). These provisions are prospectively applicable
from A.Y. 2018-19 onwards and cannot be treated as clarificatory amendments.

 

Note: Clause (ba) to section 12A as inserted
by the Finance Act, 2017 prescribes that the return of income and tax audit
report has to be submitted by a trust within the time provided by section
139(1). Consequently, the ratio of this decision will not apply post
insertion of clause (ba), i.e. for assessment years 2017-18 and thereafter.

 

The grounds of appeal filed by the assessee
were allowed.

 

SPECIFIED DOMESTIC TRANSACTIONS: RETROSPECTIVE OPERABILITY OF OMISSION OF CLAUSE (i) TO SECTION 92BA(1)

Section 92BA of
the Income-tax Act, 1961 defines ‘Specified Domestic Transaction’ by providing
an exhaustive list of transactions; this section was introduced through the
Finance Act, 2012 w.e.f. 1st April, 2013. The transaction for
expenditure payable / paid to certain persons [mentioned u/s 40A(2)(b)], being
one of the specified domestic transactions, was omitted from the statute book
through the Finance Act, 2017 w.e.f. 1st April, 2017.

 

The enumeration
of a domestic transaction in section 92BA is a necessary requirement for the
reference of the same to the Transfer Pricing Officer u/s 92CA. Accordingly,
the omission of clause (i) to section 92BA(1) had the effect of restraining
reference to the Transfer Pricing Officer in case of transactions for expenditure
payable / paid to certain persons [mentioned u/s 40A(2)(b)] on and after the
date of enforcement of the omission (1st April, 2017).

 

The above said
omission and its effect was clear enough to rule out the scope for any
ambiguities, but incidentally, there exist contradictory findings / judicial
pronouncements by certain Tribunals as well as the High Courts in relation to
(A) applicability of the above said omission since 1st April, 2013,
i.e. the date of introduction of section 92(BA); (B) on holding that the clause
(i) to be believed to have never existed on the statute book; and (C) holding
the reference to the Transfer Pricing Officer in respect of clause (i)
transactions as void ab initio. Hence, this
article puts forth a synopsis of various judicial decisions on the captioned
issue.

 

MOOT QUESTION FOR
CONSIDERATION

The moot question
for consideration is whether the provisions appearing in clause (i) to
section 92BA [i.e., the clause that included expenditures relating to clause
(b) of section 40A(2), under Specified Domestic Transactions], which was
omitted vide Finance Act, 2017 with effect from 1st April,
2017, will be considered as omitted since the date on which section 92BA was
brought into force (i.e., 1st April, 2013 itself), which makes
clause 92BA(1)(i) inapplicable even in respect of the period of assessment
prior to 1st April, 2017?

 

And accordingly, whether
it is a correct and settled position of law to state that when a provision is
omitted, its impact would be to believe that the particular provision did not
ever exist on the statute book and that the said provision would also not be
applicable in the circumstances which occurred when the provision was in force
even for the prior period?

 

WHAT IS CENTRAL TO THE
ISSUE

Section 92BA, as it
stood prior to the omission of clause (i), and section 92CA are central to the
issue at stake and hence are reproduced hereunder:

 

Section
92BA(1) – For the purposes of this section
and sections 92, 92C, 92D and 92E, ‘specified domestic transaction’ in case of
an assessee means any of the following transactions, not being an international
transaction, namely,

(i) any
expenditure in respect of which payment has been made or is to be made to a
person referred to in clause (b) of sub-section (2) of section 40A;

(ii) any
transaction referred to in section 80A;

(iii) any
transfer of goods or services referred to in sub-section (8) of section 80-IA;

(iv) any
business transacted between the assessee and other person as referred to in
sub-section (10) of section 80-IA;

(v) any
transaction referred to in any other section under Chapter VI-A or section
10AA, to which provisions of sub-section (8) or sub-section (10) of section
80-IA are applicable; or

(vi) any other
transaction as may be prescribed and where the aggregate of such transactions
entered into by the assessee in the previous year exceeds a sum of [five] crore
rupees.

Section
92CA(1) – Where any person, being the
assessee, has entered into an international transaction or specified domestic
transaction in any previous year, and the Assessing Officer considers it
necessary or expedient so to do, he may, with the previous approval of the
Principal Commissioner or Commissioner, refer the computation of the arm’s
length price in relation to the said international transaction or specified
domestic transaction under section 92C to the Transfer Pricing Officer.

 

PROSPECTIVE, NOT
RETROSPECTIVE

It is pertinent to
note here that the deletion by the Finance Act, 2017 was prospective in nature
and not retrospective, either expressly or by necessary implication of the
Parliament. At this juncture, the findings of ITAT Bangalore (further
upheld by the High Court of Karnataka in ITA 392/2018) in Texport Overseas Pvt.
Ltd. vs. DCIT [IT(TP)A No. 2213/Bang/2018] are of relevance:

 

The ITAT held that ‘clause (i) of section 92BA deemed to be omitted from its
inception and that clause (i) was never part of the Act. This is due to the
reason that while omitting the clause (i) of section 92BA, nothing was
specified whether the proceeding initiated or action taken on this continue.
Therefore, the proceeding initiated or action taken under that clause would not
survive at all in the absence of any specific provisions for continuance of any
proceedings under the said provision. As a result if any proceedings have been
initiated, it would be considered or held as invalid and bad in law.’

 

WIDE ACCEPTANCE

This finding of the
ITAT Bangalore received wide acceptance all over the country and had been
followed by various Tribunals (such as ITAT Indore, Ahmedabad, Cuttack and
Bangalore).

 

The Tribunal based
its finding completely on the following judicial pronouncements pertaining to
section 6 of the General Clauses Act, 1897:

i.  Kolhapur Canesugar Works Ltd. vs. Union of
India in Appeal (Civil) 2132 of 1994 vide
judgment dated 1st February, 2000 (SC);

ii. General Finance Co. vs. Assistant Commissioner
of Income-tax 257 ITR 338 (SC);

iii. CIT vs. GE Thermometrics India Pvt. Ltd. in ITA
No. 876/2008 (Kar.).

 

Before looking into
the findings of the Hon’ble Supreme Court in this regard, which were relied
upon by the ITAT Bangalore, sections 6, 6A and 24 of the General Clauses Act,
1897 should be considered. These sections are reproduced hereunder:

Section 6:‘Where this Act, or any Central Act or Regulation made after the
commencement of this Act, repeals any enactment hitherto made or hereafter to
be made, then, unless a different intention appears, the repeal shall not –

(a) revive
anything not in force or existing at the time at which the repeal takes effect;
or

(b) affect the
previous operation of any enactment so repealed or anything duly done or
suffered thereunder; or

(c) affect any
right, privilege, obligation or liability acquired, accrued or incurred under
any enactment so repealed; or

(d) affect any
penalty, forfeiture or punishment incurred in respect of any offence committed
against any enactment so repealed; or

(e) affect any
investigation, legal proceeding or remedy in respect of any such right,
privilege, obligation, liability, penalty, forfeiture or punishment as
aforesaid;

and any such
investigation, legal proceeding or remedy may be instituted, continued or
enforced, and any such penalty, forfeiture or punishment may be imposed as if
the repealing Act or Regulation had not been passed.’

 

Section 6A:‘Where any Central Act or Regulation made after the commencement of
this Act repeals any enactment by which the text of any Central Act or
Regulation was amended by the express omission, insertion or substitution of
any matter, then, unless a different intention appears, the repeal shall not
affect the continuance of any such amendment made by the enactment so repealed
and in operation at the time of such repeal.’

 

Section 24: ‘Where any Central Act or Regulation is, after the commencement of
this Act, repealed and re-enacted with or without modification, then, unless it
is otherwise expressly provided, any appointment notification, order, scheme,
rule, form or bye-law, made or issued under the repealed Act or Regulation,
shall, so far as it is not inconsistent with the provisions re-enacted,
continue in force, and be deemed to have been made or issued under the provisions
so re-enacted, unless and until it is superseded by any appointment
notification, order, scheme, rule, form or bye-law, made or issued under the
provisions so re-enacted.’

 

DEEMED ORDER

The effect of
section 24 insofar as it is material is that where the repealed and re-enacted
provisions are not inconsistent with each other, any order made under the
repealed provisions are not inconsistent with each other, any order made under
the repealed provision will be deemed to be an order made under the re-enacted provisions.

Section 24 of the
General Clauses Act deals with the effect of repeal and re-enactment of an Act
and the object of the section is to preserve the continuity of the
notifications, orders, schemes, rules or bye-laws made or issued under the
repealed Act unless they are shown to be inconsistent with the provisions of
the re-enacted statute. In the light of the fact that section 24 of the General
Clauses Act is specifically applicable to the repealing and re-enacting
statute, its exclusion has to be specific and cannot be inferred by twisting
the language of the enactments – State of Punjab vs. Harnek Singh (2002)
3 SCC 481.

 

WHERE AN ACT IS
REPEALED

Section 6 applies
to repealed enactments. Section 6 of the General Clauses Act provides that
where an Act is repealed, then, unless a different intention appears, the
repeal shall not affect any right or liability acquired or incurred under the
repealed enactment or any legal proceeding in respect of such right or
liability and the legal proceeding may be continued as if the repealing Act had
not been passed.

 

As laid down by the
Apex Court in M/s Gammon India Ltd. vs. Spl. Chief Secretary & Ors.
[Appeal (Civil) 1148 of 2006] that, ‘…whenever there is a repeal of
an enactment the consequences laid down in section 6 of the General Clauses Act
will follow unless, as the section itself says, a different intention appears
in the repealing statute. In case the repeal is followed by fresh legislation
on the same subject, the court has to look to the provisions of the new Act for
the purpose of determining whether they indicate a different intention. The
question is not whether the new Act expressly keeps alive old rights and
liabilities but whether it manifests an intention to destroy them. The
application of this principle is not limited to cases where a particular form
of words is used to indicate that the earlier law has been repealed. As this
Court has said, it is both logical as well as in accordance with the principle
upon which the rule as to implied repeal rests, to attribute to that
legislature which effects a repeal by necessary implication the same intention
as that which would attend the case of an express repeal. Where an intention to
effect a repeal is attributed to a legislature then the same would attract the
incident of saving found in section 6.’

 

Section 6A is to
the effect that a repeal can be by way of an express omission, insertion or
substitution of any matter, and in such kind of repeal unless a different
intention appears, the repeal shall not affect the continuance of any such
amendment made by the enactment so repealed and in operation at the time of
such repeal.

 

Now, we examine the
observations of the Apex Court in General Finance Co. vs.
ACIT. Therein, the Apex Court has examined the issue of retrospective
operation of omissions and held that the principle underlying section 6 as
saving the right to initiate proceedings for liabilities incurred during the
currency of the Act will not apply to omission of a provision in an Act but
only to repeal, omission being different from repeal as held in different
cases. In the case before the Apex Court, a prosecution was commenced against
the appellants by the Department for offences arising from non-compliance with
section 269SS of the Income-tax Act, 1961 (punishment for non-compliance with
provisions of section 269SS was provided u/s 276DD). Section 276DD was omitted
from the Act with effect from 1st April, 1989 and the complaint u/s
276DD was filed in the Court of the Chief Judicial Magistrate, Sangrur, on 31st
March, 1989.The assessee sought for quashing of the proceedings by filing a
petition u/s 482 of the Code of Criminal Procedure and Article 227 of the
Constitution. The High Court held that the provisions of the Act under which
the appellants had been prosecuted were in force during the accounting year
relevant to the assessment year 1986-87 and they stood omitted from the statute
book only from 1st April, 1989. The High Court, therefore, took the
view that the prosecution was justified and dismissed the writ petition. But
the Apex Court did not concur with the view of the High Court and ruled that:

 

‘…the principle
underlying section 6 of the General Clauses Act as saving the right to initiate
proceedings for liabilities incurred during the currency of the Act will not
apply to omission of a provision in an Act but only to repeal, omission being
different from repeal as held in the aforesaid decisions. In the Income-tax
Act, section 276DD stood omitted from the Act but not repealed and hence, a
prosecution could not have been launched or continued by invoking section 6 of
the General Clauses Act after its omission.’

 

PRINCIPLE OF EQUITY AND
JUSTICE

It is inferable
from the findings of the Apex Court that by granting retrospective operability
to the omission of a penal provision it was merciful and did uphold the
principles of equity and justice. But the moot question here is whether the
findings of the Apex Court in respect of a penal provision can be extended
universally to all kinds of provisions present under any law in force, i.e.
substantive, procedural and machinery provisions. A situation that revolves
around this moot question was before the Karnataka High Court in CIT vs.
GE Thermometrics India Pvt. Ltd. [ITA No. 876/2008] and further in DCIT
vs. Texport Overseas Pvt. Ltd. [ITA 392/2018], which followed the ratio
laid down by the Apex Court in General Finance Co. vs. ACIT and
applied the findings in an identical manner to the cases involving omission of
the provision providing definitions.

 

The ITAT Bangalore
in Texport Overseas also relied upon the findings of the Apex
Court in Kolhapur Canesugar Works Ltd. vs. Union of India [1998 (99) ELT
198 SC], wherein the sole question before the Hon’ble Court was whether
the provisions of section 6 of the General Clauses Act can be held to be
applicable where a Rule in the Central Excise Rules is replaced by Notification
dated 6th August, 1977 issued by the Central Government in exercise
of its Rule-making power, (and) Rules 10 and 10A were substituted. The findings
of the Apex Court herein were also similar to those in General Finance
Co. vs. ACIT, as to retrospective operability of the omission.

 

Section 6A of the
General Clauses Act is central to the captioned issue; it removes the ambiguity
of whether the repeal and omission both have the same effect as retrospective
operability. ‘Repeal by implication’ has been dealt with in State of
Orissa and Anr. vs. M.A. Tulloch and Co. [(1964) 4 SCR 461] wherein the
Court considered the question as to whether the expression ‘repeal’ in section
6 r/w/s 6A of the General Clauses Act would be of sufficient amplitude to cover
cases of implied repeal. It was stated that:

 

‘The next
question is whether the application of that principle could or ought to be
limited to cases where a particular form of words is used to indicate that the
earlier law has been repealed. The entire theory underlying implied repeals is
that there is no need for the later enactment to state in express terms that an
earlier enactment has been repealed by using any particular set of words or
form of drafting but that if the legislative intent to supersede the earlier
law is manifested by the enactment of provisions as to effect such
supersession, then there is in law a repeal notwithstanding the absence of the
word “repeal” in the later statute.’

 

REPEAL VS. OMISSION

The captioned issue
in reference to the findings of the Apex Court in Kolhapur Canesugar
Works Ltd. vs. Union of India and General Finance Co. vs. ACIT
was also discussed in G.P. Singh’s ‘Principles of Statutory Interpretation’ [12th
Edition, at pages 697 and 698] wherein the learned author expressed his
criticism of the aforesaid judgments in the following terms:

 

 

‘Section 6 of
the General Clauses Act applies to all types of repeals. The section applies
whether the repeal be express or implied, entire or partial, or whether it be
repeal simpliciter or repeal accompanied by
fresh legislation. The section also applies when a temporary statute is
repealed before its expiry, but it has no application when such a statute is
not repealed but comes to an end by expiry. The section on its own terms is
limited to a repeal brought about by a Central Act or Regulation. A rule made
under an Act is not a Central Act or regulation and if a rule be repealed by
another rule, section 6 of the General Clauses Act will not be attracted. It
has been so held in two Constitution Bench decisions. The passing observation
in these cases that “section 6 only applies to repeals and not to
omissions” needs reconsideration, for omission of a provision results in
abrogation or obliteration of that provision in the same way as it happens in
repeal. The stress in these cases was on the question that a “rule” not being a
Central Act or Regulation, as defined in the General Clauses Act, omission or
repeal of a “rule” by another “rule” does not attract section 6 of the Act and
proceedings initiated under the omitted rule cannot continue unless the new rule
contains a saving clause to that effect…’

 

In a comparatively
recent case before the Apex Court, M/s Fibre Boards (P) Ltd. vs. CIT
Bangalore [(2015) 279 CTR (SC) 89], the Hon’ble Court reconsidered its
opinion as to retrospective operability of omissions and distinguished the
findings in Kolhapur Canesugar Works Ltd. vs. Union of India, General
Finance Co. vs. ACIT and other similar cases. The Apex Court held that
sections 6 and 6A of the General Clauses Act are clearly applicable on
‘omissions’ in the same manner as applicable on ‘repeals’; it also held that:

 

‘…29. A reading
of this section would show that a repeal can be by way of an express omission.
This being the case, obviously the word “repeal” in both section 6 and section
24 would, therefore, include repeals by express omission. The absence of any
reference to section 6A, therefore, again undoes the binding effect of these
two judgments on an application of the per incuriam
principle.

…31. The two
later Constitution Bench judgments also did not have the benefit of the
aforesaid exposition of the law. It is clear that even an implied repeal of a
statute would fall within the expression “repeal” in section 6 of the General
Clauses Act. This is for the reason given by the Constitution Bench in M.A. Tulloch & Co. that only the
form of repeal differs but there is no difference in intent or substance. If
even an implied repeal is covered by the expression “repeal”, it is clear that
repeals may take any form and so long as a statute or part of it is obliterated,
such obliteration would be covered by the expression “repeal” in section 6 of
the General Clauses Act.

…32. In fact,
in ‘Halsbury’s Laws of England’ Fourth Edition,
it is stated that:

“So far as
express repeal is concerned, it is not necessary that any particular form of
words should be used. [R vs. Longmead (1795) 2 Leach 694 at 696]. All that is required is that an
intention to abrogate the enactment or portion in question should be clearly
shown. (Thus, whilst the formula “is hereby repealed” is frequently
used, it is equally common for it to be provided that an enactment “shall
cease to have effect” (or, if not yet in operation, “shall not have
effect”) or that a particular portion of an enactment “shall be
omitted”).’

 

In view of the
above-mentioned judicial pronouncements and the provision of law, it can be
interpreted that insofar as ‘omission’ forms part of ‘repeal’, the omission of
clause (i) to section 92BA(1) does not have retrospective operation and the
omission will not affect the reference to the Transfer Pricing Officer in
respect of transactions u/s 92BA(1)(i) for the accounting years prior to 1st
April, 2017. But on account of varied findings in this regard by the Tribunals
as well as the High Courts, the matter is yet to be settled.