BCAJ | Bombay Chartered Accountant Journal

Section 80-IB(10) – Deduction u/s 80-IB(10) cannot be denied even if the return of income is filed beyond the due date u/s 139(1) owing to bona fide reasons

10. [2019] 72
ITR 402 (Trib.) (Chand.) Himuda vs. ACIT ITA Nos.: 480,
481 & 972/Chd/2012 A.Ys.: 2006-07,
2007-08 & 2009-10 Date of order:
10^thMay, 2019

Section
80-IB(10) – Deduction u/s 80-IB(10) cannot be denied even if the return of
income is filed beyond the due date u/s 139(1) owing to bona fide
reasons

FACTS

The assessee
filed his return of income beyond the due date u/s 139(1). Later, he filed
revised return claiming deduction u/s 80-IB(10). The AO rejected this claim for
the reason that the original return had been filed beyond the due date
specified u/s 139(1). The Commissioner (Appeals) also confirmed the action. The
assessee therefore appealed to the Tribunal.

HELD

The first factual observation made by the
Tribunal was that the delay in filing return of income was on account of the
local audit department and an eligible deduction cannot be denied due to
technical default owing to such bona fide reason.

Based on a
harmonious reading of sections 139(1), 139(5) and 80AC, the Tribunal considered
various decisions available on the issue:

(i) DHIR
Global Industrial Pvt. Ltd. in ITA No. 2317/Del/2010 for A.Y. 2006-07;

(ii) Unitech
Ltd. in ITA No. 1014/Del/2012 for A.Y. 2008-09;

(iii) Venkataiya
in ITA No. 984/Hyd/2011;

(iv) Hansa
Dalkoti in ITA No. 3352/Del/2011;

(v) SAM
Global Securities in ITA No. 1760/Del/2009;

(vi) Symbosis
Pharmaceuticals Pvt. Ltd. in ITA No. 501/Chd/2017;

(vii) Venkateshwara Wires Pvt. Ltd. in ITA No.
53/Jai/2018.

The Tribunal applied the ratio of the above decisions to the
facts of the case and allowed the assessee’s claim of deduction u/s 80-IB,
primarily on the basis of the following three judgements:

(a) National
Thermal Power Company Ltd. vs. CIT 229 ITR 383;

(b) Ahmedabad
Electricity Co. Ltd. vs. CIT (1993) 199 ITR 351 (FB);

In all these
decisions, the courts have held that the appellate authorities have
jurisdiction to deal not merely with any additional ground which became
available on account of change of circumstances or law, but also with
additional grounds which were available when the return was filed.

In National
Thermal Power Company (Supra), the Supreme Court observed that the Tribunal
is not prevented from considering questions of law arising in assessment which
were not raised earlier; the Tribunal has jurisdiction to examine a question of
law which arises from the facts as found by the authorities below and having a
bearing on the tax liability of the assessee.

Besides, the
full bench of the Hon’ble Bombay High Court in the cases of Ahmedabad
Electricity Company Ltd. vs. CIT and Godavari Sugar Mills Ltd.
vs. CIT (1993) 199 ITR 351 observed that either at the stage of CIT(A)
or the Tribunal, the authorities can consider the proceedings before them and
the material on record for the purpose of determining the correct tax
liability. Besides, there was nothing in section 254 or section 251 which would
indicate that the appellate authorities are confined to considering only the
objections raised before them, or allowed to be raised before them, either by
the assessee or by the Department as the case may be. The Tribunal has
jurisdiction to permit additional grounds to be raised before it even though
these might not have arisen from any order of a lower appellate authority so
long as these grounds were in respect of the subject matter of the tax
proceedings. Similar ratio was held by the Bombay High Court in CIT
vs. Pruthvi Brokers and Shareholders Pvt. Ltd. (Supra).

The Tribunal
further observed that the decision of the Hon’ble Supreme Court in the case of Goetze
(India) Limited vs. CIT (2006) 287 ITR 323, relating to the restriction
of making the claim through a revised return was limited to the powers of the
assessing authority only and not the appellate authority.

An assessee cannot be burdened with the
taxes which he otherwise is not liable to pay under the law.

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Section 148 – Issue of notice u/s 148 is a foundation for reopening of assessment and to be sent in the name of living person – Where notice is issued in the name of deceased person, the deceased person could not participate in assessment proceedings and even provisions of section 292BB could not save such invalid notice

9. [2019] 72
ITR 389 (Trib.) (Chand.) S/Sh. Balbir
Singh & Navpreet Singh vs. ITO ITA Nos.: 657
& 658/CHD/2016 A.Y.: 2008-09 Date of order:
13^th May, 2019

Section 148 –
Issue of notice u/s 148 is a foundation for reopening of assessment and to be
sent in the name of living person – Where notice is issued in the name of
deceased person, the deceased person could not participate in assessment
proceedings and even provisions of section 292BB could not save such invalid
notice

FACTS

The assessment
for A.Y. 2008-09 of the deceased assessee Balbir Singh was reopened u/s 147 of
the Act by way of issuance of a notice in his name only.

Considering the
manner of service of the notice and the name in which it was issued, the legal
heir contested the validity of the reopening before the Commissioner (Appeals).
However, the Commissioner (Appeals) confirmed the action taken by the AO as to
the reopening as well as on merits.

Aggrieved, the
legal heir of the assessee filed an appeal to the Tribunal.

HELD

The Tribunal
observed that for valid reopening of a case, notice u/s 148 should be issued in
the name of the correct person. The notice has to be responded to and hence it
is a requirement that it should be sent in the name of a living person. This view
was based on the decision of the Bombay High Court in Sumit Balkrishna
Gupta vs. ACIT in Writ Petition No. 3569 of 2018, order dated 15^thFebruary,
2019, wherein it was held that the issue of a notice u/s 148 of the Act
is the foundation for reopening of assessment.

It also relied
on another decision of the Delhi High Court in Rajender Kumar Sehgal vs.
ITO [2019] 101 taxmann.com 233 (Delhi) wherein it was held that where
the notice seeking to reopen assessment was issued in the name of a deceased
assessee, since she could not have participated in reassessment proceedings,
provisions of section 292BB were not applicable to the case and as a
consequence the reassessment proceedings deserved to be quashed.

On the argument
of the learned D.R. that the legal heir of the assessee ought to have informed
the AO of the fact of the assessee’s death, the Tribunal said this contention
had no force because the notice was not served through registered post / or by
regular mode of service but was allegedly served through a substituted mode of
service, i.e., by affixation of the same at the door of the house of the
assessee and the report of service through affixation had not been witnessed by
any person.

The Tribunal
remarked, ‘It is not believable that the Revenue officials had visited the
house of the assessee and they could not get the information about the death of
the assessee despite affixation of the notice which is also required to be
witnessed by some independent / respectable (sic) of the village.’

The Tribunal
also found that even otherwise, the notice was never served at the address at
which the assessee was actually residing before death, which address was
available in a document with the Income Tax Officer.

Based on these
factual and legal grounds, the notice u/s 148 was held to be invalid.

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Section 41(1) r.w.s. 28(iv) – Where assessee assigned its loan obligation to a third party by making a payment in terms of present value of future liability, surplus resulting from assignment of loan was not cessation or extinguishment of liability as loan was to be repaid by third party –The same could not be brought to tax in the hands of the assessee

8. [2019] 201
TTJ (Mum.) 1009 Cable
Corporation of India Ltd. vs. DCIT ITA Nos.:
7417/Mum/2010 & 7369/Mum/2012 A.Y.: 2000-01 Date of order:
30^th April, 2019

Section 41(1)
r.w.s. 28(iv) – Where assessee assigned its loan obligation to a third party by
making a payment in terms of present value of future liability, surplus
resulting from assignment of loan was not cessation or extinguishment of
liability as loan was to be repaid by third party –The same could not be
brought to tax in the hands of the assessee

FACTS

The assessee
company was engaged in the business of manufacturing and sales of cables.
During the year the assessee borrowed interest-free loan of Rs. 12 crores from
a company, MPPL, which was to be repaid over a period of 100 years. The said
loan was utilised for the purchase of shares by the assessee and not for its
line of activity / business. Thereafter, a tripartite agreement was entered
into between the assessee, MPPL and CPPL under which the obligation of repaying
the above-mentioned loan of Rs. 12 crores was assigned to CPPL at a discounted
present value of Rs. 0.36 crores. The resultant difference of Rs. 11.64 crores
was credited by the assessee to the profit and loss account as ‘gain on
assignment of loan obligation’ under the head income from other sources.
However, while computing the taxable income, the assessee reduced the said
amount from the taxable income on the ground that the same constituted a
capital receipt in the hands of the assessee and was not taxable.

The AO observed that the lender, MPPL, had
accepted the arrangement of assignment of loan to CPPL and CPPL had started
paying the instalments to MPPL as per the said tripartite agreement. Thus, the
liability of the assessee was ceased / extinguished; as such, the provisions of
section 41(1) were applicable to this case. He further observed that the
assessee during the course of his business borrowed funds to the tune of Rs. 12
crores and assigned the same to CPPL for Rs. 0.36 crores, thus the resultant
benefit of Rs. 11.6 crores by cessation of liability was a trading surplus and
had to be taxed. The AO further observed that the assessee himself had credited
Rs. 11.64 crores to the profit and loss account as gain on assignment of loan
under the head income from other sources. On appeal, the Commissioner (Appeals)
upheld the AO’s order.

HELD

The Tribunal
held that the assessee was in the line of manufacturing and trading of cables
and not the purchase and sale of shares and securities. It was apparent from
the facts that the loan was utilised for the purpose of purchase of shares
which was not a trading activity of the assessee. The liability of the loan of
Rs. 12 crores to be discharged over a period of 100 years was assigned to the
third party, viz., CPPL, by making a payment of Rs. 0.36 crores in terms of the
present value of the future liability and the surplus resulting from the
assignment of the loan liability was credited to the profit and loss account
under the head income from other sources; but while computing the total income,
the said income was reduced from the income on the ground that the surplus of
Rs. 11.64 crores represented capital receipt and, therefore, was not taxable.
It was true that both companies, MPPL and CPPL, were amalgamated with the
assessee later on with all consequences. So the issue was whether the surplus
Rs. 11.64 crores resulting from the assignment of loan to CPPL under the said
tripartite agreement between the assessee, MPPL and CPPL was a revenue receipt
liable to tax or a capital receipt as has been claimed by the assessee.

The purchase of
shares by the assessee was a non-trading transaction and was of capital nature.
The surplus resulting from the assignment of loan as referred to above was not
resulting from trading operation and therefore was not to be treated as revenue
receipt. The provisions of section 41(1) were not applicable to the said
surplus as its basic conditions were not fulfilled. In other words, the
assessee had not claimed it as deduction in the profit and loss account in the
earlier or in the current year. In order to bring an allowance or deduction
within the ambit of section 41(1), it was necessary that a deduction /
allowance was granted to the assessee.

In the instant
case, the loan was utilised for purchasing shares which was a capital asset in
the business of the assessee and the surplus resulting from assignment of loan
was a capital receipt not liable to be taxed either u/s 28(iv) or u/s 41(1).
Accordingly, the surplus arising from assignment of loan was not covered by the
provisions of section 41(1) and consequently could not be brought to tax either
u/s 28(iv) or u/s 41(1). Further, the surplus had resulted from the assignment
of liability as the assessee had entered into a tripartite agreement under
which the loan was to be repaid by the third party in consideration of payment
of net present value (NPV) of future liability. Thus, the surplus resulting
from assignment of loan at present value of future liability was not cessation
or extinguishment of liability as the loan was to be repaid by the third party
and, therefore, could not be brought to tax in the hands of the assessee.
Therefore, the order of the Commissioner (Appeals) was set aside and the AO was
directed to delete the addition of Rs. 11.64 crores.

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Section 271AAB – Mere disclosure and surrender of income in statement recorded u/s 132(4) would not ipso facto lead to the conclusion that the amount surrendered by the assessee was undisclosed income in terms of section 271AAB of the Act, when the entry and the income were duly recorded in the books of accounts

4. [2019] 71 ITR 518 (Trib.) (Jai.) DCIT vs. Rajendra
Agrawal ITA No.: 1375
(Jaipur) of 2018 A.Y.: 2015-16 Date of order: 22^nd
March, 2019

Section 271AAB –
Mere disclosure and surrender of income in statement recorded u/s 132(4) would
not ipso facto lead to the conclusion that the amount surrendered by the
assessee was undisclosed income in terms of section 271AAB of the Act, when the
entry and the income were duly recorded in the books of accounts

FACTS

The assessee, an individual, filed his return of income declaring total
income at Rs. 12,01,09,200 which included, inter alia, surrendered
income of Rs. 10,87,68,470 on account of long-term capital gain. The assessment
was completed u/s 143(3) read with section 153A of the Income-tax Act, 1961 at
the total income of Rs. 12,24,18,200. The AO also initiated proceedings for
levy of penalty u/s 271AAB.

The AO passed the
order imposing penalty u/s 271AAB(1) @ 30% of the undisclosed income. But the
CIT(A) reduced the penalty from 30% to 10%. Aggrieved, the Revenue filed an
appeal to the Tribunal. The assessee also filed a cross appeal.

HELD

The question before the Tribunal was whether the surrender made by the
assessee in the statement recorded u/s 132(4) will be regarded as undisclosed
income without testing the same against the definition as provided under clause
(c) of the Explanation to section 271AAB of the Act.

It observed that the
term ‘undisclosed income’ has been defined in the Explanation to section 271AAB
and, therefore, the penalty under the said provision has to be levied only when
the income surrendered by the assessee constitutes ‘undisclosed income’ in
terms of the said definition. It observed that in various decisions the
Tribunal has taken a consistent view that the penalty u/s 271AAB is not
automatic but the AO has to decide whether a disclosure constitutes
‘undisclosed income’ as defined in the Explanation to section 271AAB of the
Act.

The Tribunal
observed that the assessee had established that the transactions were recorded
in the books and had also proved their genuineness with documentary evidence.
In such a scenario, mere disclosure and surrender of income would not ipso
facto lead to the conclusion that the amount surrendered by the assessee
was undisclosed income in terms of section 271AAB of the Act. The Tribunal
observed that the document found during search was not an incriminating
material when the entry and the income were duly recorded in the books of
accounts. The Tribunal also held that the statement of the assessee recorded
u/s 132(4) would not constitute incriminating material and said the income
disclosed by the assessee could not be considered as undisclosed income in
terms of section 271AAB of the Act.

The penalty levied
u/s 271AAB of the Act was deleted. The appeal filed by the assessee was
allowed.

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Section 54F – Expenditure incurred by the assessee on remodelling, painting of the flat so that the same could be made habitable according to the standard of living of the assessee, forms part of cost of purchase and is admissible u/s 54F

3. Nayana Kirit
Parikh vs. ACIT (Mumbai) Members:
Sandeep Gosain (J.M.) and Rajesh Kumar (A.M.) ITA No.:
2832/Mum/2013 A.Y.: 2009-10 Date of order:
25^th June, 2019 Counsel for
Assessee / Revenue: Rajen Damani / R.A. Dhyani

Section 54F –
Expenditure incurred by the assessee on remodelling, painting of the flat so
that the same could be made habitable according to the standard of living of
the assessee, forms part of cost of purchase and is admissible u/s 54F

FACTS

In the course
of assessment proceedings, the AO observed that the assessee had shown
long-term capital gain of Rs. 1,25,10,645 after claiming deduction of Rs.
1,54,50,250 u/s 54F of the Act. The assessee was asked to substantiate its
claim for deduction u/s 54F. The assessee submitted that she had acquired a new
residential property for Rs. 2,25,00,000 vide agreement dated 18^th
March, 2009 jointly with her husband and incurred incidental expenditure of Rs.
15,00,500 thereon. Thus, the aggregate cost worked out to Rs. 2,40,00,500 of
which the assessee’s share was one–half, i.e., Rs. 1,20,00,250. The assessee
had also incurred an expenditure of Rs. 34,50,000 on the same flat to make it
habitable as per her standard of living and claimed deduction thereof u/s 54F
of the Act.

According to
the assessee, this sum of Rs. 34,50,000 formed part of the cost of the house as
it was incurred on electrification of the house, civil work, design planning,
plumbing, flooring, etc. According to the AO, the said expenditure was not
incurred on construction / improvement of the flat but on furniture,
fabrication and painting, etc. The AO held that the expenditure of Rs. 34,50,000
falls under the category of expenditure by way of renovation to make the flat
more comfortable and therefore is not liable to be allowable as part of the
cost of the flat. The AO denied benefit of section 54F to the extent of this
sum of Rs. 34,50,000.

Aggrieved, the
assessee preferred an appeal to the CIT(A) who held that u/s 54F only amount
relating to agreement value, stamp duty, registration charges and professional
charges related to the purchase of the new flat could be claimed. The cost of
improvement and renovation are subsequent to the purchase and therefore cannot
be allowed as deduction u/s 54F of the Act. He upheld
the order of the AO on the ground that the expenditure of Rs. 34,50,000 has
been incurred to make the house more lavish.

HELD

The Tribunal
observed that the assessee incurred expenditure of Rs. 34,50,000 for
remodelling the flat, its painting and so on so that the same could be made
habitable according to her standard of living. The Tribunal held that the said
cost forms part of the cost of purchase and is admissible expenditure u/s 54F
of the Act. It noted that the case of the assessee is supported by various
judicial pronouncements and in particular the case of G. Siva Rama
Krishna, Hyderabad vs. ITO (ITA No. 755/Hyd./2013) A.Y. 2007-08; Ruskom Home
Vakil vs. ITO (ITA No. 4450/M/2014); and Mrs. Gulshabanoo R.
Mukhi vs. JCIT (2002) 83 ITR 649 (Mum.). The Hyderabad Bench in the
case of G. Siva Rama Krishna (Supra) has held that expenditure
incurred on remodelling the flat in the normal course after purchasing the
readymade flat is allowable u/s 54F of the Act. The Tribunal, following the decisions of the Co-ordinate Benches, set
aside the order of the CIT(A) and directed the AO to allow deduction of Rs.
34,50,000, being expenditure incurred by the assessee, also u/s 54F of the Act.

The appeal
filed by the assessee was allowed.

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Section 234A – Interest u/s 234A can be charged only till the time tax is unpaid

2. Gulick Network Distribution vs. ITO (Mumbai) Members: Pawan Singh (J.M.) and M. Balaganesh (A.M.) ITA No. 2210/Mum/2019 A.Y.: 2010-11 Date of order: 21^stJune, 2019 Counsel for Assessee / Revenue: Gautam R. Mota / Satish Rajore

Section 234A –
Interest u/s 234A can be charged only till the time tax is unpaid

FACTS

The assessee, a
private limited company, engaged in the business of multi-level marketing, did
not file its return of income within the time prescribed u/s 139 or 139(5). The
assessee filed its return of income manually on 7^th May, 2014
declaring total income of Rs. 16,49,960 under normal provisions and Rs.
1,39,326 u/s 115JB of the Act. The AO received information in Individual
Transaction Statement (ITS) that the assessee company was in receipt of credit
of Rs. 16,49,960 and that the assessee failed to disclose the said income for
the relevant assessment year.

The AO issued
and served notice u/s 148 dated 30^th March, 2017 and selected the
case for scrutiny. In response to the notice u/s 148, the assessee filed return
on 23^rdJune, 2017. The assessment was completed on 13^th
October, 2017 u/s 143(3) r/w/s 147 and no addition was made to the returned
income. The AO, while passing assessment order, raised a demand of Rs. 5,81,470
on account of interest u/s 234A and 234B.

The due date of
filing return of income for the assessment year under consideration, i.e., A.Y.
2010-11, was 15^th October, 2010. From the calculation of interest
levied by the AO, the assessee noted that since the assessee paid tax on 24^th
March, 2014 he was liable to pay interest for 42 months (from 15^th
October, 2010 to 24^th March, 2014) and not for the period of 81
months (from 15^th October, 2010 to 30^th June, 2017) as
charged by the AO.

On 22^nd
December, 2017 the assessee applied for rectification u/s 154 seeking
rectification of the working of the interest. The AO partially rectified the
mistake vide order dated 9^th January, 2018.

Aggrieved, the
assessee preferred an appeal to the CIT(A) who confirmed the order passed by
the AO on an application u/s 154 of the Act.

Still
aggrieved, the assessee preferred an appeal to the Tribunal where he relied
upon the decision of the Mumbai Bench of the Tribunal in the case of Ms
Priti Prithwala vs. ITO [(2003) 129 Taxman 79 (Mum.)]. It was also
submitted that in the subsequent assessment year, on similar facts, no such
interest was charged from the assessee.

HELD

At the outset,
the Tribunal observed that, in principle, it is in agreement with the
calculation of interest as furnished by the assessee. It observed that in the
subsequent year, on similar facts, no such interest was charged by the Revenue.
It noted that the Co-ordinate Bench of the Tribunal had in the case of Priti
Prithwala (Supra) held that the words ‘regular assessment’ are used in
the context of computation. It does not show that the order passed u/s 143(3) /
144 shall be substituted by section 147. Considering the finding of the
Co-ordinate Bench and the fact that the assessee submitted that the assessee
could not be made liable to pay interest for the period during which it was not
possible on their part to file the return of income, the Tribunal directed the
AO to re-compute the interest up to the date of filing of the return.

The appeal
filed by the assessee was allowed.

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Section 50C – In the course of assessment proceedings if the assessee objects to adoption of stamp duty value as deemed sale consideration, for whatever reason, it is the duty of the AO to make a reference to the DVO for determining the value of the property sold

1. Aavishkar
Film Pvt. Ltd. vs. ITO (Mumbai) Members:
Saktijit Dey (J.M.) and G. Manjunatha (A.M.) ITA No.
2256/Mum/2016 A.Y.: 2011-12 Date of order:
21^st June, 2019 Counsel for
Assessee / Revenue: Deepak Tralshawala / Jothi Lakshmi Nayak

Section 50C –
In the course of assessment proceedings if the assessee objects to adoption of
stamp duty value as deemed sale consideration, for whatever reason, it is the
duty of the AO to make a reference to the DVO for determining the value of the
property sold

FACTS

During the previous year relevant to the assessment year under
consideration, the assessee sold a residential flat for Rs. 1,75,00,000. The AO
in the course of assessment proceedings called for stamp duty value of the flat
sold by the assessee from the office of the Registrar. The stamp duty value of
the flat was Rs. 2,51,45,500. The AO called upon the assessee to explain why
short-term capital gains should not be computed by adopting the stamp duty
valuation.

The assessee
vide his letters dated 7^th March, 2014 and 25^th March,
2014 objected to adoption of stamp duty valuation. The assessee had
specifically stated the reasons for which the sale consideration received by
the assessee is reasonable and said that since the property was encumbered it
could not have fetched the value as determined by the stamp valuation
authority.

The AO,
rejecting the arguments of the assessee, proceeded to compute the capital gains
by adopting the stamp duty value to be the full value of consideration.

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

The assessee
then preferred an appeal to the Tribunal where it was contended that on the
face of the objection raised by the assessee, the AO should have made a
reference to the DVO for determining the value of the property and the stamp
duty valuation could not be adopted as the deemed sale consideration
considering the fact that the property was encumbered.

HELD

The Tribunal
noted that the issue before it is whether as per section 50C(2) of the Act, it
is mandatory on the part of the AO to make a reference to the DVO to determine
the value of the property. The Tribunal held that since in the course of
assessment proceedings the assessee objected to adoption of stamp duty value as
the deemed sale consideration, for whatever reason, it was the duty of the AO
to make a reference to the DVO for determining the value of the property sold.

The Tribunal
found the contention of the Department, viz., that the reference to DVO was not
made because the assessee raised the objection before the AO purposely at the
fag end to see to it that the proceeding gets barred by limitation, to be
unacceptable. It observed that even the CIT(A) could have directed the AO to
get the valuation of the property done by the DVO and thereafter proceeded in
accordance with law.

The Tribunal noted the ratio of the decisions of the Madras High Court
in the case of S. Muthuraja vs. CIT [(2014) 369 ITR 483 (Mad.)]
and also observed that the Calcutta High Court in Sunil Kumar Agarwal vs.
CIT [(2015) 372 ITR 83 (Cal.)] has gone a step further to observe that
valuation by DVO is contemplated u/s 50C to avoid miscarriage of justice. The
Calcutta High Court has held that when the legislature has taken care to
provide adequate machinery to give a fair treatment to the taxpayer, there is
no reason why the machinery provided by the legislature should not be used and
the benefit thereof should be refused. The Court observed that even in a case
where no request is made by the assessee to make a reference to the DVO, the AO
while discharging a quasi judicial function is duty-bound to act fairly
by giving the assessee an option to follow the course provided by law to have
the valuation made by the DVO.

The Tribunal held that the AO should have followed the mandate of
section 50C(2) of the Act by making a reference to the DVO to determine the
value of the property sold. The AO having not done so and the CIT(A) also
failing to rectify the error committed by the AO, the Tribunal restored the
issue to the AO with a direction to make a reference to the DVO to determine
the value of the property sold in terms of section 50C(2) of the Act and
thereafter proceed to compute capital gain in accordance with law.

The Tribunal
did not delve into the issue relating to actual value of the property on
account of certain prevailing conditions like encumbrance, etc., as these
issues are available to the assessee for agitating in the course of proceedings
before the DVO.

The Tribunal
set aside the impugned order of the CIT(A) and restored the issue to the AO for
fresh adjudication in terms of its direction.

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Section 13(1)(c) – Payments made to trustees in professional capacity cannot be considered as for the benefit of trustees

3. [2019] 71
ITR (Trib.) 687 (Pune) Parkar Medical
Foundation vs. ACIT ITA Nos.: 2724
& 2725 (Pune) of 2017 A.Ys.: 2004-05
& 2005-06 Date of order:
20^th March, 2019

Section
13(1)(c) – Payments made to trustees in professional capacity cannot be considered
as for the benefit of trustees

FACTS

The assessee
was a hospital registered u/s 12A of the Income-tax Act, 1961. At the time of
reassessment proceedings, the AO disallowed Rs. 6,52,748 being professional
charges paid to two of the trustees. He also disallowed Rs. 1,95,000 being
utilisation charges paid to those trustees. These disallowances were made on
the ground that the assessee had violated the provision of section 13(1)(c)
which provides that where any part of the income of a trust enures or any part
of such income or any property of the trust or the institution is, during the
previous year, used or applied, directly or indirectly, for the benefit of any
persons referred to in section 13(3), then such amounts are not to be allowed
as deduction.

But the
assessee argued that the trustees were doctors and payments were made to them
for rendering their professional services apart from looking after the
day-to-day activities and managing the hospital. Further, the assessee paid
utilisation fees to the trustees because certain equipments were owned by those
trustees but were utilised by the hospital.

These arguments
were rejected by the CIT(A) and now the question before the Hon’ble ITAT was
whether payments made to the trustees were directly or indirectly for the
benefit of those trustees.

HELD

The Hon’ble
ITAT allowed the appeal of the assessee on the following basis:

It was an
undisputed fact that the trustees to whom professional fees were paid were
qualified doctors who, besides looking after the administration and running of
the hospital, were also providing their professional medical services to the
assessee and thus such payments cannot be held to be paid for the direct or
indirect benefit of those trustees.

Similarly,
regarding the disallowance of utilisation fees paid to those trustees, the ITAT
held that there was no finding of the AO that utilisation fees paid were
excessive or were being paid for any direct or indirect benefit of those
trustees and hence cannot be disallowed.

shailesh.kwebmaker

Section 56(2)(viia) – Value of tangible or intangible assets once substantiated would be replaced with the book value for the purposes of FMV regardless of the book entries in this regard

2. [2019] 109 taxmann.com 165 (Ahd. – Trib.) Unnati
Inorganics (P.) Ltd. vs. ITO ITA No.:
2474/Ahd./2017 A.Y.: 2014-15 Date of order:
11^th September, 2019

Section 56(2)(viia)
– Value of tangible or intangible assets once substantiated would be replaced
with the book value for the purposes of FMV regardless of the book entries in
this regard

FACTS

The assessee, a
private limited company, filed its return of income for A.Y. 2013-14 declaring
Nil total income. In the course of assessment proceedings the AO noticed that
the assessee company has, during the previous year, issued 10,16,000 shares of
face value of Rs. 10 each at a premium of Rs. 23 per share. The AO made
inquiries regarding the Fair Market Value (FMV) of the shares allotted, having
regard to the provisions of section 56(2)(viib) of the Act, for the purposes of
ascertaining the correctness of the premium charged.

The assessee
submitted that the company holds certain land parcels in Vadodara and Dahej
whose FMV is substantially high on the date of allotment of shares and
consequently premium charged of Rs. 23 per share is quite commensurate with the
FMV of shares allotted as contemplated in Explanation to section 56(2)(viib) of
the Act. By producing a valuation report of the land, the assessee demonstrated
that the value of land adopted by the assessee for this purpose is only 45% of
the jantri price. However, the AO disputed the FMV of the fresh
allotment and proceeded to apply the prescribed method of valuation as
stipulated in Rule 11UA to determine the FMV of the shares; for this purpose he
adopted the book value of the assets and liabilities including land as on 31^st
March, 2013 and determined the FMV of fresh allotment at Rs 12.84 per share in
place of Rs. 33 per share adopted by the assessee. The AO, accordingly, added a
sum of Rs. 2,04,82,560 to the total income, on issue of shares at a price in
excess of the FMV of the shares, u/s 56(2)(viib) of the Act.

Aggrieved, the
assessee preferred an appeal to the CIT(A) who upheld the action of the
assessee by observing that (i) no accounting entry has been passed in respect
of the difference between the FMV of the land at the relevant point of time and
its corresponding actual costs as reflected in the books of accounts; (ii) if
share premium was charged on the basis of jantri price, then it was less
than what was required to be charged, and therefore there is arbitrariness in
deciding the issue price; (iii) the assessee first acquired land at Vadodara
for setting up its plant and thereafter acquired another plot of land at Dahej
since it was not in a position to complete legal formalities qua the
first property acquired by it, and therefore there is an element of ad
hocism in the actions of the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that section 56(2)(viib) seeks to enable the
determination of FMV by two methods: (i) prescribed method as purportedly
embedded in Rule 11UA of the Income-tax Rules; and (ii) FMV based on the
intrinsic value of the assets both tangible and intangible on the date of issue
of shares. Thus, the FMV of all the assets (tangibles, intangibles, human
resources, right of management or control or other rights whatsoever in or in
relation to the Indian company), whether recorded in the books or not,
appearing in the books at their intrinsic value or not, is a sufficient warrant
to value the premium on issue of unquoted equity shares by a closely-held
company. Thus, the Explanation (a)(ii) itself implies that book entry for
recognition of intrinsic value is not necessary at all. Moreover, the higher of
the values determined as per the first and second limbs of Explanation shall be
adopted for the purposes of section 56(2)(viib) of the Act.

It also observed that the FMV of the land belonging to the assessee
company was sought to be substantiated by the valuation report. And that the
valuation report has not been controverted by the Revenue. No rebuttal of the
fact towards the value of land is on record. It observed that one of the
grounds taken by the Revenue for rejecting the basis of determination of FMV is
that no accounting entry has been passed in respect of difference between the
FMV of the immovable property at the relevant point of time and its actual cost
as reflected in the books of accounts.

The Tribunal
held that the value once substituted would be replaced with the book value for
the purposes of FMV regardless of the book entries in this regard. What is
relevant is whether at the time of allotment of shares the value of shares as
claimed existed or not. The valuation report is not evidence in itself but
merely an opinion of an independent having regard to totality of expert facts
and circumstances existing on the date of valuation. So long as the facts and
circumstances exist, the presence or otherwise of valuation report per se
has no effect. It observed that the AO has himself, in a subsequent year,
disputed the higher valuation of Rs. 46 and unequivocally adopted Rs. 33 as its
fair value. The assessee has also been able to demonstrate arm’s length
transaction and unison of two different groups bringing different capabilities and
expertise for furtherance of business. Also, the existing promoters, too,
subscribed at a rate similar to the rate at which shares were allotted to the
new group which, according to the Tribunal, further reinforces the inherent
strengths in the valuations of the company as represented by the value of
equity shares.

The Tribunal
set aside the order of the CIT(A) and directed the AO to delete the addition
made u/s 56(2)(viib) of the Act. The appeal filed by the assessee was allowed.

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14. Section 271(1)(c) – Penalty – Concealment – Two views are possible – When two views are possible, penalty cannot be imposed

14. Section 271(1)(c) – Penalty – Concealment –
Two views are possible – When two views are possible, penalty cannot be imposed

The assessee is a co-operative
bank. It had incurred expenditure for acquisition of three co-operative banks.
Claiming directives of the RBI contained in its circular, the bank amortised
such expenditure over a span of five years. The Revenue was of the opinion that
the expenditure was capital in nature and that the claim of expenditure would
be governed by the Income-tax Act, 1961 and not by the directives of RBI. The
expenditure was therefore disallowed.

The AO initiated proceedings for
imposition of penalty u/s 271(1)(c) and held that the assessee has deliberately
made a wrong claim of deduction which is otherwise inadmissible. Accordingly,
the AO proceeded to pass an order imposing a penalty of Rs. 1,41,30,553 u/s
271(1)(c).

Being aggrieved at the penalty
order so passed, the assessee preferred an appeal before the CIT(A). The CIT(A)
observed that the AO had taken a view that the expenditure is capital in nature
due to the enduring benefit accruing to the assessee, but as per the RBI
circular the assessee is allowed to amortise 1/5th of the expenditure over a
period of five years. He, therefore, inferred that there exist two different
views with regard to the assessee’s claim. Accordingly, he held that the issue
on which the addition was made being a debatable one, it cannot be said that
the claim made by the assessee is totally inadmissible. The assessee has
furnished all requisite particulars of income, so it cannot be said that the
assessee has furnished inaccurate particulars of income or concealed its
income. The Commissioner (A), relying upon the decision of the Hon’ble Supreme
Court in CIT vs. Reliance Petroproducts Pvt. Ltd. [2010] 322 ITR 158
(SC), deleted the penalty imposed by the AO.

But Revenue, now aggrieved by the
order of the CIT(A) preferred an appeal before the ITAT. The Tribunal held that
the addition on the basis of which penalty was imposed by the AO as on date
does not survive. Moreover, on a perusal of the circular issued by the RBI as
referred to by the CIT(A), it is seen that the acquirer bank is permitted to
amortise the loss taken over from the acquired bank over a period of not more
than five years, including the year of merger. It is also noticed that in the
case of Bank of Rajasthan, the Tribunal has allowed it as revenue expenditure.
Therefore, the claim made by the assessee cannot be said to be totally
inadmissible, or amounts to either furnishing of inaccurate particulars of
income or misrepresentation of facts. It is possible to accept that the
assessee being guided by the RBI circular has claimed the deduction. In such
circumstances, the assessee cannot be accused of furnishing inaccurate
particulars of income, more so when the assessee has furnished all relevant
information and material before the AO in relation to the acquisition of three
urban co-operative banks.

The
High Court held that, in relation to the assessee’s claim of expenditure, two
views were possible. Even otherwise, the Revenue has not made out any case of
concealment of income or concealment of particulars of any income. As is well
laid down through a series of judgements of the Supreme Court, raising a bona
fide claim even if ultimately found to be not sustainable, is not a ground
for imposition of penalty. In the result, the Revenue Appeal was dismissed.

shailesh.kwebmaker

Jalaram Enterprises Co. P. Ltd. vs. DCIT [ITA No. 4289/Mum./2014; Bench: J; Date of order: 29th April, 2016; Mum. ITAT] Section 68 – Cash credits – Unsecured loans received – The assessee has proved identity, genuineness of the transaction and the creditworthiness of the lenders – no addition can be made

13. Pr. CIT-15 vs. Jalaram Enterprises Co. P.
Ltd. [Income tax Appeal No. 671 of 2017;

Date of order: 7^th
June, 2019;

A.Y.: 2010-11 (Bombay High
Court)]

Jalaram Enterprises Co. P. Ltd. vs.
DCIT [ITA No. 4289/Mum./2014; Bench: J; Date of order: 29^thApril,
2016; Mum. ITAT]

Section 68 – Cash credits –
Unsecured loans received – The assessee has proved identity, genuineness of the
transaction and the creditworthiness of the lenders – no addition can be made

The assessee is a private limited
company engaged in the business of trading in real estate and grains. The
assessee had shown borrowings of Rs. 3 crores. The AO verified the same and was
of the opinion that the transactions were not genuine. He made addition of Rs.
2,66,00,000 out of the said sum of Rs. 3 crores u/s 68 of the Act.

The CIT(A) in his detailed order
allowed the assessee’s appeal and deleted the addition. He noted that out of 12
lenders, nine were parties to whom the assessee had allotted the shares of the
company on 1^st April, 2010. The amounts deposited by these parties
therefore were in nature of share application money. He also noted that in
response to summons issued by the AO, the assessee had submitted the reply and
response of all the lenders with supporting material. He noted that all 12
parties had confirmed the transactions, produced their bank statements and a
majority of them had filed their income tax returns, in which computation of
their income for A.Y. 2010- 11 was also available. The CIT(A) therefore held
that the transactions were genuine and that the assessee had established the
source and the creditworthiness of the lenders.

The Revenue took the matter before
the Tribunal. The Tribunal held that the AO made addition u/s 68 of the Act in
respect of 12 parties holding that the creditors had not appeared in response
to the summons issued u/s 131 of the Act; he also held that the genuineness of
the transaction and creditworthiness of the creditors was not established.

The assessee has proved the
identity and genuineness of the transaction and the creditworthiness of the
lenders by furnishing the requisite details, like confirmations, PAN details,
return of income, bank statements, etc. It is the finding of the CIT(A) that
first deposits were received through bank transfers from the lenders’ accounts
and thereafter they were given to the assessee company by account payee cheque.
In the circumstances, the order of the CIT(A) in deleting the addition made u/s
68 of the Act was upheld.

Being
aggrieved with the ITAT order, the Revenue filed an appeal to the High Court.
The Court held that the entire issue is based on appreciation of evidence. The
CIT(A) and the Tribunal had come to the concurrent conclusions on facts which
were shown not to be perverse. The Revenue appeal was dismissed.

shailesh.kwebmaker

Sections 194, 194D and 194J of ITA, 1961 – TDS – Works contract or professional services – Outsourcing expenses – Services clerical in nature – Not technical or managerial services – Tax deductible u/s 194C and not u/s 194J TDS – Insurance business – Insurance agent’s commission – Service tax – Quantum of amount on which income-tax to be deducted – Tax deductible on net commission excluding service tax

38. CIT vs. Reliance Co. Ltd.; 414 ITR 551 (Bom.)

Date of order: 10^th
June, 2019

A.Y.: 2009-10

Sections 194, 194D and 194J of ITA,
1961 – TDS – Works contract or professional services – Outsourcing expenses –
Services clerical in nature – Not technical or managerial services – Tax
deductible u/s 194C and not u/s 194J

TDS – Insurance business –
Insurance agent’s commission – Service tax – Quantum of amount on which
income-tax to be deducted – Tax deductible on net commission excluding service
tax

The assessee,
an insurance company, deducted tax at source u/s 194C of the Income-tax Act,
1961 on payment of outsourcing expenses. The Department held that the tax ought
to have been deducted u/s 194J on the ground that the payments were for
managerial and technical services. The assessee deducted the tax at source on
the agent’s commission excluding the service tax component, which it directly
deposited with the Government. The Department contended that the service tax
component ought to have been part of the amount on which tax was required to be
deducted at source.

The
Commissioner (Appeals) and the Tribunal found that the services outsourced were
clerical in nature and that the payments made by the assessee were neither for
managerial services nor for technical services and that the charges for event
management paid by the assessee were for services in the nature of travel agent
and allowed the assessee’s claim. The Tribunal referred to the Circular of the
CBDT wherein it was provided that the deduction of tax at source was to be made
in relation to the income of the payee and held that tax was deductible on the
net insurance commission of the agent after excluding the service tax component
from the gross commission.

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

“(i) The work outsourced by the assessee was in
the nature of clerical work. The Tribunal was justified in holding that the tax
at source was deductible u/s 194C and not u/s 194J.

(ii) The
commission payment made to the agent was the net commission payable excluding
the service tax component which was required to be directly deposited with the
Government. The Tribunal was justified in holding that the tax was deductible
from the payment of net commission to the agents, after excluding the service
tax component from the gross commission.”

shailesh.kwebmaker

Sections 132 and 133A of ITA, 1961 – Search and seizure – Survey converted into search – Preconditions not satisfied – Action illegal and invalid

37. Pawan Kumar Goel vs. UOI; [2019] 107
taxmann.com 21 (P&H)

Date of order: 22^nd
May, 2019

Sections 132 and 133A of ITA, 1961
– Search and seizure – Survey converted into search – Preconditions not
satisfied – Action illegal and invalid

The respondent tax officials
entered the business premises of the assessee and he was allegedly asked to
sign documents without disclosing their contents. Upon raising a question the
respondents supplied him with a copy of summons u/s 131 of the Income-tax Act,
1961 informing him that the officials wanted to carry out a survey operation
u/s 133A. The assessee submitted that although the summons indicated survey
operations but the procedure was converted into search and seizure which was
impermissible in law.

The assessee therefore filed a writ
petition with a prayer that the process of search and seizure conducted by the
respondents on his business premises be quashed and set aside.

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

“(i) The respondents have not demonstrated from any material as to
whether the assessee failed to co-operate, which is an eventuality where the
income-tax authority would be required to record its reasons to resort to the
provisions of section 131(1) and convert the whole process into search and
seizure. But this is completely missing from the process.

(ii) This, to our minds, is fatal to the cause of the respondents
because in a procedure like this which can often turn draconian the inherent
safeguard of at least recording a reason and satisfaction of non-co-operation
to resort to other coercive steps needs to be set out clearly by the income-tax
authority.

(iii) The action of the respondents is therefore bad in the eye of law.
Besides, the summons issued to the assessee was totally vague. No documents
were mentioned which were required of the assessee and neither was any other
thing stated.

(iv) Similarly, the argument of the assessee that provisions of section
131(1) could be invoked only if some proceedings were pending is agreeable. In
the instant case there was only a survey operation and no proceedings were
pending at that point of time. But the income-tax authority exercised the
powers of a court in the absence of any pending proceedings.

(v) Thus,
the income-tax authority violated the procedure completely. Nowhere was any
satisfaction recorded either of non-co-operation of the assessee or a suspicion
that income has been concealed by the assessee warranting resort to the process
of search and seizure.

(vi) For the reasons above, it is to be
concluded that the instant petition deserves to succeed. The impugned action of
the respondents is quashed. The consequential benefits would flow to the
assessee forthwith.

Ordered accordingly.”

shailesh.kwebmaker

Section 4 of ITA, 1961 – Income or capital – Assessee a Government Corporation wholly owned by State – Grant-in-aid received from State Government for disbursement of salaries and extension of flood relief – Funds meant to protect functioning of assessee – No separate business consideration between State Government and the assessee – Flood relief not constituting part of business of assessee – Grant-in-aid received is capital receipt – Not taxable

36. Principal CIT vs. State Fisheries Development
Corporation Ltd.; 414 ITR 443 (Cal.)

Date of order: 14^th
May, 2018

A.Y.: 2006-07

Section 4 of ITA, 1961 – Income or
capital – Assessee a Government Corporation wholly owned by State –
Grant-in-aid received from State Government for disbursement of salaries and
extension of flood relief – Funds meant to protect functioning of assessee – No
separate business consideration between State Government and the assessee –
Flood relief not constituting part of business of assessee – Grant-in-aid
received is capital receipt – Not taxable

The assessee was engaged in
pisciculture and was a wholly-owned company of the State Government. It
received certain amounts as grant-in-aid from the State Government towards
disbursement of salary and provident fund dues and for extension of flood
relief. The AO treated the amount as revenue receipts on the ground that the
funds were applied for items which were revenue in nature and disallowed the
claim for deduction by the assessee. It was contended by the assessee that
though the funds were applied for salary and provident fund dues, the object of
the assistance was to ensure its survival.

The Tribunal allowed the assessee’s
claim.

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

“(i) The finding of the Tribunal that the amount received by the assessee
from the State Government in the form of grant-in-aid utilised for clearing the
salary and provident fund dues and flood relief was capital in nature was
correct.

(ii) The amount received by the assessee was not on account of any
general subsidy scheme. Though the grant-in-aid was received from the public
funds, the State Government being a hundred per cent shareholder, its position
would be similar to that of a parent company making voluntary payments to its
loss-making undertaking. It was apparent that the actual intention of the State
Government was to keep the assessee, facing a cash crunch, floating and
protecting employment in a public-sector organisation. There was no separate
business consideration on record between the grantor-State Government and the
recipient-assessee.

(iii) Since flood relief did not constitute
part of the business of the assessee, the funds extended for flood relief could
not constitute revenue receipt.”

shailesh.kwebmaker

Section 5 of ITA, 1961 – Income – Accrual of income – Mercantile system of accounting – Bill raised for premature termination of contract and contracting company not accepting bill – Income did not accrue – Another bill of which small part received after four years – Theory of real income – Sum not taxable – Any claim of assessee by way of bad debts was to be adjusted

35. CIT(IT) vs. Bechtel International Inc.; 414
ITR 558 (Bom.)

Date of order: 4^thJune,
2019

A.Y.: 2002-03

Section 5 of ITA, 1961 – Income –
Accrual of income – Mercantile system of accounting – Bill raised for premature
termination of contract and contracting company not accepting bill – Income did
not accrue – Another bill of which small part received after four years –
Theory of real income – Sum not taxable – Any claim of assessee by way of bad
debts was to be adjusted

The assessee was in the
construction business. It did not include in its return two sums of Rs. 26.47
crores and Rs. 59.51 crores, respectively, for which it had raised bills but
had not accounted for in its income. The AO rejected the assessee’s contention
that those amounts had not accrued to it and that even on the basis of the
mercantile system of accounting followed by it, the amounts need not be offered
to tax. But the AO was of the opinion that since the assessee had raised the
bills, whether the payments were made or not was irrelevant since the assessee
followed the mercantile system of accounting.

The
Commissioner (Appeals) held that the sum of Rs. 59.51 crores, for which the
assessee had raised the bill after the termination of the contract, could not
have been brought to tax since the bill pertained to the mobilisation and site
operation cost; but in respect of the sum of Rs. 26.47 crores, he did not grant
any relief on the ground that the bill pertained to the construction work that
had already been carried out before the termination of the contract. The
Tribunal found that in respect of the sum of Rs. 59.51 crores, the assessee was
awarded the contract of the project of the parent company of the contracting
company, that the parent company was in severe financial crises, that the
assessee raised the bill after the termination of contract, that the bill was
not even accepted by the contracting company and that the income never accrued
to the assessee. In respect of the amount of Rs. 26.47 crores, the Tribunal
found that due to the financial crises of the parent company of the contracting
company, the assessee could not receive any payment for a long time and could
recover only 8.58% of the total claim and, inter alia applying the
theory of real income, deleted the addition. The assessee had also in a later
year claimed the same amount by way of bad debts. The Tribunal while giving
relief to the assessee ensured that any such amount claimed by way of bad debts
was to be adjusted.

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

“(i) The Tribunal did not err in holding that no real income accrued to
the assessee as only 8.58% of the total claim was received, applying the real
income theory, bill amount of Rs. 26.47 crores due to the financial crises of
the parent company of the contracting company, and in respect of the sum of Rs.
59.51 crores on the ground that the bill was raised after the termination of
the contract and the bill was not even accepted by the contracting party.

(ii) The claim of Rs. 59.51 crores was for
damages for the premature termination of the contract. Any further examination
of the issue would be wholly academic since the assessee could have claimed the
amount by way of bad debts. In fact, such claim was allowed, but in view of the
further development, pursuant to the decision taken by the Tribunal, such claim
was ordered to be adjusted.”

shailesh.kwebmaker

Sections 2(24) and 4 of ITA, 1961 – Income – Meaning of – Assessee collecting value-added tax on behalf of State Government – Excess over expenditure deposited in State Government Treasury – No income accrued to assessee

34. Principal CIT vs. H.P. Excise and Taxation
Technical Service Ltd.; 413 ITR 305 (HP)

Date of order: 7^th
December, 2018

A.Ys.: 2007-08 to 2011-12 and
2013-14

Sections 2(24) and 4 of ITA, 1961 –
Income – Meaning of – Assessee collecting value-added tax on behalf of State
Government – Excess over expenditure deposited in State Government Treasury –
No income accrued to assessee

The assessee-society was registered
under the Societies Registration Act, 1860 on 27^th August, 2002.
Under the objects of its formation the assessee was entrusted with the
responsibility of collection of value-added tax. The assessee maintained all
the multi-purpose barriers in the State of Himachal Pradesh from where all
goods entered or left the State in terms of section 4 of the Himachal Pradesh
Value-Added Tax Act, 2005. A form was to be issued to the person declaring the
goods at a cost of Rs. 5 per form till the levy was further enhanced to Rs. 10
w.e.f. 18^th May, 2009. In terms of the bye-laws, the assessee used
to deposit Re. 1 per declaration form
with the Government Treasury out of the Rs. 5 received till the year 2009; this
was later enhanced to Rs. 2 after the tax amount was increased from Rs. 5 to Rs
10 per declaration form. The assessee had been showing the surplus of income
over expenditure in its income-expenditure statements. The AO, therefore,
issued notices u/s 148 of the Income-tax Act, 1961 for taxing the excess of
income over expenditure. For the A.Y.s 2007-08 and 2010-11 the assessee
contested the notices stating that all the surplus income was payable to the
State Government and, therefore, it had earned no taxable income. The AO rejected
the assessee’s claim.

The Tribunal considered the
memorandum of association of the assessee as well as the details of its
background, functional requirements, operation and model, accounting structure
and ultimate payment to the exchequer of the Government. It also went into the
composition of the governing body, organisational structure, funds and
operation of the accounts of the assessee as enumerated in its bye-laws. It
held that the amount was not assessable in the hands of the assessee.

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

“(i) The assessee neither created any source of income nor generated
any profit or gain out of such source. The assessee merely performed the
statutory functions under the 2005 Act and collected the tax amount for and on
behalf of the State and transferred such collection to the Government Treasury.
Even if the tax collection remained temporarily parked with the assessee for
some time, it could not be treated as ‘income’ generated by the assessee as the
amount did not belong to it.

(ii) The Tribunal had rightly concluded that the surplus of income over
expenditure, as reflected in the entries or the returns filed by the assessee,
also belonged to the State Government and was duly deposited in the Government
Treasury. Hence, it did not partake of the character of ‘profit or gain’ earned
by the assessee.

(iii) The non-registration of the assessee u/s
12AA of the Act was inconsequential.”

shailesh.kwebmaker

Section 14A of ITA, 1961 r.w.r. 8D(2)(iii) of ITR, 1962 – Exempt income – Disallowance of expenditure relating to exempt income – Voluntary disallowance by assessee of expenditure incurred to earn exempt income – AO cannot disallow expenditure far in excess of what has been disallowed by assessee

33. Principal CIT vs. DSP Adiko Holdings Pvt.
Ltd.; 414 ITR 555 (Bom.)

Date of order: 3^rd
June, 2019

A.Y.: 2009-10

Section 14A of ITA, 1961 r.w.r.
8D(2)(iii) of ITR, 1962 – Exempt income – Disallowance of expenditure relating
to exempt income – Voluntary disallowance by assessee of expenditure incurred
to earn exempt income – AO cannot disallow expenditure far in excess of what
has been disallowed by assessee

The assessee was in investment
business. It earned interest income from investment in mutual funds. It claimed
total expenses of Rs. 24.19 lakhs and voluntarily disallowed an amount of Rs.
7.79 lakhs as expenditure relatable to earning tax-free income u/s 14A of the
Income-tax Act, 1961. The AO rejected such working and applied Rule 8D(2)(iii)
of the Income-tax Rules, 1962 and made a disallowance of Rs. 2.19 crores.

The Commissioner (Appeals)
restricted the disallowance to Rs. 24.19 lakhs, the amount which was claimed as
total expenses. The Tribunal reduced it further to the assessee’s original
offer of Rs. 7.79 lakhs.

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

“(i) The computation of the AO would lead to disallowance of
expenditure far in excess of what was claimed by the assessee itself. The
assessee’s entire claim of expenditure in relation to its business activity was
Rs. 24.19 lakhs out of which the assessee had voluntarily reduced the sum of
Rs. 7.79 lakhs in relation to income not forming part of the total income u/s
14A which was accepted by the Tribunal.

(ii) Quite apart from the correctness of the approach of the Tribunal,
accepting the stand of the AO would lead to disallowance of expenditure far in
excess of what is claimed by the assessee itself. No question of law arose.”

shailesh.kwebmaker

Sections 37 and 43B(g) of ITA, 1961 – Business expenditure – Deduction only on actual payment – Assessee paying licence fee to Railways for use of land – Railways enhancing licence fee and damages with retrospective effect and disputes arising – Assessee making provision for sum payable to Railways – Nature of fee not within description of ‘duty’, ‘cess’, or ‘fee’ payable under law at relevant time – Sum payable under contract – Deduction allowable

32. CIT vs. Jagdish Prasad Gupta; 414 ITR 396
(Del.)

Date of order: 25^th
March, 2019

A.Y.: 2007-08

Sections 37 and 43B(g) of ITA, 1961
– Business expenditure – Deduction only on actual payment – Assessee paying
licence fee to Railways for use of land – Railways enhancing licence fee and
damages with retrospective effect and disputes arising – Assessee making
provision for sum payable to Railways – Nature of fee not within description of
‘duty’, ‘cess’, or ‘fee’ payable under law at relevant time – Sum payable under
contract – Deduction allowable

The assessee was allotted lands by
the Railways and the licence fee was collected for the use of the land. The
Railways revised the licence fee periodically and also claimed damages,
unilaterally, on retrospective basis applicable from anterior dates. These led
to disputes. Therefore, the assessee made provision for the amounts which were
deemed payable to the Railways but which were disputed by it and ultimately
became the subject matter of arbitration proceedings. For the A.Y. 2007-08, the
AO disallowed the claim for deduction of the amounts on the ground that it fell
within the purview of section 43B of the Income-tax Act, 1961 and that by
virtue of the conditions laid down in section 43B, especially (a) and (b), the
licence fee payable periodically and the damages as well could not have been
allowed as deduction since they were not paid within that year in accordance
with the provision.

The Tribunal allowed the assessee’s
claim.

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

“(i) The reference to ‘fee’ in section 43B(a) had to be always read
along with the expression ‘law in force’. According to the documents placed on
record, the transaction between the parties was a commercial one, while the
land was allotted for a licence fee.

(ii) The Notes on Clauses to the Bill which inserted section 43B(g)
stated that the amendment would take effect from 1st April, 2017 and would
accordingly apply only to the A.Y. 2017-18 and subsequent years. Thus, the
notion of clarificatory amendment would not be applicable. The contentions of
the Department with respect to applicability of section 43B were untenable.

(iii) The assessee was entitled to deduction
on the enhanced licence fee in the year in which such enhancement had accrued
even though it was not paid in that year.”

shailesh.kwebmaker

Sections 48, 54F, 19 and 143 of ITA, 1961 – Assessment – Duty of Assessing Officer – It is a sine qua non for the AO to consider claims of deduction / exemption made by the assessee and thereafter to return the said claims if the assessee is not entitled to the same by assigning reasons

31. Deepak Dhanaraj vs. ITO; [2019] 107
taxmann.com 76 (Karn.)

Date of order: 28^th
May, 2019

A.Y.: 2016-17

Sections 48, 54F, 19 and 143 of
ITA, 1961 – Assessment – Duty of Assessing Officer – It is a sine qua non
for the AO to consider claims of deduction / exemption made by the assessee and
thereafter to return the said claims if the assessee is not entitled to the
same by assigning reasons

For the A.Y. 2016-17 the
petitioner-assessee had filed a return of income on 30^th March, 2018
offering to tax the capital gains along with other sources of income. The said
return was held to be a defective return. The assessee thereafter filed a
revised return on 18^th September, 2018 declaring long-term capital
gains and claiming deduction u/s 48 and exemption u/s 54F of the Income-tax
Act, 1961. The AO completed the assessment u/s 143(3) without considering the
return and the revised return and the claims for deduction / exemption u/ss 48
and 54F.

The assessee filed a writ petition
challenging the order. The Karnataka High Court allowed the writ petition and
held as under:

“(i) Ordinarily, the Court would have relegated the petitioner-assessee
to avail the statutory remedy of appeal available under the Act provided the
principles of natural justice are adhered to. As could be seen from the order
impugned, the respondent has not whispered about the revised return filed by
the assessee except observing that the returns filed by the assessee were
invalidated being defective returns. If that being the position, no opportunity
was provided to the assessee u/s 139(9) to remove the defects in the returns
pointed out by the AO, nor was an opportunity provided to file a return
pursuant to the notice issued u/s 142(1). Even assuming the arguments of the
Revenue that no revised returns could be accepted enlarging the claim of
deduction / exemption beyond the time prescribed under the Act, it is a sine
qua non for the AO to consider the claims of deduction / exemption made by
the petitioner-assessee and thereafter to return the said claims if the
assessee is not entitled to the same by assigning the reasons. The impugned
assessment order prima facie establishes that the deduction claimed u/s
54F is not considered while computing the taxable turnover. This would
certainly indicate the non-application of mind by the respondent / Revenue.

(ii) It is clear that recording of ‘reasons’ is a sine qua non
for arriving at a conclusion by the quasi-judicial authority and it is
essential to adopt, to subserve the purposes of the justice delivery system.
The reasons are the soul and heartbeat of the orders without which the order is
lifeless and void. Where the reasons are not recorded in the orders, it would
be difficult for the Courts to ascertain the minds of the authorities while
exercising the power of judicial review.

(iii) It is a well-settled legal principle that there is no bar to
invoke the writ jurisdiction against a palpable illegal order passed by the
Assessing Authority in contravention of the principles of audi alteram
partem. On this ground alone, the order impugned cannot be approved. There
is no cavil with the arguments of the respondent placing reliance on the
judgement of the Apex Court in Goetze (India) Ltd. vs. CIT [2006] 157
Taxman 1/284 ITR 323 that no claim for deduction other than by filing a
revised return can be considered but not in the absence of the AO analysing,
adjudicating and arriving at a decision by recording the reasons. It is
apparent that no reasons are forthcoming for rejecting the revised returns as
well as the claims made u/s 54F. Such a perfunctory order passed by the AO
cannot be held to be justifiable.

(iv) Hence, for the aforesaid reasons, without expressing any opinion on
the merits or demerits of the case, the order impugned and the consequent
demand notice issued u/s 156 as well as the recovery notice issued by the
respondent are quashed. The proceedings are restored to the file of the
respondent to reconsider the matter and to arrive at a decision after providing
an opportunity of hearing to the petitioner, assigning valid reasons as
aforementioned.”

shailesh.kwebmaker

Revision – Section 264 of ITA, 1961 – Delay in filing application – Condonation of delay – Assessee including non-taxable income in return – Assessee acting in time to correct return by filing revised return and rectification application – Revised return rejected on technical ground – Consequent delay in filing application for revision was to be condoned

28 Ramupillai Kuppuraj
vs. ITO; [2019] 418 ITR 458
(Mad.) Date of order: 28^th
June, 2018 A.Y.: 2009-10

Revision – Section
264 of ITA, 1961 – Delay in filing application – Condonation of delay –
Assessee including non-taxable income in return – Assessee acting in time to
correct return by filing revised return and rectification application – Revised
return rejected on technical ground – Consequent delay in filing application
for revision was to be condoned

The assessee, a non-resident seafarer, filed his
return for the A.Y. 2009-10. He then filed, in time, a revised return excluding
an amount of Rs. 19.84 lakhs which was erroneously included in the return
though, according to him, it was income received from abroad and hence not
taxable in India. The revised return was rejected for a technical reason. An
application for rectification was also rejected and a notice of demand was
issued. The assessee filed an application for revision u/s 264 of the
Income-tax Act, 1961 which was rejected solely on the ground of delay. The
assessee filed a writ petition and challenged the order.

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

‘i) The
Commissioner has powers to condone a delay in the application for revision u/s
264 of the Income-tax Act, 1961. There is no restriction regarding the length
of delay that can be condoned. In case of delay whether sufficient cause has
been made out or not is always a question which depends on the facts and
circumstances of each case and it has to be established based on records of
that case.

ii) The
period of one year for filing an application u/s 264 expires on 22^nd
October, 2011, as the order of assessment u/s 143(1) came to be passed on 23^rd
October, 2010. Within this one year, i.e., on 5^th August, 2011
itself, the assessee had taken the first step to have his Rs. 19.84 lakhs
excluded qua the assessment year by filing a revised return. This
revised return was rejected u/s 139(5) on a technical ground. The assessee
filed a rectification application, on which no orders were passed. Without
passing orders on the application for rectification, a demand notice was issued
triggering a second application for rectification from the assessee which came
to be dismissed. A demand was made on 31^st January, 2018, the second
rectification application was filed by the assessee on 2^nd July,
2018; the assessee ultimately filed a petition u/s 264.

iii) Therefore,
this was not a case where the assessee had not acted in time. The rejection of
the application for revision solely on the ground of delay was not justified.’

shailesh.kwebmaker

ACIT-2(3) vs. M/s Tata Sons Ltd.; date of order: 9th December, 2015; [ITA. No. 1719/Mum/2012, A.Y.: 2004-05; Mum. ITAT]

3.
The Pr. CIT-2 vs. M/s Tata Sons
Ltd. [Income tax Appeal No. 639 of 2017] Date of order: 19^thAugust, 2019 (Bombay High Court)

ACIT-2(3) vs. M/s Tata Sons Ltd.; date of
order: 9^thDecember, 2015; [ITA. No. 1719/Mum/2012, A.Y.: 2004-05;
Mum. ITAT]

Section 147 – Reassessment – The reopening
notice was issued before the reasons were recorded for reopening the assessment
– Reopening notice is bad in law [S. 148]

On 6^th
March, 2009 the AO issued a notice u/s 148 of the Act seeking to re-open the
assessment. The assessee company contended that the reopening notice was issued
much before the reasons for doing so were recorded, thus the reopening notice
was without jurisdiction. However, the AO did not accept the assessee’s
contention and passed an order of assessment u/s 143(3) r/w/s 148 of the Act.

Being aggrieved with the order, the assessee
company carried the issue in appeal to the CIT(A). The CIT(A) held that the
reopening notice had been issued without having recorded the reasons which might
have led the AO to form a reasonable belief that income chargeable to tax had
escaped assessment. The reasons were recorded on 19^th March, 2009
while the impugned notice issued is dated 6^th March, 2009. The
CIT(A) held that the entire proceeding of reopening is vitiated as notice u/s
148 of the Act is bad in law.

Aggrieved with this, the Revenue filed an
appeal before the Tribunal. The Tribunal specifically asked the Revenue to
produce the assessment record so as to substantiate its case that the impugned
notice u/s 148 of the Act was issued only after recording the reasons for
reopening the assessment. The Revenue produced the record of assessment for
A.Y. 2004-05 before the Tribunal. The Tribunal on facts found from the entries
made in the assessment record produced an entry as regards issue of notice u/s
148 dated 6^th March, 2009.

However, no
entries prior to 6^th March, 2009 were produced before the Tribunal
so as to establish that the reasons were recorded prior to the issue of notice
dated 6^th March, 2009 u/s148 of the Act. Thus, the Tribunal
concluded that there was nothing in the records which would indicate that any
reasons were recorded prior to the issue of notice. Therefore, the order of the
CIT(A) was upheld.

Still aggrieved, this time with the order of
the Tribunal, the Revenue carried the issue in appeal to the High Court. The
High Court held that both the CIT(A) and the Tribunal had concurrently come to
a finding of fact that no reasons were recorded by the AO prior to issuing the
reopening notice dated 6^th March, 2009.

Further,
section 292B of the Act would have no application in the present facts as the
condition precedent for issuing of the reopening notice, namely, recording of
reasons, has not been satisfied by the AO. Thus, it is not a case of clerical
error but the substantial condition for a valid reopening notice, viz.,
recording of reasons to form a reasonable belief, is not satisfied. Accordingly
the appeal was dismissed.

shailesh.kwebmaker

Sandu Pharmaceuticals Ltd. vs. Asst. CIT-10(2); date of order: 23rd March, 2016; [ITA. No. 2087/Mum/2012; A.Y.: 2009-10; Mum. ITAT] Section 194H – Tax deduction at source – Manufacture the goods as per the specification – Discount vis-a-vis commission – No principal-agent relationship, hence not liable to deduct tax at source – Consistent view accepted over years

2.
Pr. CIT-14 vs. Sandu
Pharmaceuticals Ltd. [ITA No. 953 of 2017] Date of order: 27^th August, 2019 (Bombay High Court)

Sandu Pharmaceuticals Ltd. vs. Asst.
CIT-10(2); date of order: 23^rd March, 2016; [ITA. No. 2087/Mum/2012;
A.Y.: 2009-10; Mum. ITAT]

Section 194H – Tax deduction at source –
Manufacture the goods as per the specification – Discount vis-a-vis commission
– No principal-agent relationship, hence not liable to deduct tax at source –
Consistent view accepted over years

The assessee company is engaged in the
manufacture of Ayurvedic medicines. During the assessment proceedings the AO
noted that on the sales turnover of Rs.14.25 crores, the assessee had given
discount of Rs. 7.27 crores. The AO called upon the assessee to furnish details
of the discount given. In response, the respondent pointed out that it was
selling its Ayurvedic medicines to a company called Sandu Brothers Private
Limited (SBPL) at a discount of 51%. This, after taking into account the cost
of distribution, field staff salary, travelling expenses, incentives,
marketing, etc. However, the AO held that 10% was on account of discount and
the balance 41% was the commission involved in selling its product through
SBPL. He therefore held that tax had to be deducted on the commission of Rs.
5.84 crores u/s 194H of the Act. This not being done, the entire amount of Rs.
5.84 crores being the commission at 41% was disallowed in terms of section
40(a)(ia) of the Act.

Being aggrieved, the assessee filed an
appeal before the CIT(A). But the CIT(A) dismissed the appeal.

Being aggrieved by the order, the assessee
filed an appeal to the Tribunal. The Tribunal observed that the assessee had
entered into an agreement with SBPL on 1^st April, 1997 for the sale
of its products. As per clause 1 of the agreement, the assessee is to
manufacture and process certain Ayurvedic drugs and formulations by utilising
the secret formulation given by SBPL and pack them in bulk or in such other
packs as may be stipulated or specified by SBPL to enable them to market the
same by buying the said products on its account. Clause 11 of the agreement
stipulates that the sale of goods to SBPL is on principal-to-principal basis
and none of the parties to the agreement shall hold oneself as agent of the
other under any circumstances. It further stipulates that SBPL shall sell the
products on its own account only and not as an agent or on behalf of the
assessee.

Clause 10(a) of the agreement provides that
the assessee shall manufacture the goods as per the specifications of SBPL and
if the products are not in accordance with the standard, SBPL shall have the
right to reject the products. However, clause 10(b) provides that once SBPL
accepts certain products manufactured by the assessee, any loss suffered by
SBPL subsequently, due to handling, transportation of storage shall be borne by
SBPL itself. Thus, on overall consideration of the agreement between the
parties, it becomes clear that once certain goods are sold to SBPL after
certification by them, ownership of such goods is transferred from the assessee
and vests with SBPL. Thus, once the goods are certified by SBPL and sold to
them the contract of sale concludes as far as the assessee is concerned, as
goods cannot be returned back to the assessee. Therefore, examined in the
aforesaid perspective, it has to be concluded that it is a transaction of sale
between the assessee and SBPL on principal-to-principal basis and there is no
agency between them. Further, on a perusal of the invoices raised, it is clear
that the assessee has given a discount of 51% on the MRP of the goods sold.

These evidences clearly demonstrate that
there is no relationship of principal and agent between the assessee and SBPL.
The Departmental authorities have failed to demonstrate that SBPL was acting as
an agent on behalf of the assessee to satisfy the condition of section 194H. It
is also relevant to note, though, that the agreement with SBPL is subsisting
from the year 1997 and similar trade discount has been given to SBPL on sales
effected over the years; but the Department has not made any disallowance
either in the preceding assessment years or in the subsequent assessment years.
This fact is evident from the assessment orders passed for A.Ys. 2005-06 and
2006-07 u/s 143(3) of the Act. That being the case, when the Department is
following a consistent view by not treating the discount given in the nature of
commission over the years under identical facts and circumstances, a different
approach cannot be taken in the impugned A.Y.

Being aggrieved
by the order, the Revenue filed an appeal before the High Court. The Court
observed that the Tribunal has on facts come to the conclusion that the sale of
goods to Sandu Brothers Private Limited was on principal-to-principal basis and
not through an agent. Thus, no amount of the discount aggregating to Rs. 7.27
crores can be classified as commission. Therefore, section 194H of the Act
calling for deduction of tax of such a commission would have no application to
the present facts. The Revenue has not been able to show that the finding of
fact arrived at by it on the basis of the terms of the agreement is in any
manner perverse, or capable of a different interpretation. Therefore, the
department appeal was dismissed.

shailesh.kwebmaker

M/s Siemens Nixdorf Information Systemse GmbH vs. Dy. Dir. of Income Tax (Int’l Taxation) 2(1); [ITA No. 3833/M/2011; date of order: 31st March, 2016; A.Y.: 2002-03; Mum. ITAT] Section 2(14) – Capital asset – Advance given to subsidiary – Loss arising on sale of said asset was held to be treated as short-term capital loss [S. 2(47)]

1.
The CIT (IT)-4 vs. M/s Siemens
Nixdorf Information Systemse GmbH [Income tax Appeal No. 1366 of 2017 Date of
order: 26^th August, 2019 (Bombay
High Court)

M/s Siemens Nixdorf Information Systemse
GmbH vs. Dy. Dir. of Income Tax (Int’l Taxation) 2(1); [ITA No. 3833/M/2011;
date of order: 31^st March, 2016; A.Y.: 2002-03; Mum. ITAT]

Section 2(14)
– Capital asset – Advance given to subsidiary – Loss arising on sale of said
asset was held to be treated as short-term capital loss [S. 2(47)]

The assessee company has a subsidiary by the
name Siemens Nixdorf Information Systems Limited (SNISL) to which it had lent
an amount of Euros 90 lakhs under an agreement dated 21^st September,
2000. When SNISL ran into serious financial troubles and was likely to be wound
up, the assessee company sold this debt of Euros 90 lakhs to one Siemens AG.
This was done on the basis of the valuation carried out by M/s Infrastructure
and Leasing Finance Ltd. The assessee company claimed the difference in the
amount which was invested / lent to SNISL and the consideration received when
sold / assigned to Siemens AG as a short-term capital loss.

However, the AO disallowed the short-term
capital loss, pointing out that the amount lent by the assessee company to its
subsidiary was not a capital asset u/s 2(14) of the Act and also that no
transfer in terms of section 2(47) of the Act took place on the assignment of a
loss.

Being aggrieved, the assessee company
carried the issue in appeal to the CIT(A). But even the CIT(A) did not accept
the contention that the amount of Euros 90 lakhs lent to SNISL was a capital
asset and upheld the order of the AO. However, it also held that although the
assignment of a loss was a transfer u/s 2(47) of the Act, but it is of no avail
as the loan being assigned / transferred is not a capital asset.

On further appeal, the Tribunal held that
section 2(14) defines the term ‘capital asset’ as ‘property of any kind held by
an assessee, whether or not connected with his business or profession’, except
those which are specifically excluded in the said section. It further records
the exclusion is only for stock-in-trade, consumables or raw materials held for
purposes of business. It thereafter examined the meaning of the word ‘property’
to conclude that it has a wide connotation to include interest of any kind. It
placed reliance upon the decision of the Bombay High Court in the case of CWT
vs. Vidur V. Patel [1995] 215 ITR 30 rendered in the context of the
Wealth Tax Act, 1957 which, while considering the definition of ‘asset’, had
occasion to construe the meaning of the word ‘property’. It held the word
‘property’ to include interest of every kind. On the aforesaid basis, the
Tribunal held that in the absence of loan being specifically excluded from the
definition of capital assets under the Act, the loan of Euros 90 lakhs would
stand covered by the meaning of the word ‘capital asset’ as defined u/s 2(14)
of the Act. It also held that the transfer of the loan, i.e., capital asset,
will be covered by section 2(47) of the Act. The Revenue had not filed any
appeal on this issue, thus holding that the assessee company would be entitled
to claim loss on capital account while assigning / transferring the loan given
to SNISL to one to Siemens AG.

Being aggrieved with the order of the ITAT,
the Revenue carried the issue in appeal to the High Court. The Court observed
that section 2(14) of the Act defined the word ‘capital asset’ very widely to
mean property of any kind. However, it specifically excludes certain properties
from the definition of ‘capital asset’. The Revenue has not been able to point
out any of the exclusion clauses being applicable to an advancement of a loan.
It is also relevant to note that it is not the case of the Revenue that the
amount of Euros 90 lakhs was a loan / advance income of its trading activity.
The meaning of the word ‘property’ as given in the context of the definition of
asset in the Wealth Tax Act is that ‘property’ includes every interest which a
person can enjoy. This was extended by the Tribunal to understand the meaning
of the word ‘property’ as found in the context of capital asset u/s 2(14) of
the Act. The High Court in the case of Vidur Patel (Supra) has
observed
as under:

‘…So far as the meaning of “property” is
concerned, it is well settled that it is a term of widest import and, subject
to any limitation which the context may require, it signifies every possible
interest which a person can hold or enjoy. As observed by the Supreme Court
in Commissioner, Hindu Religious Endowments vs. Shri Lakshmirudra Tirtha Swami
of Sri Shirur Mutt (1954) SCR 1005, there is no reason why this word should
not be given a liberal or wide connotation and should not be extended to those
well-recognised types of interests which have the insignia or characteristic of
property right.’

The only objection of the Revenue to the
above decision being relied upon was that it was rendered under a different
Act. In this context, the Court relied on another decision in case of Bafna
Charitable Trust vs. CIT 230 ITR 846. In this case, the Court observed
as under:

‘Capital asset has been defined in clause
(14) of section 2 to mean property of any kind held by an assessee, whether or
not connected with his business or profession, except those specifically
excluded. The exclusions are stock-in-trade, consumable stores or raw materials
held for the business or profession, personal effects, agricultural land and
certain bonds. It is clear from the above definition that for the purposes of
this clause property is a word of widest import and signifies every possible
interest which a person can hold or enjoy except those specifically excluded.’

The Bombay High Court noted that the Revenue
had not been able to point out why the above decision of this Court rendered in
the context of capital assets as defined in section 2(14) of the Act was
inapplicable to the present facts; nor, why the loan given to SNISL would not,
in the present facts, be covered by the meaning of ‘capital asset’ as given u/s
2(14) of the Act. In the above view, as the issue raised herein stands
concluded by the decision of this Court in Bafna Charitable Trust (Supra),
and also by the self-evident position as found in section 2(14) of the Act, the
Revenue appeal accordingly stands dismissed.

shailesh.kwebmaker

Refund of tax wrongly paid – Income-tax authorities – Scope of power u/s 119 of ITA, 1961 – Tax paid by mistake – Application for revision u/s 264 not maintainable – Income-tax authorities should act u/s 119

8.
Karur Vysya Bank Ltd. vs.
Principal CIT; [2019] 416 ITR 166 (Mad.) Date of order: 12^th June, 2019 A.Y.: 2007-08

Refund of tax
wrongly paid – Income-tax authorities – Scope of power u/s 119 of ITA, 1961 –
Tax paid by mistake – Application for revision u/s 264 not maintainable –
Income-tax authorities should act u/s 119

The assessee is a
bank. For the A.Y. 2007-08, the assessee paid fringe benefits tax in respect of
contribution to an approved pension fund. For the A.Y. 2006-07, the Tribunal
held that fringe benefits tax was not payable on such contribution. Therefore, for
the A.Y. 2007-08, the assessee filed an application u/s 264 of the Income-tax
Act, 1961 for refund of the tax wrongly paid. The application was rejected on
the ground of delay.

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

‘(i) The Income-tax
Department represents the sovereign power of the State in matters of taxation.
Whether the Department had illegally collected the tax from the citizen or
whether the assessee mistakenly paid the tax to the Department, the consequence
is one and the same. If the assessee had mistakenly paid, it is a case of
illegal retention by the Department.

(ii) It is
well-settled principle of administrative law that if the authority otherwise
had the jurisdiction, mere non-quoting or misquoting of provision will not
vitiate the proceedings.

(iii) Section 264 was clearly not applicable in
this case. But section 119 could have been invoked. The authority ought to have
posed only one question to himself, i.e., whether the assessee was liable to
pay the tax in question or not. If he was not liable to pay the tax in
question, the Department had no business to retain it even if it was wrongly
paid.

(iv) In this view of the matter, the order impugned
in this writ petition is quashed and the respondent is directed to pass orders
afresh u/s 119 of the Act within a period of eight weeks from the date of
receipt of this order.’

shailesh.kwebmaker

Refund – Interest on refund – Section 244A of ITA, 1961 – Amount seized from assessee in search proceedings shown as advance tax in return – Return accepted and assessment made – Assessee entitled to interest u/s 244A on such amount

7.
Agarwal Enterprises vs. Dy.
CIT; [2019] 415 ITR 225 (Bom.) Date of order: 24^th January, 2019 A.Y.: 2015-16

Refund – Interest on refund – Section 244A
of ITA, 1961 – Amount seized from assessee in search proceedings shown as
advance tax in return – Return accepted and assessment made – Assessee entitled
to interest u/s 244A on such amount

In the course of
the search proceedings u/s 132 of the Income-tax Act, 1961 conducted in the
office premises of the assessee on 9^th October, 2014 cash of Rs. 35
lakhs was seized. The assessee applied for release of the seized cash after
adjusting tax liability due on the amount but the same was not accepted by the
AO. The assessee filed its return of income for the A.Y. 2015-16, declaring
total income of Rs. 39.15 lakhs, which included the cash of Rs. 35 lakhs seized
during the course of the search. The assessee showed the seized cash of Rs. 35
lakhs as advance tax and claimed a refund of Rs. 27.50 lakhs. The AO passed an
assessment order u/s 143(3) of the Act including the said cash of Rs. 35 lakhs
in the total income. However, the amount of Rs. 35 lakhs which was shown as
advance tax was not accepted and an independent demand of Rs. 9.18 lakhs was
raised on the assessee u/s 156 of the Act. The demand was paid by the assessee.
Subsequently, on application for refund of seized cash of Rs. 35 lakhs, the AO
refunded Rs. 31.5 lakhs after deducting the outstanding penalty demand of Rs.
3.5 lakhs. However, the AO refused to pay interest on the refunded amount.

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

‘(i) It was an undisputed position that Rs. 35
lakhs was seized when the officers of the Revenue searched the assessee’s
premises. It was also undisputed position that consequent to the seizure of Rs.
35 lakhs, the assessment was done not u/s 153A of the Act, but u/s 143(3) of
the Act in respect of the A.Y. 2015-16.

(ii) The assessee in its return of income filed on 22/09/2015 had shown
Rs. 35 lakhs being the seized cash, as advance tax. While passing the
assessment order, the Assessing Officer did not adjust the seized cash as
advance tax paid on behalf of the assessee. This non-adjustment by the
Assessing Officer of the amount being offered as advance tax by the assessee
was unjustified and without reasons. Under the circumstances, the character of
the seized cash underwent a change and became advance tax. This was more
particularly so as for the subject assessment year, it had been accepted as
income. Though the Revenue did not accept the declaration made by the assessee
in its return of advance tax, the fact was that the assessee claimed it to be
tax.

(iii) Therefore, on the date the demand notice u/s 156 of the Act was
issued, there was an excess amount with the Revenue which the assessee was
claiming to be tax. Therefore, in terms of the Explanation to section
244A(1)(b) the amount of Rs. 35 lakhs was excess tax (on change of its character
from seized amount to tax paid) and the assessee was entitled to interest on
Rs. 35 lakhs w.e.f. 16/12/2016 on the passing of the assessment order. The
Assessing Officer had to give interest at 6% per annum from 16/12/2016 up to
31/05/2017 on Rs. 35 lakhs (i.e. before the adjustment of penalty of Rs. 3.5
lakhs of Rs. 35 lakhs) and on Rs. 31.50 lakhs from 01/06/2017 to 07/03/2018
when the sum of Rs. 31.5 lakhs was paid to the assessee.’

shailesh.kwebmaker

Industrial undertaking – Deduction u/s 80-IB of ITA, 1961 – Condition precedent – Profit must be derived from industrial undertaking – Assessee manufacturing pig iron – Profit from sale of slag, a by-product in manufacture of pig iron – Profit entitled to deduction u/s 80-IB

6.
Sesa Industries Ltd. vs. CIT;
[2019] 415 ITR 257 (Bom.) Date of order: 18^th April, 2019 A.Y.: 2004-05

Industrial undertaking – Deduction u/s
80-IB of ITA, 1961 – Condition precedent – Profit must be derived from
industrial undertaking – Assessee manufacturing pig iron – Profit from sale of
slag, a by-product in manufacture of pig iron – Profit entitled to deduction
u/s 80-IB

For the A.Y.
2004-05, the assessee claimed deduction u/s 80-IB of the Income-tax Act, 1961
for one of its industrial undertakings which was engaged in the manufacture of
pig iron. The AO computed the deduction u/s 80-IB only on the profits arising
from the sale of pig iron, without considering the profits arising on sale of
‘slag’ which, according to the assessee, was a by-product in the manufacture of
pig iron.

The Commissioner
(Appeals) allowed the assessee’s claim. The Tribunal held that the Commissioner
(Appeals) had taken the correct view holding that profits from sale of slag
generated out of the manufacturing process were a part of the profits derived
from the industrial undertaking engaged in the manufacturing of pig iron, but
allowed the appeal of the Revenue.

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

‘(i) The conclusion drawn by the Tribunal was
contrary to the finding rendered by it and perverse. The slag generated during
the process of manufacturing activity of pig iron was part of the manufacturing
process and was a by-product of pig iron and an integral part of the
manufacturing activity conducted by the assessee and thus the profits earned
from the sale of such by-product would have to be considered as part of the
profits derived from the business of the industrial undertaking.

(ii) The slag generated during the manufacturing activity
satisfied the test of first degree source and, thus, the assessee was eligible
to seek deduction u/s 80-IB for the profits earned out of the sale of slag, in
addition to the deduction already availed of by the assessee on the profits
earned on sale of pig iron.’

shailesh.kwebmaker

Capital gains – Exemption u/s 54F of ITA, 1961 – Agreement to sell land in August, 2010 and earnest money received – Sale deed executed in July, 2012 – Purchase of residential house in April, 2010 – Assessee entitled to benefit u/s 54F

20. Kishorbhai
Harjibhai Patel vs. ITO; [2019]
417 ITR 547 (Guj.) Date
of order: 8^th July, 2019

A.Y.:
2013-14

Capital
gains – Exemption u/s 54F of ITA, 1961 – Agreement to sell land in August, 2010
and earnest money received – Sale deed executed in July, 2012 – Purchase of
residential house in April, 2010 – Assessee entitled to benefit u/s 54F

The
assessee entered into an agreement to sell agricultural land at Rs. 4 crores on
13^th August, 2010. An amount of Rs. 10 lakhs towards the earnest
money was received by the assessee as part of the agreement. On 15^th
October, 2011, possession of the land was handed over by the assessee to the
purchasers of the land. On 3^rd July, 2012 the sale deed came to be
executed by the assessee in favour of the purchaser of the land. The assessee
had purchased a new residential house in April, 2010 and claimed exemption u/s
54F of the Income-tax Act, 1961. The AO denied the exemption on the ground that
the transfer of the land took place on 3^rdJuly, 2012 and the
purchase of the residential house on 22^nd April, 2010, thus it was beyond
the period of one year as required u/s 54F.

The
Tribunal upheld the decision of the AO.

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

‘(i) The Act gives a precise definition to the
term “transfer”. Section 2(47)(ii) of the Act talks about extinguishment of
rights. The Supreme Court, in Sanjeev Lal vs. CIT (2014) 365 ITYR 389
(SC) is very clear that an agreement to sell would extinguish the
rights and this would amount to transfer within the meaning of section 2(47) of
the Act. This definition of transfer given in the Act is only for the purpose
of the income-tax.

(ii) The assessee had purchased the new
residential house in April, 2010. The agreement to sell which had been executed
on 13^th April, 2010 (and) could be considered as the date on
which the property, i.e., the agricultural land had been transferred. Hence,
the assessee was entitled to the benefit u/s 54F.’

shailesh.kwebmaker

Charitable purpose – Exemption u/s 11 of ITA, 1961 – Assessee entitled to allocate domain names providing basic services of domain name registration charging annual subscription fees and connectivity charges – Activity in nature of general public utility – Fees charged towards membership and connectivity charges – Incidental to main objects of assessee – Assessee entitled to exemption

19. CIT vs. National Internet Exchange of India; [2019]
417 ITR 436 (Del.) Date
of order: 9^thJanuary, 2018 A.Y.:
2009-10

Charitable
purpose – Exemption u/s 11 of ITA, 1961 – Assessee entitled to allocate domain
names providing basic services of domain name registration charging annual
subscription fees and connectivity charges – Activity in nature of general
public utility – Fees charged towards membership and connectivity charges –
Incidental to main objects of assessee – Assessee entitled to exemption

The
assessee was granted registration u/s 12A of the Income-tax Act, 1961 from the
A.Y. 2004-05. The assessee was engaged in general public utility services. He
was the only nationally designated entity entitled to allocate domain names to
its applicants who sought it in India. It was also an affiliate national body
of the Internet Corporation for assigned names and numbers and authorised to
assign ‘.in’ registration and domain names according to the Central
Government’s letter dated 20^th November, 2004. It provided basic
services by way of domain name registration for which it charged subscription
fee on annual basis and also collected connectivity charges.

The AO was
of the opinion that the subscription fee and the fee charged by the assessee
towards various services provided by it were in the nature of commercial
activity and fell outside the charitable objects for which it was established
and denied exemption u/s 11 of the Act.

The Commissioner (Appeals) held that the assessee had been incorporated
without any profit motive, that the nature of services provided by the assessee
were of general public utility and that the services provided were towards
membership and connectivity charges which were only incidental to the main
objects of the assessee. The Tribunal confirmed the order of the Commissioner
(Appeals).

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

‘(i) The assessee had been incorporated without
any profit motive. The services provided by the assessee were of general public
utility and were towards membership and connectivity charges and were
incidental to its main objects. The assessee (though not a statutory body)
carried on regulatory work.

(ii) Both the appellate authorities had
concluded that the assessee’s objects were charitable and that it provided
basic services by way of domain name registration for which it charged
subscription fee on an annual basis and also collected connectivity charges. No
question of law arose.’

shailesh.kwebmaker

Charitable institution – Registration u/s 12AA of ITA, 1961 – Cancellation of registration – No finding that activities of charitable institution were not genuine or that they were not carried out in accordance with its objects – Mere resolution of governing body to benefit followers of a particular religion – Cancellation of registration not justified

18. St.
Michaels Educational Association vs. CIT; [2019]
417 ITR 469 (Patna) Date
of order: 13^th August, 2019

Charitable institution – Registration u/s 12AA of ITA,
1961 – Cancellation of registration – No finding that activities of charitable
institution were not genuine or that they were not carried out in accordance
with its objects – Mere resolution of governing body to benefit followers of a
particular religion – Cancellation of registration not justified

The
assessee was an educational institution running a high school and was granted
registration u/s 12AA of the Income-tax Act, 1961 in April, 1985. In August,
2011 the Commissioner issued a show-cause notice proposing to cancel
registration and cancelled the registration exercising powers u/s 12AA(3) of
the Act.

The
Tribunal upheld the order of the Commissioner cancelling the registration.

But the
Patna High Court allowed the appeal filed by the assessee and held as under:

‘(i) A plain reading of the enabling power vested
in the Commissioner in section 12AA(3) would confirm that it is only in two
circumstances that such power can be exercised by the Principal Commissioner or
the Commissioner:

(a) if the
activities of such trust or institution are not found to be genuine; or (b) the
activities of such trust or institution are not being carried out in accordance
with the objects of the trust or institution. Where a statute provides an act
to be done in a particular manner it has to be done in that manner alone and every
other mode of discharge is clearly forbidden.

(ii) The ground for cancellation of
registration is that in some of the subsequent governing body meetings some
resolutions were passed for the benefit of the Christian community. The order
of cancellation has been passed by the Commissioner without recording any
satisfaction, either on the issue of the activities of the school being not
genuine or that they were not being carried out in accordance with the objects
for which the institution had been set up. The order of cancellation of the
registration was not valid.’

shailesh.kwebmaker

Business expenditure – Section 37 of ITA, 1961 – Prior period expenses – Assessment of income of prior period – Prior period expenses deductible – No need to demonstrate that expenses relate to income

16. Principal
CIT vs. Dishman Pharmaceuticals and Chemicals Ltd.; [2019]
417 ITR 373 (Guj.) Date
of order: 24^th June, 2019 A.Y.:
2006-07

Business expenditure – Section 37 of ITA, 1961 – Prior
period expenses – Assessment of income of prior period – Prior period expenses
deductible – No need to demonstrate that expenses relate to income

For the
A.Y. 2006-07, the AO found that the assessee had credited Rs. 3,39,534 as net
prior period income, i.e., prior period income of Rs. 46,50,648 minus prior
period expenses of Rs. 43,11,114. The AO took the view that ‘prior period
income’ was taxable, but the ‘prior period expenses’ were not allowable. Thus,
he made an addition of Rs. 46,50,648 as prior period income and denied the
set-off of the prior period expenses on the basis that a different set of rules
applied to such income and expenses.

The
Commissioner (Appeals) confirmed the addition and held that prior period expenses
cannot be adjusted against the prior period income in the absence of any
correlation or nexus. The Tribunal allowed the assessee’s claim and held that
once the assessee offers the prior period income, then the expenditure incurred
under the different heads should be given set-off against that income and only
the net income should be added.

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

‘(i) The only requirement u/s 37 of the
Income-tax Act, 1961 is that the expenses should be incurred for the purposes
of the business or profession. There is no need to demonstrate that a certain
expense relates to a particular income in order to claim such expense.

(ii) Once prior period income is held to be
taxable, prior period expenditure also should be allowed to be set off and the
assessee is not obliged in law to indicate any direct or indirect nexus between
the prior period income and prior period expenditure.’

shailesh.kwebmaker

Capital gains – Exemption u/s 54EC of ITA, 1961 – Investment in notified bonds within time specified – Part of consideration for sale of shares placed in escrow account and released to assessee after end of litigation two years later – Amount taxable in year of receipt and invested in specified bonds in year of receipt – Investment within time specified and assessee entitled to exemption u/s 54EC

5.
Principal CIT vs. Mahipinder
Singh Sandhu; [2019] 416 ITR 175 (P&H) Date of order: 12^thMarch 2019 A.Y.: 2008-09

Capital gains – Exemption u/s 54EC of ITA,
1961 – Investment in notified bonds within time specified – Part of
consideration for sale of shares placed in escrow account and released to
assessee after end of litigation two years later – Amount taxable in year of
receipt and invested in specified bonds in year of receipt – Investment within
time specified and assessee entitled to exemption u/s 54EC

On 28^th
November, 2007, the assessee sold certain shares and received a part of sale
consideration during the previous year relevant to the A.Y. 2010-11. The
assessee made investment in Rural Electrification Corporation bonds on 6^th
August, 2010 and claimed exemption u/s 54EC of the Income-tax Act, 1961 in the
A.Y. 2010-11. The AO held that such income was to be taxed in the A.Y. 2008-09
and that since the assessee had made investment in REC bonds on 6^th
August, 2010, i.e., after a period of six months from the date of transfer of
the shares, irrespective of when the whole or part of sale consideration was
actually received, the assessee was not entitled to deduction u/s 54EC of the
Act.

The Tribunal, inter
alia, held that the amount of Rs. 18 lakhs was deposited in an escrow
account as a security in respect of future liabilities of the company /
transferor, that since there was no certainty of the time of release of the
amount or part of the amount to either of the parties as dispute between the
parties had occurred and the litigation was going on, it could not be said that
the assessee had a vested right to receive the amount in question and that it
was only at the end of the litigation that the rights and liabilities of the
transferor and the transferee were ascertained and thereupon the share of the
assessee was passed on to the assessee for which the assessee had offered
capital gains in the immediate assessment year 2010-11. The Tribunal held that
the assessee was entitled to the benefit of exemption u/s 54EC as the amount
was invested by him in REC bonds in the year of receipt which was also the year
of taxability of the capital gains.

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

‘There was no error in the findings recorded by the Tribunal which
warranted interference. No question of law arose.’

shailesh.kwebmaker

Section 143 r.w.s. 131 and 133A – Assessing Officer could not make additions to income of the assessee company only on the basis of a sworn statement of its managing director recorded u/s. 131 in the course of a survey without support of any corroborative evidence

23 [2019] 199 TTJ (Coch) 758 ITO vs. Toms Enterprises ITA No. 442/Coch/2018 A.Y.: 2014-15 Date of order: 7^th
February, 2019

Section
143 r.w.s. 131 and 133A – Assessing Officer could not make additions to income
of the assessee company only on the basis of a sworn statement of its managing
director recorded u/s. 131 in the course of a survey without support of any
corroborative evidence

FACTS

A survey action u/s. 133A was conducted in the business
premises of the assessee firm. During the course of survey, summons u/s. 131(1)
was issued by the AO to TCV, managing partner of the firm, and statement u/s.
131 was recorded in which he indicated the gross profit of the assessee at 15%.
On verification of the profit and loss, the AO found that the assessee had
shown gross profit at 10.55% instead of 15% as indicated by the managing
partner. The AO assessed the gross profit at 15% and made an addition to the
income returned.

Aggrieved by the assessment order, the assessee preferred
an appeal to the CIT(A). The CIT(A) observed that the statement of the managing
partner was not based on any books maintained by the assessee and, therefore,
no addition could be made based on such general statements.

Being aggrieved by the CIT(A) order, the Revenue filed an
appeal before the Tribunal.

HELD

The Tribunal held that u/s. 131 the income tax authority
was empowered to examine on oath. The power invested u/s. 131(1) was only to
make inquiries and investigations and not meant for voluntary disclosure or
surrender of concealed income. As per section 31 of the Indian Evidence Act,
1878 admissions were not conclusively proved as against admitted proof. The
burden to prove ‘admission’ as incorrect was on the maker and in case of
failure of the maker to prove that the earlier stated facts were wrong, these
earlier statements would suffice to conclude the matter. The authorities could
not conclude the matter on the basis of the earlier statements alone.

If the assessee proved that the statement recorded u/s.
131 was involuntary and it was made under coercion or during their admission,
the statement recorded u/s. 131 had no legal validity. From the CBDT Circular
in F. No. 286/98/2013-IT (Inv. II) dated 18^th December, 2014 it was
amply clear that the CBDT had emphasised on its officers to focus on gathering
evidences during search / survey operations and strictly directed to avoid
obtaining admission of undisclosed income under coercion / under influence.

The uncorroborated statements collected by the AO could
not be the evidence for sustenance of the addition made by the AO. It had been
consistently held by various courts that a sworn statement could not be relied
upon for making any addition and must be corroborated by independent evidence
for the purposes of making assessments.

From the foregoing discussion, the following principles
could be culled out: Firstly, an admission was an extremely important piece of
evidence but it could not be said that it was conclusive and it was open to the
person who made the admission to show that it was incorrect and that the
assessee should be given a proper opportunity to show that the books of
accounts did not correctly disclose the correct state of facts. Secondly,
section 132(4) enabled the authorised officer to examine a person on oath and
any statement made by such person during such examination could also be used in
evidence under the Income-tax Act.

On the other hand,
whatever statement was recorded u/s. 133A could not be given any evidentiary
value for the obvious reason that the officer was not authorised to administer
oath and to take any sworn statement which alone had evidentiary value as
contemplated under law. Thirdly, the word ‘may’ used in section 133A(3)(iii),
viz., record the statement of any person which may be useful for, or relevant
to, any proceeding under this Act, made it clear that the materials collected
and the statement recorded during the survey u/s. 133A were not a conclusive
piece of evidence in themselves. Finally, the statement recorded by the AO u/s.
131 could not be the basis to sustain the addition since it was not supported
by corroborative material.

shailesh.kwebmaker

Section 115JAA r.w.s. 263 – Amalgamated company is entitled to claim set-off of MAT credit of the amalgamating company

7. [2019]
111 taxmann.com 10 (Trib.) (Mum.) Ambuja Cements Ltd. vs. DCIT ITA No.: 3643/Mum/2018 A.Y.: 2007-08 Date of order: 5^th September,
2019

Section 115JAA r.w.s. 263 – Amalgamated
company is entitled to claim set-off of MAT credit of the amalgamating company

FACTS

The assessee, engaged in the manufacture and
sale of cement, filed its return of income wherein a MAT credit of Rs. 20.12
crores was claimed. The AO, while completing the assessment, allowed MAT credit
of only Rs 6.99 crores instead of Rs 20.12 crores as claimed in the return of
income.

Aggrieved, the assessee preferred an appeal
to the CIT(A) on several grounds, one of which was that MAT credit was
short-granted. The CIT(A) directed the AO to grant MAT credit in accordance
with law. The AO passed an order giving effect to the order of CIT(A) wherein
he allowed MAT credit of Rs. 20.12 crores to the assessee.

The CIT was of
the opinion that the MAT credit allowed by the AO is excessive as the MAT
credit allowed includes Rs. 6.99 crores being MAT credit of ACEL, a company
which was amalgamated into the assessee company. She, accordingly, exercised
her powers u/s 263 of the Act and directed the AO not to grant MAT credit of
Rs. 6.99 crores because according to her the amalgamated company is not
entitled to MAT credit of the amalgamating company.

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal observed that there is no
restriction with regard to allowance of MAT credit of an amalgamating company
in the hands of the amalgamated company. According to the Tribunal, a plain
reading of the aforesaid provision reveals that MAT credit is allowed to be
carried forward for a specific period.

In the case of Skol Breweries Ltd.,
the Tribunal, Mumbai Bench, while deciding an identical issue, has held that
carried forward MAT credit of the amalgamating company can be claimed by the
amalgamated company. A similar view has been expressed by the Tribunal,
Ahmedabad Bench, in Adani Gas Ltd.. If we consider the issue in
the light of the ratio laid down in the aforesaid decisions, there
cannot be two views that the assessee is entitled to claim carried-forward MAT
credit of the amalgamating company Ambuja Cement Eastern Ltd. (ACEL).

The Tribunal also observed that while
completing the assessment in case of the amalgamating company ACEL in the A.Y.
2006-07, the AO has also concluded that carried-forward MAT credit of ACEL
would be available in the hands of the present assessee.

Keeping in view the assessment order passed
in case of the amalgamating company as well as the decisions referred to above,
the Tribunal held that the principle which emerges is that the carried-forward
MAT credit of the amalgamating company can be claimed by the amalgamated
company. Viewed in this perspective, the decision of the AO in allowing set-off
of carried forward MAT credit of Rs. 6,99,46,873 in the hands of the assessee
cannot be considered to be erroneous. Therefore, one of the conditions of
section 263 of the Act is not satisfied. That being the case, the exercise of
power u/s 263 of the Act to revise such an order is invalid.

The Tribunal quashed the impugned order
passed by the CIT.

This ground of appeal filed by the assessee
was allowed.

shailesh.kwebmaker

Section 43CA applies only when there is transfer of land or building or both – In a previous year, when an assessee engaged in the business of construction of a commercial project entered into agreements to sell flats / offices (which were under construction) and there was no transfer of any land or building or both in favour of buyers, provisions of section 43CA would not apply

1. [2019] 108
taxmann.com 195 (Mum. – Trib.) Shree Laxmi Estate (P.) Ltd. vs. ITO ITA No.:
798/Mum/2018 A.Y.: 2014-15 Date of order: 5^th July, 2019

Section 43CA
applies only when there is transfer of land or building or both – In a previous
year, when an assessee engaged in the business of construction of a commercial
project entered into agreements to sell flats / offices (which were under
construction) and there was no transfer of any land or building or both in
favour of buyers, provisions of section 43CA would not apply

FACTS

The assessee,
engaged in the construction of a commercial project following the project
completion method of accounting, entered into seven agreements to sell flats /
offices. In each of these cases there was a huge difference between the
consideration as per the agreement entered into by the assessee and the stamp
duty value of the units agreed to be sold. Further, there were a further seven
agreements entered into during the previous year in respect of which the
allotments were made prior to 31^st March, 2013. In these seven cases
also there was a huge difference between the agreement value and stamp duty
value.

The AO asked
the assessee to explain the difference between the agreement value and the
stamp duty value. In response, the assessee submitted that the two values were
different because (i) the stamp valuation authorities have charged stamp duty
by considering the project to be situated in an area different from the area
where the project is situated; (ii) in respect of seven agreements which were
registered during the year but the allotments were made in the earlier year,
the stamp duty value was greater because the allotments were made in an earlier
year whereas the stamp duty was levied on the basis of value prevailing on the
date of registration; (iii) the sale value of properties is based on various
market conditions, location, etc., whereas the stamp duty valuation is based on
thumb rule without taking into account various market conditions, location,
etc.

For these
reasons, the assessee pleaded, the agreement value is the correct value and the
buyers were not willing to make any payment over and above the amount stated in
the agreement. The assessee pleaded that in the alternative the provisions be
made applicable in A.Y. 2015-16 when, following the project completion method,
the assessee has offered profits for taxation. The AO added a sum of Rs.
3,41,41,270 being the difference between stamp duty value and the agreement
value of all the 14 flats to the total income of the assessee.

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

HELD

The Tribunal
noted that during the year under consideration the assessee had not reported
any sales of units since it was following the project completion method. The
project under consideration was completed and profits offered for taxation in
A.Y. 2015-16 by considering agreement value as sale consideration. The Tribunal
observed that it is not in dispute that the assessee had not sold any land or
building or both in respect of any of the units during the year under appeal.
The assessee had only registered the agreement during the year under appeal
wherein it is clearly stated that the subject mentioned property was still
under construction and that the ultimate flat owners shall allow the assessee
to enter upon the subject premises to complete the construction of the flats as
per the said agreement which was subject matter of registration with the stamp
duty authorities. The Tribunal held that what was registered was the ‘property
under construction’ and not the ‘property’ per se. Therefore, the question
was whether in these facts the provisions of section 43CA could at all be
applied.

Observing that the provisions of section 43CA are applicable only when
there is transfer of land or building or both, the Tribunal stated that in the
present case neither of these had happened pursuant to the registration of the
agreement. In respect of the seven allotments made prior to 31^stMarch,
2013, the Tribunal observed that the assessee and the prospective purchaser had
specifically agreed that till such time as the agreement to sell is executed
and registered, no right is created in favour of the purchaser and that
allotment is only a confirmation of booking subject to execution of the
agreement which is to be drafted at a later point of time. The said allotment
letter also specifies that the relevant office has been allotted to the buyer
with the rights reserved to the assessee to amend the building plan as it may
deem fit and that the buyer is bound to accept unconditionally and confirm that
any kind of increase or decrease in the area of the said office or shift in the
position of the said office, due to amendment in plan, etc., and in case of
variation of the area, the value of the office shall be proportionately
adjusted.

The Tribunal
held that, during the previous year under consideration, the construction of
the property was not completed and that the registration of the agreement
resulted in a transfer of rights in the office (which is under construction)
and not the property per se. It held that there was no transfer of any
land or building or both by the assessee in favour of the flat buyers pursuant
to registration of the agreement in the year under appeal. The Tribunal held
that the provisions of section 43CA cannot be made applicable during the year
under consideration. The Tribunal supported its conclusion by placing reliance
on the decisions of the Tribunal in the case of ITO vs. Yasin Moosa Godil
[(2012) 20 taxmann.com 425 (Ahd. Trib.)] and Mrs. Rekha Agarwal
vs. ITO [(2017) 79 taxmann.com 290 (Jp. – Trib.)].

The Tribunal
allowed the appeal filed by the assessee.

shailesh.kwebmaker

Section 271(1)(c) – Imposition of penalty on account of inadvertent and bona fide error on the part of the assessee would be unwarranted

15.
Rasai Properties Pvt. Ltd. vs. DCITITAT Mumbai: ShamimYahya (AM) and
Ravish Sood (JM) ITA No. 770/Mum./2018 A.Y.: 2013-14 Date of order: 28^th June, 2019; Counsel for Assessee / Revenue: Nilesh Kumar
Bavaliya / D.G. Pansari

Section 271(1)(c) – Imposition of penalty
on account of inadvertent and bona fide error on the part of the
assessee would be unwarranted

FACTS

For the assessment year under consideration,
the assessee filed its return of income declaring total income of Rs.
80,19,650. In the schedule of Block of Assets, there was a disclosure of a sum
of Rs. 67,00,000 against caption ‘Deductions’ under immovable properties.

On being queried about the nature of the
aforesaid deduction, the assessee submitted that the same pertained to certain
properties which were sold during the year under consideration. The AO called
upon the assessee to explain why it had not offered the income from the sale of
the aforementioned properties under the head income from ‘Long-Term Capital
Gain’ (LTCG). In response, the assessee offered long-term capital gain of Rs.
19,45,176 and also made a disallowance of Rs. 93,453 towards excess claim of
municipal taxes.

In the assessment order, the AO initiated
penalty proceedings u/s 271(1)(c) for furnishing of inaccurate particulars of
income and concealment of income in the context of the aforesaid addition /
disallowance. Subsequently, the AO being of the view that the assessee had
filed inaccurate particulars of income within the meaning of 271(1)(c) r.w.
Explanation 1, imposed a penalty of Rs. 6,29,936.

Aggrieved, the assessee preferred an appeal
to the CIT(A) who deleted the penalty with reference to the disallowance of Rs.
93,453 but confirmed it with reference to addition of long-term capital gain
which was offered for taxation in the course of the assessment proceedings.

Aggrieved, the assessee preferred an appeal
to the Tribunal where it was contended that the LTCG on the sale of three shops
had, on account of a bona fide mistake on the part of the assessee, had
not been shown in the return of income.

The fact that the assessee had never
intended to withhold sale of the property under consideration could safely be
gathered from a perusal of the chart of the tangible fixed assets that formed
part of its balance sheet for the year under consideration, wherein a deduction
of Rs. 67,00,000 was disclosed by the assessee.

Besides, on learning of his mistake, the
assessee had immediately worked out the LTCG on the sale of the aforementioned
properties and had offered the same for tax in the course of the assessment
proceedings.

HELD

The Tribunal noted that while the assessee
had admittedly failed to offer the LTCG on the sale of three shops for tax in
its return of income for the year under consideration, at the same time, the
‘chart’ of the ‘block of assets’ of tangible fixed assets, forming part of the
balance sheet of the assessee as ‘Note No. 6’ to the financial statements for
the year ended 31^st March, 2013 clearly reveals that the assessee
had duly disclosed the deduction of Rs. 67,00,000 from the block of fixed
assets. The Tribunal also found that the assessee in the course of the
assessment proceedings on learning about its aforesaid inadvertent omission and
not offering the LTCG on the sale of the aforesaid shops, had worked out its
income under the said head and offered the same for tax.

The Tribunal held that:

(a) when the assessee had disclosed the
deduction of Rs. 67,00,000 pertaining to sale of the aforesaid three shops from
the ‘block of assets’ in its balance sheet for the year under consideration,
therefore, there is substantial force in its claim that the failure to offer
LTCG on the sale of the said shops had inadvertently been omitted to be shown
in the return of income for the year under consideration;

(b) imposition of penalty u/s 271(1)(c)
would be unwarranted in a case where the assessee had committed an inadvertent
and bona fide error and had not intended or attempted to either conceal
its income or furnish inaccurate particulars;

(c) its aforesaid view is fortified by the
judgement of the Supreme Court in the case of PriceWaterHouse Coopers
Pvt. Ltd. vs. CIT(2012) 348 ITR 306;

(d) imposition of penalty u/s 271(1)(c)
would be unwarranted on account of the aforesaid inadvertent and bona fide
error on the part of the assessee.

The Tribunal set aside the order of the
CIT(A) and deleted the penalty imposed by the AO u/s 271(1)(c). The appeal
filed by the assessee was allowed.

shailesh.kwebmaker

Section 254(2) – If the appeal against the order of the Tribunal has already been admitted and a substantial question of law has been framed by the Hon’ble High Court, the Tribunal cannot proceed with the Miscellaneous Application u/s 254(2) of the Act

14.
Ratanlal C. Bafna vs. JCIT ITAT Pune; Members: Anil Chaturvedi (AM) and
Vikas Awasthy (JM) MA No. 97/Pune/2018 in ITA No. 204/Pune/2012 A.Y.: 2008-09 Date of order: 15^thMarch, 2019; Counsel for Assessee / Revenue: Sunil Ganoo
/ Ashok Babu

Section 254(2)
– If the appeal against the order of the Tribunal has already been admitted and
a substantial question of law has been framed by the Hon’ble High Court, the
Tribunal cannot proceed with the Miscellaneous Application u/s 254(2) of the
Act

FACTS

For the captioned assessment year, the
assessee preferred an application u/s 254(2) against the order of the Tribunal
in ITA No. 204/Pune/2012 for A.Y. 2008-09 on the ground that while adjudicating
the said appeal the Tribunal had not adjudicated ground No. 12 of the appeal,
although the same was argued before the Bench.

Aggrieved by the order of the Tribunal in
ITA No. 204/Pune/2012 for A.Y. 2008-09, the assessee had preferred an appeal to
the Bombay High Court which was admitted by the Court vide order dated 26^th
November, 2018 (in ITA No. 471 and 475 of 2016) for consideration of
substantial question of law.

Since the present M.A. was the second M.A.
against the impugned order of the Tribunal, the Bench raised a query as to
whether a second M.A. is maintainable since the first M.A. against the same
order has been dismissed by the Tribunal. In response, the assessee submitted
that the second M.A. is maintainable because it is on an issue which was not a
subject matter of the first M.A. For this proposition, reliance was placed on
the decision of the Kerala High Court in CIT vs. Aiswarya Trading Company
(2011) 323 ITR 521, the decision of the Allahabad High Court in Hiralal
Suratwala vs. CIT 56 ITR Page 339 (All.) and the decision
of the Gujarat High Court in CIT vs. Smt. Vasantben H. Sheth (2015) 372
ITR 536 (Guj.).

At the time of hearing, the assessee relied
on the decision of the Bombay High Court in R.W. Promotions Private
Limited (W.P. No. 2238/2014) decided on 8^thApril, 2015 to
support its contention that even though the assessee has filed an appeal
against the order of the Tribunal, the Tribunal can still entertain an
application u/s 254(2) of the Act seeking rectification of the order passed by
it. Relying on this decision, it was contended that since ground No. 12 of the
appeal has not been adjudicated, the Tribunal can recall the order to decide
the said ground.

HELD

The Tribunal observed that it is a settled
law that the judgement must be read as a whole and the observations made in a
judgement are to be read in the context in which they are made; for this
proposition it relied on the decision of the Bombay High Court in Goa
Carbon Ltd. vs. CIT (2011) 332 ITR 209 (Bom.).

It observed
that the slightest change in the facts changes the factual scenario and makes
one case distinguishable from the other. It observed that the Kolkata Bench of
the Tribunal in Subhlakshmi Vanijya (P) Ltd. vs. CIT (2015) 60
taxmann.com 60 (Kolkata – Trib.) has noted as under:

‘13.d It is a well settled legal position
that every case depends on its own facts. Even a slightest change in the
factual scenario alters the entire conspectus of the matter and makes one case
distinguishable from another. The crux of the matter is that the ratio of any
judgement cannot be seen divorced from its facts.’

The Tribunal noted that in the case of R.W.
Promotions Pvt. Ltd. (Supra), the assessee had filed an appeal u/s 260A
of the Act before the High Court but the appeal was yet to be admitted. It was
in such a fact pattern that the Court held that the Tribunal has power to
entertain an application u/s 254(2) of the Act for rectification of mistake. In
the present case, however, it is not a case where the assessee has merely filed
an appeal before the High Court but it is a case where the High Court has
admitted the appeal for consideration after framing substantial question of
law. On account of this difference in
the facts, the Tribunal held that the facts in the case of R.W.
Promotions (Supra) and the present case are distinguishable.

The Tribunal noted that the Gujarat High
Court in the case of CIT vs. Muni Seva Ashram (2013) 38 taxmann.com 110
(Guj.) has held that when an appeal has been filed before the High Court,
the appeal is admitted and substantial question of law has been framed in the
said appeal, then the Tribunal cannot recall the order.

The Tribunal held that since the appeal
against the order of the Tribunal has already been admitted and a substantial
question of law has been framed by the High Court, the Tribunal cannot proceed
with the miscellaneous application u/s 254(2) of the Act.

Hence, the Tribunal dismissed the
miscellaneous application u/s 254(2) of the Act seeking rectification in the
order of the Tribunal as being not maintainable.

shailesh.kwebmaker

Section 50C – Third proviso to section 50C inserted w.e.f. 1st April, 2019 providing for a safe harbour of 5%, is retrospective in operation and will apply since date of introduction of section 50C, i.e., w.e.f. 1st April, 2003, since the proviso is curative and removes an incongruity and avoids undue hardship to assessees

13.
Chandra Prakash Jhunjhunwala vs. DCIT (Kol.) Members: A.T. Varkey (JM) and Dr. A.L. Saini
(AM) ITA No. 2351/Kol./2017 A.Y.: 2014-15 Date of order: 9^th August, 2019; Counsel for Assesssee / Revenue: Manoj
Kataruka / Robin Chowdhury

Section 50C – Third proviso to section 50C
inserted w.e.f. 1^st April, 2019 providing for a safe harbour of 5%,
is retrospective in operation and will apply since date of introduction of
section 50C, i.e., w.e.f. 1^st April, 2003, since the proviso is
curative and removes an incongruity and avoids undue hardship to assessees

FACTS

The assessee in his return of income
declared total income to be Nil and claimed current year’s loss to be Rs. 1,19,46,383. In the course of assessment proceedings, the AO noticed that
the assessee had on 14^th December, 2013 transferred his property at
Pretoria Street, Kolkata for a consideration of Rs. 3,15,00,000 and had
declared long-term capital gain of Rs. 1,22,63,576 on transfer thereof. The
stamp duty value (SDV) of this property was Rs. 3,27,01,950. In response to the
show cause notice issued by the AO as to why the SDV should not be adopted as
full value of consideration, the assessee asked the AO to make a reference to
the DVO to ascertain the fair market value of the property. Accordingly, the
reference was made but the DVO did not submit his report within the specified
time and the AO completed the assessment by adopting SDV to be the full value
of consideration.

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

HELD

The Tribunal observed that:

(i) the fundamental purpose of introducing
section 50C was to counter suppression of sale consideration on sale of
immovable properties, and this section was introduced in the light of the
widespread belief that sale transactions of land and buildings are often
undervalued resulting in leakage of legitimate tax revenues;

(ii) the variation between SDV and the sale
consideration arises because of many factors;

(iii) Stamp duty value and the sale
consideration, these two values represent the values at two different points
of time;

(iv) in order to minimise hardship in case
of genuine transactions in the real estate sector, it was proposed by the
Finance Act, 2018 that no adjustments shall be made in a case where the
variation between the SDV and the sale consideration is not more than 5% of the
sale consideration. This amendment is with effect from 1^stApril,
2019 and applies to assessment year 2019-20 and subsequent years;

(v) the co-ordinate Bench of the ITAT
Mumbai, in the case of John Fowler (India) Ltd. in ITA No.
7545/Mum./2014, for AY 2010-11, order dated 25.1.2017 held that if the
difference between valuation adopted by the Stamp Valuation Authority and
declared by the assessee is less than 10%, the same should be ignored and no
adjustments shall be made.

The Tribunal noted that the amendment made
by the Finance Act, 2018 is introduced only with prospective effect from 1^st
April, 2019. It noted that the observations in the memorandum explaining the
provisions of the Finance Bill, 2018 make it abundantly clear that the
amendment is made to remove an incongruity, resulting in undue hardship to the
assessee. Relying on the decision of the Delhi High Court in the case of CIT
vs. Ansal Landmark Township (P) Ltd., the Tribunal held that once it is
not in dispute that a statutory amendment is made to remove an apparent
incongruity, such an amendment has to be treated as effective from the date on
which the law containing such an undue hardship or incongruity was introduced.

The Tribunal held that the insertion of the
third proviso to section 50C of the Act is declaratory and curative in nature.
The third proviso relates to computation of value of property and hence is not
a substantive amendment, it is only a procedural amendment and therefore the
co-ordinate Benches of ITAT used to ignore the variation of up to 10%, and
hence the said amendment should be retrospective. The third proviso to section
50C should be treated as curative in nature with retrospective effect from 1^stApril, 2003,. i.e., the date from which section 50C was introduced.

Since the difference between the SDV and the
consideration was less than 5%, the Tribunal deleted the addition made by the
AO and confirmed by the CIT(A).

This ground of
the appeal filed by the assessee was allowed.

shailesh.kwebmaker

Section 56(2)(vii) – The amount received by the assessee from the HUF, being its member, is a capital receipt in his hands and is not exigible to income tax If the decisions passed by the higher authorities are not followed by the lower authorities, there will be chaos resulting in never-ending litigation and multiplication of cases

12.
Pankil Garg vs. PCIT ITAT Chandigarh; Members: Sanjay Garg (JM)
and Ms Annapurna Gupta (AM) ITA No.: 773/Chd./2018 A.Y.: 2011-12 Date of order: 3^rd August, 2019; Counsel for Assessee / Revenue: K.R. Chhabra
/ G.S. Phani Kishore

Section 56(2)(vii) – The amount received by
the assessee from the HUF, being its member, is a capital receipt in his hands
and is not exigible to income tax

If the decisions passed by the higher
authorities are not followed by the lower authorities, there will be chaos
resulting in never-ending litigation and multiplication of cases

FACTS

For the assessment year under consideration,
the AO completed the assessment of total income of the assessee u/s 143(3) of
the Act by accepting returned income of Rs. 14,32,982. Subsequently, the AO
issued a notice u/s 147 on the ground that the assessee has received a gift of
Rs. 5,90,000 from his HUF and since the amount of gift was in excess of Rs.
50,000, the same was taxable u/s 56(2)(vii) of the Act.

In the course of reassessment proceedings,
the assessee contended that the amount received by him from his HUF was not
taxable and relied upon the decision of the Rajkot Bench of the Tribunal in Vineetkumar
Raghavjibhai Bhalodia vs. ITO [(2011) 46 SOT 97 (Rajkot)] which was
followed by the Hyderabad Bench (SMC) of the Tribunal in Biravel I.
Bhaskar vs. ITO [ITA No. 398/Hyd./2015; A.Y. 2008-09; order dated 17^th
June, 2015] wherein it has been held that HUF being a group of
relatives, a gift by it to an individual is nothing but a gift from a group of
relatives; and further, as per the exclusions provided in clause 56(2)(vii) of
the Act, a gift from a relative is not exigible to taxation; hence, the gift
received by the assessee from the HUF is not taxable. The AO accepted the
contention of the assessee and accepted the returned income in an order passed
u/s 147 r.w.s. 143(3) of the Act.

Subsequently, the Ld. PCIT, invoking
jurisdiction u/s 263 of the Act, set aside the AO’s order and held that the HUF
does not fall in the definition of relative in case of an individual as provided
in Explanation to clause (vii) to section 56(2) as substituted by the Finance
Act, 2012 with retrospective effect from 1^st October, 2009. Though
the definition of a ‘relative’ in case of an HUF has been extended to include
any member of the HUF, yet, in the said extended definition, the converse case
is not included. In the case of an individual, the HUF has not been mentioned
in the list of relatives.

The PCIT, thus, formed a view that though a
gift from a member to the HUF was not exigible to taxation as per the
provisions of section 56(2)(vii) of the Act, a gift by the HUF to a member
exceeding a sum of Rs. 50,000 was taxable.

The PCIT also held that the decisions of the
Rajkot and the Hyderabad Benches of the Tribunal relied upon by the assessee were
not in consonance with the statutory provisions of sections 56(2)(vii) and
10(2) of the Act and, thus, the AO had made a mistake in not taking recourse to
the clear and unambiguous provisions of section 56(2)(vii) of the Act and in
unduly placing reliance on judicial decisions which were not in accordance with
the provisions of law.

The order passed by the AO was held by the
PCIT to be erroneous and prejudicial to the interest of Revenue and was set aside. The AO was directed to make assessment afresh.

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal noted that the AO had duly
applied his mind to the issue and followed the decisions of the co-ordinate
Benches of the Tribunal; hence, the order of the AO cannot be held to be
erroneous and, therefore, the PCIT wrongly exercised jurisdiction u/s 263 of
the Act and the same cannot be held to be justified and is liable to be set
aside on this score alone.

The Tribunal held that the PCIT neither had
any power nor any justification to say that the AO should not have placed
reliance on the judicial decisions of the Tribunal. The Tribunal held that if
such a course is allowed to subsist, then there will be no certainty and
finality to the litigation. If the decisions passed by the higher authorities
are not followed by the lower authorities, there will be chaos resulting in
never-ending litigation and multiplication of cases. The Tribunal held that the
impugned order of the PCIT is not sustainable as per law.

On merits, the Tribunal, after discussing
the concept of HUF and the provisions of sections 56(2)(vii) and 10(2), held
that any amount received by a member of the HUF, even out of the capital or
estate of the HUF cannot be said to be income of the member exigible to
taxation. Since a member has a pre-existing right in the property of the HUF,
it cannot be said to be a gift without consideration by the HUF or by other
members of the HUF to the recipient member. The Tribunal observed that
provisions of section 56(2)(vii) are not attracted when an individual member
receives any sum either during the subsistence of the HUF for his needs or on
partition of the HUF in lieu of his share in the joint family property.
However, the converse is not true, that is, in case an individual member throws
his self-acquired property into the common pool of an HUF. The HUF or its
members do not have any pre-existing right in the self-acquired property of a
member. If an individual member throws his own / self-acquired property in the
common pool, it will be an income of the HUF; however, the same will be exempt
from taxation as the individual members of an HUF have been included in the
meaning of relative as provided in the Explanation to section 56(2)(vii) of the
Act. It is because of this salient feature of the HUF that in case of an
individual the HUF has not been included in the definition of relative in
Explanation to section 56(2)(vii), whereas in the case of an HUF, members of
the HUF find mention in the definition of relative for the purpose of the said
section.

In view of the above discussion, the amount
received by the assessee from the HUF, being its member, is a capital receipt
in his hands and is not exigible to income tax.

The Tribunal allowed the appeal of the
assessee.

shailesh.kwebmaker

Section 194J, section 40(a)(ia) – Payment made by film exhibitor to distributor is neither royalty nor FTS and is not covered by section 194J and, consequently, does not attract disallowance u/s 40(a)(ia)

29.
[2019] 71 ITR 332 (Ahd. – Trib.) ITO vs. Eyelex Films Pvt. Ltd. ITA No.: 1808 (Ahd.) of 2017 & 388
(Ahd.) of 2018 A.Ys.: 2013-14 and 2014-15 Date of order: 7^th March, 2019;

Section 194J, section 40(a)(ia) – Payment
made by film exhibitor to distributor is neither royalty nor FTS and is not
covered by section 194J and, consequently, does not attract disallowance u/s
40(a)(ia)

FACTS

The assessee was an exhibitor of films. It
purchased cinematographic films from the distributors for exhibition in cinema
houses. The revenue earned from box office collections was shared with the
distributors as a consideration for purchase of films. The assessee had not
deducted tax at source on the said payments under the belief that the payment
does not fall under any of the provisions mandating TDS. However, the AO
categorised the said payments as royalty u/s 194J and, in turn, disallowed the
said payments u/s 40(a)(ia).

Aggrieved, the assessee preferred an appeal
to the CIT(A) who allowed the appeal. In turn, the aggrieved Revenue filed an
appeal before the Tribunal.

HELD

The Tribunal discussed the observations made
by the CIT(A) and concurred with its view which was as under:

Section 194J defines royalty in Explanation
2 to section 9(1)(vi). As per the said definition, the consideration for sale /
distribution or exhibition of cinematographic films has been excluded. The
payment made by the appellant could not be included under the definition of
royalty u/s 9 of the Act, and therefore the provisions of section 194J were not
applicable. Payments made by the assessee to the distributors were nothing but
the procurement charges, meaning purchases of the rights of exhibition for a
certain period as per the terms and conditions of the contract.

The CIT(A) had even discussed the
applicability of section 194C as well as section 9(1)(vii) of the Act and concluded that even section 194C was not applicable as the impugned
payment was not for carrying out any work.

shailesh.kwebmaker

CBDT circular dated 8th August, 2019 – The relaxation in monetary limits for departmental appeals vide CBDT circular dated 8th August, 2019 shall be applicable to the pending appeals in addition to the appeals to be filed henceforth

28.
[2019] 108 taxmann.com 211 (Ahd. – Trib.) ITO vs. Dinesh Madhavlal Patel ITA No.: 1398/Ahd./2004 A.Y.: 1998-99 Date of order: 14^th August, 2019;

CBDT circular dated 8^th August,
2019 – The relaxation in monetary limits for departmental appeals vide CBDT
circular dated 8^th August, 2019 shall be applicable to the pending
appeals in addition to the appeals to be filed henceforth

FACTS

The Tribunal vide its order disposed of the
present appeal and 627 other appeals filed by various AOs challenging the
correctness of the orders passed by CIT(A) and also cross-objections filed by
the assessees against the said appeals of the Revenue supporting the orders of
the CIT(A). The tax effect in each of these appeals is less than Rs. 50 lakhs.

The Tribunal noted that vide CBDT circular
dated 8^th August, 2019 the income tax department has further
liberalised its policy for not filing appeals against the decisions of the
appellate authorities in favour of the taxpayers where the tax involved is
below certain threshold limits, and announced its policy decision not to file,
or press, the appeals before the Tribunal against appellate orders favourable
to the assessees – in cases in which the overall tax effect, excluding interest
except when interest itself is in dispute, is Rs. 50 lakhs or less.

Following the said circular, the Tribunal
sought to dismiss all the appeals. However, while dismissing the appeals, the
DR pointed out that the said circular is not clearly retrospective because in
para 4 it says, “(t)he said modifications shall come into effect from the
date of issue of this circular”. Relying on this, the argument sought to be
made was that the limits mentioned in the circular dated 8^thAugust,
2019 will apply only to appeals to be filed after the date of the said
circular. The representatives of the assessees, however, argued that the
circular must be held to have retrospective application and must equally apply
to the pending appeals as well. It was submitted that the said circular is not
a standalone one but is required to be read with old circular No. 3 of 2018 which it seeks to modify.

HELD

The Tribunal did not have even the slightest
hesitation in holding that the concession extended by the CBDT not only applies
to the appeals to be filed in future but is also equally applicable to the
appeals pending disposal as of now. The Tribunal observed that the circular
dated 8^th August, 2019 is not a standalone circular but has to be read
in conjunction with the CBDT circular No. 3 of 2018 (and subsequent amendment
thereto) and all it does is to replace paragraph Nos. 3 and 5 of the said
circular.

It observed that all other portions of the
circular No. 3 of 2018 have remained intact and that includes paragraph 13
thereof. Having noted the contents of paragraph 13 of the said circular No. 3
of 2018, the Tribunal held that the relaxation in monetary limits for
departmental appeals vide CBDT circular dated 8^th August, 2019 shall
be applicable to the pending appeals in addition to the appeals to be filed
henceforth.

The Tribunal
dismissed all the appeals as withdrawn. As the appeals filed by the Revenue
were found to be non-maintainable and as all the related cross-objections of
the assessees arose only as a result of those appeals and merely supported the
order of the CIT(A), the cross-objections filed by them were also dismissed as
infructuous.

shailesh.kwebmaker

Section 271(1)(c) – Assessee cannot be accused of either furnishing inaccurate particulars of income or concealing income in a case where facts are on record and all necessary information relating to expenditure has been fully disclosed in the financial statements and there is only a difference of opinion between the assessee and the AO with regard to the nature of the expenditure

9 DCIT vs. Akruti Kailash Construction (Mum.) Members: Saktijit Dey (J.M.) and Manoj Kumar
Aggarwal (A.M.) ITA No. 1978/Mum/2018 A.Y.: 2012-13 Date of order: 11^th October, 2019

Counsel for Revenue / Assessee: Manoj Kumar
/ Pavan Ved

Section
271(1)(c) – Assessee cannot be accused of either furnishing inaccurate
particulars of income or concealing income in a case where facts are on record
and all necessary information relating to expenditure has been fully disclosed
in the financial statements and there is only a difference of opinion between
the assessee and the AO with regard to the nature of the expenditure

FACTS

The assessee firm, engaged in the business of property development,
filed its return of income for A.Y. 2012-13 on 31^st July, 2012
declaring a loss of Rs. 3,36,32,538. The AO, in the course of assessment
proceedings, noted that the assessee has offered interest income of Rs. 70,492
under the head ‘Income from Other Sources’, whereas it has shown a loss of Rs.
3,43,45,900 under the head ‘Income from Business’. He noticed that the loss was
mainly due to various expenses such as administrative, employee costs, etc.,
which have been debited to the P&L account.

The AO held that
since the assessee has undertaken a single development project during the year,
the expenditure should have been capitalised and transferred to
work-in-progress and should not have been debited to the P&L account. The
AO, accordingly, disallowed the loss claimed which resulted in determination of
income at Rs. 5,70,840. The assessee did not contest the decision.

The AO initiated
proceedings for imposition of penalty u/s 271(1)(c) alleging furnishing of
inaccurate particulars of income and concealment of income. Rejecting the
explanation of the assessee, he imposed a penalty of Rs. 1,06,12,880 u/s
271(1)(c).

Aggrieved, the
assessee preferred an appeal to CIT(A) who allowed the appeal holding that
merely because the expenditure was required to be capitalised would not lead to
either concealment of income or furnishing of inaccurate particulars of income.
He observed that treating the expenditure as WIP is mere deferral of income and
that there was no taxable income and tax payable even after assessment and
thus, there cannot be a motive on the part of the assessee to evade tax. The
CIT(A) deleted the penalty levied by the AO.

Aggrieved, the
Revenue preferred an appeal to the Tribunal.

HELD

The Tribunal
observed that the AO has neither doubted nor disputed the genuineness of
expenditure incurred by the assessee. In the AO’s opinion, since the
development of the project undertaken by the assessee is in progress, instead
of debiting the expenditure to the P&L account the assessee should have
capitalised it by transferring it to WIP. Thus, it held that there is only a
difference of opinion between the assessee and the AO with regard to the nature
of expenditure. It observed that it is also a fact on record that all the
necessary information relating to the expenditure has been fully disclosed by
the assessee in the financial statements. In such circumstances, the assessee
cannot be accused of either furnishing inaccurate particulars of income or
concealing income. It held that the CIT(A) has rightly held that there is no
dispute with regard to the development of the project by the assessee and
treating the expenses as work-in-progress is merely deferral of expenses.

The Tribunal upheld the decision of the CIT(A) in deleting the penalty
and dismissed the appeal filed by the Revenue.

shailesh.kwebmaker

Section 80AC – The condition imposed u/s 80AC of the Act is mandatory – Accordingly, upon non-fulfilment of condition of section 80AC, the assessee would be ineligible to claim deduction u/s 80IB(10) of the Act

8 Uma Developers vs.
ITO (Mum.) Members: Saktijit
Dey (J.M.) and N.K. Pradhan (A.M.) ITA No.
2164/Mum/2016 A.Y.: 2012-13 Date of order: 11^th
October, 2019

Counsel for Assessee
/ Revenue: Rajesh S. Shah / Chaudhary Arun Kumar Singh

Section 80AC – The condition imposed u/s 80AC of the Act is mandatory –
Accordingly, upon non-fulfilment of condition of section 80AC, the assessee would be ineligible to
claim deduction u/s 80IB(10) of the Act

FACTS

The assessee, a partnership firm, in its business as builders and
developers undertook construction of a housing project at Akash Ganga Complex,
Ghodbunder Road, Thane. For the assessment year under dispute (2012-13), the
assessee filed its return of income on 31^st March, 2013 declaring
nil income after claiming deduction u/s 80IB(10) of the Act. In the course of
assessment proceedings, the AO while examining the assessee’s claim of
deduction u/s 80IB(10) found that conditions of section 80AC have been
violated, issued show-cause notice requiring the assessee to show cause as to
why the deduction claimed u/s 80IB(10) should not be disallowed. In the said
notice, the AO also alleged several violations of various other conditions prescribed
u/s 80IB(10). The AO also conducted independent inquiry with the Thane
Municipal Corporation. In response, the assessee filed its reply justifying the
claim of deduction u/s 80IB(10). As regards non-compliance with the provisions
of section 80AC, the assessee submitted that the said provision is directory
and not mandatory.

The AO was of the
view that as per section 80AC, for claiming deduction u/s 80IB(10) the assessee
must file its return of income within the due date of filing return of income u/s
139(1). He held that since the assessee had not filed its return within such
due date, as per section 80AC the assessee would not be eligible to claim
deduction u/s 80IB(10). The AO also held that certain conditions of section
80IB(10) have also not been fulfilled by the assessee. The AO rejected the
assessee’s claim of deduction u/s 80IB(10).

Aggrieved, the
assessee preferred an appeal to the CIT(A) who was of the view that due to
non-compliance with the provisions of section 80AC, the assessee is not eligible
to claim deduction u/s 80IB(10). Since he upheld the disallowance, he did not
venture into other issues relating to non-fulfilment of conditions of section
80IB(10) itself.

Aggrieved, the
assessee preferred an appeal to the Tribunal.

HELD

The Tribunal
observed that the issue before it lies in a very narrow compass, viz., whether
the condition imposed u/s 80AC is mandatory and, if so, whether on
non-fulfilment of the said condition, the assessee would be ineligible to claim
deduction u/s 80IB(10).

It held that on a
reading of section 80AC of the Act, the impression one gets is that the
language used is plain and simple and leaves no room for any doubt or
ambiguity. Therefore, the provision has to be interpreted on the touchstone of
the ratio laid down in the Constitution Bench decision of the Hon’ble
Supreme Court in the case of Commissioner of Customs (Import) vs. Dilip
Kumar & Co. & Ors., C.A. No. 3327/2007, dated 30^th July,
2018.

Having discussed
the ratio of this decision (Supra), the Tribunal held that
applying the principle laid down in the aforesaid decision of the Supreme Court
to the facts of the present case, it is quite clear that as per the provision
of section 80AC, which is very clear and unambiguous in its expression, for
claiming deduction u/s 80IB(10) it is a mandatory requirement that the assessee
must file its return of income within the due date prescribed u/s 139(1),
notwithstanding the fact whether or not the assessee has actually claimed
deduction in the said return of income. Once the return of income is filed
within the due date prescribed u/s 139(1), even without claiming deduction
under the specified provisions, the assessee can claim it subsequently either
in a revised return filed u/s 139(5) or by filing a revised computation during
the assessment proceeding. In that situation, the condition of section 80AC
would stand complied. The words used in section 80AC of the Act being plain and
simple, leave no room for a different interpretation.

Therefore, as per
the ratio laid down by the Supreme Court in the decision cited (Supra),
the provision contained in section 80AC has to be construed strictly as per the
language used therein. Otherwise, the very purpose of enacting the provision
would be defeated and the provision would be rendered otiose.

The Tribunal noted
that –

(i) The Pune Bench of the Tribunal in the case of
Anand Shelters and Developers supports the
condition of the AR that the provision of section 80AC is directory. It
observed that the foundation of this decision is the decision of the Andhra
Pradesh High Court in ITO vs. S. Venkataiah, ITA No. 114/2013, dated 26^th
June, 2013, as well as some other decisions of the Tribunal;

(ii) The Calcutta High Court in the case of CIT
vs. Shelcon Properties Private Limited [(2015) 370 ITR 305 (Cal.)] and
the Uttarakhand High Court in Umeshchandra Dalakot [ITA No. 07/2012,
dated 27^th August, 2012 (Uttarakhand HC)] have clearly and
categorically held that the provision contained in section 80AC is mandatory;

(iii) The Special Bench of the Tribunal in Saffire
Garments [(2013) 140 ITD 6] while considering pari material
provision contained under the proviso to section 10A(1A) of the Act, has
held that the condition imposed requiring furnishing of return of income within
the due date prescribed u/s 139(1) for availing deduction is mandatory.

The Tribunal
observed that the Delhi High Court in CIT vs. Unitech Ltd., ITA No.
236/2015, dated 5^th October, 2015 while considering a
somewhat similar issue relating to the interpretation of section 80AC has
observed that while the decisions of the Calcutta High Court in Shelcon
Properties Pvt. Ltd. (Supra) and of Uttarakhand High Court in Umeshchandra
Dalakot (Supra) are directly on the issue and support the case of the
Revenue that section 80AC is mandatory, but the Court observed that the
decision of the Andhra Pradesh High Court in S. Venkataiah (Supra) was
one declining to frame a question of law thereby affirming the order of the
Tribunal. Thus, ultimately the Delhi High Court left open the issue whether the
provision of section 80AC is directory or mandatory.

The Tribunal also
held that:

(a) after the decision of the Supreme Court in Dilip
Kumar & Co. & Ors. (Supra) the legal position has materially
changed and the provisions providing for exemption / deduction have to be
construed strictly in terms of the language used therein, and if there is any
doubt, the benefit should go in favour of the Revenue;

(b) the Pune Bench of the Tribunal, while deciding
the issue on the basis that if there are two conflicting views on a particular
issue, the view favourable to the assessee has to be taken, did not have the
benefit of the aforesaid judgment of the Supreme Court while rendering its
decision;

(c) the condition imposed u/s 80AC has to be
fulfilled for claiming deduction u/s 80IB(10). Since the assessee has not
fulfilled the aforesaid condition, the deduction claimed u/s 80IB(10) has been
rightly denied by the Department.

The Tribunal upheld
the order passed by the CIT(A) and dismissed the appeal filed by the assessee.

shailesh.kwebmaker

Section 45 – Capital gains arise in the hands of owners and not in the hands of general power of attorney holder

15 [2019] 72 ITR (Trib.) 578 (Hyd.) Veerannagiri Gopal Reddy vs. ITO ITA No. 988/Hyd/2018 A.Y.: 2008-2009 Date of order: 24^th May, 2019

Section 45 – Capital gains arise in the
hands of owners and not in the hands of general power of attorney holder

FACTS

The assessee, an individual, did not file
return of income for A.Y. 2008-09. The AO, however, received information that
the assessee is holding GPA for certain persons and had sold the immovable
property belonging to them for a consideration of Rs. 8,40,000 against a market
value of Rs. 38,08,000 as per the registration authority. Based on this
information, the assessee’s case was reopened u/s 147.

In response to the notice u/s 148, the
assessee did not file return of income. Therefore, the AO issued a notice u/s
142(1) along with a questionnaire requiring the assessee to furnish the details
in connection with the assessment proceedings. In response, the assessee filed
a copy of the sale deed and contended that he has executed the sale deed as a
GPA holder only and has not received any amount under the transaction.

The AO observed that the assessee had not
filed any evidence in support of his contention but has filed a reply on 29^th
February, 2016 in which he has justified the sale of plot for a sum of Rs.
8,40,000 as against a market value of Rs. 38,08,000. Therefore, the AO held
that the assessee sold the plot to his daughter not only as a GPA holder, but
also as owner of the property and has earned capital gain therefrom. The AO
brought the capital gains to tax.

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

Aggrieved, the assessee filed an appeal to
the Tribunal.

HELD

The Tribunal observed that in the year 1994
the assessee was given a registered irrevocable GPA by landowners and it was
stated therein that the possession was also given to the assessee to enable him
to handover possession to the purchaser. The GPA did not mention about the
receipt of consideration from whomsoever. It was 13 years later that the
assessee executed the sale deed in favour of his daughter and in the sale deed
it was mentioned that a sum of Rs. 8,40,000 was received by the vendors from
the vendee in the year 1994 and the vendor has handed over possession to the
vendee. The Tribunal agreed with the Revenue authorities that it is not
understandable as to why GPA was executed in favour of the assessee when the
entire consideration was received in 1994 and even possession handed over.

The Tribunal also noted that the recitals in
the GPA stated that the assessee is not the owner of the property but has only
been granted authority to convey the property to a third party. Therefore, the
Tribunal held that it cannot be considered that the assessee became owner of
the property by virtue of an irrevocable GPA.

It held that in the relevant previous year,
the assessee has executed the sale deed in favour of his daughter and in the
sale deed it has been mentioned that the total sale consideration was paid in
the year 1994. This fact also cannot be accepted, because if the entire sale
consideration was paid in the year 1994, then the vendors or even the GPA
holder could have executed the sale deed in favour of the vendee in that year
itself. Therefore, the sale is only in the year 2007 but capital gain would
arise in the hands of the owners of the property and not the GPA holder.

It observed that the Hon’ble Supreme Court
in the case of Suraj Lamps & Industries Pvt. Ltd. vs.
State of Haryana (2012) 340 ITR 2 has held that GPA is not a deed of
conveyance and hence cannot be construed as an instrument of transfer in regard
to any right, title or interest in the immovable property. It also considered
the judgment in Wipro Ltd. vs. DCIT 382 ITR 179 (Kar.), which has
considered the above judgment as well as the judgment in the case of State
of Rajasthan vs. Basant Nahata (2005) 12 SCC 77 to hold that a power of
attorney is not an instrument of transfer in regard to any right, title or
interest in an immovable property.

The Tribunal held that since the assessee is
not the owner of the property, capital gains cannot be brought to tax in his
hands.

shailesh.kwebmaker

Sections 37, 263 – Foreign exchange loss arising out of foreign currency fluctuations in respect of loan in foreign currency used for acquiring fixed assets should be allowed as revenue expenditure

14 [2019] 111 taxmann.com 189 (Trib.)(Coch.) Baby Memorial Hospital Ltd. vs. ACIT (CPC –
TDS) ITA No. 420/Coch/2019 A.Y.: 2014-15 Date of order: 8^thNovember, 2019

Sections 37,
263 – Foreign exchange loss arising out of foreign currency fluctuations in
respect of loan in foreign currency used for acquiring fixed assets should be
allowed as revenue expenditure

FACTS

For assessment
year 2014-15, the assessment of total income of the assessee was completed u/s
143(3) of the Act by accepting the income returned. The Pr. CIT, on
verification of records, noticed that the assessment order passed by the AO was
prima facie erroneous insofar as it was prejudicial to the interest of
the Revenue.

The Pr. CIT
found that the assessee had claimed an amount of Rs. 2,08,09,140 being foreign
exchange loss which was allowed by the AO. According to the Pr. CIT, the
foreign exchange loss was on account of foreign currency loan taken for the
construction of new building and additional equipment and the loss was
recognised translating the liabilities at the exchange rate in effect at the
balance sheet date. The Pr. CIT said that the loss on devaluation of rupee on
account of loan utilised for fixed capital was not deductible u/s 37(1) since
the expenditure is capital in nature. Therefore, he held that the foreign
exchange loss claimed as revenue expenditure is to be disallowed in the
assessment. The Pr. CIT set aside the assessment and invoked the provision of
section 263 of the I.T. Act inter alia for the limited purpose of
verifying whether the foreign exchange loss qualifies for being a revenue
expenditure.

Aggrieved, the
assessee preferred an appeal to the Tribunal where it contended that the case
of an assessee was a limited scrutiny case and in a limited scrutiny case the
details specific to CASS reasons were furnished and were verified. Therefore,
the order of CIT is invalid.

HELD

As regards the
challenge of the assessee to the jurisdiction of CIT, the Tribunal held that
even in a case of limited
scrutiny assessment, the AO is duty-bound to make a prima facie inquiry
as to whether there is any other item which requires examination and in the
assessment, the potential escapement of income thereof exceeded Rs. 10 lakhs.
The AO ought to have sought the permission of CIT / DIT to convert the ‘limited
scrutiny assessment’ into a ‘complete scrutiny assessment’. If there is no
escapement of income, which would have been more than Rs. 10 lakhs, the Pr. CIT
could not exercise jurisdiction u/s 263 of the I.T. Act. In the present case,
the assessee itself agreed that the Pr. CIT is justified in giving direction to
rework MAT income after adding back the provision for doubtful debts. Now, the
argument of the learned AR that in case of limited scrutiny assessment, the Pr.
CIT could not exercise jurisdiction u/s 263 is devoid of merit. Accordingly,
the Tribunal rejected the ground relating to challenging of the exercise of
jurisdiction by the Pr. CIT u/s 263.

The Tribunal
observed that the question for its consideration is whether gain on account of
foreign exchange fluctuation can be reduced from the cost of assets as per the
provisions of section 43(1). It held that as per the provisions of section
43(1), actual cost means actual cost of the capital assets of the assessee
reduced by that portion of the cost of the capital assets as has been met
directly or indirectly by any other person or authority. The section also has
Explanations. However, the section nowhere specifies that any gain or loss on
foreign currency loans acquired for purchase of indigenous assets will have to
be reduced or added to the cost of assets.

After having
considered the ratio of various judicial pronouncements and the
provisions of Schedule VI and AS-11, the Tribunal observed that in view of the
revision made in AS-11 in 2003, it can be said that treatment of foreign
exchange loss arising out of foreign currency fluctuations in respect of fixed
assets acquired through loan in foreign currency shall be required to be given
in profit and loss account. The said exchange loss should be allowed as revenue
expenditure in view of amended AS-11 (2003). The Tribunal observed that the
Apex Court had followed treatment of exchange loss or gain as per AS-11 (1994).
It held that in view of revision made in AS-11, now treatment shall be as per
the revised AS-11 (2003). Exchange gain or loss on foreign currency
fluctuations in respect of foreign currency loan acquired for acquisition of
fixed asset should be allowed as revenue expenditure.

The Tribunal held that –

(a) in its opinion, section 43A is only relating
to the foreign exchange rate fluctuation in respect of assets acquired from a
country outside India by using foreign currency loans which is not applicable
to the indigenous assets acquired out of foreign currency loans;

(b) foreign exchange loss arising out of foreign
currency fluctuations in respect of loans in foreign currency used for
acquiring fixed assets should be allowed as revenue expenditure by charging the
same into the profit and loss account and not as capital expenditure by
deducting the same from the cost of the respective fixed assets. Hence, in its
opinion, there is no potential escapement of income on the issue relating to
allowability of foreign exchange loan taken for the construction of new
building and additional equipment. Accordingly, this ground of appeal filed by
the assessee is allowed.

shailesh.kwebmaker

DCIT CC-44 vs. M/s Shreya Life Sciences Pvt. Ltd. [ITA No. 2835/Mum./2014; Bench E; Date of order: 20th November, 2015] Penalty u/s 221(1) r/w/s 140A(3) of the Act – Default on payment of self-assessment tax – Acute financial constraints – Good and sufficient reasons – Penalty deleted

18. The Pr.
CIT-Central-4 vs. M/s Shreya Life Sciences Pvt. Ltd. [Income tax Appeal No. 180
of 2017]; Date of order: 19^th March, 2019; A.Y.: 2010-11

DCIT CC-44 vs. M/s Shreya Life Sciences Pvt. Ltd. [ITA No. 2835/Mum./2014;
Bench E; Date of order: 20^th November, 2015]

Penalty u/s 221(1) r/w/s 140A(3) of the Act – Default on payment of
self-assessment tax – Acute financial constraints – Good and sufficient reasons
– Penalty deleted

The assessee is a pharmaceutical company manufacturing a wide range of
medicines and formulations. It filed its e-return on 15^th October,
2010 and was liable to pay self-assessment tax of Rs. 2,61,19,300. But the
assessee did not pay the tax and merely uploaded the e-return. Asked the
reasons for not depositing the tax, it was submitted before the AO that the
assessee company was in great financial crisis.

However, the assessee’s contention was not accepted and the AO issued
notice u/s 221(1) r/w/s 140A(3) of the Act holding that the assessee had failed
to deposit self-assessment tax due to which a penalty was imposed u/s 221(1) of
the Act.

The CIT(A) deleted the penalty to the extent of Rs. 10 lakhs and upheld
the balance amount of Rs. 40 lakhs.

Both the assessee as well as the Department went in appeal before the
ITAT. The Tribunal, while deleting the penalty referred to relied upon the
further proviso to sub-section (1) of section 221 of the Act which provides
that where the assessee proves to the satisfaction of the AO that the default
was for good and sufficient reasons, no penalty shall be levied under the said
section.

The Tribunal accepted the assessee’s explanation that due to acute
financial constraints the tax could not be deposited. The assessee pointed out
that even the other dues such as provident fund, ESIC and bank interest could
not be paid. The assessee also could not deposit the government taxes such as
sales tax and service tax. In fact, the recoveries of the tax could be made only
upon adjustment of the bank accounts.

The financial crisis was because of non-receipt of proceeds for its
exports. Attention was drawn to the amount of outstanding receivables which had
increased from Rs. 291,96,24,000 to Rs. 362,54,82,000 during the year under
consideration.

On further appeal to the High Court, the Revenue appeal was dismissed.

shailesh.kwebmaker

Dy. Commissioner of Income-tax, Circle-6(3) vs. M/s Graviss Foods Pvt. Ltd. [ITA No. 4863/Mum./2014] Pre-operative expense – New project unconnected with the existing business – Deductible u/s 37(1) of the Act

17. The Pr. CIT-7 vs. M/s Graviss
Foods Pvt. Ltd. [Income tax Appeal No. 295 of 2017]; Date of order: 5^th April, 2019; A.Y.: 2010-11

Dy. Commissioner of Income-tax, Circle-6(3) vs. M/s Graviss Foods Pvt.
Ltd. [ITA No. 4863/Mum./2014]

Pre-operative expense – New project unconnected with the existing
business – Deductible u/s 37(1) of the Act

The assessee is a private limited company engaged in the business of
manufacturing ice cream and other milk products. For the AY 2010-11 the
assessee had incurred an expenditure of Rs. 1.80 crores (rounded off) in the
process of setting up a factory for production of ‘mawa’, which project the
assessee was forced to abandon.

The AO was of the opinion that the expenditure was incurred for setting
up of a new industry. The expenditure was a pre-operative expenditure and could
not have been claimed as revenue expenditure.

The AO held that the assessee had entered a new field of business of
producing and supplying ‘mawa’ (or ‘khoa’) which is entirely different from the
business activity carried on by it. The AO completed the assessment and
disallowed the expenditure on the ground that it was incurred in connection
with starting a new project, that the expenditure was incurred for setting up a
new factory at Amritsar and thus not for the expansion and extension of the
existing business but for an altogether new business. The CIT(A) allowed the
appeal. The Tribunal relied upon its earlier decision for A.Y. 2009-10 and
confirmed the view of the CIT(A) and dismissed the Revenue’s appeal.

Before the Hon’ble High Court counsel for Revenue submitted that the
assessee was previously engaged in the business of manufacturing ice cream. The
assessee desired to set up a new plant at a distant place for production of
‘mawa’. This was, therefore, a clear case of setting up of a new industry.

The High Court observed that there was interlacing of the accounts,
management and control. The facts on record as culled out by the Tribunal are
that the assessee company was set up with the object to produce or cause to be
produced by process, grate, pack, store and sell milk products and ice cream.
In furtherance of such objects, the assessee had already set up an ice cream
producing unit. Using the same management control and accounts, the assessee
attempted to set up another unit for production of ‘mawa’, which is also a milk
product. The Tribunal, therefore, rightly held that the expenditure was
incurred for expansion of the existing business and it was not a case of
setting up of new industry, therefore it was allowable as revenue expenditure.

The High Court relied on the decision of the Supreme Court in the case
of Alembic Chemical Works Co. Ltd. vs. CIT, Gujarat, [1989] 177 ITR 377,
and the Bombay High Court decision in the case of CIT vs. Tata Chemicals
Ltd. (2002) 256 ITR 395 Bom.

The Department’s appeal was dismissed.

shailesh.kwebmaker

The DCIT vs. Mrs. Supriya Suhas Joshi [ITA No. 6565/Mum./2012; Bench: L; Date of order: 31st May, 2016; Mum. ITAT] Income from salary vis-a-vis income from contract of services – Dual control – Test of the extent of control and supervision

16. The Pr. CIT-27 vs. Mrs.
Supriya Suhas Joshi [Income tax Appeal No. 382 of 2017]; Date of order: 12^th April, 2019; A.Y.: 2009-10

The DCIT vs. Mrs. Supriya Suhas Joshi [ITA No. 6565/Mum./2012; Bench: L;
Date of order: 31^st May, 2016; Mum. ITAT]

Income from salary vis-a-vis income from contract of services – Dual
control – Test of the extent of control and supervision

The assessee is the sole proprietor of M/s Radiant
Services, engaged in Manpower Consultancy and Recruitment Services in India and
overseas. The said Radiant Services had entered into an agreement with M/s
Arabi Enertech, a Kuwait-based company, in 2007-08 for providing manpower to it
as per its requirements. Individual contracts were executed for providing the
personnel. As per the contract, the Kuwait-based company paid a fixed sum out
of which the assessee would remunerate the employee.

The AO treated the payments made by the assessee to
the persons recruited abroad as not in the nature of salaries and applied the
provisions of section 195 r/w/s 40(a)(ia) and disallowed the same as no TDS was
done by the assessee. The AO concluded that there was no master and servant
relationship between the assessee and the recruited persons and therefore the
payments could not be held to be salaries. He did not accept the assessee’s
stand that the persons so employed worked in the employment of the assessee and
were only loaned to the Kuwait-based company for carrying out the work as per
the requirements of the said company. It is undisputed that in case of payment
to a non-resident towards salary, it would not come within the scope of section
195 of the Act, and hence this controversy. The assessee carried the matter in
appeal. The CIT(A) took note of the documents from the records, including the contract
between the assessee and the Kuwait-based company and the license granted by
the Union Government to enable the assessee to provide such a service. The
Commissioner was of the opinion that the assessee had employed the persons who
had discharged the duties for the Kuwait-based company. The assessee was,
therefore, in the process making payment of salary and, therefore, there was no
requirement of deducting tax at source u/s 195 of the Act.

The Tribunal confirmed the view of the CIT(A) upon
which an appeal was filed before the High Court.

The Hon’ble High Court observed that the contract
between the assessee and the Kuwait-based company was sufficiently clear,
giving all indications that the concerned person was the employee of the
assessee. The preamble to the contract itself provided that as per the contract
the assessee would supply the Commissioning Engineer to the said company on
deputation basis for its ongoing project. Such deputation would be on the terms
and conditions mutually discussed between the assessee and the said company.
The contract envisaged payment of deputation charges which were quantified at
US$ 5,500 per month. Such amount would be paid to the assessee out of which the
assessee would remunerate the employee. The mode of payment was also specified.
The same would be released upon the assessee submitting invoices. The record
suggested that the assessee after receiving the said sum from the Kuwait-based
company would regularly pay to the employee US$ 4,000 per month, retaining the
rest. In clear terms, thus, the concerned employee was in the employment of the
assessee and not of the Kuwait-based company, contrary to what the Department
contended.

The Department argued that looking to the
supervision and control of the Kuwait-based company over the employee, it must
be held that he was under the employment of the said company and not of the
assessee. In this regard, it placed heavy reliance on the decision of the
Supreme Court in the case of Ram Prashad vs. Commissioner of Income tax
(1972) 86 ITR 122 (SC). The Court observed that the test of the extent
of control and supervision of a person by the engaging agency was undoubtedly a
relevant factor while judging the question whether that person was an agent or
an employee. However, in a situation where the person employed by one employer
is either deputed to another or is sent on loan service, the question of dual
control would always arise. In such circumstances, the mere test of on-spot
control or supervision in order to decide the correct employer may not succeed.
It is inevitable that in a case such as the present one, the Kuwait-based
company would enjoy considerable supervising powers and control over the
employee as long as the employee is working for it.

Nevertheless, the assessee company continued to
enjoy the employer-employee relationship with the said person. For example, if
the work of such person was found to be wanting or if there was any complaint
against him, as per the agreement it would only be the assessee who could
terminate his services. Under the circumstances, no question of law arises. The
Department’s appeal was dismissed.

shailesh.kwebmaker

Sections 9(1)(vii)(b) and 195 of ITA 1961 – TDS – Income deemed to accrue or arise in India – Non-resident – TDS from payment to non-resident – Payment made to non-resident for agency services as global coordinator and lead manager to issue of global depository receipt – Services neither rendered nor utilised in India and income arising wholly outside India from commercial services rendered in course of carrying on business wholly outside India – Tax not deductible at source

46. CIT(IT) vs. IndusInd Bank
Ltd.; [2019] 415 ITR 115 (Bom.) Date of order: 22^nd April, 2019;

Sections 9(1)(vii)(b) and 195 of ITA 1961 – TDS – Income deemed to
accrue or arise in India – Non-resident – TDS from payment to non-resident –
Payment made to non-resident for agency services as global coordinator and lead
manager to issue of global depository receipt – Services neither rendered nor
utilised in India and income arising wholly outside India from commercial
services rendered in course of carrying on business wholly outside India – Tax
not deductible at source

The assessee was engaged in banking business. For
its need for capital, the bank decided to raise capital abroad through the
issuance of global depository receipts. The assessee engaged the A bank,
incorporated under the laws of the United Arab Emirates and carrying on
financial services, for providing services of obtaining global depository
receipts. The assessee bank raised USD 51,732,334 by way of the gross proceeds
of global depository receipts issued. The agency would be paid the agreed sum
of money which was later on renegotiated. The assessee paid a sum of USD
20,09,293 as agency charges which in terms of Indian currency came to Rs. 90.83
lakhs. The AO held that tax was deductible at source on such payment.

The Tribunal allowed the assessee’s claim that
there was no liability to deduct tax at source.

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

‘i) The
assessee had engaged the A bank for certain financial services. The payment was
made for such financial services rendered by the A bank. The global depository
receipts were issued outside India. The services were rendered by the A bank
outside India for raising such funds outside India. It was, in this context,
that the Tribunal had come to the conclusion that the services rendered by the
A bank were neither rendered in India nor utilised in India and the character
of income arising out of such transaction was wholly outside India emanating
from commercial services rendered by the bank in the course of carrying on business wholly outside India.

ii) The Tribunal
was, therefore, correctly of the opinion that such services could not be
included within the expression “technical services” in terms of
section 9(1)(vii)(b) read with Explanation to section 9. Tax was not deductible
at source from such payment.’

shailesh.kwebmaker

Sections 69, 132 and 158BC of ITA 1961 – Search and seizure – Block assessment – Undisclosed income – Search at premises of assessee’s father-in-law – Valuation of cost of construction of property called for pursuant to search – Addition to income of assessee as unexplained investment based on report of Departmental Valuer – Report available with Department prior to search of assessee’s premises – Addition unsustainable

45. Babu
Manoharan vs. Dy. CIT; [2019] 415 ITR 83 (Mad.) Date of order: 4^th
June, 2019; A.Ys.: B.P. from 1^st April, 1989 to 31^stMarch,
2000

Sections 69, 132 and 158BC of ITA 1961 – Search and seizure – Block
assessment – Undisclosed income – Search at premises of assessee’s
father-in-law – Valuation of cost of construction of property called for
pursuant to search – Addition to income of assessee as unexplained investment
based on report of Departmental Valuer – Report available with Department prior
to search of assessee’s premises – Addition unsustainable

During a search operation u/s 132 of the Income-tax
Act, 1961 conducted in the premises of the assessee’s father-in-law on 12^th
August, 1999 it had been found that a house property was owned by the assessee
and his spouse equally and a valuation was called for from the assessee. After
the assessee submitted the valuation report, the Department appointed a valuer
who subsequently submitted his report in December, 1999. Thereafter, on 13^th
January, 2000, a search and seizure operation was conducted in the premises of
the assessee. In the block assessment made u/s 158BC, the AO made an addition
to the income of the assessee on account of unexplained investment in the
construction of the house property.

Both the Commissioner (Appeals) and the Tribunal
upheld the addition.

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

‘i) In the
absence of any material being found during the course of search in the premises
of the assessee with regard to the investment in the house property, the
assessee could not be penalised solely based on the valuation report provided
by the Department. The house property of the assessee was found during the
search conducted in the premises of the father-in-law of the assessee on 12^th
August, 1999 and a valuation report was called for from the assessee as well as
the Departmental valuer. The valuation report was prepared much earlier to the
search conducted on 13^th January, 2000 in the assessee’s premises.
Therefore, the valuation report was material which was available with the
Department before the search conducted in the assessee’s premises and it could
not have been the basis for holding that there had been an undisclosed
investment.

ii) The
assessee had not been confronted with any incriminating material recovered
during the search. According to the valuation report submitted in the year
1999, it was only to determine the probable cost of construction and the valuer
in his report had stated that the construction was in progress at the time of
inspection on 12^th August, 1999 on the date of search of the premises
of the assessee’s father-in-law. Therefore, the assessee could not be faulted
for not filing his return since he had time till September, 2001 to do so. The
order passed by the Tribunal holding that the investment in the house property
represented the undisclosed income of the assessee was set aside.’

shailesh.kwebmaker

Sections 69B, 132 and 153A of ITA 1961 – Search and seizure – Assessment – Undisclosed income – Burden of proof is on Revenue – No evidence found at search to suggest payment over and above consideration shown in registration deed – Addition solely on basis of photocopy of agreement between two other persons seized during search of other party – Not justified

44. Principal CIT vs. Kulwinder
Singh; [2019] 415 ITR 49 (P&H) Date of order: 28^th March, 2019;
A.Y.: 2009-10

Sections 69B, 132 and 153A of ITA 1961 – Search and seizure – Assessment
– Undisclosed income – Burden of proof is on Revenue – No evidence found at
search to suggest payment over and above consideration shown in registration
deed – Addition solely on basis of photocopy of agreement between two other
persons seized during search of other party – Not justified

In the A.Y. 2009-10, the assessee purchased a piece
of land for a consideration of Rs. 1 crore. Search and seizure operations u/s
132 of the Income-tax Act, 1961 were conducted at the premises of the seller
(PISCO) and the assessee. Further, during the course of the search conducted at
the residential premises of the accountant of PISCO, certain documents and an
agreement which showed the rate of the land at Rs. 11.05 crores per acre were
found. Since the land purchased by the assessee was part of the same (parcel
of) land, the AO was of the view that the assessee had understated his
investment in the land. He adopted the rate as shown in the agreement seized
during the search of the third party and made an addition to the income of the
assessee u/s 69B of the Act as undisclosed income.

The Commissioner (Appeals) held that the evidence
relied upon by the AO represented a photocopy of an agreement to sell between
two other persons in respect of a different piece of land on a different date,
that the AO had proceeded on an assumption without a finding that the assessee
had invested more than what was recorded in the books of accounts and deleted
the addition. The Tribunal found that the original copy of the agreement was
not seized; that the seller, buyer and the witnesses refused to identify it;
that the assessee was neither a party nor a witness to the agreement and was not
related to either party; that the assessee had purchased the land directly from
PISCO at the prevalent circle rate; and that in the purchase deed of the
assessee the rate was Rs. 4 crores per acre as against the purchase rate of Rs.
11.05 crores mentioned in the agreement seized. The Tribunal held that the
burden to prove understatement of sale consideration was not discharged by the
Department and that the presumption of the AO could not lead to a conclusion of
understatement of investment by the assessee and upheld the order passed by the
Commissioner (Appeals).

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

‘The Tribunal rightly upheld the findings recorded
by the Commissioner (Appeals). Learned Counsel for the appellant-Revenue has
not been able to point out any error or illegality therein.’

shailesh.kwebmaker

REOPENING CASES OF INTIMATION u/s. 143(1)

ISSUE FOR CONSIDERATION

Section 147 of the Income Tax Act, 1961
provides for reassessment of income which has escaped assessment for any
assessment year. The section reads as under:

“Income Escaping Assessment

If the Assessing Officer has reason to
believe that any income chargeable to tax has escaped assessment for any
assessment year, he may, subject to the provisions of sections 148 to 153,
assess or reassess such income and also any other income chargeable to tax
which has escaped assessment and which comes to his notice subsequently in the
course of the proceedings under this section, or recompute the loss or the
depreciation allowance or any other allowance, as the case may be, for the
assessment year concerned (hereafter in this section and in sections 148 to 153
referred to as the relevant assessment year) :

Provided that where an assessment under
sub-section (3) of section 143 or this section has been made for the relevant
assessment year, no action shall be taken under this section 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
the failure on the part of the assessee to make a return under section 139 or
in response to a notice issued under sub-section (1) of section 142 or section
148 or to disclose fully and truly all material facts necessary for his
assessment, for that assessment year:”

The issue of applicability of the above
referred proviso to section 147 has come
up before the courts in cases where no assessment has been made u/s. 143(3),
but merely an intimation has been issued u/s. 143(1). In other words, in cases
where more than 4 years have expired from the end of the relevant assessment
year, is the A.O. required to satisfy and establish that there was a failure on
the part of the assessee to disclose
fully and truly all material facts necessary for the assessment for a valid
reopening of the case? While the Madras High Court has taken the view that
the proviso applies even in cases of
intimation u/s. 143(1) and the A.O is
required to establish that there was a failure to disclose material facts
before reopening a case, the Gujarat High Court has taken a contrary view that
the proviso applies only in the case of
assessments u/s. 143(3).

EL FORGE’S CASE

The issue came up before the Madras High
Court in the case of EL Forge Ltd vs. Dy CIT 45 taxmann.com 402.

In this case, an intimation was issued u/s.
143(1) on 31^st December, 1991 for assessment year 1989-90. The
assessing officer thereafter noticed that the assessee had claimed deduction
u/s. 80HH and 80-I on the total income before set off of unabsorbed losses of
earlier years. Therefore, as the assessing officer was of the view that the
assessee was not entitled to deduction under chapter VI-A, reassessment proceedings
were initiated u/s. 147 and a notice was issued u/s. 148 on 15^th
December, 1997.

The assessee objected to the reopening of
the assessment, contending that as the reopening was made after a lapse of 4
years from the end of the assessment year, and as there was no failure on the
part of the assessee to disclose all material facts necessary for making the
assessment, the reopening was not valid.

The Commissioner (Appeals) rejected the
assessee’s claim and dismissed the appeal, holding that the reopening of the
assessment by the assessing officer was perfectly in order. The Tribunal held
that the assessee did not disclose fully and truly all material facts, and
therefore agreed with the finding of the assessing officer as well as the
Commissioner (Appeals). It held that the reopening of the assessment was
justified, as it was well within the period provided for under the proviso to
section 147.

Before the Madras High Court, besides pointing
out on behalf of the assessee that the notice u/s. 147 did not give any
independent reasons for reopening of assessment u/s. 147, it was argued that the details of the income
computation were very much before the assessing officer. The assessee therefore
claimed that the assessing officer had not shown that there was a failure to
disclose material facts necessary for assessment.

The Madras High Court observed that the
facts of the case showed that there was no denial of the fact that the assessee
had disclosed details of carry forward of the losses as well as the computation
of income, and that these details were very much before the assessing officer.
It observed that there was no denial of the fact that there was no failure on
the part of the assessee in disclosing the facts necessary for assessment, and
there was no allegation that the escapement of income was on account of failure
of the assessee to disclose fully and truly all material facts for assessment.

Applying the decision of the Supreme Court
in Kelvinator’s case, the Madras High Court accepted the argument of the
assessee that the assumption of jurisdiction beyond four years was hit by the
limitation provided under the proviso to section 147. The Madras High Court
therefore allowed the appeal of the assessee.

LAXMIRAJ DISTRIBUTORS’ CASE

The issue again came up before the Gujarat
High Court in the case of Pr CIT vs. Laxmiraj Distributors (P) Ltd 250
Taxman 455.

In this case, the assessee, a company, had
filed its return of income for assessment year 2009-10 on 13^th
September, 2009. The return was accepted and an intimation was issued u/s.
143(1). Subsequently, a survey was carried out on the premises of the company.
During the course of such survey, several documents were seized and a statement
of a director of the company was recorded on 30^th August, 2012.

The assessee also wrote a letter on 4^th
September, 2012 to the assessing officer, in which it stated that the company
had verified its records for various years, that it might not be possible to substantiate certain
issues and transactions recorded in the regular books of account as required by
law, as it would take a lot of time and effort, and that it would like to avoid
protracted litigation. To avoid litigation and penalty and to buy peace, the
company stated that it would voluntarily disclose an amount of Rs. 9 crore as
it’s undisclosed income, comprising of Rs. 7.52 crore for assessment year
2009-10 towards share capital reserves and Rs. 1.48 crore for assessment year
2013-14 towards estimated profit for the year of survey. In such letter,
details of the companies to which 7.52 lakh shares were allotted with premium
of Rs. 6.77 crore were given.

In spite of such letter, the company did not
offer such income to tax. The assessing officer therefore issued notice on 13^th
February, 2013 u/s. 148, to reopen the assessment for assessment year 2009-10.
The reason recorded for such reassessment was that the income disclosed as a
result of survey at Rs. 7.52 crore was over and above the income of Rs. 78.47
lakh returned in the original return of income.

In reassessment proceedings, an addition of
Rs. 7.52 crore as bogus share capital was made. The Commissioner (Appeals)
rejected the assessee’s appeal.

The ground of
validity of the notice of reopening was raised before the Tribunal for the
first time. The Tribunal permitted raising of such ground, since it touched
upon the very jurisdiction of the assessing officer to reassess the income.

The Tribunal held that reopening of
assessment was bad in law, and therefore it did not enter into the question of
correctness of the additions. The Tribunal referred to the Supreme Court
decisions in the case of ITO vs. Lakhmani Mewal Das 103 ITR 437, and Asst
CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd 291 ITR 500, and the decision
of the Gujarat High Court in the case of Inductotherm (India) (P) Ltd vs. M
Gopalan, Dy CIT 356 ITR 481, and proceeded to annul the reassessment on the
ground that the formation of belief by the assessing officer that income
chargeable to tax had escaped assessment was erroneous on account of the fact that there was no
corroborative evidence casting doubts on the assessee’s share capital received
up to the date of issue of the notice of reopening. According to the Tribunal, the
basic tenet of cause effect relationship between the reasons for reopening and
the taxable income having escaped assessment was not made out by the assessing
officer.

The Gujarat High Court observed that, in the
case of Rajesh Jhaveri Stock Brokers (P) Ltd (supra), the Supreme Court
highlighted a clear distinction between assessment under section 143(1) and
assessment made by the assessing officer after scrutiny u/s. 143(3). Such distinction was noticed in the background of the
notice of reassessment where the return of the assessee was accepted u/s.
143(1). The Supreme Court had observed that, in the scheme of things, the
intimation u/s. 143 (1) could not be treated to be an order of assessment, and
that being the position, the question of change of opinion did not arise. The
Gujarat High Court further observed that the ratio of the decision was
reiterated in a later judgement of the Supreme Court in the case of Dy CIT
vs. Zuari Estate Development & Investment Co Ltd 373 ITR 661.

The Gujarat High Court also referred to its
decision in the case of Inductotherm (supra), where the court observed
that even in case of reopening of an assessment where the return was accepted
without scrutiny, the requirement that the assessing officer had reason to
believe that income chargeable to tax had escaped assessment, would apply.

The Gujarat High Court further referred to
the Supreme Court decision in the case of Lakhmani Mewal Das (supra),
where it had been held that the reasons for the formation of the belief contemplated
by section 147 for the reopening of an assessment must have a rational
connection or relevant bearing on the formation of the belief. Rational
connection postulated that there must be a direct nexus or live link between
the material coming to the notice of the assessing officer and the formation of
his belief that there had been escapement of the income of the assessee from
assessment.

Culling out the ratio of those decisions,
the Gujarat High Court stated that what broadly emerged was that there was a
vital distinction between the reopening of an assessment where the return of an
assessee had been accepted u/s. 143 (1) without scrutiny, and where the
scrutiny assessment had been framed.
According to the Gujarat High Court, in the former case, the assessing officer
could not be stated to have formed any opinion, and therefore, unlike in the
latter case, the concept of change of opinion would have no applicability. The
common thread that would run through both sets of exercises of reopening of assessment
was that the assessing officer must have reason to believe that income
chargeable to tax had escaped assessment.

Looking at the facts of the case and the
observations of the Tribunal, the Gujarat High Court observed that the Tribunal
had evaluated the evidence on record in minutest detail, as if each limb of the
assessing officer’s reasons recorded for issuing notice of reassessment was in
the nature of an addition made in assessment order, which had either to be
upheld or reversed, which, according to the High Court, was simply
impermissible.

The Gujarat High Court referred to the
decision of the Delhi High Court in the case of Indu Lata Rangwala vs. Dy
CIT 384 ITR 337, where the Delhi High Court had taken the view that where
the return initially filed was processed u/s. 143(1), there was no occasion for
the assessing officer to form an opinion after examining the documents enclosed
with the return. In other words, the requirement in the first proviso to
section 147 of there having to be a failure on the part of the assessee “to
disclose fully and truly all material facts” did not at all apply whether the
initial return had been processed u/s. 143(1). In that case, the Delhi High
Court had taken the view that it was not necessary in such a case for the
assessing officer to come across some fresh tangible material to form reasons
to believe that income had escaped assessment.

The Gujarat
High Court thereafter considered the decision of the Madras High Court in the
case of EL Forge (supra) and expressed its inability to concur with the
view of the Madras High Court in the said case where it held that the condition
that there was a failure to disclose the material facts for the purposes of
assessment was required to be satisfied even in cases of intimation issued u/s.
143(1). According to the Gujarat High Court, the proviso to section 147 would
apply only in a case where an assessment
had been framed after scrutiny. In a case where the return was accepted u/s.
143(1), the additional requirement that income chargeable to tax had escaped
assessment on account of the failure on the part of the assessee to disclose
truly and fully all material facts, would simply not apply. According to the
Gujarat High Court, the decision of the Supreme Court in Kelvinator’s
case did not apply, to the facts of the
case before the court, as that was a case in which the original assessment was
framed after scrutiny.

The Gujarat High Court therefore allowed the
appeal of the revenue, quashing the conclusion of the Tribunal that the notice
of reopening of assessment was invalid.

OBSERVATIONS

Reading the proviso in the manner, as is read by the Gujarat High Court, would mean that in all
cases of the intimation u/s. 143(1) where other things are equal, the time
limit for reopening gets automatically extended to six years from the end of
the assessment year and that the requirement to satisfy the disclosure test has
to be met with only in cases of assessment u/s. 143(3) and is otherwise dispensed with in cases of intimation u/s. 143(1). On a reading
of the Proviso this does not appear to be the case and even on the touchstone
of common sense there appears to be a
case that the requirement to satisfy the disclosure test should not be
restricted to section 143(3) cases only. A failure by the AO to initiate the
proceedings u/s. 143(2) and again under the main provisions of section 147,
within the time prescribed under the respective provisions can not be remedied
by resorting to the reading of the proviso in a convenient manner that
gives a license to the AO to reopen a
case even after a lapse of a long time
and deny the finality to the proceedings in cases where there otherwise is not
a failure to disclose the material on the part of the assessee. Such an
understanding is strongly supported by the overall scheme of the Income tax
Act.

In cases where the assesssee has disclosed
the material facts and the AO has failed to have a prima facie look into
the facts, in time, and fails to pursue the matter appropriately, within the
prescribed time, it is reasonable to hold that his power to reopen a case comes
to an end irrespective of the fact that the assessment was not made u/s.
143(3).

Even otherwise, it is not unreasonable to
hold that in cases where the assessee has made an adequate disclosure of facts,
then the same are deemed to have been considered by the AO and therefore his
inaction, within the prescribed time, should be construed to be a case of a
change of opinion.

It is difficult to appreciate that the
standards that are applicable to the cases covered by section 143(3) are not
applied to cases covered by section 143(1) for no fault of the assessee more so when the assessee has no control over
the action or inaction of the AO. It is not the assessee who prevented the AO
from scrutinising the return of income. In fact, permitting the AO to have a
longer time than it is prescribed is giving him a premium for his inefficiency
of not having acted within the time when he should have.

The decision of the Gujarat High Court in Laxmiraj’s
case, is the one delivered on very peculiar facts involving an admission by the
assessee firm at the time of survey and not following it us with the offer for
tax in spite of admitted facts that were not denied by the assessee later on at
the time of even reassessment. The SLP file by the assessee against the
decision has been rejected by the Supreme Court 95 taxxmann.com
109(SC).

The Madras High Court in case of TANMAC India vs. Dy.CIT 78 taxmann.com 155 (Mad.) held
that if after issuing intimation u/s. 143(1) of the Act, the Assessing
Officer did not issue notice of scrutiny assessment u/s. 143(2) of the Act, it
would not be open for the Assessing Officer thereafter to resort to reopening
of the assessment. The High Court in deciding the case placed heavy reliance on
the decision of Delhi High Court in case of CIT vs. Orient Craft Ltd. 354
ITR 536 in which the distinction between scrutiny assessment and a
situation where return has been accepted u/s. 143(1) was narrowed down. The
Court had applied the concept of true and full disclosure even in case of
reopening assessment where return was accepted u/s. 143(1) of the Act.

It seems that the excessive reliance on the
ratio of the Supreme Court cases in Rajesh Jhaveri Stock Brokers’ case
(supra) and Zuari Estate & Investment Co.‘s case (supra) requires a fresh
consideration and perhaps was uncalled for. The issue in those cases has been about whether there could be a
change of opinion in a case where an intimation u/s. 143(1) was issued and
whether there was a need to have the
reason to believe that income has escaped income in such cases of intimation
and whether an intimation was different form an order. The issue under consideration, namely, the
application of the first proviso to section 147 was not an issue before
the court in both the cases. It is
respectfully submitted that in the below quoted part of the decision, the
Supreme Court inter alia held that the condition of the First Proviso to
section 147 were required to be satisfied for a valid reopening of a case
involving even an intimation issued u/s. 143(1) of the Act.

“The scope and effect of section
147 as substituted with effect from 1-4-1989, as also sections 148 to 152 are
substantially different from the provisions as they stood prior to such
substitution. Under the old provisions of section 147, separate clauses (a) and
(b) laid down the circumstances under which income escaping assessment for the
past assessment years could be assessed or reassessed. To confer jurisdiction
under section 147(a) two conditions were required to be satisfied firstly the
Assessing Officer must have reason to believe that income profits or gains
chargeable to income tax have escaped assessment, and secondly he must also
have reason to believe that such escapement has occurred by reason of
either omission or failure on the part
of the assessee to disclose fully or truly all material facts necessary for his
assessment of that year. Both these conditions were conditions precedent to be
satisfied before the Assessing Officer could have jurisdiction to issue notice
under section 148 read with section 147(a). But under the substituted section
147 existence of only the first condition suffices. In other words if the
Assessing Officer for whatever reason has reason to believe that income has
escaped assessment it confers jurisdiction to reopen the assessment. It is
however to be noted that both the conditions must be fulfilled if the case
falls within the ambit of the proviso to section 147.” The disclosure of
the material facts is a factor that can not be ignored even in the case of
intimation simply because the first proviso expressly refers only to the order
of assessment u/s. 143(3). It appears that the last word on the subject has yet
to be said and sooner the same is said by the Supreme Court, is better.

shailesh.kwebmaker

Rectification of mistake – Debatable issue –Adjusting the business loss against capital gain in terms of provisions of section 71(1) of the Act –View once allowed by the AO could not be rectified by him if the issues is debatable. [Section 154]

1. 3.
Pr.CIT-6 vs. Creative
Textile Mills Pvt. Ltd. [Income tax Appeal no 1570 of 2016 Dated: 13^th February, 2019 (Bombay High Court)]

[Creative Textile Mills Pvt. Ltd vs.
ACIT-6(2); dated 28^th October, 2015; ITA. No 7480/Mum/2013, AY : 2005-06,
Bench:C Mum. ITAT]

Rectification
of mistake – Debatable issue –Adjusting the business loss against capital gain
in terms of provisions of section 71(1) of the Act –View once allowed by the AO
could not be rectified by him if the issues is debatable. [Section 154]

The
assessee is engaged in the business of Processing, Manufactures and Export of
Readymade Garments & Fabric, filed its return of income on 30.10.2005
declaring total loss of Rs. 4,37,23,576/-. The assessment order was passed on
31.12.2007 declaring total loss of Rs. 2,29,98,454/-. However, the AO made a
rectification of the assessment order u/s. 154 of the I.T. Act in its order on
the pretext that computation of loss has not been adjusted against the capital
gain and that excess loss has been allowed to the assessee and thus a sum of
Rs. 1,82,65,501/- was added on account of LTCG, against which an appeal was filed
before the CIT(A) on the ground, the order u/s. 154 was bad in law, void, ab
initio and was impermissible under the law.However, the ld. CIT(A) upheld
the order of AO.

Being aggrieved with the CIT(A) order, the assessee filed an appeal to
the ITAT. The Tribunal held that the assessee relied upon the judgment in case
of T.S.Balaram, ITO vs. Vokart Brothers & Others 82 ITR 50 (SC)
wherein it was held “that mistake apparent from the record must be an obvious
and patent mistake and not something which can be established by a long drawn
process and of reasoning on points on which there may be conceivably two
opinions. A decision on a debatable point of law is not a mistake apparent from
the record. The Ld AR further relied upon the cases of CIT vs. Victoria
Mills Ltd. [153 ITR 733], CIT vs. British Insulated Calender’s Ltd. [202
ITR 354], Addl. Second ITO vs. C.J. Shah [10 ITD 151 (TM)] and DCIT
vs. Shri Harshavardan Himatsingka [ITA No. 1333 to 1335/Kol/2012] (Bom. High
Court). In DCIT (Kol.) vs. Harshavardan Himatsingka, it was held
that the order passed by the AO u/s. 154 of the Act adjusting the business loss
against capital gain in terms of provisions of section 71(1) of the Act,
wherein assessee is entitled to carry forward the business loss without
adjusting the same from capital gain or the same is mandatory required to be
adjusted. It was further held by co-ordinate bench that this aspect of
provision of section 71(1) of the Act is also a subject matter of dispute and
there are case law both in favour and against the said proposition as
canvassed. Hence issue is debatable cannot be said that there was a mistake
apparent on record which could be rectified u/s. 154 of the Act, hence the
order passed by AO u/s. 154 of the Act is not sustainable. It was further seen that in the regular assessment,
certain disallowance/additions were made by the AO which was deleted by ld.
CIT(A) in further appeal and the appeal filed by the department against the
order of CIT(A) has also been dismissed by the Tribunal and the case had
already travelled up to the ITAT till then no such interference was drawn at
the time of regular assessment or during the appellate stage. In view of the
above, ITAT held that the order passed
by the AO u/s. 154 which was subsequently upheld by CIT(A) is void, ab
initio and the same is liable tobe set-aside and is not permissible under
the law.

Being aggrieved with the
ITAT order, the Revenue filed an appeal to the High Court. The Court held that
sub-section (1) of section 71 of the Act provides that where in respect of any
assessment year the net result of the computation under any head of income
other than “capital gains’ is a loss and the assessee has no income under the
head ‘capital gains’ he shall, subject to the provisions of this Chapter, be
entitled to have the amount of such loss set off against his income, if any,
assessable for that assessment year under any other head. This provision came
up for consideration before this Court in the case of Commissioner of Income
Tax vs. British Insulated Calendar’s Ltd. [202 ITR 354] in which it was
held that under sub-section (1) of section 71 of the Act the assessee has no
option in setting off the business loss against the heads of other income as
long as there was no capital gain during the year under consideration. The case
of the assessee does not fall under sub-section (1) of section 71 of the Act
since the assessee had declared capital gain. Such a situation would be covered
by subsection (2) of section 71 of the Act which reads as under;

“(2) Where in respect
of any assessment year, the net result of the computation under any head of
income, other than “Capital gains”, is a loss and the assessee has income
assessable under the head “Capital gains”, such loss may, subject to the
provisions of this Chapter, be set off against his income, if any, assessable
for that assessment year under any head of income including the head “Capital
gains” (whether relating to short-term capital assets or any other capital
assets)”.

In case of British
Insulated Calender’s (supra) this Court had in respect to sub-section 2 of
section 71 observed that “

in case of the assessee
declaring capital gain, he had an option to set off the business loss, whereas
no such option is given for sub-section (1)”. Before the High Court, of course,
the provision of sub-section 2 of section 71 of the Act was somewhat different
and the expression “ or, if the assessee so desires, shall be set off only
against his income, if any, assessable under any head of income other than
‘capital gains’” has since been deleted. Nevertheless, the question that would
arise is, whether even in the unamended form sub-section (2) of section 71 of
the Act mandates the assessee to set off its business loss against the capital
gains of the same year when this provision used an expression “may” as compared
to the expression “shall” used in s/s. (1).

In the present case, the Hon’ble Court was not called upon to judge the correctness of
interpretation of either the revenue or the assessee. However the court
observed that issue was far from being
clear. It was clearly debatable. In this position, the A.O, as per the settled
law, could not have exercised the rectification powers. The Income Tax Appeal
was dismissed.

shailesh.kwebmaker

Section 45 – Capital gains – Non-compete clause – Transfer of business – Amount is liable to be bifurcated and apportioned – Attributed to the non- compete clause is revenue receipts and remaining was to be treated as the capital receipt taxable as capital gains.

1. 2.
Pr CIT-17 vs. Lemuir Air
Express [ ITA no 1388 of 2016 Dated: 6^th February, 2019 (Bombay High
Court)]

[ACIT-12(3)
vs. Lemuir Air Express; dated 9^th October, 2015 ; ITA. No
3245/Mum/2008, AY : 2004-05 Bench: G
Mum. ITAT ]

Section
45 – Capital gains – Non-compete clause – Transfer of
business – Amount is liable to be bifurcated and apportioned –
Attributed to the non- compete clause is revenue receipts and remaining was to
be treated as the capital receipt
taxable as capital gains.

The
assessee is a partnership firm. The assessee was engaged in the business as
custom house agent, as also an air cargo agent. The activities of the assessee
would involve assisting the clients in air freight, forwarding for export etc.
During the year, the assessee transferred its business of international cargo
to one DHL Danzar Lemuir Pvt Ltd (“DHL” for short) as a going concern
for consideration of Rs. 54.73 crore. The assessee offered such receipt to tax
as capital gain. The A O did not accept this stand of the assessee. He noticed
that in the deed of transfer of business, there was a clause that the assessee
would not involve into carrying on the same business. According to the A.O,
therefore, in view of such non-compete clause in the agreement, the receipt could
be the assessee’s income in terms of section 28(va) of the Act and
consequentially taxable under the head ‘Profits and Gains of Business and
Profession’.

The
assessee carried the matter in appeal. The CIT(A) was of the opinion that the
entire sum of Rs. 54.73 crore was not paid for non-compete agreement. He
apportioned the total consideration into two parts namely a sum of Rs. 4.5
crore was attributed to the non-compete clause, the rest i.e Rs. 50.23 crore
(after deducting costs) was treated as the assessee’s capital receipt taxable
as capital gains. On this apportionment, the CIT(A) arrived at after taking
into consideration the profit of the firm for last two years from said
business.

Revenue
carried the matter in appeal before the Tribunal. The Tribunal, by the impugned
judgment, upheld the view of the CIT(A) inter alia observing that the
assessee had under the agreement in question transferred the entire business
and the non-compete clause was merely consequent to the transfer of business.

Being aggrieved with the
ITAT order, the revenue filed an appeal to the High Court. The Court observed
that the entire sale consideration of Rs. 54.73 crore could never have been
attributed to the non-compete clause contained in such agreement. The CIT(A)
applied logical formula to arrive at the apportionment between the value for
the sale of business and of non-compete clause in the agreement. No perversity
is pointed out in this approach of the CIT(A). The assessee which was engaged
in highly specialised business, transferred the entire business for valuable
consideration. Non-compete clause in such agreement was merely a part of the
understanding between the parties. What purchaser received under such agreement
was entire business of the assessee along with non-compete assurance. We notice
that Clause (va) of section 28 pertains to any sum whether received or
receivable, in cash or kind, under an agreement, inter alia for not carrying
out any activity in relation to any business or profession. A non-compete agreement
would therefore fall in this clause. Proviso to said Clause (va), however,
provides that the said clause would not apply, to any sum whether received or
receivable, in cash or kind, on account of transfer of right to manufacture,
produce or process any article or thing or right to carry on any business or
profession which is chargeable under the head Capital Gains. The assessee’s
receipt attributable to the transfer of business was correctly taxed by the
CIT(A) as confirmed by the Tribunal as giving rise to capital gain. It was only
residual element of receipt relatable to the non-compete agreement which was
brought within fold of Clause (va) of section 28 of the Act. In the result, the
appeal was dismissed.

shailesh.kwebmaker

Section 68 – Cash credits – Share application money – Identity, genuineness of transaction and creditworthiness of persons from whom assessee received funds – Allegation by AO about evasion of tax without any supporting evidence, is not justified.

1. 1.
The Pr. CIT-1 vs. Pushti
Consultants Pvt Ltd [Income tax Appeal no 1332 of 2016 Dated: 6^th February, 2019 (Bombay High Court)].

[Pushti
Consultants Pvt Ltd vs. DCIT-1(2); dated 23^rd March, 2015 ; ITA. No
4963/Mum/2012, AY 2008-09, Bench : C , Mum.
ITAT ]

Section
68 – Cash credits – Share application money – Identity, genuineness of
transaction and creditworthiness of persons from whom assessee received funds –
Allegation by AO about evasion of tax
without any supporting evidence, is not justified.

During
the course of the scrutiny proceedings, the A.O noticed that the assessee had
received share application money of Rs. 2.20 crore during the year under
assessment. The assessee substantiated its claim of share application money of
Rs. 2.20 crore received from Speed Trade Securities Pvt Ltd (“STSPL”
for short) by filing Board resolution and a letter from STSPL. The assessee
also filed details consequent to the summons issued u/s. 131 of the Act to the
director of STSPL. However, the A.O was not convinced with the same on the
ground that the board resolution of STSPL mentions that it will pay 50% of the
share application money i.e Rs. 2.20 crore and if the balance 50% of share
application money is not paid before 30.9.2008, the amount paid as share application
money will stand forfeited by the assessee. The A.O noted that STSPL has
sufficient funds to the extent of Rs. 14.33 crore available with it on
31.3.2009 (the extended period within which the balance amount of the share
application money has to be paid). In spite of having such huge funds at its
disposal, STSPL has allowed its investment to go in waste and claim loss in its
profit and loss account.

The A.O held that the
entire act of obtaining share application money and having it forfeited was an attempt
to evade tax. Thus, AO came to the conclusion that the share application money
was in fact the assessee’s own funds which were introduced under the garb of
share application money. Therefore,made an addition of Rs. 2.20 crore to
assessee’s income.

Being
aggrieved by the order of the A.O, the assessee filed an appeal to the CIT(A).
The CIT(A) dismissed the appeal upholding the view of the A.O and inter alia
placing reliance upon a decision of the Apex Court in the case of McDowell
& Co Ltd vs. Commercial Tax Officer1 (1985) 154 ITR 148 (SC) as being
applicable to the facts of this case,
thus, dismissing the assessee’s appeal.

On
further appeal of the assessee, the Tribunal held that the evidence on record
established the identity, capacity and genuineness of the share application
money received from STSPL. This is on the basis of the fact that the amounts
were received through proper banking channels, the ledger accounts, bank
statement and audited annual accounts of STSPL were also submitted which
supported the case of the assessee. Further the valuation report/certificate of
a Chartered Accountant to the effect that the valuation of shares would be Rs.
20.83 per share and therefore, the receipt of share application money at the aggregate
price of Rs. 20 i.e Rs. 10 as face value and Rs. 10 as premium was perfectly in
order. It also recorded the fact that the application money had been paid by
STSPL by selling its own investments/shares in the stock exchange through its
broker Satco Securities and Financial Ltd (Satco) and had received the money
from Satco for sale of its investments/shares. The statement of Bank of Baroda,
the banker of Satco reflected the payments to STSPL for sale of its own
investments/shares of stock exchange was also produced. In the aforesaid view,
the impugned order held that the investment of Rs. 2.20 crore by STSPL on the
basis of evidence on record was established, as the identity, capacity and
genuineness stood proved. In the above view, the impugned order allowed the
assessee’s appeal.

Being
aggrieved with the ITAT order, the Revenue filed an appeal to the High Court.
The Court held that the assessee has gone beyond the requirement of the law as
existing in the subject assessment year 2008-09 by having explained the source
in terms of section 68 of the Act. Besides, the reliance by the CIT (A) on the
decision of McDowell (supra) is not applicable to the facts of the
present case. The Apex Court in decisions in the cases of Union of India
& Anr. vs. Azadi Bachao Andolan &
Anr2 and Vodafone International Holdings 2 (2003) 263 ITR 706
(SC) B.V. vs. Union of India & Anr.3 also held that principles laid
down in the case of McDowell (supra) is not applicable across the board
to discard an act which is valid in law upon some hypothetical assessment of
the real motive of the assessee. Thus, imputing a plan on the part of the
assessee and STSPL to evade tax without any supporting evidence in the face of
the detailed facts recorded by the impugned order of the Tribunal, is not
justified. We find that the impugned order of the Tribunal being essentially a
finding of fact which is not shown to be perverse does not give rise to any
substantial of law. Hence, not entertained. Accordingly, the appeal is
dismissed.

shailesh.kwebmaker

Section 40A(2)(b) and 92BA – Specified domestic transactions – Determination of arm’s length price – Meaning of “specified domestic transactions” – Section 92BA applies to transactions between assessee and a person referred to in section 40A(2)(b) – Assessee having substantial interest in company with whom it has transactions – Beneficial ownership of shares does not include indirect shareholding – Amount paid to acquire asset – Not an expenditure covered by section 40A(2)(b)

6.
HDFC Bank Ltd. vs. ACIT; 410
ITR 247 (Bom): Date of order: 20^th December, 2018 A. Y.: 2014-15

Section
40A(2)(b) and 92BA – Specified domestic transactions – Determination of arm’s
length price – Meaning of “specified domestic transactions” – Section 92BA
applies to transactions between assessee and a person referred to in section
40A(2)(b) – Assessee having substantial interest in company with whom it has
transactions – Beneficial ownership of shares does not include indirect
shareholding – Amount paid to acquire asset – Not an expenditure covered by
section 40A(2)(b)

By an
order dated 29/12/2016, the Assessing Officer held that three transactions were
specific domestic transactions and referred the case to the Transfer Pricing
Officer for determining arms length price. The three transactions were, loans
of Rs. 5,164 crore purchased by the assessee from the promoters (HDFC) and
loans of Rs. 27.72 crore purchased from the subsidiaries, payment of Rs. 492.50
crore by the assessee to HBL for rendering services and payment of interest of
Rs. 4.41 crore by the assessee to HDB trust. The assessee filed a writ petition
and challenged the order.

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

“i) The assessee purchased the
loans of HDFC of more than Rs. 5,000 crore. HDFC admittedly held 16.39% of the
shareholdings in the assessee. If one were to go merely by this figure of 16.39% then, on a plain
reading of section 40A(2)(b)(iv) read with Explanation (a) thereto, HDFC would
not be a person who would have a substantial interest in the assessee. However,
the Revenue contended that the requirement of Explanation (a) of having more
than 20% of voting power is clearly established in the case because HDFC held
100% of the shareholding in another
company which in turn held 6.25% of shareholding in the assesee. When one
clubbed the shareholding of HDFC of 16.39% with the shareholding of the other
company of 6.25%( and which was a wholly owned subsidiary of HDFC) the
threshold of 20% as required under Explanation (a) to section 40A(2)(b) was
clearly crossed.

ii) HDFC on its own was not the
beneficial owner of shares carrying at least 20% of the voting power as
required under Explanation (a) to section 40A(2)(b). The Revenue was incorrect
in trying to club the shareholding of the subsidiary with the shareholding of
HDFC, in the assessee, to cross the threshold of 20% as required in Explanation
(a) to section 40A(2)(b). HDFC did not have a substantial interest in the
assesee, and therefore, was not a person contemplated u/s. 40A(2)(b)(iv) for
the present transaction to fall within the meaning of a specified domestic
transaction as set out in section 92BA(i).

iii) Moreover the assessee had
purchased the loans of HDFC. This was a
purchase of an asset. This transaction
of purchase of loans by the assessee from HDFC would not fall within the
meaning of a specified domestic transaction.

iv) As far as the second
transaction was concerned, the assessee held 29% of the shares in ADFC. In
turn, ADFC held 94% of the shares in HBL. The assessee held no shares in HBL.
The assessee could not be regarded as having a substantial interest in HBL.

v) It was not the case of the
Revenue that the assessee was entitled to at least 20% of the profits of the
trust. The trust had been set up exclusively for the welfare of its employees
and there was no question of the assessee being entitled to 20% of the profits
of such trust. This being the case, this transaction clearly would not fall
within 40A(2)(b) read with Explanation (b) thereto to be a specific domestic
transaction as understood and covered by section 92BA(i).

vi) None of the three
transactions that formed the subject matter of this petition fell within the
meaning of a specified domestic transaction as required u/s. 92BA(i) of the
Income-tax Act. This being the case, the Assessing Officer was clearly in error
in concluding that these transactions were specified domestic transactions and
therefore required to be disclosed by the assessee by filing form 3CEB. He
therefore could not have referred these transactions to the Transfer Pricing
Officer for determining the arms length price.”

shailesh.kwebmaker

Sections 69 and 147 – Reassessment – Where Assessing Officer issued a reopening notice on ground that assessee had made transactions of huge amount in national/multi commodity exchange but he had not filed his return of income and assessee filed an objection that he had earned no income out of trading in commodity exchange and he had actually suffered loss and, therefore, he had not filed return of income. Since, Assessing Officer had not looked into objections raised by assessee and proceeded ahead, impugned reassessment notice was unjustified

5.
Mohanlal Champalal Jain vs.
ITO; [2019] 102 taxmann.com 293 (Bom): Date of order: 31^st January, 2019 A. Y.: 2011-12

Sections
69 and 147 – Reassessment – Where Assessing Officer issued a reopening notice
on ground that assessee had made transactions of huge amount in national/multi
commodity exchange but he had not filed his return of income and assessee filed
an objection that he had earned no income out of trading in commodity exchange
and he had actually suffered loss and, therefore, he had not filed return of
income. Since, Assessing Officer had not looked into objections raised by
assessee and proceeded ahead, impugned reassessment notice was unjustified

The
assessee, an individual was engaged in trading in commodity exchange. On the
premise that he had no taxable income, the assessee had not filed return of
income for the relevant assessment year. An information was received by the
Assessing Officer that as per NMS data and its details the assessee had made
transactions of Rs. 18.82 crore in national /multi commodity exchange. Further,
it was seen that the assessee had not filed his return of income. The Assessing
Officer concluded that profit/gain on commodity exchange remained unexplained
and also the source of investment in these transactions remains unexplained.
Therefore, the income chargeable to tax had escaped assessment within the
meaning of provisions of section 147 as no return of income has been filed by
the assessee.

The
assessee raised an objection that he had earned no income out of trading in
commodity exchange. He pointed out that the assessee’s sales turnover was Rs.
16.82 crore (rounded off) and he actually suffered a loss of Rs. 1.61 crore.
The Assessing Officer, however, rejected the objections. With respect to the
assessee’s contention of no taxable income, he stated that the same would be
subject to verification and further inquiry.

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

“i) The Assessing Officer has
proceeded on wrong premise that even when called upon to state why the
petitioner had not filed return of income, he had not responded to the said
query. The petitioner did communicate to the department that he had no taxable
income and therefore, there was no requirement to file the return. The
Assessing Officer did not carry out any further inquiry before issuing the
impugned notice. In the reasons, one more error pointed out by the petitioner
is that the Assessing Officer referred to the sum of Rs. 18.82 crore as total
transaction in the commodities. In the petition as well as in the objections
raised before the Assessing Officer, the petitioner pointed out that his sales
were to the tune of Rs.16.82 crore against purchases of Rs. 16.84 crore and
thereby, he had actually suffered a loss.

ii) The Assessing Officer has not
discarded these assertions. Importantly, if the Assessing Officer had access to
the petitioner’s sales in commodities, he could as well have gathered the
information of his purchases. Either on his own or by calling upon the
petitioner to provide such details, the Assessing Officer could and ought to
have verified at least prima facie that the income in the hands of the
petitioner chargeable to tax had escaped assessment. In the present case, what
the Assessing Officer aiming to do so is to carry out fishing inquiry. In fact,
even when the assessee brought such facts and figures to his notice, the
Assessing Officer refused to look into it.

iii) In the result, the impugned
notice is quashed and set aside.”

shailesh.kwebmaker

Sections 12AA, 147 and 148 – Charitable Trust – Cancellation of registration – Section 12AA amended in 2004 enabling cancellation of registration is not retrospective – Cancellation cannot be made with retrospective effect Reassessment – Notice u/s. 148 consequent to cancellation of registration – No allegation of fraud – Notice not valid

4.
Auro Lab vs. ITO; 411 ITR
308 (Mad): Date of order: 23^rd January, 2019 A. Ys.: 2004-05 to 2007-08

Sections 12AA, 147 and 148 – Charitable Trust –
Cancellation of registration – Section
12AA amended in 2004 enabling cancellation of registration is not retrospective
– Cancellation cannot be made with retrospective effect

Reassessment – Notice u/s. 148 consequent to cancellation
of registration – No allegation of fraud – Notice not valid

The
assessee, a charitable trust, was granted registration by the Commissioner u/s.
12A of the Income-tax Act, 1961, as it stood prior to the year 1996 with
medical relief as the main object of the trust. The returns of income were
assessed periodically by the Department and assessment orders passed year after
year until the amendment to section 12AA
was introduced to specifically to empower the proper officer to cancel the
registration granted under the erstwhile section 12A of the Act. Subsequent to
the amendment, by an order dated 30/12/2010, the registration granted to the
assessee was cancelled on the allegation that the assessee failed to fulfil the
conditions required for enjoying the exemption available to the assessee
registered u/s. 12A. The Tribunal upheld the cancellation. Assessee preferred
appeal to the High Court which was pending. In the meanwhile, the Assessing
officer issued notices u/s. 148 of the Act and reopened the assessments for the
A. Ys. 2004-05 to 2007-08. The assessee’s objections were rejected. The
assessee filed writ petitions and challenged the validity of reopening.

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

“i) Until 2004, when section 12AA of the
Income-tax act 1961 was amended, there was no power under the Act to the
Commissioner or any other authority to revoke or cancel the registration once
granted to charitable trusts. Later, on June 1, 2010, by the Finance Act, 2010,
section 12AA(3) was further amended to include specifically registration
granted under the erstwhile section 12A of the Act also within the ambit of
revocation or cancellation as contemplated u/s. 2004 amendment.

ii) The powers of the Commissioner u/s. 12AA are
neither legislative nor executive but are essentially quasi-judicial in nature
and, therefore, section 21 of the General Clauses Act is not applicable to
orders passed by the Commissioner u/s. 12AA. Section 12AA(3) is prospective and
not retrospective in character. The cancellation of registration will take
effect only from the date of the order or notice of cancellation of
registration.

iii) The cancellation of the registration would
operate only from the date of the cancellation order, that is December 30,
2010. In other words, the exemption u/s. 11 could not be denied to the assessee
for and upto the A. Y. 2010-11 on the sole ground of cancellation of the
certificate of the registration.

iv) Unless the assessee had obtained registration
by fraud, collusion or concealment of any material fact, the registration
granted could never be alleged to be a nullity. It was evident that fact of the
cancellation of the registration triggered the reassessment proceedings and
evidently formed the preamble of each of the orders. And clearly, there was no
allegation of fraud or misdeclaration on the part of the assessee and the
Department was candid in confessing that the certificate was granted
erroneously. Therefore, reopening the assessment for the past years on account
of the cancellation order dated December
30, 2010, in the case of the assessee by the Assessing Officer was not permissible under the law and the
proceedings relating to the A. Ys. 2004-05 to 2007-08 were liable to be
quashed. Also, the assessment order relating to the A. Y. 2010-11 disallowing
exemption on the basis of cancellation order dated December 30, 2010, was
liable to be quashed.”

shailesh.kwebmaker

Section 68 – Cash credits – Capital gain or business income – Profits from sale of shares – Genuineness of purchase accepted by Department – Profits from sale cannot be treated as unexplained cash credits – Profit from sale of shares to be taxed as short/long term capital gains

3.
Principal CIT vs. Ramniwas
Ramjivan Kasat; 410 ITR 540 (Guj):Date of order: 5^th June, 2017 A. Y.: 2006-07

Section
68 – Cash credits – Capital gain or business income – Profits from sale of
shares – Genuineness of purchase accepted by Department – Profits from sale
cannot be treated as unexplained cash credits – Profit from sale of shares to
be taxed as short/long term capital gains

For the A.
Y. 2006-07, the Assessing Officer made additions to the income of the assessee
u/s. 68 of the Income-tax Act, 1961 on the ground that the assessee had sold
certain shares and the purchasers were found to be bogus. The second issue
was in respect of the treatment of the
income earned by the assesse on the sale of shares. The assesse contended that
the shares were in the nature of his investment and the income earned to be
treated as long term capital gains. The Department contended that looking to
the pattern of holding the shares, the frequency of transactions and other
relevant considerations, the assessee was trading in shares and the income was
to be taxed as business income.

The
Commissioner (Appeals) dismissed the appeal filed by the assessee. The Tribunal
found that the purchase of the shares was made during the month of April, 2004
and they were sold in the months of May, June and July, 2005, that the
purchases thus made during the Financial Year 2004-05 had been accepted in the
relevant A. Y. 2005-06 and that in the assessment made u/s. 143(3) r.w.s. 147
the purchases of the shares were accepted as genuine. The Tribunal therefore
held that no additions could have been made u/s. 68 when the shares were in the
later years sold and deleted the addition. On the second issue, the Tribunal
took the relevant facts into consideration and referred to the circular dated
29/02/2016, of the CBDT and held that the income was to be taxed as capital
gains, be it long term or short term, as the case might be, and not as business
income.

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

“i) Circular dated 29/02/2016, issued by the CBDT
provides that in respect of listed shares and securities held for a period of
more than 12 months immediately preceeding the date of their transfer, if the assessee
desires to treat the income arising from the transfer thereof as capital gains
that shall not be disputed by the Assessing Officer and the Department shall
not pursue the issue if the necessary ingredients are satisfied, the only rider
being that the stand taken by the assessee in a particular year would be
followed in the subsequent years also and the assessee would not be allowed to
adopt a contrary stand in such subsequent years.

ii) The circular dated 29/02/2016 applied to the
assessee. The Tribunal was right in deleting the addition made u/s. 68 upon
sale of shares when the Department had accepted the purchases of the shares in
question as genuine and in holding that the share transaction as investment and
directing the Assessing Officer to treat the sum as short/long term capital
gains and not business income.”

shailesh.kwebmaker

Bank – Valuation of closing stock – Securities held to maturity – Constitute stock-in-trade – Valuation at lower of cost or market value – Proper – Classification in accordance with Reserve Bank of India guidelines – Not relevant for purposes of income chargeable to tax

2.
Principal CIT vs. Bank of
Maharashtra; 410 ITR 413 (Bom): Date of order: 27^th February, 2018 A. Y.: 2005-06

Bank – Valuation
of closing stock – Securities held to maturity – Constitute stock-in-trade –
Valuation at lower of cost or market value – Proper – Classification in
accordance with Reserve Bank of India guidelines – Not relevant for purposes of
income chargeable to tax

The
assessee claimed that the held-to-maturity securities constituted
stock-in-trade and were to be valued at cost or market value whichever was
less. The Assessing Officer disallowed the claim on the ground that the
assessee had shown the value at cost for earlier assessment years and therefore
it could not change the valuation. The Commissioner upheld the decision of the
Assessing Officer. The Tribunal held that irrespective of the basis adopted for
valuation in earlier years, the assessee had the option to change the method of
valuation of its closing stock to the lower of cost or market value provided
the change was bonafide and followed regularly thereafter, that the
held-to-maturity securities were held by the assessee as stock-in-trade and that
the receipts therefrom were business income.

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

“The order
of the Tribunal to the effect that the securities held to maturity were
stock-in-trade and the income on sales had been offered to tax as business
income, was correct. Merely because the Reserve Bank of India guidelines
directed a particular treatment to be given to a particular asset that would
not necessarily hold good for the purposes of income chargeable to tax.”

shailesh.kwebmaker

Section 260A – Appeal to High Court – Power of High Court to condone delay in filing appeal – Delay in filing appeal by Revenue – General principles – No reasonable explanation for delay – Delay cannot be condoned

1. CIT vs. Lata Mangeshkar
Medical Foundation; 410 ITR 347 (Bom): Date of order: 1^st
March, 2018 A. Ys.: 2008-09 and 2009-10

Section
260A – Appeal to High Court – Power of High Court to condone delay in filing
appeal – Delay in filing appeal by Revenue – General principles – No reasonable
explanation for delay – Delay cannot be condoned

Revenue
filed notice of motion for condonation of delay of 318 days in filing appeal.
The Bombay High Court dismissed the notice of motion and held as under:

“i) Section 260A(2A) of the Income-tax Act, 1961
allows the Court to admit an appeal beyond the period of limitation, if it is
satisfied that there was sufficient cause for not filing the appeal in time. It
cannot be accepted that in appeal by the Revenue, the delay has to be condoned,
if large amounts are involved, on payment of costs. Each case for condonation
of delay would have to be decided on the basis of the explanation offered for
the delay, i.e., is it bona fide or not, concocted or not or does it evidence
negligence or not. The object of the law of limitation is to bring certainty
and finality to litigation. This is based on the maxim “interest reipublicae ut
sit finis litium”, i.e., for the general benefit of the community at large,
because the object is every legal remedy must be alive for a legislatively
fixed period of time. Therefore, merely because the respondent does not appear,
it cannot follow that the applicant is bestowed with a right to the delay being
condoned. The officers of the Revenue should be well aware of the statutory
provisions and the period of limitation and should pursue its remedies
diligently.

ii) There was no proper explanation for the delay
on the part of the applicant. In fact, the affidavit dated 16/09/2017 stated
that, the applicant handed over the papers to his subordinate, i.e., the Deputy
Commissioner. This was also put in as one of the reasons for the delay. This
even though they appeared to be a part of the same office. In any case, the
date on which it was handed over to the Deputy Commissioner was not indicated.
Further, the affidavit dated 16/09/2017 also did not explain the period of time
during which the proposal was pending before the Chief Commissioner of
Income-tax, Delhi for approval. The Chief Commissioner of Income-tax was also
an officer of the Department and there was no explanation offered by the Chief
Commissioner at Delhi or on his behalf, as to why such a long time was taken in
approving the proposal. In fact, there was no attempt to explain it. The
applicant being a senior officer of the Revenue would undoubtedly be conscious
of the fact that the time to file the
appeal was running against the Revenue and there must be an averment in the application
of the steps he was taking to expedite the approval process. Further, there was
no proper explanation for the delay after having received the approval from the
Chief Commissioner at Delhi on May 29, 2017. No explanation was offered in the
affidavits dated 16/09/2017 and for having filed the appeal on July 20, 2017,
i.e., almost after two months. The delay could not be condoned.”

shailesh.kwebmaker

Section 2(15) r.w.s. 10(23C) – Where assessee was conducting various skill training programmes for students to get placement, activities would fall within definition of education u/s. 2(15), thus entitling it for exemption u/s. 10(23C)(iiiab)

22 [2019] 199 TTJ (Del) 922 Process-cum-Product
Development Centre vs. Additional CIT ITA No. 3401 to
3403/Del/2017 A.Y.s: 2010-11 to 2013-14 Date of order: 4^th
February, 2019

Section 2(15) r.w.s.
10(23C) – Where assessee was conducting various skill training programmes for
students to get placement, activities would fall within definition of education
u/s. 2(15), thus entitling it for exemption u/s. 10(23C)(iiiab)

FACTS

The assessee society was engaged in imparting education
and in the same process trained students by sending them to sports industries,
etc. It conducted various short-duration training programmes of computer
training, training in Computer Accounting System, cricket bat manufacturing,
carom board manufacturing, training in R/P workshop, wood workshop, etc. The
assessee got raw material from industries and after manufacturing the goods
through its trainees, returned the finished goods after receiving its job charges.
The assessee claimed exemption u/s. 10(23C)(iiiab). The AO declined the
exemption on the ground that the assessee did not exist solely for educational
purposes.

Aggrieved, the assessee preferred an appeal to the CIT(A).
The CIT(A) also declined the exemption and recorded further in his order that
the issue of charitable activities of the assessee society being of charitable
nature was not relevant in the instant case as the assessee was yet to be
registered u/s. 12AA.

HELD

The Tribunal held that the main objects of the assessee
society were to be examined. The AO had relied upon the decision rendered by
the Supreme Court in the case of Sole Trustee Loka Shikshak Trust vs. CIT
[1975] 101 ITR 234 wherein the word ‘education’ as referred in section
2(15) was explained. The Supreme Court had categorically held that ‘education’
connoted the process of training and developing the knowledge, skill, mind and
character of students by normal schooling.

When the training imparted to the students was not to
produce goods of world standard by doing necessary marketing research and by
identifying products for domestic and export market, such training would be of
no use and the students who had been given training would not be in a position
to get placement. Examination of the audited income and expenditure account of
the assessee society showed that substantial income was from training courses
and there was a minuscule income from job receipts.

The
assessee society was admittedly getting raw material from various industries to
produce sport goods for them and the job charges paid by them were again used
for running the training institute, therefore it could not be said by any
stretch of the imagination that the assessee society was not being run for
educational / training purpose. The word ‘education’ was to be given wide
interpretation which included training and developing the knowledge, skill,
mind and character of the students by normal schooling. So, the assessee
society was engaged in imparting training to the students in manufacturing
sport goods and leisure equipments without any profit motive.

Further,
the exemption sought for by the assessee society u/s. 10(23C)(iiiab) was
independent of exemption being sought by the assessee u/s. 12AA. So, the
exemption u/s. 10(23C)(iiiab) could not be declined on the ground that
registration u/s. 12A had been rejected. The assessee society, substantially
financed by the Government of India, was engaged only in imparting
research-based education / skill training to the students in manufacturing of
sports goods and leisure equipments without any profit motive, to enable them
to get placement; this fell within the definition of education u/s. 2(15),
hence it was entitled for exemption u/s. 10(23C)(iiiab).

shailesh.kwebmaker

Section 148 – Mere reliance on information received from Investigation Wing without application of mind cannot be construed to be reasons for reopening assessment u/s. 148

21 [2019] 70 ITR (Trib.) 211
(Delhi) M/s. Key Components (P) Ltd.
vs. the Income Tax Officer ITA. No.366/Del./2016 A.Y.: 2005-2006 Date of order: 12^th
February, 2019

Section 148 – Mere
reliance on information received from Investigation Wing without application of
mind cannot be construed to be reasons for reopening assessment u/s. 148

FACTS

The assessee’s case was reopened on the basis of
information received from the Investigation Wing of the Income-tax Department
that the assessee company has taken accommodation entries. The assessee
objected to the reopening; however, the AO completed the assessment after
making an addition of undisclosed income on account of issue of share capital.
The assessee challenged the reopening of the assessment as well as the addition
on merits before the Commissioner (Appeals). The CIT(A), however, dismissed the
appeal of the assessee on both grounds. Aggrieved, the assessee preferred an
appeal on the same grounds to the Tribunal.

HELD

The
Tribunal observed that in this case the AO has merely reproduced the
information which he received from the Investigation Wing, in the reasons
recorded u/s. 148 of the Act. He has neither gone through the details of the
information nor has he applied his mind and merely concluded that the
transaction SEEMS not to be genuine, which indicates that he has not recorded
his satisfaction. These reasons are, therefore, not in fact reasons but only
his conclusion, that, too, without any basis. The AO has not brought anything
on record on the basis of which any nexus could have been established between
the material and the escapement of income. The reasons fail to demonstrate the
link between the alleged tangible material and formation of the reason to
believe that income has escaped assessment, the very basis that enables an
officer to assume jurisdiction u/s. 147.

The
Tribunal remarked, “Who is the accommodation entry giver is not mentioned. How
can he be said to be ‘a known entry operator’ is even more mysterious.”

In
coming to the conclusion, the Tribunal discussed the following decisions at
length:

1. Pr. CIT vs. Meenakshi Overseas Pvt. Ltd. [395
ITR 677] (Del.)

2. Pr. CIT vs. G&G Pharma India Ltd. (2016)
[384 ITR 147] (Del.)

3. Pr. CIT vs. RMG Polyvinyl (I) Ltd. (2017)
[396 ITR 5] (Del.)

4. M/s. MRY Auto Components Ltd. vs. ITO – ITA.
No. 2418/Del./2014, dated 15.09.2017

5. Signature Hotels Pvt. Ltd. vs. Income-tax
Officer Writ Petition (Civil) No. 8067/2010 (HC)

6. CIT vs. Independent Media Pvt. Limited – ITA
No. 456/2011 (HC)

7. Oriental Insurance Company Limited vs.
Commissioner of Income-tax [378 ITR 421] (Del.)

8. Rustagi Engineering Udyog (P) Limited vs.
DCIT W.P. (C) 1293/1999 (HC)

9. Agya Ram vs. CIT – ITA No. 290/2004 (Del.)

10. Rajiv Agarwal vs. CIT W.P. (C) No. 9659 of
2015 (Del.)

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Section 234E – In case of default in filing TDS statement for a period beyond 1st June, 2015, fees u/s. 234E cannot be levied for the period before 1st June, 2015

20 [2019] 70 ITR (Trib.) 188 (Jaipur) Shri Uttam Chand Gangwal vs.
The Asst. CIT, CPC (TDS), Ghaziabad ITA No. 764/JP/2017 A.Y.: 2015-16 Date of order: 23^rd
January, 2019

Section
234E – In case of default in filing TDS statement for a period beyond 1^st
June, 2015, fees u/s. 234E cannot be levied for the period before 1^st
June, 2015

FACTS

The assessee filed TDS statement in Form 26Q for Q4 of
F.Y. 2014-15 on 22^nd July, 2015 for which the due date was 15^th
May, 2015. The TDS statement was processed and the ACIT, TDS issued an
intimation dated 30^th July, 2015 u/s. 200A of the Act imposing a
late fee of Rs. 13,600 u/s. 234E of the Act for the delay in filing the TDS
statement. On appeal, the Learned CIT(A) confirmed the said levy. The assessee
therefore filed an appeal to the Tribunal.

HELD

The Tribunal observed that though the quarterly statement
pertains to the quarter ended 31^st March, 2015, the fact remains
that there is a continuing default even after 1^st June, 2015 and the
statement was actually filed on 22^nd July, 2015. It further observed
that an assessee who belatedly filed the TDS statement even though pertaining
to the period prior to 1^st June, 2015 cannot be absolved from levy
of late fee when there is a continuous default on his part even after that
date. The Tribunal, therefore, concluded that, irrespective of the period to
which the quarterly statement pertains, where the statement is filed after 1^st
June, 2015, the AO can levy fee u/s. 234E of the Act.

At the same time, in terms of determining the period for
which fees can be levied, the only saving could be that for the period of delay
falling prior to 1^st June, 2015, there could not be any levy of fees
as the assumption of jurisdiction to levy such fees has been held by the Courts
to be prospective in nature. However, where the delay continues beyond 1^st
June, 2015, the AO is well within his jurisdiction to levy fees u/s. 234E for
the period starting 1^st June, 2015 to the date of actual filing of
the TDS statement. In the result, the Tribunal partly allowed the assessee’s
appeal by deleting fees for the period prior to 1^st June, 2015 and
confirmed the fees levied for the subsequent period.

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Section 154 – Non-consideration of decision of Jurisdictional High Court or of the Supreme Court can be termed as ?mistake apparent from the record’ which can be the subject matter of rectification application u/s. 154 even if not claimed earlier by the assessee during assessment proceedings or appellate proceedings

19 [2019] 71 ITR (Trib.) 141 (Mumbai) Sharda Cropchem Limited vs.
Dy. Comm. of Income Tax ITA No. 7219/Mum/2017 A.Y.: 2012-2013 Date of order: 14^th
February, 2019

Section 154 –
Non-consideration of decision of Jurisdictional High Court or of the Supreme
Court can be termed as ?mistake apparent from the record’ which can be the
subject matter of rectification application u/s. 154 even if not claimed
earlier by the assessee during assessment proceedings or appellate proceedings

FACTS

The assessee’s income was subject to assessment u/s. 143(3).
Additions were made u/s. 35D as also under other sections. The assessee did not
contest addition u/s. 35D but filed appeal against the other additions. In the
meanwhile, the assessee filed an application for rectification to allow the
expenditure on issue of bonus shares, in terms of decision of the Bombay High
Court in CIT vs. WMI Cranes Limited [326 ITR5 23] and the Supreme
Court in CIT vs. General Insurance Corporation [286 ITR 232].
However, the AO denied the rectification; consequently, the assessee appealed
to the Commissioner (Appeals) against the AO’s order rejecting his
rectification application. However, the assessee’s claim was rejected by the
Commissioner (Appeals) also. The assessee then filed an appeal to the Tribunal.

HELD

The Tribunal observed that the assessee moved
rectification petition u/s. 154 for the first time towards his claim u/s. 35D
relying upon the decision of the Hon’ble Supreme Court as well as the decision
of the jurisdictional High Court. The only basis on which the same was denied
by first appellate authority is the fact that there was no mistake apparent
from the record. The Tribunal considered the decision of the Supreme Court in ACIT
vs. Saurashtra Kutch Stock Exchange Ltd. [305 ITR 227]. It observed
that non-consideration of a decision of the Jurisdictional High Court or of the
Supreme Court could be termed as ‘mistake apparent from the record’.

The Tribunal also analysed the said facts from the angle
of constitutional authority – in terms of Article 265 of the Constitution of
India, no tax is to be levied or collected except by the authority of law. It
is trite law that true income is to be assessed and the Revenue could not
derive benefit out of the assessee’s ignorance or procedural defects. The
Tribunal finally allowed the appeal filed by the assessee considering the
principles of rectification pronounced in Saurashtra Kutch Stock Exchange
Ltd. (supra) and merits of the case as held in General Insurance
Corporation (supra).

shailesh.kwebmaker

Section 143 r.w.s. 148 – Failure to issue notice u/s. 143(2) of the Act after the assessee files the return of income renders the re-assessment order illegal and invalid

18 [2019] 105 taxmann.com 118
(Pune) ITO
(Exemptions) vs. S. M. Batha Education Trust ITA No. 2908/Pun/2016 A.Y.: 2012-13 Date of order: 4^th
April, 2019

Section 143 r.w.s.
148 – Failure to issue notice u/s. 143(2) of the Act after the assessee files
the return of income renders the re-assessment order illegal and invalid

FACTS

The AO issued a notice u/s. 148 of the Act dated 29^thSeptember, 2014 to the assessee, a trust engaged in educational
activities. The assessee neither replied to the notice nor filed its return of
income. Thereafter,
the AO issued two separate notices u/s. 143(2) of the Act on 29^th
April, 2015 and 1^st July, 2015. Subsequently, the assessee filed the
return of income on 21^st October, 2015.

The AO completed the assessment and passed a reassessment
order. Aggrieved, the assessee preferred an appeal to the CIT(A).

Revenue also preferred an appeal to the Tribunal. The
assessee filed cross-objections challenging the re-assessment proceedings to be
bad in law since no statutory notice u/s. 143(2) was issued by the AO after the
assessee filed the return of income. The Tribunal decided this jurisdictional
issue.

HELD

The Tribunal held that the AO is required to issue
statutory notice u/s. 143(2) of the Act after the assessee files the return of
income in response to notice issued u/s. 148 of the Act. In the absence of such
a statutory notice after return of income is filed by the assessee, the
re-assessment order made by the AO was held to be invalid and illegal.

The Tribunal dismissed the appeal filed by Revenue and
allowed this ground raised by the assessee in its cross-objections.

shailesh.kwebmaker

Section 69 – No addition u/s 69 could be made in year under consideration in respect of investment in immovable property made in earlier year(s)

27.
[2019] 200 TTJ (Del.) 375 Km. Preeti Singh vs. ITO ITA No. 6909/Del./2014 A.Y.: 2009-10 Date of order: 31^st October,
2018;

Section 69 – No addition u/s 69 could be
made in year under consideration in respect of investment in immovable property
made in earlier year(s)

FACTS

The AO made an
addition of Rs. 55.39 lakhs while completing the assessment, being the entire
amount of investment in immovable property. The aforesaid amount of Rs. 55.39
lakhs consisted of cost of property of Rs. 51.86 lakhs and stamp duty of Rs.
3.53 lakhs. The investment made by the assessee during the year under
consideration was only Rs. 12.58 lakhs. The remaining amount of investment was
made in the earlier year(s) for which no addition could be made in the year
under consideration. The assessee
submitted that the aforesaid investment of Rs. 12.58 lakhs during this
year included Rs. 6.05 lakhs by cheque out of the assessee’s bank account and a
payment of Rs. 6.53 lakhs made in cash. The assessee provided copies of the
accounts from the books of the builder from whom the property was purchased.
She also provided copies of statements of bank accounts. The assessee showed
that there were sufficient deposits in her bank accounts carried forward from
the earlier year to explain the source of the aforesaid cheques. The brought
forward opening balance at the beginning of the year in the bank accounts of
the assessee had accumulated over a period of time in the past few years.

On appeal, the CIT(A) upheld the addition of
Rs. 38.58 lakhs out of the aforesaid addition of Rs. 55.39 lakhs made by the
AO.

HELD

The Tribunal held that on perusal of section
4(1), it was obvious that in the year under consideration no addition could be
made in respect of investments in property made by the assessee in earlier
years or in respect of deposits in bank accounts of the assessee made in the
earlier year which was brought forward to this year for making cheque payments
of the aforesaid total amount of Rs. 6.05 lakhs. Moreover, certain amounts were
invested by the assessee and certain other amounts were deposited in the bank
account of the assessee in previous years relevant to earlier assessment years;
such investments or deposits could not possibly have been out of the income of
the previous year under consideration.

It is well settled that each year is a
separate and self-contained period. The income tax is annual in its structure
and organisation. Each ‘previous year’ is a distinct unit of time for the
purposes of assessment; further, the profits made and the liabilities of losses
made before or after the relevant previous year are immaterial in assessing the
income of a particular year. Even if certain income has escaped tax in the
relevant assessment year because of a devise adopted by the assessee or
otherwise, it does not entitle Revenue to assess the same as the income of any
subsequent year when the mistake becomes apparent.

In view of the
above, the AO was directed to delete the additions in respect of those amounts
which were invested by the assessee in earlier years, i.e., before previous
year 2008-09. Secondly, the AO was directed to delete the addition amounting to
Rs. 6.05 lakhs which was made by the assessee during the year under
consideration through cheque transactions from the bank account because, as
stated earlier, it was not disputed that the assessee had sufficient deposits
in her bank account at the beginning of the year to explain the source of the
aforesaid transactions by cheque. Thirdly, as far as investment aggregating to
Rs. 6.53 lakhs in cash was concerned, the matter was restored to the file of
the AO with the direction to pass a fresh order on merits on this limited issue
after considering the explanation of the assessee.

shailesh.kwebmaker

Section 37 – Lease rent paid for taking on lease infrastructure assets under a finance lease, which lease deed provided that the assessee would purchase them upon expiry of the lease period, was allowable as a deduction since the assets were used exclusively for the purpose of the business of the assessee

13 [2019] 112 taxmann.com 66 (Trib.)(Del.) NIIT Ltd. vs. DCIT (CPC – TDS) ITA No. 376/Del/2014 A.Y.: 2009-10 Date of order: 1^stNovember, 2019

Section 37 – Lease rent paid for taking on
lease infrastructure assets under a finance lease, which lease deed provided
that the assessee would purchase them upon expiry of the lease period, was
allowable as a deduction since the assets were used exclusively for the purpose
of the business of the assessee

FACTS

The assessee, a public limited company
engaged in the business of Information Technology Education and Knowledge
Solutions, filed its return of income on 29^th September, 2009
declaring Rs. 25.81 crores, which was processed u/s 143(1) of the I.T. Act,
1961. The assessee had taken certain infrastructure / movable assets on lease
which were located at three places, i.e., Malleswaram Centre, Bangalore;
Mehdipatnam Centre, Hyderabad; and Mylapore Centre, Chennai. The said lease, in
accordance with the mandatory prescription of AS-19, was recognised as a
finance lease. Accordingly, in the books of accounts, the present value of
future lease rentals was recognised as capital asset with a liability of
corresponding amount.

Lease rents payable over the period of the
lease were divided into two parts, i.e., (a) principal payment of its cost of
asset, which was reduced from the liability recognised in the books, and (b)
finance charges, which was recognised as expense and debited to the P&L
account. Accordingly, in the books of accounts, out of the total lease rent of
Rs. 56,73,765 paid by the assessee during the relevant previous year, an amount
of Rs. 50,09,835 was adjusted against the principal repayments towards the cost
of asset and the balance amount of Rs. 6,63,930 was recognised as interest and
debited to P&L account.

The AO noticed that in the return of income,
the assessee has claimed deduction of Rs. 50,09,835 in respect of payment of
principal amount of finance lease. The AO asked the assessee to explain as to
how this amount is allowable as revenue expenditure. After considering the
reply filed by the assessee, the AO held that though the interest on such
finance lease is allowable as revenue expenditure, payment of principal amount
cannot be allowed as revenue expenditure because it is capital expenditure in
nature in respect of the value of leased assets. The AO, following the order of
ITAT, Delhi Bench in the case of Rio Tinto India (P) Ltd. vs. Asstt. CIT
[2012] 24 taxmann.com 124/52 SOT 629 disallowed the deduction claimed
by the assessee on account of principal amount of finance lease.

Aggrieved, the assessee preferred an appeal
to the CIT(A) who dismissed the appeal by relying on the decision of the
Tribunal in the case of Rio Tinto India (P) Ltd. (Supra).

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal noted that it is pursuant to
lease agreements dated 1^st September, 2006, 1^st April,
2008 and 1^stJune, 2009 that the assessee was provided
infrastructure assets on lease. The assets provided on lease and also the terms
and conditions for granting lease have been recorded in these agreements. The
agreements provided that after termination, the assessee would buy the
infrastructure assets. It observed that the infrastructure assets are required
for the purpose of business of the assessee. Therefore, the assessee paid finance
lease rentals to the lessor for the purpose of business. Thus, the assessee is
not the owner of these infrastructure facilities provided on rent.

It also noted that a similar claim of the
assessee on the basis of the same agreements have been allowed in favour of the
assessee in preceding A.Ys. 2007-08 and 2008-09 in the scrutiny assessments u/s
143(3) of the I.T. Act, 1961. In A.Ys.
2012-13 and 2014-15 also, the Tribunal has allowed the claim of the assessee of
a similar nature vide order dated 26^th July, 2019.

The Tribunal held that –

(i) it is a well-settled law that rule of
consistency does apply to the income tax proceedings. Therefore, the AO should
not have taken a different view in the assessment year under appeal, when
similar claims of the assessee have been allowed as revenue expenditure in
earlier years;

(ii) since the assessee used these items wholly and
exclusively for the purpose of business and was not the owner of the same,
therefore, the assessee rightly claimed the same as revenue expenditure and
rightly claimed the deduction of the same;

(iii) it is also well settled law that the liability
under the Act is governed by the provisions of the Act and is not dependent on
the treatment followed for the same in the books of accounts;

(iv) Further, it is also well settled that
whether the assessee was entitled to a particular deduction or not would depend
upon the provisions of law relating thereto, and not on the view which the
assessee might take of his right, nor could the existence or absence of entries
in the books of accounts be decisive or conclusive in the matter.

The Tribunal set aside the orders of the
authorities below and deleted the entire addition. The appeal filed by the
assessee was allowed.

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Special Deduction u/s 80-IA – Infrastructure facility – Transferee or contractor approved and recognised by authority and undertaking development of infrastructure facility or operating or maintaining it eligible for deduction – Assessee maintaining and operating railway siding under agreement with principal contractor who had entered into agreement with Railways and recognised by Railways as transferee – Assessee entitled to benefit of special deduction

43. CIT vs. Chettinad Lignite Transport Services Pvt. Ltd.; [2019] 415
ITR 107 (Mad.) Date of order: 12^th March, 2019; A.Y.: 2006-07

Special Deduction u/s 80-IA – Infrastructure facility – Transferee or
contractor approved and recognised by authority and undertaking development of
infrastructure facility or operating or maintaining it eligible for deduction –
Assessee maintaining and operating railway siding under agreement with principal
contractor who had entered into agreement with Railways and recognised by
Railways as transferee – Assessee entitled to benefit of special deduction

For the A.Y. 2006-07, the AO denied the assessee
the benefit u/s 80-IA of the Income-tax Act, 1961 on the ground that the
assessee itself did not enter into a contract with the Railways or with the
Central Government and did not satisfy the requirement u/s 80-IA(4).

The Tribunal found that though the assessee had
only an agreement with the principal contractor who had entered into an
agreement with the Railway authorities to put up rail tracks, sidings, etc.,
the Railways had recognised the assessee as a contractor. The Tribunal held
that impliedly the Department had accepted the fact that the assessee had
provided ‘infrastructure facility’ to the specified authority, to maintain a
rail system by operating and maintaining such infrastructure facility as
defined, and that the assessee performed the contract according to the terms
agreed upon, that the services rendered by the assessee were an integral and
inseparable part of the operation and maintenance of a lignite transport
system, and that the assessee’s claim that it had complied with the requisite
condition specified under the proviso and was entitled to deduction u/s 80-IA
in terms of the proviso to sub-section (4) had to be accepted.

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

‘i) The term
“infrastructure facility” has been defined in the Explanation to section 80-IA
and it includes a toll road, a bridge or a rail system, a highway project,
etc., which are big infrastructure facilities for which the enterprises have
entered into a contract with the Central Government or the State Government or
local authority. The proviso to section 80-IA(4) extends the benefit of such
deduction even to a transferee or a contractor who is approved and recognised
by the concerned authority and undertakes the work of development of the
infrastructure facility or only operating and maintaining it. The proviso to
sub-section (4) stipulates that subject to the fulfilment of the conditions,
the transferee will be entitled to such benefit, as if the transfer in question
had not taken place.

ii) The
Tribunal had rightly applied the proviso to section 80-IA(4) and had held that
the assessee was recognised as a contractor for the railway sidings, which fell
under the definition of “infrastructure facility” and that it was entitled to
the benefit u/s 80-IA. It had also rightly held that the proviso did not
require that there should be a direct agreement between the transferee
enterprise and the specified authority to avail the benefit u/s 80-IA.

iii) There
was no dispute that the assessee was duly recognised as a transferee or
assignee of the principal contractor and was duly so recognised by the Railways
to operate and maintain the railway sidings in the two railway stations. It has
been found by the AO himself that the assessee under an agreement with the
principal contractor had undertaken the work of development of the railway
sidings and had operated and maintained them.

iv) The
findings of fact with regard to such position recorded by the Tribunal were
unassailable and that attracted the first proviso to section 80-IA(4). The
grounds on which the assessing authority had denied the benefit to the assessee
ignoring the effect of the proviso to section 80-IA(4) could not be sustained.’

shailesh.kwebmaker

SECTION 115BAA AND 115BAB – AN ANALYSIS

INTRODUCTION

Finance Minister Nirmala Sitharaman presented her maiden Budget in the
backdrop of a significant economic slowdown which is now threatening to turn
into a recession. The Budget and the Finance Act passed thereafter did not
reduce the tax rates which many expected. In fact, the surcharge on individuals
was increased significantly, reversing the trend of a gradual reduction in
taxes in earlier Budgets. The increase was criticised and it was felt that the
high level of taxes would have a negative impact on the investment climate in
the country. Responding to the situation, the government issued the Taxation
Laws (Amendment) Ordinance, 2019 which seeks to give relief to corporates and a
fillip to the economy.

This article analyses the various issues in the two principal provisions
in the Ordinance. In writing this article I am using inputs from Bhadresh
Doshi, my professional colleague who spoke on the topic on the BCAS
platform a few days ago.

As I write this article, the Ordinance has been converted into a Bill. I
have considered the amendments made in the Bill while placing it before
Parliament. However, during its passage in Parliament, the said Bill may
further be amended. The article therefore should be read with this caveat.

SECTION 115BAA

The new provision 115BAA(1) provides that

(a) notwithstanding anything contained in the other provisions of the
Income-tax Act

(b) income tax payable by

(d) for A.Y. 2020-21 onwards

(e) shall at the option of
the company

(f) be computed at the rate
of 22% if conditions set out in sub-section (2) are satisfied

The proviso to this sub-section stipulates that in the event the company
opting for the lower rate violates any condition prescribed in sub-section (2),
the option shall become invalid for that previous year in which the condition
is violated and the provisions of the Act shall apply as if the option had not
been exercised for that year as well as subsequent years.

Sub-section (2) provides the following conditions:

(i) the income of the
company is computed without deductions under sections 10AA, 32(1)(iia), 32AD,
33AB, 33ABA, 35(1)(ii)/(iia)/(iii), 35(2AA)/(2AB), 35CCC, 35CCD or any
deductions in respect of incomes set out in Part C of Chapter VIA other than a
deduction u/s 80JJAA;

(ii) the company shall not
claim a set-off of any loss or depreciation carried forward from earlier
assessment years, if such loss or depreciation is attributable to the
provisions enumerated above;

(iii) the company shall not
be entitled to set-off of any deemed unabsorbed loss or depreciation carried
forward by virtue of an amalgamation or demerger in terms of section 72A;

(iv) company shall claim depreciation u/s 32(1).

Sub-section (3) provides that the loss referred to in sub-section (2)
shall be treated as having been given effect to. The proviso, however, provides
that there would be an adjustment to the block of assets to the extent of the
depreciation that has remained unabsorbed for the years prior to assessment
year 2020-21.

Sub-section (4) provides that if the option is exercised by a company
having a unit in the International Financial Services Centre as referred to in
sub-section (1A) of section 80LA, the conditions contained in sub-section (2)
shall be modified to the extent that the deduction u/s 80LA shall be available
to such unit subject to compliance with the conditions contained in that
section.

Sub-section (5) provides that the section shall apply only if an option
is exercised by the company in the prescribed manner on or before the due date
specified under sub-section (1) of section 139 for any assessment year from
2020-21 onwards. The sub-section further provides that the option once
exercised cannot be withdrawn for the said year or future years.

The proviso provides that if an option exercised u/s 115BAB becomes
invalid on account of certain violations of the conditions set out in that
section, such a person may exercise the option under this section.

ANALYSIS

The new section grants an option to domestic companies to choose a lower
rate of tax @ 22% plus the applicable surcharge and cess and forgo the
deductions enumerated. It is fairly clear from the section that claim in an
anterior year attributable to the specified deductions which could not be
allowed on account of insufficiency of income cannot be set off in the year in
which an option under the section is exercised or future years.

The issue that may arise in this context is that except for the claim
u/s 35(1)(iv), the law does not contemplate a segregation of the business loss
into loss attributable to different sections. In fact, it is only in regard to
the loss arising on account of a capital expenditure u/s 35(1)(iv) that a
priority of set-off of losses is contemplated in section 72(2). Therefore, if
one is to give effect to section 115BAA(2), then the assessee company would
have to compute a breakup of a business loss which has been carried forward,
between various provisions to which it is attributable. Without such a
bifurcation the provision attributing loss to the enumerated deductions cannot
be given effect to. Even as far as depreciation is concerned, depreciation is
computed under sections 32(1)(i) and (iia). It is the aggregate of such depreciation
which is claimed as an allowance and a reduction from the written down value
(w.d.v.) of the block of assets. There is no specific provision requiring a
bifurcation between the two.

A harmonious interpretation would be that a company exercising the option
for the applicability of this section would have to give a breakup of the said
loss, attributing losses to the deductions referred to above and such
attribution would bind the Department, as the provisions for set-off do not
provide for an order of priority between general business loss and loss
attributable to the enumerated deductions.

The proviso
to sub-section (3) seeks to mitigate the double jeopardy to a person seeking to
exercise the option of the lower rate, namely, that set-off of unabsorbed
depreciation will not be allowed as well as the w.d.v. of the block would also
stand reduced. The proviso provides that if there is a depreciation allowance
in respect of a block of assets which has not been given full effect to, a
corresponding adjustment shall be made to the w.d.v. of the block. To
illustrate, if Rs. 1 lakh is unabsorbed depreciation in respect of a block of
assets for assessment year 2019-20, for computing the depreciation for the
block for assessment year 2020-21 the w.d.v. of the block shall stand increased
to that extent.

SECTION 115BAB

This section seeks to grant a substantial relief in terms of a reduced
tax rate to domestic manufacturing companies. The section provides that

(1) a domestic company, subject
to conditions prescribed, would at its option be charged at a tax rate of 15%
from assessment year 2020-21 onwards;

(2) it is, however, provided
that income which is neither derived from nor incidental to manufacturing or
production, and income in the nature of short-term capital gains arising from
transfer of non-depreciable assets, will be taxed at 22%. In regard to such
income, no deduction of expenditure would be allowed in computing it;

(3) the income in excess of the
arm’s length price determined u/s 115BAB(6) will be taxed at 30%;

(4) the conditions are:

(a) the company is set up
and registered on or after 1^st October, 2019 and commences
manufacture or production on or before the 31^stday of March, 2023;

(b) it is not formed by
splitting up or the reconstruction of a business already in existence (except
for re-establishment contemplated u/s 33B);

(c) it does not use any
machinery or plant previously used for any purpose (except imported machinery
subject to certain conditions). Other than imported machinery, the condition
will be treated as having been fulfilled if the value of previously used
machinery or part thereof does not exceed 20% of the total value of machinery;

(d) it does not use any
building previously used as a hotel or convention centre in respect of which a
deduction u/s 80-ID has been claimed and allowed;

(e) the company is not
engaged in any business other than the business of manufacture or production of
any article or thing and research in relation to or distribution of such
article or thing manufactured or produced by it;

(f) the explanation to
section 115BAB(2)(b) excludes development of computer software, mining,
conversion of multiple blocks or similar items into slabs, bottling of gas into
cylinders, printing of books or production of cinematograph film from the
definition of manufacture or production. The Central Government has also been
empowered to notify any other business in the list of excluded categories;

(g) income of the company is
computed without deductions under
sections 10AA, 32(1)(iia), 32AD, 33AB, 33ABA, 35(1)(ii)/(iia)/(iii),
35(2AA)/(2AB), 35CCC, 35CCD or any deductions in respect of incomes set out in
Part C of Chapter VIA other than a deduction u/s 80JJAA;

(h) the company shall not be
entitled to set-off of any deemed unabsorbed loss or depreciation carried
forward by virtue of an amalgamation or demerger in terms of section 72A;

(i) company shall claim
depreciation u/s 32(1).

Sub-section (3) provides that the loss referred to in sub-section (2)
shall be treated as having been given effect to.

Sub-section (4) empowers the CBDT, with the approval of the Central
Government, to remove any difficulty by prescribing guidelines in regard to the
fulfilment of the conditions regarding use of previously-used plant and
machinery or buildings, or the restrictive conditions in regard to the nature
of business.

Sub-section (5) provides that the guidelines issued shall be laid before
each House of Parliament and they shall bind the company as well as all income
tax authorities subordinate to the CBDT.

Sub-section (6) provides that if, in the opinion of the assessing
officer, on account of close connection between the company and another person,
the business is so arranged that it produces to the company more than ordinary
profits, he shall compute for the purposes of this section such profits as may
be reasonably deemed to have been derived from such business.

The proviso to the sub-section provides that if the aforesaid
arrangement involves a specified domestic transaction (SDT) as defined in
section 92BA, the profits from such transaction shall be determined having
regard to the arm’s length price as defined in section 92F.

The second proviso provides that the profits in excess of the arm’s
length price shall be deemed to be the income of the person.

Sub-section (7) provides that the section shall apply only if an option
is exercised by the company in the prescribed manner on or before the due date
specified under sub-section (1) of section 139 for any assessment year from
2020-21 onwards. The sub-section further provides that the option once
exercised cannot be withdrawn for the said year or future years.

The explanation to the section states that the expression ‘unabsorbed
depreciation’ shall have the meaning assigned to it in section 72A(7) for the
purposes of section 115BAB and 115BAA.

ANALYSIS

Unlike the provisions of section 115BAA, the provisions of this section
give rise to a number of issues, many of them arising on account of lacunae in
drafting which may be taken care of when the Taxation Laws (Amendment) Bill
becomes an Act. These are as under:

The threshold condition of eligibility is that the company is set up and
registered on or after 1^st October, 2019 and commences manufacture
or production on or before the 31^st day of March, 2023. It is not
clear as to whether the eligibility for the lower rate would be available to
the company after it is set up but before it commences manufacture or
production.

It needs to be pointed out that the situs of manufacturing unit
is not relevant. Therefore, manufacture outside India would also be entitled to
the lower rate of tax. Considering the tax cost in the country of manufacture,
this may not turn out to be tax effective, but such a situation is
theoretically possible.

If a company fails to meet the condition of commencement of manufacture
or production, the grant of the lower rate of tax would amount to a mistake
apparent from record amenable to a rectification u/s 154.

It is possible that in the interregnum between the setting up and
commencement of manufacture or production, the company may earn some income.
This is proposed to be taxed at 22% if it is not derived from or incidental to
manufacture or production. The term ‘incidental’ is likely to create some
controversy. While the higher rate of tax for such other income can be
understood, the condition that no deduction or expenditure would be allowed in
computing such income appears to be unjust. To illustrate, a company demolishes
an existing structure and disposes of the debris as scrap. The debris is
purchased by a person to whom it has to be transported and the company bears
the transport cost. On a literal interpretation of the section a deduction of
such expenditure will not be allowed. This aspect needs to be dealt with during
the passage of the Bill into an Act, or a suitable clarification needs to be
issued by
the CBDT.

Section 115ABA(2)(a)(i): This provides that the company is not formed by
splitting up or reconstruction of a business already in existence. As to what
constitutes splitting up or reconstruction of a business is already judicially
explained [Refer: Textile Machinery vs. CIT 107 ITR 195 (SC)].
There are several other decisions explaining the meaning of these terms. The
difference between this provision and all other incentive provisions is that in
those provisions (sections 80-I, 80-IA) this phrase was used in the context of
the business of an ’undertaking’. In this case the phrase is used in the
context of an assessee, namely, a domestic company. Therefore, an issue may
arise as to whether, after its formation, if a company acquires a business of
an existing entity (without acquiring its plant and machinery), the conditions
of this section would be vitiated. The words used are similar to those in other
incentive provisions, namely, ‘is not formed’. It therefore appears that a
subsequent acquisition of a business may not render a company ineligible for
claiming the lower rate of tax.

Section 115ABA(2)(a)(ii): This prescribes that the company does not ‘use’
any machinery or plant previously used for any purpose. While the explanation
grants some relaxation in regard to imported machinery, this condition is
extremely onerous. This is because hitherto the words used were ‘transferred to
a new business of machinery or plant’. Therefore, the undertaking had to be
entitled to some dominion and control over the old machinery for the condition
to be attracted. The provision as it is worded now will disentitle the company
to the relief if any old machinery is used. To illustrate, a company decides to
construct its own factory and the plant and machinery in the said factory is of
the value of Rs. 5 crores. During the course of construction, the company hires
for use a crane (which obviously has been used earlier), of the value of Rs. 2
crores. It would have, on a literal reading of the section, contravened one of
the eligibility conditions. It must be remembered that the condition is not
even connected with the business of manufacture but is attracted by ‘use’ of
the machinery by a company for any purpose.

Admittedly, this may not be the intention, but this condition needs to
be relaxed or amended to ensure that an overzealous tax authority does not deny
the rightful lower rate to a company which is otherwise eligible.

Section 115ABA(2)(a)(iii): This clause prescribes a condition that is even
more onerous. The company is not entitled to ‘use’ any building previously used
as a hotel or convention centre, in respect of which a deduction u/s 80-ID is
claimed. Here again the test is merely ‘user’ without there being any dominion
or control of the company over the building. Further, it is virtually
impossible for a company to ascertain whether the building in respect of which
it has obtained a right of temporary user has hitherto been used as a hotel or
convention centre, and whether deduction u/s 80-ID has been claimed by the
owner / assessee. To illustrate, a company decides to hold a one-month
exhibition of its manufactured goods and for that purpose obtains on leave and
licence 5,000 sq. ft. area in a commercial building. It holds its exhibition
and it later transpires that the said area was hitherto used as a convention
centre. On a literal reading of the section, the company would lose benefit of
the lower rate of tax. Clarity on this issue is required by way of issue of a
CBDT circular.

Section
115BAB(2)(b): The
last condition, which is distinct from the conditions prescribed in 115BAA, is
in regard to restricting the eligibility to those companies whose business is
of manufacture or production of articles and things, research in relation to
such goods as well as distribution thereof. The term manufacture is defined in
the Act in section 2(29B). The same is as follows: [(29BA) ‘manufacture’, with
its grammatical variations, means a change in a non-living physical object or
article or thing:

(a)
resulting in transformation of the object or article or thing into a new and
distinct object or article or thing having a different name, character and use;
or

(b) bringing
into existence of a new and distinct object or article or thing with a
different chemical composition or integral structure.]

These two terms have been judicially interpreted and are distinct from
each other, though the common man uses them interchangeably. Reference may be
made to the decisions of the Apex Court in CIT vs. N.C. Budharaja 204 ITR
412 (SC); CIT vs. Oracle Software India Ltd. 320 ITR 546(SC). The term
production is a wider term, while the term manufacture must ensure that there
is change in the form and substance of an article at least commercially. While
introducing the Bill, development of software in any form, mining and certain
other activities which could have fallen into the realm of manufacture or
production have been specifically excluded. Companies engaged in such business
will therefore not be entitled to the lower rate. It is also provided that the
Central Government is empowered to notify further businesses which will not be
entitled to the lower rate. It is hoped that any notification will be
prospective in nature, because if a company is registered and it incurs a cost
in setting up a manufacturing facility, a subsequent notification denying it
the lower rate will be unfair.

The
conditions prescribed in section 115BAB(2)(c) are identical to those of section
115BAA and the analysis in regard thereto will apply with equal force to this
section as well.

Sub-section (6) seeks to limit the operation of the section to income
which is derived from the business of the company computed at arm’s length. The
proviso further provides that if the arrangement between the company and the
related person (associated enterprise), involves a specified domestic
transaction, then the profits from the transaction will be computed based on
the arm’s length price as defined in 92F(ii).

Like in the case of section 115BAA, sub-section (7) provides that, in
order to avail of the benefit of the section, the company must exercise the
option on or before the due date prescribed in section 139, and once exercised
the option cannot be subsequently withdrawn for that or any previous year.

The explanation provides that the term ‘unabsorbed depreciation’ will
have the meaning assigned to it in clause (b) of sub-section (7) of section
72A. It is therefore clear that the denial of unabsorbed depreciation in
computing income will be restricted to such depreciation that is deemed to be
unabsorbed on account of an amalgamation or demerger. This appears to be in
keeping with the intent of the lawmakers.

CONCLUSION

Both the sections are clear on intent but seem to suffer from lacunae in
drafting, particularly in the case of section 115BAB. Let us hope that these
creases are ironed out before the Bill becomes an Act or if that does not
happen, then the Central Board of Direct Taxes (CBDT) issues circular/s
clarifying the legislative intent.

shailesh.kwebmaker

SPORTS ASSOCIATIONS AND PROVISO TO SECTION 2(15)

ISSUE FOR
CONSIDERATION

A charitable
organisation is entitled to exemption from tax under sections 11 and 12 of the
Income-tax Act, 1961 in respect of income derived from property held under
trust for charitable purposes. The term ‘charitable purpose’ is defined in
section 2(15) as under:

‘“charitable purpose”
includes relief of the poor, education, yoga, medical relief, preservation of
environment (including watersheds, forests and wildlife) and preservation of
monuments or places or objects of artistic or historic interest, and the
advancement of any other object of general public utility:

Provided that
the advancement of any other object of general public utility shall not be a
charitable purpose, if it involves the carrying on of any activity in the
nature of trade, commerce or business, or any activity of rendering any service
in relation to any trade, commerce or business, for a cess or fee or any other
consideration, irrespective of the nature of use or application, or retention,
of the income from such activity, unless –

(a) such activity is undertaken in the course of
actual carrying out of such advancement of any other object of general public
utility; and

(b) the aggregate receipts from such activity or
activities during the previous year do not exceed twenty per cent of the total
receipts, of the trust or institution undertaking such activity or activities,
of that previous year;’

For the purposes of
income tax exemption, promotion of sports and games is regarded as a charitable
activity, as clarified by the CBDT vide its Circular No. 395 dated 14^th
September, 1984. Many sports associations conduct tournaments where sizeable
revenues are generated from sale of tickets, sale of broadcasting and
telecasting rights, sponsorship, advertising rights, etc. resulting in earning
of a large surplus by such associations.

The issue has
arisen before the appellate authorities as to whether such sports associations
can be regarded as carrying on an activity in the nature of trade, commerce or
business and whether their activities of conducting tournaments cease to be
charitable activities by virtue of the proviso to section 2(15), leading to
consequent loss of exemption under sections 11 and 12. While the Jaipur,
Chennai, Ahmedabad and Ranchi Benches of the Tribunal have held that such
activity does not result in a loss of exemption, the Chandigarh Bench has
recently taken a contrary view, holding that the association loses its
exemption for the year due to such activity.

THE RAJASTHAN
CRICKET ASSOCIATION CASE

The issue came up
before the Jaipur Bench of the Tribunal in Rajasthan Cricket Association
vs. Addl. CIT, 164 ITD 212.

In this case, the
assessee was an association registered under the Rajasthan Sports
(Registration, Recognition and Regulation of Association) Act, 2005. It was
formed with the objective of promotion of the sport of cricket within the state
of Rajasthan. The main object of the association was to control, supervise,
regulate, or encourage the game of cricket in the areas under the jurisdiction
of the association on a ‘no profit-no loss’ basis. It was granted registration
u/s 12A. The assessee had filed its return claiming exemption u/s 11 for the
assessment year 2009-10.

During the course
of assessment proceedings, the AO observed that the assessee had earned
substantial income in the shape of subsidy from the Board of Control for
Cricket in India (BCCI), advertisement income, membership fees, etc. and
concluded that since the assessee was earning huge surplus, the same was not in
the nature of charitable purpose and was rather in the nature of business. The
AO, therefore, denied exemption u/s 11, computing the total income of the
association at Rs. 4,07,58,510, considering the same as an AOP. The
Commissioner (Appeals) upheld the order of the AO confirming the denial of exemption
u/s 11.

It was argued
before the Tribunal on behalf of the assessee that:

(i) the term ‘any activity in the nature of
trade, commerce or business’ was not defined and thus the same had to be
understood in common parlance and, accordingly, the expression ‘trade, commerce
or business’ has to be understood as a regular and systematic activity carried
on with the primary motive to earn profit, whereas the assessee never acted as
a professional advertiser, TV producer, etc.;

(ii) no matches of any game other than cricket or
no other events were organised to attract an audience, only cricket matches
were being organised, whether the same resulted in profit or loss. Further, not
all the cricket matches attracted an audience – the surplus had been earned
only from one cricket match;

(iii) the Hon’ble Madras High Court in the case of Tamil
Nadu Cricket Association, 360 ITR 633 had held that volume should not
be the sole consideration to decide the activity of the society – rather, the
nature of activity vis-a-vis the predominant object was to be seen;

(iv) being registered under the Rajasthan Sports
(Registration, Recognition and Regulation of Association) Act, 2005, the
assessee was authorised as well as well-equipped for organising all the cricket
matches taking place in the state of Rajasthan.

(v) all the payments in the shape of sponsorship,
advertisements, TV rights, etc. were received directly by BCCI which had later
shared such receipts with the assessee. Further, BCCI had delegated the task of
the organisation of matches to state associations and, in turn, state
associations were paid some funds for promotion and expansion of their
charitable activities;

(vi) a major benefit of organising the matches was
that the local teams, being trained by RCA, got an opportunity to learn from
the experience of coaches of international calibre assisting them during
practice matches and by witnessing the matches played by international players,
by spending time with them, etc. Ultimately, organising such matches resulted
in promotion of the sport of cricket and the surplus generated, if any, was purely
incidental in nature;

(vii) the assessee had been organising matches even
in the remote areas of Rajasthan where there few spectators and the assessee
association had to essentially incur losses in organising such matches;

(viii) the surplus was the result of subsidies only
and not from the conducting of tournaments on a commercial basis. The subsidies
were a form of financial aid granted for promoting a specific cause, which was
ultimately for the overall benefit of a section of the public, but never for
the benefit of an individual organisation. The subsidy received was utilised in
the promotion and development of the sport of cricket in the state at each
level, i.e., from mofussil areas to big cities like Jaipur;

(ix) the renting of premises was done wholly and
exclusively for the purpose of cricket and no other activity of whatsoever
nature had been carried out, and neither was it engaged in the systematic
activity as a hotelier;

(x) RCA was run by a committee which consisted of
members from different walks of life – such members were not professional
managers or businessmen. The agreement with the players was only to control and
monitor their activities, to ensure that the same was in accordance with the
objects;

(xi) The RCA was providing technical and financial
support to all the DCAs (District Cricket Associations), i.e., providing
equipments, nets, balls, etc. without any consideration. RCA was getting only
nominal affiliation fee from them and had provided grants of a substantial
amount to the DCAs;

(xii) RCA was organising various matches of national
level tournaments like Ranji Trophy, Irani Trophy, Duleep Trophy, Maharana
Bhagwat Singh Trophy, Salim Durrani Trophy, Laxman Singh Dungarpur Trophy,
Suryaveer Singh Trophy, matches for under-14s, u-15s, u-19s, u-22s, etc.,
without having any surplus. Rather, they were organised for the development of
the game of cricket at the national level and to identify the players who could
represent the country at the international level;

(xiii) RCA was spending a large amount on the
training and coaching camps for which no fee was charged from the participants;

(xiv) the assessee had organised several
championships in various interior towns and smaller cities of Rajasthan in
order to provide an opportunity and to create a competitive environment for the
talented youth, without any profit motive and with the sole intention to
promote the game of cricket;

(xv) the surplus, if any, generated by the
assessee was merely incidental to the main object, i.e., promotion of the sport
of cricket and in no way by running the ‘business of cricket’.

Reliance was placed
on behalf of the assessee on the following decisions:

(a) the Delhi High Court in the case of Institute
of Chartered Accountants of India vs. Director-General of Income Tax
(Exemptions) 358 ITR 91;

(b) the Madras High Court in the case of Tamil
Nadu Cricket Association vs. DIT(E) 360 ITR 633;

(d) the Delhi bench of the ITAT in the case of DDIT
vs. All India Football Federation 43 ITR(T) 656.

On behalf of the
Revenue, it was argued that:

(1) the entire argument of the assessee revolved
around the theory that grant of registration u/s 12A automatically entitled it
for exemption u/s 11. The case laws cited by the assessee in the case of the T.N.
Cricket Association and DDCA, etc., were in the context
of section 12A and were inapplicable;

(2) the domain of registration u/s 12AA and
eligibility for exemption u/s 11 were totally independent and different. At the
time of registration, CIT was not empowered to look into the provisions of
section 2(15); these were required to be examined only by the AO at the time of
assessment;

(3) once the first proviso to section 2(15) got
attracted, the assessee lost the benefit of exemption as per the provisions of
section 13(8) – therefore, the only question to be decided was whether the
assessee was engaged in commercial activity for a fee or other consideration;

(4) the nature of receipt in the hands of the
assessee was by way of sharing of sponsorship and media rights with BCCI, as
well as match revenue for conducting various cricket matches. The assessee had earned
surplus of 75% out of the receipts in the shape of advertisement, canteen and
tickets, which amounted to super-normal profit. Therefore, the income of the
assessee from ‘subsidy’ was nothing but a percentage of the fee gathered from
the public for matches and a percentage of advertisement receipts while
conducting matches;

(5) the nature of receipts in the hands of the
assessee certainly fell under ‘Trade & Commerce’ as understood in common
parlance. Once the receipts were commercial in nature and such receipts
exceeded the threshold of
Rs. 10 lakhs as the proviso then provided (both conditions satisfied in the
assessee’s case), the assessee would be hit by the proviso to section 2(15);

(6) and once the proviso to 2(15) was attracted,
the assessee ceased to be a charitable organisation irrespective of whether it
was registered u/s 12A. Grant of registration u/s 12A did not preclude the AO
from examining the case of the assessee in the light of the said proviso and if
he found that the assessee was hit by the proviso, then the assessee ceased to
be a charitable organisation;

(7) the receipts of ICAI were basically from
members (and not the public as in the case of the assessee) and did not exploit
any commercial / advertisement / TV rights as in the case of the assessee. One
test of the commercialism of receipt was whether receipts were at market rates
and were open to subscription by the general public as opposed to a select few
members;

(8) and once the provisos to 2(15) were attracted,
the assessee lost the benefit of exemption u/s 11 as per section 13(8) and the
entire income became taxable.

The Tribunal noted
that the Revenue had not doubted that the assessee had conducted cricket
matches; the only suspicion with regard to the activity was that during the
One-Day International match played between India and Pakistan there was huge
surplus and the assessee had rented out rooms belonging to the association at a
very high rate. Therefore, according to the Tribunal, it could be inferred that
the AO was swayed by the volume of receipts. It noted that these identical
facts were also before the Hon’ble Madras High Court in the case of Tamil
Nadu Cricket Association vs. DIT (Exemptions) 360 ITR 633, wherein the
Court opined that from the volume of receipts an inference could not be drawn
that an activity was commercial and that those considerations were not germane
in considering the question whether the activities were genuine or carried on
in accordance with the objects of the association.

Further, it was not
in dispute that the TV subsidy, sale on advertisements, surplus from the ODI
between India and Pakistan, income from the RCA Cricket Academy were all
related to the conduct of cricket matches by the association. Without the
conduct of matches, such income could not have been derived. Therefore, the
incomes were related to the incidental activity of the association which
incomes could not accrue without the game of cricket.

The Tribunal, while
examining the facts from the perspective of volume of receipts and constant
increase in surplus, referred to the Supreme Court decision in the case of Commissioner
of Sales Tax vs. Sai Publication Fund [2002] 258 ITR 70, for holding
that where the activity was not independent of the main activity of the assessee,
in that event, such ancillary activity would not fall within the term
‘business’.

It added that the
objection of the AO was that the other activities overshadowed the main
activity, based upon the receipts of the assessee from the other activity. It,
however, noted that all those activities were dependent upon the conduct of the
match. Referring to various High Court decisions, the Tribunal was of the view
that the AO was swayed by the figures and the volume of receipts. It noted that
such receipts were intermittent and not regular and also were dependent on the
conduct of cricket matches. It was not the other way round, that the cricket
matches were dependent upon such activities. According to the Tribunal, the
facts demonstrated that the assessee had been predominantly engaged in the
activity of promoting cricket matches. The Tribunal, therefore, held that the
AO was not justified in declining the exemption.

A similar view has
also been taken by the Tribunal in the cases of Tamil Nadu Cricket
Association vs. DDIT(E) 42 ITR(T) 546 (Chen.); DCIT(E) vs. Tamil Nadu Cricket
Association 58 ITR(T) 431 (Chen.); Gujarat Cricket Association vs. JCIT(E) 101
taxmann.com 453 (Ahd.); Jharkhand State Cricket Association vs. DCIT(E) (Ran.);
Chhattisgarh State Cricket Sangh vs. DDIT(E) 177 ITD 393 (Rai.); and DDIT(E)
vs. All India Football Federation 43 ITR(T) 656 (Del).

THE PUNJAB CRICKET ASSOCIATION CASE

The issue again
came up before the Chandigarh Tribunal in the case of the Punjab Cricket
Association vs. ACIT 109 taxmann.com 219.

In this case, the
assessee cricket association was a society registered under the Societies
Registration Act, 1860. It was also registered u/s 12A of the Income Tax Act.
It filed its return of income claiming exemption u/s 11 for the assessment year
2010-11.

The AO observed
that the income of the assessee was inclusive of an amount of Rs. 8,10,43,200
from IPLsubvention from BCCI and Rs. 6,41,100 as service charges for IPL
(Net). The AO observed that the IPL event was a highly commercial event and the
assessee had generated income from the same by hosting matches of Punjab
franchisee ‘Kings XI, Punjab’ during the Indian Premier League through TV
rights subsidy, service charges from IPL and IPL-subvention, etc. Similarly,
the assessee had earned income from the facilities of swimming pool, banquet
hall, PCA chamber, etc., by hosting these facilities for the purpose of
recreation or one-time booking for parties, functions, etc., which activities
were commercial in nature, as the assessee was charging fees for providing the
facilities to its members. The assessee had also received income from M/s
Silver Services who provided catering services to Punjab Cricket Club and its
restaurant, which again was a commercial activity, as the assessee was earning
income from running of the restaurant which was not related to the aims and
objectives of the society. According to the AO, the activities of the assessee
were not for charitable purposes, and therefore, in view of the proviso to
section 2(15), he disallowed the claim of exemption u/s 11.

The Commissioner
(Appeals) dismissed the appeal of the assessee observing that:

(a) it could not be disputed that the Indian
Premier League was a highly commercialised event in which huge revenue was
generated through TV rights, gate-money collection, merchandising and other
promotions;

(b) the franchises had been sold to corporates
and individuals and in this process, the appellant had received a huge income
of Rs. 8,10,43,200 for IPL-subvention from BCCI, service charges (Net) of Rs.
6,41,100 and reimbursement of Rs. 1,86,64,990 from BCCI;

(c) the argument of the appellant that all the
tickets of the IPL matches were sold by the BCCI or the franchisee team, and
the IPL players were sold in public auction for a huge amount, was all done by
the BCCI and the appellant had no role in conducting these matches, could not
be accepted, as huge revenue was generated in this commercial activity and
whether it was done by BCCI or by the appellant, the share of the income so generated
had been passed on to the appellant;

(d) the Chennai Tribunal’s decision in the case
of Tamil Nadu Cricket Association (Supra) did not apply to the
appellant’s case as in that case the assessee had received funds from BCCI for
meeting the expenditure as the host, while in the case of the appellant it was
not only the reimbursement of expenses but over and above that a huge amount
had been passed on to the appellant;

(e) the activity generating the income, whether
undertaken by BCCI or by the appellant, was purely a business activity of which
the appellant was a beneficiary.

It was argued before the Tribunal on behalf of the assessee that:

the assessee was not involved in any manner
in organising or commercially exploiting the IPL matches. The commercial
exploitation, if any, was done by the BCCI;

the only activity on the part of the
assessee was the renting out of its stadium to BCCI for holding of IPL matches;

‘T-20’ or IPL was also a
form of popular cricket. Since the main object of the assessee was the
promotion of the game of cricket, considering the popularity of the IPL
matches, the renting out of the stadium for the purpose of holding of IPL
matches by the BCCI for a short period of 30 days in a year was an activity
towards advancement of the objects of the assessee, of promotion of the game;

in lieu of providing the
stadium, the assessee got rental income for a short period and renting out the
stadium was not a regular business of the assessee;

the grant received from the
BCCI during the year under consideration in the form of share of TV subsidy of
Rs. 18,00,76,452 and IPL subvention of Rs. 8,10,43,200 was part of the largesse
distributed by BCCI to its member associations at its discretion for promotion
of the sport of cricket;

BCCI was not obliged to
distribute the earnings generated by it to state cricket associations and no
such association could claim, as an integral right, any share in the earnings
of BCCI;

even if a member state
association did not provide any assistance in holding of the IPL matches, or
when the IPL match was not hosted or organised at the stadium of an
association, yet the member cricket association got a grant out of the TV
subsidy. However, if a match was staged or hosted at the ground of an
association, the amount of subsidy was increased;

whatever had been received
from the BCCI on account of IPL subvention was a voluntary, unilateral donation
given by BCCI to various cricket associations, including the assessee, to be
expended for the charitable objects of promotion of the game of cricket and not
in lieu of carrying out any activity for conducting of IPL;

the assessee had no locus
with respect to the promotion and conduct of IPL, except for the limited extent
of providing its stadium and other allied services for holding of the matches.
The question whether the conduct of IPL was a commercial activity or not might
be relevant from BCCI’s standpoint, but not to the case of the assessee;

the assessee’s income,
including grants received from BCCI, was applied for attainment of the objects
of the assessee society, i.e., mainly for promotion of the game of cricket;

the assessee was running a
regional coaching centre wherein gaming equipment / material was also provided
such as cricket balls, cricket nets, etc. The assessee also distributed grants
to the district cricket associations attached to it for the purpose of laying
and maintenance of grounds, purchase of equipment, etc., as well as for holding
of matches and for the purpose of promoting the game of cricket;

the assessee conducted
various tournaments for the member district cricket associations. On the basis
of the inter-district tournaments, players were selected for the Punjab team
who underwent training at various coaching camps and thereafter the teams were
selected to participle in the national tournaments for different age groups. In
addition, financial assistance had also been provided to the ex-Punjab players
in the shape of monthly grants;

the assessee was also
maintaining an international cricket stadium, which gave needed practice and
exposure to the cricketers. Even other sports facilities like swimming pool,
billiards, lawn tennis, etc., were provided to the members as well as to the
cricketers, which activities were also towards the achievement of the objects
of the assessee society;

the assessee had been
spending substantial amounts towards development of the game at the grassroots
level and also for the development and promotion of the game by holding
international matches;

the assessee was only
conducting activities in pursuance of the objects, i.e., the promotion of the
game of cricket in India and that merely because some revenue had been
generated in pursuance of such activities, the same was not hit by the proviso
to section 2(15);

the Supreme Court had held
in CIT vs. Distributors (Baroda) (P) Ltd. 83 ITR 377 that
‘business’ refers to real, substantial, organised course of activity for
earning profits, as ‘profit motive’ is an essential requisite for conducting
business;

Delhi High Court in India
Trade Promotion Organization vs. DIT(E) 371 ITR 333, reading down the
scope of the proviso to section 2(15), had held that an assessee could be said
to be engaged in business, trade or commerce only where earning of profit was
the predominant motive, purpose and object of the assessee and that mere
surplus from incidental or ancillary activities did not disentitle claim of
exemption u/s 11;

Punjab & Haryana High
Court in the cases of The Tribune Trust vs. CIT & CIT (Exemptions)
vs. Improvement Trust, Moga 390 ITR 547 had approved the predominant
object theory, i.e. if the predominant motive or act of the trust was to
achieve its charitable objects, then merely because some incidental income was
being generated that would not disentitle the trust to claim exemption u/s 11
r.w.s. 2(15);

all the incidental income /
surplus so earned by the assessee in the course of advancement of its object of
promotion of the game of cricket had been ploughed back for charitable
purposes;

profit-making was not the
motive of the assessee and the only object was to promote the game of cricket.

It was argued on
behalf of the Revenue that:

(1) in the annual report of BCCI, the concept of
IPL was described as merger of sport and business – the various IPL-related
activities described in the report indicated that the entire IPL show was a
huge money-spinner and had been rightly termed as ‘cricketainment’ by the BCCI;

(2) the 38^th Report of the Standing
Committee on Finance, dealing with Tax Assessment / Exemptions and related
matters concerning IPL / BCCI, mentioned that the income derived from media
rights and sponsorships was shared with the franchisees as envisaged in the
franchise agreement. The franchisees had to pay the BCCI an annual fee which
BCCI distributed to the associations as subvention. The report highlighted the
commercial character of IPL, which established that no charitable activity was
being promoted in organising the commercial venture called BCCI-IPL;

(3) the Justice Lodha Committee, set up by the
Supreme Court, highlighted the unhealthy practices of match-fixing and betting.
Its report highlighted the indisputable fact that there was absolutely no
charitable work which was undertaken by the BCCI or its constituents while
organising the cricket, especially IPL, where the entire spectacle of
‘cricketainment’ was a glamorous money-spinner;

(4) the Justice Mudgal IPL Probe Committee, set up
by the Supreme Court, highlighted the allegation of match / spot-fixing against
players. It further found that the measures undertaken by the BCCI in combating
sporting fraud were ineffective and insufficient. The facts demonstrated that
no charitable activity was undertaken in various matches conducted by BCCI-IPL.
The report highlighted the commercial character of the venture sans any
trace of charitable activity;

(5) the Bombay High Court, in the case of Lalit
Kumar Modi vs. Special Director in WP No. 2803 of 2015, observed that
if the IPL had resulted in all being acquainted and familiar with phrases such
as ‘betting’, ‘fixing of matches’, then the RBI and the Central Government
should at least consider whether holding such tournaments served the interest
of a budding cricketer, the sport and the game itself;

(6) the tripartite agreement / stadium agreement
proved that the assessee was intrinsically and intimately involved in
organising the commercial extravaganza of the IPL. It required the PCA to
provide all the necessary co-operation and support to the BCCI-IPL and the
franchisee. It mandated the PCA to provide adequate, sufficiently skilled and
trained personnel to BCCI-IPL at its own cost. The PCA was duty-bound to ensure
that TV production took place at the stadium according to the requirements of
TV producers. It required PCA to erect and install all the desired facilities,
structures and equipment required in connection with the exploitation of media
rights at its own cost. It was to use its best endeavour to make areas
surrounding the stadium available for exploitation of the commercial rights.
The PCA agreed to assist the BCCI-IPL with local trading standard department,
police, private security arrangements, with a view to minimising or eliminating
certain exigencies pertaining to matches, advertising / promotions,
unauthorised sale of tickets, etc. All costs of such services were to be borne
by the PCA;

(7) the above clauses amply demonstrated that the
PCA, being the federal constituent and full member of BCCI, had taken various
steps / initiatives at its own cost to ensure that the BCCI-mandated IPL
matches were organised smoothly and were a huge commercial success;

(8) no claim was made on behalf of the assessee
that the BCCI-IPL matches were charitable activities;

(9) a perusal of the case laws cited on behalf of
the assessee revealed that the Hon’ble Courts therein were not presented with
public documents / Standing Committee Reports / facts wherefrom judicial notice
could be taken as per the Evidence Act.

Summons was issued
to the BCCI by the Tribunal for determination of the character of the amounts
paid by it to the assessee. BCCI clarified that there were two types of
payments made by it – reimbursements of expenditure which the state
associations had to incur for conduct of matches, and a share in the media
rights income earned by the BCCI. The claim of the BCCI was that these payments
were application of income for the purpose of computation of income u/s 11.
Since the tax authorities were denying BCCI the exemption u/s 11, strictly in
the alternative and without prejudice to its contention that the entire sum was
allowable as an application, BCCI had contended that the payments were
allowable as a deduction u/s 37(1).

The Tribunal observed that a perusal of the accounts of the BCCI revealed
that it had booked the above payments to the state associations as expenditure
out of the gross receipts. The BCCI had taken a clear and strong stand before
the tax authorities, including appellate authorities, that the payment to the
state associations was not at all an appropriation of profits. The Tribunal
noted certain appellate submissions made by the BCCI in its own case, which
seemed to indicate that it was organising the matches jointly with the state
associations.

In response to the
above observations, it was contended on behalf of the assessee that:

(a) the primary plea / stand of the BCCI is that
the payments / grants made by it to the state associations is application of
income, hence it is only a voluntary grant given by the BCCI to the state
associations, including the assessee, for the purpose of the promotion of the
game of cricket, hence it cannot be treated as income of the assessee from IPL
matches;

(b) the alternate stand of the BCCI that the
payments to the state associations be treated as expenditure in the hands of
the BCCI was opposite and mutually destructive to the primary stand of the BCCI
and thus could not be made the basis to decide the nature of receipts from BCCI
in the hands of the assessee;

(c) the Revenue authorities, even otherwise, have
consistently rejected the aforesaid alternate contention of the BCCI and the
entire receipts from the IPL had been taxed in the hands of the BCCI;

(d) if the BCCI was treated as an Association of
Persons (AOP) as per the plea of the Revenue, still, once the entire income
from IPL had been taxed in the hands of an AOP, further payment by BCCI to its
member associations could not be taxed as it would amount to double taxation of
the same amount.

The corresponding
submissions of the Revenue were:

(A) the Punjab Cricket Association was absolutely
involved in the commercial venture of IPL;

(B) BCCI had stated that it did not have the
infrastructure and the resources to conduct the matches by itself and was
dependent on the state associations to conduct them;

(C) according to BCCI, the income from media
rights was dependent on the efforts of the state associations in conducting the
matches from which the media rights accrued;

(D) as per the BCCI, the state
associations were entitled by virtue of established practice to 70% of the
media rights fee. It was in expectation of the revenue that the various state
associations took an active part and co-operated in the conduct of the matches.
The payment was therefore made only with a view to earn income from the media
rights;

(E) it was clear that the transaction between the
BCCI and the PCA was purely commercial in nature and the income / receipts
received by the PCA were in lieu of its services rendered to BCCI;

(F) the share of revenue from BCCI out of sale of
media rights was not a grant – the various payments made by the BCCI ensured
that the state associations were ever ready with their stadia and other
infrastructure to ensure smooth execution of IPL matches.

On the basis of the
arguments, the Tribunal observed that the status of the BCCI was of an
Association of Persons (AOP) of which the state associations, including the
assessee, were members. It noted that the BCCI, in its consistent plea before
the tax authorities had claimed that the payments made to the state
associations were under an arrangement of sharing of revenues with them. BCCI
had pleaded that it had just acted as a facilitator for the sale of media
rights collectively on behalf of the state associations for the purpose of
maximising the profits, for which it retained 30% of the profits and the
remaining 70% belonged to the state associations. According to the Tribunal,
when the payer, i.e., BCCI, had not recognised the payments made by it to the
state associations as voluntary grant or donation, rather, the BCCI had
stressed that the payments had been made to the state associations under an
arrangement arrived at with them for sharing of the revenues from international
matches and the IPL, then the payee (the recipient associations) could not
claim the receipts as voluntary grants or donations at discretion from the
BCCI.

The Tribunal,
however, noted that the legal status as of that date was that BCCI was being
treated by the tax authorities as an AOP and the payments made to the state
associations as distribution of profits. The BCCI payments to the state
associations, including the appellant, having already been taxed in the hands
of BCCI, could not be taxed again in the hands of the member of the AOP, i.e.,
the state association, as it would amount to double taxation of the same
amount.

Further, it
observed that the state associations in their individual capacity were pleading
that the IPL might be the commercial venture of their constituent and apex
body, the BCCI, but that they were not involved in the conduct of the IPL.
However, these associations had collectively formed the apex association named
BCCI, got it registered under the Tamil Nadu Societies Registration Act and
thereby collectively engaged in the operation and conduct of the IPL through
their representatives in the name of BCCI. As per the Tribunal, PCA was
individually taking a totally opposite stand to the stand it had taken
collectively with other associations under the umbrella named as BCCI.

The Tribunal
observed that it was settled law that what could not be done directly, that
could not be done indirectly, too. If an institution claiming charitable status
being constituted for the advancement of other objects of public utility as per
the provisions of law was barred from involving in any commerce or business, it
could not do so indirectly also by forming a partnership firm or an AOP or a
society with some other persons and indulge in commercial activity. Any
contrary construction of such provisions of law in this respect would defeat
the very purpose of its enactment.

According to the
Tribunal, the assessee was a full member of BCCI, which was an AOP, which had
been held to be actively involved in a large-scale commercial venture by way of
organising IPL matches, and therefore the assessee could be said to have been
involved in a commercial venture as a member of the BCCI, irrespective of the
fact whether it received any payment from the BCCI or not, or whether such
receipts were applied for the objects of the assessee or not. However, once the
income was taxed in the hands of the AOP, the receipt of share of the income of
the AOP could not be taxed in the hands of the member of the AOP. For the sake
of ease of taxation, the AOP had been recognised as a separate entity; however,
actually, its status could not be held to be entirely distinct and separate
from its members and that was why the receipt of a share by a member from the
income of its AOP would not constitute taxable income in the hands of the
member.

The Tribunal
observed that even otherwise, PCA was involved in commercial activity in a
systemic and regular manner not only by offering its stadium and other services
for conduct of IPL matches, but by active involvement in the conduct of matches
and exploiting their rights commercially in an arrangement arrived at with the
BCCI. According to the Tribunal, there was no denial or rebuttal by the
appellant to the contention that the IPL was purely a large-scale commercial
venture involving huge stakes, hefty investments by the franchisees, auction of
players for huge amounts, exploiting to the maximum the popularity of the game
and the love and craze of the people of India for cricket matches. From a
reading of the tripartite agreement, the Tribunal was of the view that it
showed that the assessee was systematically involved in the conduct of IPL
matches and not just offering its stadium on rent to BCCI for the conduct of
the matches.

The Tribunal
further accepted the Department’s argument that the BCCI, which was constituted
of the assessee and other state associations, had acted in monopolising its
control over cricket and had also adopted a restrictive trade practice by not
allowing the other associations, who may pose competition to the BCCI, to hold
and conduct cricket matches for the sole purpose of controlling and exclusively
earning huge revenue by way of exploiting the popularity of cricket. PCA, being
a constituent member of the BCCI, had also adopted the same method and rules of
the BCCI for maintaining its monopoly and complete domain over the cricket in
the ‘area under its control’. Such an act of exclusion of others could not be
said to be purely towards the promotion of the game, rather, it was an act
towards the depression and regression of the game. Hence the claim of the
assessee that its activity was entirely and purely for the promotion of the
game was not accepted by the Tribunal. The Tribunal also did not accept the
assessee’s argument that the payment to it by the BCCI was a grant, holding
that it was a payment in an arrangement of sharing of revenue from commercial
exploitation of cricket and infrastructure thereof.

The Tribunal took
the view that the commercial exploitation of the popularity of cricket and its
infrastructure by the assessee was not incidental but was, inter alia,
one of the main activities of the assessee. It relied upon certain observations
of the Supreme Court in the case of Addl. CIT vs. Surat Art Silk Cloth
Manufacturers’ Association 121 ITR 1, to point out that there was a
differentiation between ‘if some surplus has been left out of incidental
commercial activity’ and ‘the activity is done for the generation of
surplus’ – the former would be charitable, the latter would not be
charitable. The Tribunal was of the view that despite having the object of
promotion of sports, the fact that the activity of the assessee was also
directed for generation of profits on commercial lines would exclude it from
the scope of charitable activity.

Even if it was
assumed that the commercial exploitation of cricket and infrastructure was
incidental to the main purpose of promotion of cricket, even then, in view of
the decision of the Chandigarh Bench of the Tribunal in the case of Chandigarh
Lawn Tennis Association vs. ITO 95 taxmann.com 308, as the income from
the incidental business activity was more than Rs. 10 lakhs [as the proviso to
section 2(15) then provided], the proviso to section 2(15) would apply,
resulting in loss of exemption.

Therefore, the
Tribunal held that the case of the assessee would not fall within the scope of
‘charitable purpose’ as defined in section 2(15), as the commercial
exploitation of the popularity of the game and the property / infrastructure held
by the assessee was not incidental to the main object but was apparently and inter
alia one of the primary motives of the assessee. Hence the assessee was not
entitled to exemption u/s 11.

The Tribunal
further noted that PCA had amended its objects to add the following object: ‘To
carry out any other activity which may seem to the PCA capable of being
conveniently carried on in connection with the above, or calculated directly or
indirectly to enhance the value or render profitable or generate better income
/ revenue, from any of the properties, assets and rights of the PCA;’

According to the
Tribunal, the amendment revealed that the assessee’s activities inter alia
were also directed for generation and augmentation of revenue by way of
exploitation of its rights and properties, and with the amended objects it
could exploit the infrastructure so created for commercial purposes which
supported the view taken by the Tribunal.

OBSERVATIONS

The Chandigarh
Tribunal seems to have gone into the various facts in far greater detail than
the Jaipur, Chennai, Ahmedabad and Ranchi Benches, having examined the stand
taken by the BCCI, in its accounts and before the tax authorities, as well as
examined the reports of various committees set up by the Supreme Court to look
into match-fixing and the management of the affairs of BCCI. It rightly
highlighted the observations of the Supreme Court in Surat Art Silk Cloth
Manufacturers Association (Supra), where it observed:

‘Take, for
example, a case where a trust or institution is established for promotion of
sports without setting out any specific mode by which this purpose is intended
to be achieved. Now obviously promotion of sports can be achieved by organising
cricket matches on free admission or no-profit-no-loss basis and equally it can
be achieved by organising cricket matches with the predominant object of
earning profit. Can it be said in such a case that the purpose of the trust or
institution does not involve the carrying on of an activity for profit, because
promotion of sports can be done without engaging in an activity for profit. If
this interpretation were correct, it would be the easiest thing for a trust or
institution not to mention in its constitution as to how the purpose for which
it is established shall be carried out and
then engage itself in an activity for profit in the course of actually carrying
out of such purpose and thereby avoid liability to tax. That would be too
narrow an interpretation which would defeat the object of introducing the words
“not involving the carrying on of any activity for profit”. We cannot
accept such a construction which emasculates these last concluding words and
renders them meaningless and ineffectual.’

The Tribunal
incorrectly interpreted this to apply to the facts of the assessee’s case,
since the Tribunal was of the view that the assessee was organising cricket
matches with a view to earn profit.

Besides holding
that PCA was carrying on a business activity of assisting BCCI in the conduct
of matches, one of the basis of the Chandigarh Tribunal decision was that since
BCCI was carrying on a commercial activity every member of BCCI (an AOP) should
also be regarded as carrying on a commercial activity through BCCI, which would
attract the proviso to section 2(15). In so doing, it seems to have ignored the
fact that under tax laws an AOP and its members are regarded as separate
entities and the activities carried on by each need to be evaluated independently.
For instance, if a charitable organisation invests in a mutual fund and its
share of income from the mutual fund is considered for taxation in the hands of
the charitable organisation, does it necessarily follow that the charitable
organisation is carrying on the business of purchase and sale of shares and
securities just because the mutual fund is doing so?

Secondly, the
Chandigarh Tribunal relied on the BCCI’s alternative contention that the
payments to the state associations should be treated as expenditure incurred by
it, ignoring BCCI’s main contention that it was a division of surplus amongst
the member associations. A division of surplus cannot be regarded as an income
from exploitation of assets, nor can it be regarded as a compensation for services
rendered.

Thirdly, the Tribunal relied on the then prevalent income tax appeal
status of BCCI, ignoring the fact that the appeals had not yet attained
finality; the conclusions in the appeals were therefore only a view of the
interim appellate authorities which may undergo a change on attaining finality.
Placing absolute reliance on such ratios of appeals of BCCI not yet finally
concluded, for deciding the case of PCA, was therefore not necessarily the
right approach.

The Chandigarh
Tribunal also seems to have taken the view that generating better returns from
use of properties, assets or rights amounts to commercialisation, vitiating the
charitable nature. That does not seem to be justified, as every person or
organisation, even though they may not carry on business, may seek to maximise
their income from assets. Can a charitable organisation be regarded as carrying
on business just because it invests in a bank which offers higher interest than
its existing bank? Would it amount to business if it lets out premises owned by
it to a person who offers to pay higher rent, rather than to an existing tenant
paying lower rent? Seeking maximisation of return from assets cannot be the
basis for determination of whether business is being carried on or not.

Can it be said that
merely because PCA was assisting BCCI in conducting the IPL matches at its
stadium it was engaged in a business activity? Such assistance may not
necessarily be from a profit-earning motive. It could be actuated by the motive
of popularising the game of cricket amongst the public, or by the desire to
ensure better utilisation of its stadium and to earn rent from its use. This
would not amount to carrying on of a business activity.

The question which
would really determine the matter is as to the nature of the amounts paid by
BCCI out of the telecast rights. Were such payments for the support provided by
the associations, for marketing of telecast rights by BCCI on behalf of the
state associations, a distribution of surplus by BCCI, or a grant by BCCI to
support the state associations?

If one examines the
submissions made by BCCI to the Tribunal in response to the summons issued to
it, it had clarified that payments towards participation subsidy, match and
staging subsidies were in the nature of reimbursements of expenditure which the
state associations have to incur for conduct of matches. This indicates that
the state associations incur the expenditure for the matches on behalf of BCCI,
which expenditure is reimbursed by BCCI. This indicates that the activity of
conduct of the tournament was that of BCCI.

In respect of the
second category of payments in regard to a share in the media rights income
earned by the BCCI, BCCI had clarified that these payments were application of
income for the purpose of computation of income u/s 11. Either donations /
grants or expenses incurred, both could qualify as application of income. In
the submissions to the Commissioner (Appeals) in its own case, BCCI had
clarified that such TV subvention represents payment of 70% of revenue from the
sale of media rights to state associations. These payments were made out of the
gross revenue from the media rights and not out of the surplus and were
therefore not a distribution of profit. Even if there were to be losses in any
year, TV subvention and subsidy would be payable to the state associations.

In its appeal
submissions, BCCI has stated that the state association is entitled to the
ticket revenue and ground sponsorship revenue. Expenses on account of security
for players and spectators, temporary stands, operation of floodlights, score
boards, management of crowds, insurance for the match, electricity charges,
catering, etc. are met by the state associations. On the other hand,
expenditure on transportation of players and other match officials, boarding
and lodging, expenses on food for players and officials, tour fee, match fee,
etc., are met by BCCI and the revenues from sponsorship belong to BCCI.

The submissions by
BCCI, in its appeal, further clarified that for a Test series or ODI series
conducted in multiple centres and organised by BCCI and multiple state
associations, it was found that if each state association were to negotiate the
sale of rights to events in its centre, its negotiating strength would be low.
It was, therefore, agreed that BCCI would negotiate the sale of media rights
for the entire country to optimise the income under this head. It was further
decided that out of the receipts from the sale of media rights, 70% of the
gross revenue, less production cost, would belong to the state associations.
Every year, BCCI has paid out 70% of its receipts from media rights (less
production cost) to the state associations. This amount has been utilised by
the respective associations to build infrastructure and promote cricket, making
the game more popular, nurturing and encouraging cricket talent and leading to
higher revenues from media rights.

From the above, it
is clear that while the conduct of matches may be physically done by the state
associations, it was BCCI which was responsible for the commercial aspects of
the IPL, such as sale of sponsorship rights, media rights, etc. BCCI pays 70%
of such revenues to the state associations for having permitted it to market
such rights. The state associations are conducting the matches as a part of
their object of promoting and popularising cricket. The conduct of matches was
quite distinct from marketing the rights to sponsor or telecast those matches.
Can the state associations be regarded as having carried on a commercial
activity, if they have granted the right to market such sponsorship and media
rights to the BCCI, with the consideration being a percentage of the revenues
earned by BCCI from such marketing?

A mere passive
receipt of income (though recurring and linked to gross revenues) for giving up
a valuable right may perhaps not constitute a business activity. An analogy can
be drawn from a situation where a business is given on lease to another entity
for running (or conducting). If such a lease is for a long period, various
Courts have taken the view that since the intention is not to carry on business
by the lessor, such lease rentals are not taxable as business profits of the
lessor. The mere fact that the lease rentals may be linked to the gross revenues
of the business carried on by the lessee would not change the character of the
income. It is only the lessee who is carrying on business and not the lessor.
On a similar basis, the carrying on of the business of marketing of rights by
BCCI would not change the character of matches conducted by the state
associations from a charitable activity carried on in furtherance of their
objects to a business activity, even if the state associations are entitled to
a certain part of the revenues for having given up the right to market such
rights.

In today’s times,
when watching of sport is a popular pastime resulting in large revenues for the
organisers, a mere seeking of maximising the revenue-earning potential of the
matches, in order to raise funds for furtherance of the cause of the sport,
cannot be said primarily to be the conduct of a business. The mere fact of the
quantum being large cannot change the character of an activity from a
charitable activity to a business activity, unless a clear profit-earning
motive to the exclusion of charity is established. This is particularly so when
all these state associations have been actively involved in encouraging sport
at the grassroots level in cities as well as smaller towns.

In a series of
decisions, the Supreme Court, the Madras, Gujarat and Bombay High Courts and
various benches of the Tribunal have held that the section 12A registration of
the state associations could not be cancelled merely on account of the fact
that they have conducted IPL matches. These decisions are:

DIT(E) vs.
Tamil Nadu Cricket Association 231 Taxman 225 (SC);

DIT(E) vs.
Gujarat Cricket Association R/Tax Appeal 268 of 2012 dated 27^th
September, 2019 (Guj.);

Pr. CIT(E)
vs. Maharashtra Cricket Association 407 ITR 9 (Bom.);

Tamil Nadu
Cricket Association vs. DIT(E) 360 ITR 633 (Mad.);

Saurashtra
Cricket Association vs. CIT 148 ITD 58 (Rajkot ITAT);

Delhi &
District Cricket Association vs. DIT(E) 38 ITR(T) 326 (Del. ITAT);

Punjab
Cricket Association vs. CIT 157 ITD 227 (Chd. ITAT).

While most of these
decisions have been decided on the technical ground that applicability of the
proviso to section 2(15) cannot result in cancellation of registration u/s
12AA(3), in some of these decisions there has been a finding that the activity
of the conduct of the matches by the state associations is a charitable
activity in accordance with its objects.

Recently, in an
elaborate judgment of over 200 pages, the Gujarat High Court, hearing appeals
filed against the Tribunal orders in the case of Gujarat Cricket
Association (Supra), Baroda Cricket Association and Saurashtra
Cricket Association, in a series of appeals heard together (R/Tax
268 of 2012, 152 of 2019, 317 to 321 of 2019, 374 and 375 of 2019, 358 to 360
of 2019, 333 to 340 of 2019, 675 of 2019, and 123 of 2014, by its order dated
27^th September, 2019), has decided the matter in favour of
the state associations. It noted from the resolution passed by BCCI that the
grants given by it were in the nature of corpus donations to the state
associations. After analysing the concept of ‘charitable purpose’, the
insertion of the proviso to section 2(15) and various case laws on the subject
of charity, the High Court held:

(i) In carrying on the charitable activities,
certain surplus may ensue. However, earning of surplus, itself, should not be
construed as if the assessee existed for profit. The word ‘profit’ means that
the owners of the entity have a right to withdraw the surplus for any purpose,
including a personal purpose.

(ii) It is not in dispute that the three
associations have not distributed any profits outside the organisation. The profits,
if any, are ploughed back into the very activities of promotion and development
of the sport of cricket and, therefore, the assessees cannot be termed to be
carrying out commercial activities in the nature of trade, commerce or
business.

(iii) It is not correct to say
that as the assessees received a share of income from the BCCI, their
activities could be said to be the activities of the BCCI. Undoubtedly, the
activities of the BCCI are commercial in nature. The activities of the BCCI are
in the form of exhibition of sports and earning profit out of it. However, if
the associations host any international match once in a year or two at the
behest of the BCCI, then the income of the associations from the sale of tickets, etc., in such
circumstances would not portray their character as being of a commercial
nature.

(iv) The state cricket associations
and the BCCI are distinct taxable units and must be treated as such. It would
not be correct to say that a member body can be held liable for taxation on
account of the activities of the apex body.

(v) Irrespective of the nature of
the activities of the BCCI (commercial or charitable), what is pertinent for
the purpose of determining the nature of the activities of the assessees is the
object and the activities of the assessees and not that of the BCCI. The nature
of the activities of the assessee cannot take its colour from the nature of the
activities of the donor.

The Gujarat High
Court has, therefore, squarely addressed all the points made by the Chandigarh
Tribunal while deciding the issue. It has emphatically held that the conduct of
the matches did not amount to carrying on of a business, particularly if the
surplus was merely on account of one or two matches. Further, the nature of
activity of BCCI cannot determine the nature of activity of the state
associations.

Therefore, as discussed in detail by
the Gujarat High Court, the better view seems to be that of the Jaipur,
Chennai, Ahmedabad, Delhi and Ranchi Benches of the Tribunal. But, given the
high stakes involved for the Revenue, it is highly likely that the matter will
continue to be agitated in the courts, until the issue is finally settled by
the Supreme Court.

shailesh.kwebmaker

M/s Lokhandwala Construction Industries Pvt. Ltd. vs. DCIT-9(2); Date of order: 29th April, 2016; [ITA. No. 4403/Mum/2013; A.Y.: 2007-08; Bench: Mum. ITAT] Section 271(1)(c): Penalty – Inaccurate particulars of income – Method of accounting – Project completion method – Dispute is on the year of allowability of claim – Levy of penalty not justified

8. CIT vs. M/s
Lokhandwala Construction Industries Pvt. Ltd. [Income tax Appeal No. 992 of
2017] Date of order: 17^th September, 2019 (Bombay High Court)]

M/s Lokhandwala Construction Industries Pvt. Ltd. vs.
DCIT-9(2); Date of order: 29th April, 2016; [ITA. No. 4403/Mum/2013; A.Y.:
2007-08; Bench: Mum. ITAT]

Section 271(1)(c): Penalty – Inaccurate particulars of
income – Method of accounting – Project completion method – Dispute is on the
year of allowability of claim – Levy of penalty not justified

The
assessee is in the activity of building and construction. In filing the return
of income for the A.Y. 2007-2008, the assessee followed the Project Completion
Method. The AO by his assessment order dated 24^th December, 2009,
disallowed the expenditure claimed towards advertisement and sales promotion on
the ground that the expenses would be claimed only in the year the project is
completed and income offered to tax. In penalty proceedings, the AO held that
the assessee was guilty of filing inaccurate particulars of income within the
meaning of section 271(1)(c) of the Act and levied penalty. The assessee filed
an appeal before the CIT(A) who dismissed the same.

Being
aggrieved by the order, the assessee filed an appeal to the Tribunal. The
Tribunal held that the claim was disallowed in the instant year on the ground
that such advertisement / sales promotion expenses should be allowed in the
year in which the sale of flats was undertaken in respect of which such
expenses were incurred. Pertinently, in A.Ys. 2009-10 and 2010-11 such expenses
were allowed following the methodology devised by the AO in the instant
assessment year. The aforesaid factual matrix goes to amply demonstrate that
the difference between the assessee and the Revenue does not hinge on
allowability or genuineness of expenditure but merely on the year of
allowability. In fact, the methodology devised by the AO in the A.Y. 2006-07
for the first time only seeks to postpone the allowability of expenses but does
not reflect any disagreement on the merit of the expenses claimed.

In the
years starting from A.Y. 1990-91 and up to 2005-06, the claim for deduction of
expenses has been allowed in the manner claimed by the assessee following the
‘project completion’ method of accounting. Therefore, if in a subsequent period
the AO re-visits an accepted position and makes a disallowance, the same would
not be construed as a deliberate attempt by the assessee to furnish inaccurate
particulars of income or concealment of particulars of his income. Therefore,
where the difference between the assessee and the Revenue is merely on account
of difference in the year of allowability of claim, and in the absence of any
finding or doubt with regard to the genuineness of the expenses claimed, the
penal provisions of section 271(1)(c) of the Act are not attracted. The penalty
levied u/s 271(1)(c) of the Act deserves to be deleted.

Being
aggrieved by the order, the Revenue filed an appeal to the High Court. The
Court observed that the AO adopted a methodology to postpone allowability of
claim for deduction of expenses in the year in which the income is offered to
tax. The question, therefore, is whether making such a claim on the basis of
accepted practice would amount to furnishing inaccurate particulars of income
within the meaning of section 271(1)(c) of the Act. In the case of CIT
vs. Reliance Petroproducts Pvt. Ltd. (2010) 322 ITR 158, the Supreme
Court observes that a mere making of a claim, which is not sustainable in law,
by itself will not amount to furnishing inaccurate particulars regarding the
income. Therefore, mere making of a claim which is disallowed in quantum
proceedings cannot by itself be a ground to impose penalty u/s 271(1)(c) of the
Act. The fact was that the assessee was following the above method since
1990-1991 till the subject assessment year and there was no dispute in respect
thereof save for the A.Y. 2006-07 and the subject assessment year. This fact
itself would militate against imposition of any penalty upon the assessee on
the ground of furnishing inaccurate particulars of income. Accordingly, the
Revenue appeal was dismissed.

shailesh.kwebmaker

Section 147: Reassessment – Notice issued after four years – Original assessment u/s 143(3) – Reopening is based on change of opinion – Reassessment was held to be not valid

7. Sutra Ventures
Private Limited vs. The Union of India and others [Writ Petition No. 2386 of
2019] Date of order: 9^th October, 2019 (Bombay High Court)

Section 147: Reassessment – Notice issued after four
years – Original assessment u/s 143(3) – Reopening is based on change of
opinion – Reassessment was held to be not valid

The
assessee is a company engaged in the business of providing marketing support
services and consultancy in sports. For the A.Y. 2012-13, it filed a return of
income declaring total income of Rs. 6,44,390. The AO issued a notice for
scrutiny assessment. The assessee company replied to the queries; the scrutiny
proceedings were concluded and the assessment order was passed on 13^th
March, 2015; the AO accepted the return of income filed by the assessee without
making any disallowance or additions.

After
the scrutiny assessment for the A.Y. 2012-13 was concluded, the Income Tax
Department conducted audit and certain objections were raised regarding purchases.
The assessee company filed its reply to the audit objections, submitting its
explanations. On 28^th March, 2019 the assessee company received a
notice from the AO u/s 147 of the Act on the ground that there was reason to
believe that income chargeable to tax for the A.Y. 2012-13 had escaped
assessment. The AO provided the reasons to which the assessee company filed
objections. The objections raised by the assessee company were rejected by the
AO.

Being
aggrieved by the order of the AO, the assessee filed a Writ Petition before the
High Court. The Court held that in this case assessment is sought to be
reopened after a period of four years. The significance of the period of four
years is that if the assessment is sought to be reopened after a period of four
years from the end of the relevant assessment year, then as per section 147 of
the Act an additional requirement is necessary, that is, there should be
failure on the part of the assessee to fully and truly disclose material facts.
The reason of reopening was that the assessee company, in the profit and loss
account has shown sale of services at Rs. 1,87,56,347 under the head revenue
from operations and an amount of Rs. 20,46,260 was debited as purchase of
traded goods / stock-in-trade. The AO had opined that the goods were neither
shown as sales nor as closing stock because of which the income had escaped
assessment because of the omission on the part of the assessee.

The
Court observed that the assumption of jurisdiction on the basis of the reasons
given by the AO is entirely unfounded and unjustified. In the original
assessment the petitioner was called upon to produce documents in connection
with the A.Y. 2012-13, namely, acknowledgment of return, balance sheet, profit
and loss account, tax audit report, etc. The petitioner was also called upon to
submit the return of income of the directors along with other documents such as
shareholding pattern, bank account details, etc. The assessment order dated 13^th
March, 2015 pursuant to the production of profit and loss account and other
documents referred to these documents. In the assessment order dated 13^th
March, 2015 it is stated that the assessee company produced all the material
that was called for and it remained present through its chartered accountant to
submit the documents. The total income of the assessee company was computed
with reference to the profit and loss account. Therefore, the profit and loss
account was called for, was submitted by the assessee and was scrutinised.

Thus,
it cannot be said that there was any failure on the part of the assessee
company to produce all the material particulars. After considering the entire
material the assessment order was passed. The AO is now seeking to proceed on a
mere change of opinion. All these factors and the need for jurisdictional
requirement were brought to the notice of the AO by the assessee company. Yet,
the AO ignored the same and proceeded to dismiss the objections and reiterated
his decision to reopen the assessment. In these circumstances, the impugned
notice and the impugned order issued / passed by the AO were quashed and set
aside.

shailesh.kwebmaker

The Janalaxmi Co-operative Bank Ltd. vs. The Pr. CIT-1; date of order: 20th May, 2016; [ITA No. 1955/PN/2014; A.Y.: 2010-11; Bench: ‘B’ Pune ITAT] Section 263: Revision – Assessee filed detailed reply to the query raised by AO in respect of interest on NPA – Revision not possible if the AO had taken a view after due consideration of assessee’s submissions

6. The Pr. CIT-1
vs. The Janalaxmi Co-operative Bank Ltd. [Income tax Appeal No. 683 of 2017] Date of order: 26^th August, 2019 (Bombay High Court)

The Janalaxmi Co-operative Bank Ltd. vs. The Pr. CIT-1;
date of order: 20^th May, 2016; [ITA No. 1955/PN/2014; A.Y.: 2010-11;
Bench: ‘B’ Pune ITAT]

Section 263: Revision – Assessee filed detailed reply to
the query raised by AO in respect of interest on NPA – Revision not possible if
the AO had taken a view after due consideration of assessee’s submissions

The
assessee is a co-operative society engaged in the banking business. It filed
its return of income for the A.Y. 2010-11 declaring Nil income. During the
course of scrutiny assessment, the AO issued a questionnaire to the assessee
who replied to the same. One of the queries was with respect to interest on
non-performing assets, Rs. 2,64,59,614, debited to profit and loss account. The
AO was satisfied with the reply of the assessee and did not make any addition
with regard to the interest on NPAs.

However,
the CIT issued a notice u/s 263 of the Act on the ground that no proper inquiry
/ verification was carried out by the AO in respect of interest expenses and
the NPAs claimed by the assessee. The CIT held that any provision towards any
unascertained liability is not an allowable deduction under the provisions of
the Act, therefore, the entire provision towards interest expenditure,
amounting to Rs. 2,64,59,614, needs to be disallowed. The CIT vide the impugned
order set aside the assessment order and directed the AO to pass fresh orders
after conducting proper inquiries / verification on the aforementioned issue.

Being
aggrieved by the order, the assessee filed an appeal to the Tribunal. The
assessee submitted that the issue relating to interest arising on NPAs has been
settled by the Supreme Court in the case of UCO Bank vs. CIT [154 CTR 88
(SC)]. The Bombay High Court had also, in the case of Deogiri
Nagari Sahakari Bank Ltd. in Income Tax Appeal No. 53 of 2014 on 22^nd
January, 2015, decided the issue in favour of the assessee. The assessee
further submitted that the Co-ordinate Bench of the Tribunal, in the case of
similarly situated other assessees vide common order dated 4^th
February, 2016, has deleted the addition made on account of interest accrued on
NPAs.

The
Tribunal held that a perusal of the submissions made by the assessee before
ACIT shows that during the course of assessment proceedings, the assessee has
given detailed reply to the query raised by the AO in respect of interest on
the NPAs. Therefore, once the issue has been considered by the AO in scrutiny
assessment proceedings, provisions of section 263 of the Act cannot be invoked
unless two conditions are satisfied, that is, (i) the assessment order is erroneous;
and (ii) it is prejudicial to the interest of Revenue. In the present case the
reason/s given by CIT to hold that the assessment order is erroneous is not
tenable.

Being
aggrieved by the order, the Revenue filed an appeal to the High Court. The Court
held that during the regular assessment proceedings leading to the assessment
order, specific queries with respect to interest for NPAs / sticky loans being
chargeable to tax were raised and the assessee had given detailed replies to
them. The AO, on consideration, did not make any addition with regard to it in
the return, i.e., on account of interest on sticky loans. In CIT vs. Fine
Jewellery (India) Ltd., 372 ITR 303 rendered in the context of section
263 of the Act, it was held that once inquiries are made during the assessment
proceedings and the assessee has responded to the queries, then non-mentioning
of the same in the assessment order would not lead to the conclusion that the
AO had not inquired into this aspect. In the result, the appeal of the Revenue
was dismissed.

shailesh.kwebmaker

Search and seizure – Assessment of third person – Sections 132, 132(4) and 153C of ITA, 1961 – Condition precedent – Amendment permitting notice where seized material pertained to assessee as against existing law that required Department to show that seized material belonged to assessee – Amendment applies prospectively – Where search took place prior to date of amendment, Department to prove seized documents belonged to assessee – Statement of search party containing information relating to assessee no document belonging to assessee – AO wrongly assumed jurisdiction u/s 153C

23. Principal
CIT vs. Dreamcity Buildwell P. Ltd.; [2019]
417 ITR 617 (Del.) Date
of order: 9^th August, 2019 A.Y.:
2005-06

Search
and seizure – Assessment of third person – Sections 132, 132(4) and 153C of
ITA, 1961 – Condition precedent – Amendment permitting notice where seized
material pertained to assessee as against existing law that required Department
to show that seized material belonged to assessee – Amendment applies
prospectively – Where search took place prior to date of amendment, Department
to prove seized documents belonged to assessee – Statement of search party
containing information relating to assessee no document belonging to assessee –
AO wrongly assumed jurisdiction u/s 153C

For the
A.Y. 2005-06 the Tribunal set aside the assessment order passed by the AO u/s
153C of the Income-tax Act, 1961 holding that the assumption of jurisdiction
u/s 153C by the AO was not proper. The Tribunal found that two of the documents
referred to, viz., the licence issued to the assessee by the Director, Town and
Country Planning, and the permission granted to the assessee by him for
transferring the licence could not be said to be documents that constituted
incriminating evidence revealing any escapement of income.

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

‘(i) Search and the issuance of notice u/s 153C
pertained to the period prior to 1^st June, 2015 and section 153C as
it stood at that relevant time applied. The change brought about prospectively
w.e.f. 1^st June, 2015 by the amended section 153C(1) did not apply.
Therefore, the onus was on the Department to show that the incriminating material
or documents recovered at the time of search belonged to the assessee. It was
not enough for the Department to show that the documents either pertained to
the assessee or contained information that related to the assessee.

(ii) The Department had relied on three
documents to justify the assumption of jurisdiction u/s 153C against the
assessee. Two of them, viz., the licence issued to the assessee by the
Director, Town and Country Planning, and the letter issued by him permitting
the assessee to transfer such licence, had no relevance for the purpose of
determining escapement of income of the assessee for the A.Y. 2005-06.
Consequently, even if those two documents could be said to have belonged to the
assessee, they were not documents on the basis of which jurisdiction could be
assumed by the A O u/s 153C.

(iii) The third document, the statement made by
the search party during the search and survey proceedings, was not a document
that “belonged” to the assessee. While it contained information that “related”
to the assessee, it could not be said to be a document that “belonged” to the
assessee. Therefore, the jurisdictional requirement of section 153C as it stood
at the relevant time was not met. No question of law arose.’

shailesh.kwebmaker

Revision – Section 264 of ITA, 1961 – Belated application – Merely because assessee filed application belatedly, revision application could not be rejected without considering cause of delay

22. Aadil
Ashfaque & Co. (P) Ltd. vs. Principal CIT; [2019]
111 taxmann.com 29 (Mad.) Date
of order: 24^th September, 2019 A.Y.:
2007-08

Revision
– Section 264 of ITA, 1961 – Belated application – Merely because assessee
filed application belatedly, revision application could not be rejected without
considering cause of delay

The
petitioner filed e-return on 29^th October, 2007. Due to inadvertence
and by a mistake committed by an employee of the petitioner company, both the
gross total income and the total income were shown as Rs. 2.74 crores, instead
of total income being Rs. 56.91 lakh. Therefore, the petitioner filed its
revised return on 26^th July, 2010 altering only the figures in gross
total income and total income without making any changes with respect to the
other columns and with income computation. While doing so, after five years of
filing the revised return, the petitioner company received a communication
dated 7^th August, 2015 stating that there is outstanding tax demand
for the A.Y. 2007-08 of Rs. 87.26 lakhs. The petitioner was not aware of the
intimation issued u/s 143(1) till it was received by him on 23^rd
September, 2015.

The
petitioner approached the first respondent and filed an application u/s 264 on
6^th October, 2015. The same was rejected by the impugned order for
the reason that it was filed beyond the period of limitation.

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

‘(i) The petitioner claims that gross total
income shown in the original return filed on 29^th October, 2007 as
Rs. 2.74 crores is a factual mistake; and, on the other hand, it is only a sum
of Rs. 56.91 lakh as the sum to be reflected as gross total income in all the
places. In order to rectify such mistake, it is seen that the petitioner has
filed a revised return on 26^th July, 2010. By that time, it seems
that the intimation under section 143(1) raising the demand was issued on 20^th
October, 2008 itself.

(ii) According to the petitioner, they are not
aware of such intimation. On the other hand, it is contended by the Revenue
that such intimation was readily available in the e-filing portal of the
petitioner. No doubt, the petitioner has approached the first respondent and
filed application u/s. 264 to set right the dispute. However, the fact remains
that such application was filed on 6^th October, 2015 with delay. The
first respondent has specifically pointed out that the petitioner has not filed
any application to condone the delay, specifically indicating the reasons for
such delay. It is also seen that the first respondent has chosen to reject the
application only on the ground that it was filed belatedly. Therefore, the ends
of justice would be met if the matter is remitted back to the first respondent
Commissioner for reconsidering the matter afresh if the petitioner is in a
position to satisfy the first respondent that the delay in filing such
application u/s 264 was neither wilful nor intentional.’

shailesh.kwebmaker

PERIOD OF INTEREST ON REFUND IN CASES OF DELAYED CLAIMS OF DEDUCTIONS

ISSUE FOR CONSIDERATION

Section 244A(1) provides for the grant of
simple interest in cases where refund is due to the assessee – simple interest
at the rates prescribed for different circumstances and for the periods
specified in the section. No interest is payable if the amount of refund is
less than 10% of the tax as determined u/s 143(1) or on regular assessment. In
a case where the return of income is not filed by the due date specified u/s
139(1), the interest is payable for the period commencing with the date of
filing the return. Ordinarily, interest is calculated at the rate of 0.5% for
every month or part of a month. Additional interest at the rate of 3% per annum
is granted in cases where the refund due as the result of appellate or
revisional orders is delayed beyond the period of the time allowed u/s 153(5)
of the Act. The amount of interest granted gets adjusted on account of
subsequent orders which have the effect of varying the amount of refund.

Where the proceedings resulting in the
refund are delayed for reasons attributable to the assessee, wholly or in part,
the period of the delay attributable to him is excluded from the period for
which interest is payable as per the provisions of sub-section (2) of section
244A. In deciding the question as to the period to be excluded, the decision of
the Commissioner shall be final.

Often, the refund arises or its amount
increases where a claim for deduction is made after filing the return of income
by filing a revised return, or placing the claim in the assessment or appellate
proceedings. In such cases, an interesting issue arises about deciding whether
the period for which the claim is deferred can be excluded for calculation of
the interest due to the assessee. Conflicting views of the courts are available
on the subject of excluding the period or otherwise. Gauhati and a few other
high courts have taken a view that the refund can be said to have been delayed
due to the failure of the assessee in claiming the deduction in time and the
period in question should be excluded while granting the interest on refund.
The Bombay, Gujarat and the other high courts have held that such situations of
deferred claims cannot be held to reduce the period for which the interest is
otherwise allowable to the assessee under
sub-section (1).

THE ASSAM ROOFING LTD. CASE

The issue came up for consideration in the
case of Assam Roofing Ltd. vs. CIT, 11 taxmann.com 279
(Gauhati). In that case the assessee filed its return of income on 31^st
December, 1992 for the assessment year 1991-92, including the receipt of the
transport subsidy in the total income. In the note it was claimed to be a
capital receipt, though during the assessment proceedings completed on 16^th
May, 1994 u/s 143(3) no separate representation was made by the assessee
claiming that subsidy was not taxable. An appeal was filed against the
assessment order for contesting the addition on account of the said subsidy
which was decided in its favour by the Commissioner (Appeals) by an order dated
27^th October, 1994 directing that the transport subsidy amounting to
Rs. 98,79,266 be deleted from the total income. The AO passed an order dated 13^th
December, 1994 to give effect to the appellate order, deleting transport
subsidy amounting to Rs. 98,79,266. He also allowed interest u/s 244A on the
amount of refund that was found due to the assessee as a result of the
appellate order for a period of 33 months, i.e., from 1^st April,
1992 to 13^th December, 1994.

Subsequently, in the rectification
proceedings, the AO held that the grant of refund was delayed for reasons
attributable to the assessee and, as a consequence, interest on refund was held
to be payable only for a period of eight months, that is, from 16^th
May, 1994 (date of completion of assessment) to 13^th December, 1994,
that is, the date of order giving effect to the appellate order. The appeal by
the assessee against the order reducing the interest was allowed by the
Commissioner (Appeals) and his order was confirmed by the Tribunal. The
following substantial question of law was raised: ‘Whether on the facts and
in the circumstances of the case, the Tribunal was justified and correct in
allowing interest u/s 244A of the Income-tax Act, 1961 to the assessee for the
period of delay in granting refund of tax where such delay is due to reasons
attributable to the assessee?’

The Revenue contended that the assessee had
voluntarily included the amount received on account of transport subsidy as
taxable income and on the said basis the assessment was made; at no point of
time in the course of the assessment proceedings had the assessee taken the
stand that the amount received on account of transport subsidy was not taxable;
the issue was raised by the assessee only in the appeal filed before the
Commissioner (Appeals) which was disposed of by the order dated 27^thOctober,
1994; thereafter, on 13^th December, 1994 the amount of transport
subsidy earlier included in the taxable income of the assessee was deleted and
orders were passed for the refund.

Relying on the provisions of section 244A(2)
of the Act, it was contended that the payment of refund was made at the
particular point of time only because of the conduct of the assessee in not
raising the said issue at any earlier point of time and the payment of refund, therefore,
got delayed for reasons attributable to the assessee; consequently, the
assessee was not entitled for interest for the period for which he was at
fault.

In reply the assessee contended that the
provisions of Chapter XIX of the Act made it abundantly clear that the grant of
refund was not contingent on any application of the assessee and such refund
u/s 240 of the Act was consequential to any order passed in an appeal or other
proceedings under the Act; no claim for refund was required to be lodged; the
provisions of section 244A(2) of the Act had no application to the case
inasmuch as the refund was consequential to the appellate order, no proceeding
for refund could be visualised so as to hold the assessee responsible for any
delay in finalisation of such a proceeding.

Relying on the decision in Sandvik
Asia Ltd. vs. CIT, 280 ITR 643, it was contended by the assessee that
there was a compensatory element in the interest that was awardable u/s 244A of
the Act and that such interest mitigates the hardship caused to the assessee on
account of wrongful levy and collection of tax. Reliance was also placed on the
decision of the Punjab and Haryana High Court in the case of National
Horticulture Board vs. Union of India, 253 ITR 12 to contend that interest
on refund was automatic and consequential and did not depend on initiation of a
proceeding for refund or on raising a claim for refund, as the case may be.

Section 244A of the Act, the Court observed,
contemplated grant of interest at the specified rate from the first day of
April of the assessment year to the date on which refund was granted in case of
payments of tax as contemplated by sub-clauses (a) and (b) of sub-section (1).
It further noted that under sub-section (2) of section 244A if the ‘proceedings
resulting in the refund’ were delayed for reasons attributable to the assessee,
no interest was to be awarded for the period of such delay for which the
assessee was responsible. Significantly, the Court took note of the expression ‘proceedings
resulting in revision (to be read as “refund”)’ appearing in sub-section
(2) of Section 244A to hold that the scope of section 244A(2) was not limited
to the cases of sections 238 and 239 but covered the cases of the refunds
arising on account of any order under the scheme of the Act; the expression
‘proceeding’ referred to in sub-section (2), more reasonably, would mean any
proceeding as a result of which refund had become due; viewed thus, the
expression ‘proceeding’ might take within its ambit an appeal proceeding
consequential to which refund had become due. The Court supported its decision
by relying on the decision of the Punjab and Haryana High Court in the
National Horticulture Board case (supra).

The Court in
deciding the issue noted the fact that the assessee itself declared the amount
of transport subsidy received by it to be taxable and voluntarily paid the tax
and no claim to the contrary was raised in the course of the assessment
proceeding; it was only in the appeal filed that the issue was raised and was
allowed by the Commissioner (Appeals) and a consequential refund was granted.

The Court ruled that in the above
circumstances, it could not but be held that the assessee was responsible for
the delay in grant of refund and it would be correct to hold that the interest
was payable only with effect
from 16th May, 1994 till the date of payment of the refundable amount.

The Gauhati High Court allowed the appeal of
the Revenue and reversed the order of the Tribunal by holding that the delay in
grant of refund was attributable to the assessee and as a consequence the
period for which interest on refund was to be granted required to be reduced.

MELSTAR INFORMATION TECHNOLOGIES LTD. CASE

The issue recently arose in the case of the CIT
vs. Melstar Information Technologies Ltd., 106 taxmann.com 142 (Bom.).
In this case, the assessee had not claimed certain expenditure before the AO
but raised such a claim before the Tribunal which remanded the proceedings to
the Commissioner (Appeals) who allowed the claim of expenditure. The deduction
so allowed resulted in a refund of taxes paid and it is at that juncture that
there arose the question u/s 244A of payment of interest on such refund.

It appears that there was a dispute about
the period for which the interest was to be granted to the assessee, or about
the eligibility of the assessee to interest. The AO seemed to be of the view
that no interest was payable to the assessee for the reason that the delay in
granting the refund was entirely attributable to the assessee inasmuch as he
had delayed the claim for deduction. The AO, while granting refund, seemed to
have denied the interest by relying on the provisions of section 244A(2) after
taking the approval of the Commissioner. The Tribunal, on an appeal by the
assessee, held that an appeal was maintainable against the order refusing the
interest on refund and further held that the delay could not be held to be
attributable to the assessee and, therefore, the Tribunal directed the payment
of interest.

The Revenue, aggrieved by the order of the
Tribunal had raised the following question for the Court’s consideration: ‘Whether
on the facts and circumstances of the case and in law, the ITAT has erred in
law in assuming jurisdiction to hear the appeal when no such appeal lies before
the ITAT or before CIT(A) because as per the provisions of Section 244A(2) of
the Income Tax Act, decision of CIT is final as held by Kerala High Court in
the case of Kerala Civil Supplies 185 taxman 1?’

The Court noted that the issue pertained to
interest payable to the assessee u/s 244A of the Act where the Revenue did not
dispute the assessee’s claim of refund and its eligibility to interest thereon
in ordinary circumstances. However, since the delay in the proceedings
resulting in the refund was attributable to the assessee, by virtue of
sub-section (2) of section 244A of the Act the assessee was not entitled to
such interest.

The Court observed that there was no
allegation or material on record to suggest that any of the proceedings were
delayed in any manner on account of reasons attributable to the assessee and
therefore the Tribunal was correct in allowing the interest to the assessee.

The Court, in deciding that there was no substantial
question of law involved in the appeal of the Revenue, relied on the decision
in the case of Ajanta Manufacturing Ltd. vs. Deputy CIT, 391 ITR 33
(Guj.) wherein a similar issue was considered. In that case, the
assessee had made a belated claim for deduction during assessment on filing a
revised return of income, and the Revenue had denied the interest by
attributing the delay in grant of refund to the assessee on applying the
provisions of sub-section (2) of section 244A of the Act. The Court noted with
approval the following observations of the said decision:

“16. We would also examine the order
of the Commissioner on merits. As noted, according to the Commissioner the
assessee had raised a belated claim during the course of the assessment proceedings
which resulted into delay in granting of refund and therefore, the assessee was
not entitled to interest for the entire period from the first date of
assessment year till the order giving effect to the appellate order was passed.
We cannot uphold the view of the Commissioner. First and foremost requirement
of sub-section (2) of Section 244A is that the proceedings resulting into
refund should have been delayed for the reasons attributable to the assessee,
whether wholly or in part. If such requirement is satisfied, to the extent of
the period of delay so attributable to the assessee, he would be disentitled to
claim interest on refund. The act of revising a return or raising a claim
during the course of the assessment proceedings cannot be said to be the
reasons for delaying the proceedings which can be attributable to the assessee.
(The) mere fact that the claim came to be granted by the Appellate Commissioner
would not change this position. In essence, what the Commissioner (Appeals) did
was to allow a claim which in law, in his opinion, was allowable by the
Assessing Officer. In other words, by passing order in appeal, he merely
recognised a legal position whereby the assessee was entitled to claim certain
benefits of reduced tax. Surely, the fact that the assessee had filed the
appeal which ultimately came to be allowed by the Commissioner, cannot be a
reason for delaying the proceedings which can be attributed to the assessee.

17. The Department does not contend that
the assessee had needlessly or frivolously delayed the assessment proceedings
at the original or appellate stage. In absence of any such foundation, (the)
mere fact that the assessee made a claim during the course of the assessment
proceedings which was allowed at the appellate stage would not ipso facto imply
that the assessee was responsible for causing the delay in the proceedings
resulting into refund. We may refer the decision of the Kerala High Court in
case of CIT vs. South Indian Bank Ltd., reported in (2012) 340 ITR 574 (Ker)
in which the assessee had raised a belated claim for deduction which was
allowed by the Commissioner (Appeals). The Revenue, therefore, contended that
for such delay, interest should be declined under Section 244A of the Act. In
the said case also, the assessee had not made any claim for deduction of
provision of bad debts in the original return. But before completion of the
assessment, the assessee had made such a claim which was rejected by the
Assessing Officer. The Commissioner allowed the claim and remanded the matter
to the Assessing Officer. Pursuant to which, the assessee became entitled to
refund. Revenue argued that the assessee would not be entitled to interest in
view of Section 244A(2). In this context, the Court held in Para. 6 as under
(page 578 of 340 ITR):

‘6.
Sub-section (2) of section 244A provides that the assessee shall not be
entitled to interest for the period of delay in issuing the proceedings leading
to the refund that is attributable to the assessee. In other words, if the
issue of the refund order is delayed for any period attributable to the
assessee, then the assessee shall not be entitled to interest for such period.
This is of course an exception to clauses (a) and (b) of section 244A(1) of the
Act. In other words, if the issue of the proceedings, that is, refund order, is
delayed for any period attributable to the assessee, then the assessee is not
entitled to interest for such period. Further, what is clear from sub-section
(2) is that, if the officer feels that delay in refund for any period is
attributable to the assessee, the matter should be referred to the Commissioner
or Chief Commissioner or any other notified person for deciding the issue and
ordering exclusion of such periods for the purpose of granting interest to the
assessee under section 244A(1) of the Act. In this case, there was no decision
by the Commissioner or Chief Commissioner on this issue and so much so, we do
not think the Assessing Officer made out the case of delay in refund for any
period attributable to the assessee disentitling for interest. So much so, in
our view, the officer has no escape from granting interest to the assessee in
terms of section 244A(1) (a) of the Act’.”

OBSERVATIONS

The issue under consideration revolves in a
narrow compass; whether the claim for deduction, made subsequent to the filing
of return of income, can be held to be attracting the provisions of sub-section
(2) of section 244A for excluding the period of delay in claiming the deduction
from the period for which interest is granted u/s 244A on the amount of refund
that has resulted or has increased due to the grant of deduction pursuant to
the delayed claim.

The relevant sub-section reads as under: (2)
If the proceedings resulting in the refund are delayed for reasons
attributable to the assessee, whether wholly or in part, the period of the
delay so attributable to him shall be excluded from the period for which
interest is payable under sub-sections (1) or (1A), and where any question
arises as to the period to be excluded, it shall be decided by the Principal
Chief Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner whose decision thereon shall be final.

The requirement of sub-section (2) is that
the proceedings resulting into refund should have been delayed and the delay
should be for the reasons attributable to the assessee. Only where such
requirement is satisfied, the interest relating to the period of delay so
attributable to the assessee would be denied.

On a careful reading of the provision of
sub-section (2) it is gathered that the said provisions are attracted only in
cases where the twin conditions are cumulatively satisfied: the proceedings
resulting into refund have been delayed, and further that the delay is for
reasons that are attributable to the assessee. Non-satisfaction of any one of
the conditions would not disentitle the assessee from the claim of interest on
refund; for this purpose it may be essential to appreciate the contextual
meaning of the term ‘proceedings’. Can the acts of filing the revised return or
claiming the reliefs in assessment or appellant proceedings be construed to be
‘proceedings’ for attracting the provisions of sub-section (2)? May be not. The
proceedings referred to in sub-section (2) should, in our opinion, mean and
co-rate the proceedings in respect of assessment or adjudication of appeals and
it is here that the assessee should be found to have delayed such proceedings
in any manner for disentitling him from the claim of interest.

Revising the return or placing the claim
during such proceedings cannot be considered to be part of proceedings
resulting in refund. It is essential that the proceedings in question should
further result in refund. Only assessment, rectification, revision or appellate
proceedings can be considered to be proceedings that result in refund. It is
such proceedings that should have been delayed and not the claim of deduction
or refund, and further the delay in such proceedings should be attributable to
the assessee. It is for these reasons some of the Courts have given emphasis to
ascertain whether the assessee had contributed to delay the assessment
proceedings on frivolous grounds without placing their analysis of provisions
in so many words in the orders.

Our understanding is further strengthened by
the amendments of 2016 for insertion of clause “a” in sub-section (1) of
section 244A with effect from 1^stJune, 2016 to provide that the
interest would be paid for the period commencing from the date of filing of
return of income where such return is filed outside the due date prescribed u/s
139(1). In the absence of such an amendment, interest could not have been
denied to the assessee for the delay in filing the return of income as was held
by some of
the Courts.

The Court in the Assam Roofing Limited
case rightly held that the meaning of the term ‘proceedings resulting in
refund’ was not limited to cases of sections 238 and 239 of the Act but also
cover the other cases of refund and would include any proceedings resulting in
refund and such proceedings also included the appellate proceedings. Having
held that, the Court failed in appreciating that the assessee was not
responsible for delaying any of the proceedings that resulted in refund or said
to have been delayed. Instead, the Court held that the act of filing the claim
in the appellate proceedings was to be construed as an act of delaying the
proceedings that resulted in refund. It therefore held that putting a claim at
the appellate stage was responsible for delay in grant of refund and therefore
the interest for the period up to the date of putting the claim was not
allowable. It is respectfully submitted that this was a classic case of missing
the wood for the trees; the case where the Court was preoccupied with the delay
in placing the claim for deduction, overlooking the important fact that what
was relevant for the application of sub-section (2) was delay in the proceeding
and not the delay in grant of refund as a consequence of the delayed claim. It
might be that the assessee was responsible for making belated claim but
certainly not delaying
the proceedings.

It is required to be appreciated that the
interest is the consequence of payment of excess tax. Accordingly, once excess
tax is found to have been paid at whatever stage, the tax was required to be
refunded. And as a consequence interest was bound to be paid unless the
assessee is shown to be responsible for delaying the proceedings and not the
refund. Putting a delayed claim for the deduction, otherwise allowable under
the Act, under no circumstances could be construed as an act of delaying the
‘proceedings’, when it was otherwise the duty of the authorities to compute the
correct total income by allowing all deductions that were allowed under the Act
and simultaneously excluding all such receipts that were required to be
excluded. (Please see circular No. 26 dated 7^th July, 1955.)

The act of revising a return or raising a
claim during the course of the assessment proceedings cannot be said to be part
of the proceedings for refund and cannot also be said to be the reasons for
delaying the proceedings which can be held to be attributable to the assessee.
This understanding will not change on account of the claim for deduction
outside the return of income. What happens on allowing the claim is something
which is otherwise required to be allowed as per the law by the AO. In other
words, by passing an order he merely recognises a legal position whereby the
assessee is entitled to claim certain benefits of reduced tax. Surely, the
claim in the proceedings ultimately resulting in refund cannot be construed as
an act of delaying the proceedings that can be attributed to the assessee. In
the absence of any finding that the assessee was responsible for delaying the
proceedings, the mere fact that the assessee made a claim during the course of
the assessment proceedings which was allowed at the appellate stage would not ipso
facto imply that the assessee was responsible for causing the delay in the
proceedings that resulted into refund.

In the case of Ajanta Manufacturing
Limited, 72 taxmann.com, 148 (Guj.), the assessee company had included
the receipt of subsidy in total income and paid tax thereon while filing the
return of income. During the course of assessment, a claim was made under a
letter for excluding the subsidy for receipt from income. The claim of the
assessee was allowed in appeal by the Commissioner (Appeals) and the reduction
in income resulted in refund. In deciding the period for which the interest
should be allowed for such refund, the High Court held that the disabling
provisions of sub-section 2 and section 244A were not attracted in the facts of
the case and the interest should be granted for the full period as per the
provisions of section 244(1) of the Act.

In the case of Sahara India Savings
& Investments Corporation Limited, 38 taxmann.com 192 (All.) the
refund was not granted for not filing TDS certificates with the return of
income. Subsequently, the refund became due on filing of the certificates;
while the refund was granted, the interest thereon was denied on the ground
that the refund was delayed due to non-filing of TDS certificates with the
return of income. The Allahabad High Court held that a delay in application for
refund could not be construed as a delay attributable to the assessee and the
provisions of sub-section (2) were not attracted in the facts of the case.

In the case of Larsen & Toubro,
330 ITR 340 (Bom.), again in the circumstances where the TDS
certificates were not filed with return of income, the Court upheld the order
of the Tribunal holding that interest u/s 244A could not be denied only on the
ground that certificates were not filed with the return of income.

The Supreme Court in the case of H.E.G.
Limited, 334 ITR 331 (SC), held that interest was payable to the
assessee u/s 244A for withholding of the refund by the AO on account of denial
of credit for TDS.

The Punjab and
Haryana High Court in the case of National Horticulture Board, 253 ITR 12
(P&H), held that the interest u/s 244A could not be denied on the
ground of the delayed application for refund of the taxes paid.

In the case of South Indian Bank
Limited, 340 ITR 574 (Ker.), the Commissioner (Appeals) had allowed the
related claim for deduction. The interest on resulting refund was denied by the
income tax authorities on the ground of the delayed claim for deduction which
was made, outside the return of income, in the assessment proceedings. The
Kerala High Court held that the AO had no escape from granting interest to the
assessee.

The Kerala High Court, in the case of Pala
Marketing Co-Op. Society Limited, 79 taxmann.com 438 (Ker.), however,
held that the assessee was not entitled to interest on refund where he had
delayed the filing of return of income even where such delay was condoned
following its own decision in the case of M. Ahammadkutty Haji, 288 ITR
304. However, the Rajasthan High Court in the case of Dariyavie
Singh Karnavat, 18 taxmann.com 180, held that the interest was payable
in similar circumstances ignoring the decision of the Kerala High Court in the M.
Ahammadkutty case cited before
the Court.

Interestingly, the Karnataka High Court in
the case of Dinakar Ullal, 323 ITR 452 (Kar.), ruled out the
application of circular No. 12 dated 30^th October, 2003 and circular
No. 13 dated 22^nd December, 2006 issued by CBDT. In granting the
interest on refund due on an application for condonation of delay in claiming
the refund of taxes paid, the said circulars provided that no interest on
refund should be granted in cases where the delay in application of refund was
favourably condoned.

Recently, the Bombay High Court in the case
of State Bank of India in ITA No. 1218 of 2016 held that interest
on refund could not be denied in a case where the refund arose on account of
the claim for deduction made during the assessment proceedings… following its
own decision in the case of Chetan M. Shah, 53 taxmann.com 18.

The better view appears to be the
one in favour of granting interest for the full period commencing from the
first day of the assessment year to the date of the grant of refund.

shailesh.kwebmaker

Section 80-IA – Deduction u/s. 80-IA – Industrial undertaking – Generation of power – Assessee owning three units and claiming deduction in respect of one (eligible) unit – Losses of earlier years of other two units cannot be notionally brought forward and set off against profits of eligible unit – Unit entitled to deduction u/s. 80-IA to be treated as an independent unitSection 80-IA – Deduction u/s. 80-IA – Industrial undertaking – Generation of power – Assessee owning three units and claiming deduction in respect of one (eligible) unit – Losses of earlier years of other two units cannot be notionally brought forward and set off against profits of eligible unit – Unit entitled to deduction u/s. 80-IA to be treated as an independent unit

CIT vs. Bannari Amman Sugars Ltd.;
412 ITR 69 (Mad)

Date of order: 28^th
January, 2019

A.Y.: 2004-05

Section
80-IA – Deduction u/s. 80-IA – Industrial undertaking – Generation of power –
Assessee owning three units and claiming deduction in respect of one (eligible)
unit – Losses of earlier years of other two units cannot be notionally brought
forward and set off against profits of eligible unit – Unit entitled to
deduction u/s. 80-IA to be treated as an independent unit

The
assessee manufactured and sold sugar. It operated three power generation units,
two in Karnataka and one in Tamil Nadu with a capacity of 16, 20 and 20
megawatts, respectively. For the A.Y. 2004-05, the assessee claimed deduction
u/s. 80-IA of the Income-tax Act, 1961 for the first time in respect of its 16
megawatts unit in Karnataka. The A.O. set off the losses suffered by the units
in Karnataka and Tamil Nadu against the profits earned by the eligible unit and
held that the assessee had no positive profits after such set-off and hence no
deduction was liable to be granted u/s. 80-IA.

The Tribunal found that independent power purchase
agreements were entered into by the assessee which contained different and
distinct terms and conditions. It held that the provisions of section 80-IA
were attracted only in the case of the specific unit which claimed deduction
and that consolidating the profit and loss of the three units of the assessee
by the lower authorities was untenable.

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

“i) Section
80-IA(5) provides that in determining the quantum of deduction u/s. 80-IA, the
eligible business shall be treated as the only source of income of the assessee
during the previous year relevant to the initial assessment year and to every
subsequent assessment year up to and including the assessment year for which
the determination is to be made. Thus, each unit, including a captive power
plant, has to be seen independently as separate and distinct from each other
and as units for the purpose of grant of deduction u/s. 80-IA.

ii) The mere
fact that a consolidated balance sheet and profit and loss account had been
prepared for the entire business would not disentitle the assessee to claim
deduction u/s. 80-IA in respect of only one undertaking of its choice. The
assessee had maintained separate statements and had filed before the
Commissioner (Appeals) detailing separate project cost and source of finance in
respect of each unit. The assessee had exercised its claim before the A.O. for
deduction u/s. 80-IA in respect of only the 16-megawatts unit at Karnataka.
Each unit, including a captive power plant, had to be seen independently as
separate and distinct from each other and as units for the purpose of grant of
deduction u/s. 80-IA.

iii) In the light of the above discussion, the
questions of law are answered in favour of the assessee and against the Revenue
and the tax case (appeal) is dismissed.”

shailesh.kwebmaker

Section 119 – CBDT – Power to issue directions – Any directives by CBDT which give additional incentive for an order that Commissioner (Appeals) may pass having regard to its implication, necessarily transgresses on Commissioner’s exercise of discretionary quasi judicial powers. Interference or controlling of discretion of a statutory authority in exercise of powers from an outside agency or source, may even be superior authority, is wholly impermissible

Chamber of Tax Consultants vs. CBDT;
[2019] 104 taxmann.com 397 (Bom)

Date of order: 11^th April,
2019

Section
119 – CBDT – Power to issue directions – Any directives by CBDT which give
additional incentive for an order that Commissioner (Appeals) may pass having
regard to its implication, necessarily transgresses on Commissioner’s exercise
of discretionary quasi judicial powers. Interference or controlling of
discretion of a statutory authority in exercise of powers from an outside
agency or source, may even be superior authority, is wholly impermissible

The
Chamber of Tax Consultants challenged a portion of the Central Action by the
CBDT which provided incentives to Commissioner (Appeals) for passing orders in
certain manner. The Bombay High Court allowed the writ petition and held as
under:

“i) In terms of the provisions contained in
sub-section (1) of section 119, the Board may, from time to time, issue such
orders, instructions and directions to other income tax authorities as it may
deem fit for proper administration of the Act and such authorities shall
observe and follow the orders, instructions and directions of the Board. While
granting such wide powers to the CBDT under sub-section (1) of section 119, the
proviso thereto provides that no such orders, instructions or directions shall
be issued so as to require any income tax authority to make a particular assessment
or to dispose of a particular case in a particular manner.

ii) When the CBDT guidelines provide greater
weightage for disposal of an appeal by the Appellate Commissioner in a
particular manner, this proviso of sub-section (1) of section 119, would surely
be breached.

iii) Thus, the portion of the Central Action Plan
prepared by CBDT which gives higher weightage for disposal of appeals by
quality orders, i.e., where order passed by Commissioner (Appeals) is in favour
of Revenue, was to be set aside.”

shailesh.kwebmaker

Sections 2(47) and 45(4) – Capital gains – Where retiring partners were paid sums on reconstitution of assessee-partnership firm in proportion to their share in partnership business / asset, no transfer of assets having taken place, no capital gains would arise

Principal CIT vs. Electroplast
Engineers; [2019] 104 taxmann.com 444 (Bom)

Date of order: 26^th March,
2019

A.Y.: 2010-11

Sections
2(47) and 45(4) – Capital gains – Where retiring partners were paid sums on
reconstitution of assessee-partnership firm in proportion to their share in
partnership business / asset, no transfer of assets having taken place, no
capital gains would arise

Under a
Deed of Retirement cum Reconstitution of the Partnership, the original two
partners retired from the firm and three new partners redistributed their
share. Goodwill was evaluated and the retiring partners were paid a certain sum
for their share of goodwill in proportion to their share in the partnership.
The assessee-partnership firm filed return of income. The A.O. was of the
opinion that the goodwill credited by the assessee-partnership firm to its
retiring partners was capital gain arising on distribution of the capital asset
by way of dissolution of the firm or otherwise. Thus, the assessee-partnership
firm had to pay short-term capital gain tax in terms of section 45(4) of the
Income-tax Act, 1961.

The
Commissioner (Appeals) agreed with the contention of the assessee-partnership
firm that there was neither dissolution of the firm nor was the firm
discontinued. He held that the rights and interests in the assets of the firm
were transferred to the new members and in this manner amounted to transfer of
capital asset. Thus, section 45(4) would apply. The Tribunal held that section
45(4) would apply only in a case where there has been dissolution of the firm
and, thus, the conditions required for applying section 45(4) were not
satisfied.

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

“i) As per the provision of section 45(4),
profits or gains arising from transfer of capital asset by way of distribution
of capital asset on dissolution of firm or otherwise shall be chargeable to tax
as income of the firm. For the application of this provision, thus, transfer of
capital asset is necessary.

ii) In the
case of CIT vs. Dynamic Enterprises [2014] 223 Taxman 331/[2013] 40
taxmann.com 318/359 ITR 83, the full bench of the Karnataka High Court
has held that after the retirement of the partners, the partnership continued
and the business was also carried on by the remaining partners. There was,
thus, no dissolution of the firm and there was no distribution of capital
asset. What was given to the retiring partners was money representing the value
of their share in the partnership. No capital asset was transferred on the date
of retirement. In the absence of distribution of capital asset and in the
absence of transfer of capital asset in favour of the retiring partners, no
profit or gain arose in the hands of the partnership firm.

iii) In the instant case, admittedly, there was no
transfer of capital asset upon reconstitution of the firm. All that happened
was that the firm’s assets were evaluated and the retiring partners were paid
their share of the partnership asset. There was clearly no transfer of capital
asset.”

shailesh.kwebmaker

Section 37(1) – Business expenditure – Compensation paid by assessee developer to allottees of flats for surrendering their rights was to be allowed as business expenditure

Gopal Das Estates & Housing (P)
Ltd. vs. CIT; [2019] 103 taxmann.com 334 (Delhi)

Date of order: 20^th March,
2019

Section
37(1) – Business expenditure – Compensation paid by assessee developer to
allottees of flats for surrendering their rights was to be allowed as business
expenditure

The
assessee was engaged in the business of construction and sale of commercial
space. The assessee developed a 17-storeyed building known as GDB in New Delhi.
It followed the Completed Contract Method (CCM) as compared to the Percentage
Completion Method (PCM). It booked flats to various persons after receiving
periodical amounts as advance. Some of the allottees of the flats refused to
take them for completion since the New Delhi Municipal Council (NDMC) changed
the usage of the Lower Ground Floor (LGF). The assessee then started
negotiating with the relevant flat buyers and persuaded them to surrender their
ownership and allotment letters. The assessee repaid advance money received
from these flat owners and also paid compensation in lieu of surrender
of their rights in the flats. This expenditure was claimed by the assessee as
‘revenue in nature’ and was charged to the profit and loss account (P&L
Account).

The A.O.
observed that the assessee had paid compensation amount ‘once and for all to
repurchase the property’ and this was ‘in fact a sale consideration and could
not be allowed as business expenditure.’ He observed further that flat owners
had shown the amount received from the assessee as capital gains in their books
of account as well as income tax returns after indexation of the cost of
acquisition. Accordingly, the payment of compensation towards ‘repurchase of
the flat’ was disallowed by holding that it was ‘a capital expenditure’. The
said amount was added back to the income of the assessee.

The
Commissioner (Appeals) directed that compensation paid to the allottees of the
flats for surrendering the rights therein be allowed as business expenditure of
the assessee. But the Tribunal set aside the order of the Commissioner
(Appeals) and restored the order of the A.O.

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

“i) In the instant case, the assessee has a
plausible explanation for making such payment of compensation to protect its
‘business interests.’ While it is true that there was no ‘contractual obligation’
to make the payment, it is plain that the assessee was also looking to build
its own reputation in the real estate market.

ii) Further, the mere fact that the recipients
treated the said payment as ‘capital gains’ in their hands in their returns
would not be relevant in deciding the issue whether the payment by the assessee
should be treated as ‘business expenditure.’ It is the point of view of the
payer which is relevant.

iii) The payment made by the assessee to the
allottees of the flats for surrendering the rights therein should be allowed as
business expenditure of the assessee.”

shailesh.kwebmaker

Section 37(1) and Rule 9A of ITR 1962 – Business expenditure – Where assessee was engaged in business of production and distribution of films, cost of prints as well as publicity and advertisements incurred after production as well as their certification by Censor Board, the same would not be governed by Rule 9A, they would be allowable as business expenditure u/s. 37(1)

CIT vs. Dharma Productions Ltd.;
[2019] 104 taxmann.com 211 (Bom)

Date of order: 19^th March,
2019

A.Y.s: 2006-07 and 2009-10

Section
37(1) and Rule 9A of ITR 1962 – Business expenditure – Where assessee was
engaged in business of production and distribution of films, cost of prints as
well as publicity and advertisements incurred after production as well as their
certification by Censor Board, the same would not be governed by Rule 9A, they
would be allowable as business expenditure u/s. 37(1)

The
assessee was engaged in the business of production and distribution of feature
films. The assessee claimed expenditure incurred for positive prints of feature
films and further expenditure on account of advertisements. The A.O. noticed
that these expenditures were incurred by the assessee after issuance of
certificate by the Censor Board and, hence, he disallowed the assessee’s claim
holding that such expenditure was not allowable deduction in terms of Rule 9A
and Rule 9B.

The Commissioner (Appeals), confirmed the
disallowance stating that any expenditure which was not allowable under Rule 9A
could not be granted in terms of section 37; thus, he held that the expenditure
on the prints and publicity expenses are neither allowable under Rule 9A nor
u/s. 37. However, 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) Sub-rule
(1) of rule 9A provides that in computing the profits and gains of the business
of production of feature films, the deduction in respect of the cost of
production of a feature film certified for release by the Board of Film Censors
in a previous year would be allowed in accordance with the provisions of
sub-rule (2) to sub-rule (4).

ii) Clause (ii) of Explanation to sub-rule
(1) explains the term ‘cost of production’ in relation to a feature film as to
mean expenditure incurred for preparation of the film but excluding (a)
expenditure incurred in preparing positive prints, and (b) expenditure
incurred in connection with advertisement of the film after it is certified for
release by the Board of Film Censors. The sub-rules (2) to (4) of rule 9A make
special provisions for deduction in respect of profits and gains of the
business of production of feature films. For example, in terms of sub-rule (2)
of rule 9A, where a feature film is certified for release by the Board of Film
Censors in any previous year and in such previous year, the film producer sells
all rights of exhibition of the film, the entire cost of production of the film
shall be allowed as a deduction in computing the profits and gains of such
previous year. However, if the film producer either himself exhibits the film
on a commercial basis or sells the rights of exhibition of the film in respect
of some of the areas, or he himself exhibits the film in certain areas and sells
the rights in the rest and the film is released for exhibition at least 90 days
before the end of such previous year, the cost of production of the feature
film will be allowed as a deduction in computing the profits and gains of such
previous year. As per sub-rule (3) of rule 9A, if the feature film is not
released for exhibition on a commercial basis at least 90 days before the end
of previous year, a different formula for allowing the cost of production would
apply. These provisions thus make a special scheme for deduction for cost of
production in relation to the business of production of feature films. One
thing to be noted is that no part of the cost of production as defined in
clause (ii) of Explanation to sub-rule (1) is to be denied to the
assessee permanently. It is only to be deferred to the next assessment year
under certain circumstances.

iii) All these provisions would necessarily be
applied in relation to the cost of production of a feature film. In other
words, if a certain expenditure is claimed by the assessee by way of business
expenditure, which does not form part of cost of production of a feature film,
rule 9A would have no applicability. In such a situation, the assessee’s claim
of expenditure would be governed by the provisions of the Act. If the assessee
satisfies the requirements of section 37, there is no reason why such
expenditure should not be allowed as business expenditure. To put it
differently, the expenditure that would be governed by rule 9A of the Rules
would only be that which is in respect of the production of the feature film.

iv) In the instant case, the cost of the print and
the cost of publicity and advertisement (which was incurred after the
production and certification of the film by the Censor Board) are under consideration.
These costs fail to satisfy the description ‘expenditure in respect of cost of
production of feature film’. The term ‘cost of production’ defined for the
purpose of this rule specifically excludes the expenditure for positive print
and cost of advertisement incurred after certification by the Board of Film
Censors. What would, therefore, be governed by the formula provided under rule
9A is the cost of production minus these costs. The Legislature never intended
that those costs which are in the nature of business expenditure but are not
governed by rule 9A due to the definition of cost of production are not to be
granted as business expenditure. In other words, if the cost is cost of
production of the feature film, it would be governed by rule 9A. If it is not,
it would be governed by the provisions of the Act. The Commissioner was,
therefore, wholly wrong in holding that the expenditures in question were
covered under rule 9A and therefore not allowable. The Tribunal was correct in
coming to the conclusion that such expenditure did not fall within the purview
of rule 9A and, therefore, the assessee’s claim of deduction was governed by
section 37.”

shailesh.kwebmaker

Section 37 – Business expenditure – Capital or revenue – Test to be applied – Pre-operative expenditure of new line of business abandoned subsequently – Deductible revenue expenditure

Chemplast Sanmar Ltd.
vs. ACIT; 412 ITR 323 (Mad)

Date of order: 7^th August,
2018

A.Y.: 2000-01

Section
37 – Business expenditure – Capital or revenue – Test to be applied –
Pre-operative expenditure of new line of business abandoned subsequently –
Deductible revenue expenditure

The
assessee was engaged in the business of manufacture of polyvinyl chloride,
caustic soda and shipping. For the A.Y. 2000-01, the A.O. disallowed the
expenditure incurred by the assessee on account of a textile project which it
had later abandoned. The A.O. held that the textile project, which the assessee
intended to start, being a totally new project distinguished from the
manufacture of polyvinyl chloride and caustic soda and the business of
shipping, in which the assessee was currently engaged, the entire expenditure
had to be treated as a capital expenditure.

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

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

“i) The proper test to be applied was not the
nature of the new line of business which was commenced by the assessee, but
unity of control, management and common fund. This issue was never disputed by
the A.O. or the appellate authorities.

ii) The authorities had concurrently held that it
was the assessee who had commenced the business and the assessee would mean the
assessee-company as a whole and not a different entity. Therefore, when there
was commonality of control, management and fund, those would be the decisive
factors to take into consideration and not the new line of business, namely,
the textile business.

iii) Before the Commissioner (Appeals) a specific
ground had been raised stating that the A.O. ought to have appreciated that the
decisive factors for allowance were unity of control, management,
interconnection, interlacing, inter-dependence, common fund, etc., and if the
above factors were fulfilled, then the expenditure should be allowed even if
the project was a new one. The Commissioner (Appeals) did not give any finding
on such a ground raised by the assessee. Therefore, it was incorrect on the
part of the department to contend that such a question was never raised before
the appellate authorities.”

shailesh.kwebmaker

Section 143 – Assessment order passed in the name and status of the HUF where the notice was issued in the name and status of an individual is invalid and such an assessment order deserves to be quashed

17 [2019] 105 taxmann.com 201
(Pune) Pravin Tilokchand Oswal
(HUF) vs. ITO ITA No. 1917/Pun/2018 A.Y.: 2007-08 Date of order: 4^th
April, 2019

Section 143 –
Assessment order passed in the name and status of the HUF where the notice was
issued in the name and status of an individual is invalid and such an
assessment order deserves to be quashed

FACTS

The assessment order was passed in the status of the HUF,
whereas proceedings were initiated by issue of notice u/s. 143(2) of the Act in
the name of the individual. Both the individual and the HUF were assessed to
tax and had different and distinct PAN numbers. The first notice for getting
jurisdiction to make the assessment was issued u/s. 143(2) of the Act in the
name of the individual and the PAN number of the individual was clearly
mentioned. However, assessment was made in the hands of the HUF.

Aggrieved,
the assessee preferred an appeal to the CIT(A) who decided it on merits but did
not decide the jurisdictional issue and passed an ex parte order against
the assessee.

The aggrieved assessee preferred an appeal to the Tribunal
where it was pointed out that the information received under the Right to
Information Act clearly mentioned that notice was issued for the individual and
proceedings were carried out for the individual. However, the assessment was
made in the name of the HUF.

HELD

The Tribunal held that since notice was issued in the name
of the individual and assessment completed and made in the name of the HUF, the
assessment order was invalid and bad in law. The Tribunal quashed the
assessment order. It decided in favour of the assessee.

shailesh.kwebmaker

Section 54F r.w.s. 45, 2(29B) and 2(42B) – Assessee having acquired rights in a flat vide allotment letter dated 26.02.2008 issued by the builder which was an unconditional allotment, and since the agreement to sell executed by the builder in assessee’s favour subsequently on 25.03.2010 was mere improvement in assessee’s existing rights to acquire a specific property, the gains arising on the sale of the said flat on 04.04.2012 were long term capital gains; assessee was entitled to exemption u/s. 54F

13
[2019]
199 TTJ (Mumbai) 388

ACIT vs. Keyur Hemant Shah

ITA No. 6710/Mum/2017

A.Y.:
2013-14

Dated: 2^nd April, 2019

Section 54F r.w.s. 45,
2(29B) and 2(42B) – Assessee having acquired rights in a flat vide allotment
letter dated 26.02.2008 issued by the builder which was an unconditional
allotment, and since the agreement to sell executed by the builder in
assessee’s favour subsequently on 25.03.2010 was mere improvement in assessee’s
existing rights to acquire a specific property, the gains arising on the sale
of the said flat on 04.04.2012 were long term capital gains; assessee was
entitled to exemption u/s. 54F

FACTS

The
assessee filed return of income on 31.07.2013 declaring income of Rs. 185.33
lakhs. During the assessment proceedings it was found by the A.O. that the
assessee had sold a flat for a consideration of Rs. 1.20 crores in which he had
a 50% share. The long term capital gain was computed at Rs. 288.73 lakhs out
which Rs. 109.4 lakhs was claimed exempt u/s. 54F and the balance was offered
to tax. It was observed by the A.O. that the agreement for purchase of the flat
was executed on 25.03.2010 and was sold subsequently on 04.04.2012. Hence the
period of holding for the original property was less than 36 months and hence
the capital gains arising out of the same cannot be claimed for exemption u/s.
54F.

The
assessee defended the claim by submitting the letter of allotment of the flat
dated 26.02.2008 and asserted that substantial payments for the flat were made by that time and therefore the
period of holding exceeds the required period of 36 months to classify the flat
as long term capital asset.

Aggrieved,
the assessee preferred an appeal to the CIT(A). The CIT(A) allowed exemption of
Rs. 109.40 lakhs u/s. 54F as claimed by the assessee.

HELD

The Tribunal held that on perusal of the facts of
the case, it emerged that the assessee had acquired rights in the flat on
26.02.2008. The letter of allotment was not conditional and did not envisage
cancellation of the allotted property. The agreement of sale was executed on
25.03.2010 which was nothing but a mere improvement of the assessee’s right
over the same transaction.

There was
nothing to suggest that the construction scheme promised by the builder was
materially different from the terms of allotment. Considering the same, it
confirmed that the resultant gains were long term capital gains in nature. The
assessee had made payments for the new property within the stipulated time and
obtained the new property by 14.04.2012.

Therefore,
all conditions of section 54F were fulfilled. There was no reason to deny
benefit of section 54F in this case.

shailesh.kwebmaker

Section 194C, r.w.s. 194-I – Deduction of tax at source – Contractors payment to – Payment was made to agencies towards lounging and catering services provided to customers of airlines as a part of single arrangement – Same would fall under generalised contractual category u/s. 194C

CIT (ITD)-1 vs. Jet Airways (India)
Ltd. [Income-tax Appeal No. 628 of 2018; (Bombay High Court) Dated 23^rd
April, 2019]

[ACIT vs. Jet Airways
(India) Ltd.; Mum ITAT]

Section
194C, r.w.s. 194-I – Deduction of tax at source – Contractors payment to –
Payment was made to agencies towards lounging and catering services provided to
customers of airlines as a part of single arrangement – Same would fall under
generalised contractual category u/s. 194C

The assessee is an airlines company. As part of
its business, the assessee would provide lounge services to select customers at
various airports. In a typical case, a lounge would be rented out by an agency,
in the nature of an intermediary from the airport authority. The assessee
airlines company and other airlines as well as, in some cases, credit card
companies, would provide the lounge facility to premier class customers. As is
well known, a lounge is an exclusive secluded hall or a place at the airport
where a comfortable sitting arrangement and washrooms are provided to the
flying customers. Most of these lounges would have basic refreshments for which
no separate charge would be levied. According to the assessee, the assessee
would pay the agency for use of such lounge space by its customers as per
pre-agreed terms. While making such payment, the assessee used to deduct tax at
source in terms of section 194C of the Act, treating it as a payment to a
contractor for performance of a work.

The
Revenue contends that the assessee had paid rent to the agency and, therefore,
while paying such rental charges, tax at source u/s. 194-I of the Act should
have been deducted.

The
Tribunal by the impugned judgement referred to and relied upon a decision of
the coordinate Bench in the case of ACIT vs. Qantas Airways Ltd.,
reported in (2015) 152 ITD 434 and held that the department was not
right in insisting on deduction of tax at source u/s. 194-I of the Act.

Being aggrieved with the ITAT order, the Revenue
filed an appeal to the High Court. The Court held that the A.O. in the present
case had placed reliance on a decision of the Delhi High Court in the case of Japan
Airlines Ltd., reported in (2009) 325 ITR 298 and United Airlines
(2006) 287 ITR 281. The Court, however, noted that the Supreme Court in
the case of Japan Airlines Company Limited reported in (2015) 377 ITR 372
had overruled such decision of the Delhi High Court. The Supreme Court approved
the view of the Madras High Court in the case of CIT vs. Singapore
Airlines Ltd. reported in (2013) 358 ITR 237.

The issue
before the Supreme Court was regarding the nature of payments made by the
international airlines to the Airport Authority of India for availing the
services for the purpose of landing and take-off of aircrafts. The Revenue was
of the opinion that the charges paid for such purposes were in the nature of
rent for use of land, a view which was accepted by the Delhi High Court in the
above-noted judgment. The Supreme Court, in the judgement in case of Japan
Airlines (supra), held that the charges paid by the international
airlines for landing and take-off services, as also for parking of aircrafts
are in substance not for use of the land but for various other facilities such
as providing of air traffic services, ground safety services, aeronautical
communication facilities, etc. The Court, therefore, held that the payment of
such charges did not invite section 194-I of the Act. The Court observed that
this decision of the Supreme Court does not automatically answer the question
at hand.

Reference
to this decision was made for two purposes. Firstly, to record that the
reliance placed by the A.O. on the decision of the Delhi High Court is no longer
valid. Secondly, for the purpose of drawing an analogy that the payment for
certain services need not be seen in isolation. The real character of the
service provided and for which the payment is made would have to be judged. In
the present case, as noted, the assessee would enter into an agreement with the
agency which has rented out the lounge space at the airport from the Airport
Authority. Under such agreement, the assessee would pay committed charges be it
on a lump sum basis or on the basis of customer flow to such an agency. This,
in turn, would enable the passengers of the airlines to utilise the lounge
facilities while in transit.

The Court accepted the suggestion of Revenue
that service of providing beverages and refreshments was not the dominant part
of the service. It may only be incidental to providing a quiet, comfortable and
clean place for customers to spend some spare time. However, the Court did not
see any element of rent being paid by the assessee to the agency. The assessee
did not rent out the premises. The assessee did not have exclusive use to the
lounge for its customers. The customers of the airlines, along with customers
of other airlines of specified categories, would be allowed to use all such
facilities. Section 194-I of the Act governs the situation where a person is
responsible for paying any rent. In such a situation, deduction of tax at
source while making such payment is obligated. The Revenue wrongly invoked
section 194-I of the Act. In the result, the appeal was dismissed.

shailesh.kwebmaker

Section 271(1)(c) – Penalty – Filing inaccurate particulars of income – Revised income filed voluntarily – before detection – Reason stated: accountant error – Human error – Bona fide mistake – penalty not leviable

Pr. CIT-18 vs. Padmini Trust [ITA No.
424 of 2017; (Bombay High Court) Dated 30^th April, 2019]

[Padmini Trust vs.
ITO-14(1)(4); Bench: C; Mum TAT ITA No. 5188/Mum/2013]

Dated 28^th
January, 2016;

A.Y. 2009-10.

Section
271(1)(c) – Penalty – Filing inaccurate particulars of income – Revised income
filed voluntarily – before detection – Reason stated: accountant error – Human error – Bona fide mistake –
penalty not leviable

The assessee
is a Trust. The assessee had filed a return of income for the A.Y. 2009-10. The
return was taken for scrutiny by the A.O. by issuing notice of scrutiny
assessment on 27.09.2010. When the assessment proceedings were pending, the
assessee tried to rectify the return by making a declaration and enlarging
certain liability. Commensurate additional income tax of Rs. 99,05,738 was also
paid on 26.09.2011. This was conveyed to the A.O. by letter dated 15.11.2011.
While completing the assessment, the A.O. held that the revised return was not
acceptable since it was filed after the last day for filing such a revised
return. He, however, made no further additions over and above the declaration
made by the assessee in the return. On the ground that the assessee had not
disclosed the income in the original return, he initiated the penalty
proceedings. He imposed a penalty which was confirmed by the CIT(A).

Being
aggrieved with the CIT(A) order, the assessee filed an appeal to the ITAT. The
Tribunal held that there is wrong categorisation of capital gains and loss and
the same are evident from the papers filed. It is a case of wrong
categorisation of the income under the wrong head. The revised computation of
income basically corrects the mistake in such wrong categorisation. It is a
case where the assessee paid taxes on the extra income computed by virtue of
the revised computation along with the statutory interest u/s. 234A, 234B and
234C as the case may be. It is a settled issue that penalty cannot be excisable
in a case where the income was disclosed but under the wrong head of income.
Accordingly, levy of penalty u/s. 271(1)(c) of the Act was deleted.

The Revenue was aggrieved with the ITAT order and
hence filed an appeal to the High Court. The Revenue submitted that the
assessee had filed a false declaration in the original return. But after the
return was taken in scrutiny, he attempted to revise the return. Such attempt
would not give immunity to the assessee from the penalty. The counsel relied on
the decision of the Supreme Court in the case of Union of India and Ors.
vs. Dharmendra Textiles Processors and Ors. (2008) 306 ITR 277 (SC) to
contend that mens rea is not necessary for imposition of the penalty and
the penalty is a civil consequence. He also relied on the decision of the Delhi
High Court in the case of CIT vs. Zoom Communication (P) Limited (2010)
327 ITR 510 (Delhi) in which, highlighting the fact that very few
returns filed by assessees are taken in scrutiny, the Court held that merely
because the assessee had later on surrendered the income to tax would not mean
that the penalty should not be initiated, failing which the deterrent effect of
the penalty would disappear.

The assessee opposed the appeal contending that
there was a bona fide error in claiming short-term capital gain as
dividend income. This error was committed by the accountant of the assessee.
All such errors were corrected, whether the returns were taken in scrutiny or
not, demonstrating bona fide on the part of the assessee. He pointed out
that the tax on the additional income was paid even before the A.O. issued
specific queries in relation to the return filed. He relied on the decision of
the Supreme Court in the case of Price Waterhouse Coopers (P) Ltd. vs.
CIT, Kolkata to contend that mere bona fide error in claiming
reduced tax liability would not give rise to penalty proceedings.

The Court agreed with the submission of Revenue
that once the assessee is served with a notice of scrutiny assessment,
corrections to the declaration of his income would not grant immunity from
penalty. Especially in a case where the assessee during such scrutiny
assessment is confronted with a legally unsustainable claim which he thereafter
forgoes, may not be a ground to delete penalty. However, in the present case
the facts are glaring. The assessee made a fresh declaration of revised income
voluntarily before he was confronted with the incorrect claim. The assessee had
blamed the accountant for an error in filing the return. An affidavit of the accountant
was also filed. As stated by the counsel, such error was committed by other
group assessees also. Some of them corrected the error even before the scrutiny
notices. In view of such facts, the Court agreed with the conclusion of the
Tribunal that the original declaration of income suffered from a bona fide
unintended error. The Income-tax appeal was dismissed.

shailesh.kwebmaker

Section 28 r.w.s. 37(1) – Business loss – Advance payment for booking commercial space – Deal failed and could not get refund – Object clause of the assessee covered this as business activities – Allowable as deduction

Pr. CIT-6 vs. Khyati Realtors Pvt.
Ltd. [Income-tax Appeal No. 291 of 2017; (Bombay High Court)

Dated 30^th April, 2019]

[Khyati Realtors Pvt. Ltd.
vs. ACIT-6(2); Bench: “A”; ITA. No. 129/Mum/2014, Mum ITAT]

Dated 4^th
March, 2016;

A.Y. 2009-10.

Section
28 r.w.s. 37(1) – Business loss – Advance payment for booking commercial space
– Deal failed and could not get refund – Object clause of the assessee covered
this as business activities – Allowable as deduction

The assessee,
who is a private limited company, had advanced a sum of Rs. 10 crore to one
Bhansali Developers for booking commercial space in an upcoming construction
project. For some reason, the deal failed. The assessee, despite full efforts,
could not get refund of the said advance amount. In the return of income for
the A.Y. 2009-2010, the assessee had claimed the said sum of Rs. 10 crore as a
bad debt. The A.O. disallowed the same saying that the amount could not be
claimed by way of business loss because buying and selling commercial space was
not the business of the assessee.

On
appeal, the CIT(A) confirmed the disallowance. The assessee suggested before
the CIT(A) an alternate plea, that deduction should be allowed u/s. 37 of the
Act if the write-off of the advance did not fall u/s. 36(2) of the Act. But the
CIT(A) declined the assessee’s claim u/s. 36(2) on the plea that the assessee
did not have a money-lending licence or an NBFC licence; therefore, the
assessee was covered by explanation to section 37(1) of the Act. The CIT(A)
also declined the claim of the assessee u/s. 37 on the plea that the claim of
bad debts fell u/s. 30 to 36 of the Act.

Aggrieved
with the CIT(A) order, the assessee filed an appeal to the ITAT. The Tribunal
held that it is not in dispute that the expenditure claimed by the assessee is
not covered by any of the provisions of sections 30 to 36 of the Act and being
neither a capital nor personal expenditure, and having been incurred for the
purpose of carrying on of business, is eligible for deduction u/s. 37(1) of the
Act. The amount so advanced was not in the nature of capital expenditure or
personal expenses of the assessee, but was in the nature of advance given for
reserving / booking of commercial premises in the ordinary course of the
assessee’s business of real estate development and which could not be
recovered; therefore, there is no reason to decline the assessee’s claim as a
business loss u/s. 37(1) r.w.s. 28 of the I.T. Act. Accordingly, the claim was
allowed as a business loss.

Being
aggrieved with the ITAT order, the Revenue filed an appeal to the High Court.
The Court held that the assessee was engaged in the business of real estate and
financing. The object clause for incorporation of the company reads as under:

“1. To
carry on the business of contractors, erectors, constructors of buildings,
houses, apartments, structures for residential, office, industrial,
institutional or commercial purposes and developers of co-operative housing
societies, developers of housing schemes, townships, holiday resorts, hotels,
motels, farms, holiday homes, clubs, recreation centres and in particular
preparing of building sites, constructing, reconstructing, erecting, altering,
improving, enlarging, developing, decorating, furnishing and maintenance of
structures and other properties of any tenure and any interest therein and
purchase, sale and dealing in freehold and leasehold land to carry on business
as developers of land, buildings, immovable properties and real estate by
constructing, reconstructing, altering, improving, decorating, furnishing and
maintaining offices, flats, houses, factories, warehouses, shops, wharves,
buildings, works and conveniences and by consolidating, connecting and
sub-dividing immovable properties and by leasing and disposing off the same.”

This clause is thus widely
worded and would cover within its fold a range of activities such as erection,
construction of buildings and houses, as also purchase, sale and dealing in
freehold and leasehold land to carry on business as developers of land,
buildings, and immovable properties. It was in furtherance of such an object
that the assessee had entered into a commercial venture by booking commercial
space with a developer in the upcoming construction of the commercial building,
the payment being an advance for the booking. The sum was not refunded. This
was thus clearly a business loss. It was also noticed that later when, due to
continued efforts, the assessee recovered a part of the said sum, the same was
offered as business income. In the result, the Revenue’s appeal was dismissed.

shailesh.kwebmaker

Sections 2(15), 10(20), 11, 251 and 263 – Revision – Powers of Commissioner – No jurisdiction to consider matters considered by CIT(A) in appeal – Claim for exemption rejected by A.O. on ground that assessee is not a local authority u/s. 10(20) – CIT(A) granting exemption – Principle of merger – Commissioner has no jurisdiction to revise original assessment order on ground A.O. did not consider definition in section 2(15)

CIT vs. Slum Rehabilitation
Authority; 412 ITR 521 (Bom)

Date of order: 26^th March,
2019

A.Y.: 2009-10

Sections
2(15), 10(20), 11, 251 and 263 – Revision – Powers of Commissioner – No
jurisdiction to consider matters considered by CIT(A) in appeal – Claim for
exemption rejected by A.O. on ground that assessee is not a local authority
u/s. 10(20) – CIT(A) granting exemption – Principle of merger – Commissioner
has no jurisdiction to revise original assessment order on ground A.O. did not
consider definition in section 2(15)

The assessee, the Slum Rehabilitation Authority,
claimed benefit u/s. 11 of the Income-tax Act, 1961. The A.O. disallowed the
claim and held that the assessee was not a local authority within the meaning
of section 10(20) and that in view of the nature of activities carried out by
it and its legal status, its claim could not be allowed. The Commissioner
(Appeals) allowed the assessee’s appeal and granted the benefit of exemption.
The Commissioner in suo motu revision u/s. 263 took the view that the
activities of the assessee could not be considered as for “charitable purpose”
as defined u/s. 2(15) and directed the assessment to be made afresh
accordingly.

The Tribunal allowed the appeal filed by the
assessee on the ground of merger as well as on the ground that the order of
assessment was not prejudicial to the interest of the Revenue.

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

“i) The
Commissioner in exercise of revisional powers u/s. 263 could not initiate a
fresh inquiry about the same claim made by the assessee on the ground that one
of the aspects of such claim was not considered by the Assessing Officer.

ii) Once
the claim of the assessee for exemption u/s. 11 was before the Commissioner
(Appeals), he had the powers and jurisdiction to examine all the aspects of
such claim. If the Department was of the opinion that the assessment order
could not have been sustained as the assessee did not fall within the ambit of
section 10(20) the ground on which the Assessing Officer had rejected the claim
and the other legal ground of section 2(15), it should have contended before
the Commissioner (Appeals) to reject the assessee’s claim on such legal ground.

iii) The
Tribunal did not commit any error in setting aside the revision order.”

shailesh.kwebmaker

Section 40A(3) r.w.r. 6DD of ITR 1962 – Business expenditure – Disallowance u/s. 40A(3) – Payments in cash in excess of specified limit – Exceptions u/r. 6DD – Payment to producer of meat – Condition stipulated u/r. 6DD satisfied – Further condition provided in CBDT circular of certification by veterinary doctor cannot be imposed – Payment allowable as deduction

Principal CIT vs. GeeSquare Exports;
411 ITR 661 (Bom)

Date of order: 13^th March,
2018

A.Y.: 2009-10

Section
40A(3) r.w.r. 6DD of ITR 1962 – Business expenditure – Disallowance u/s. 40A(3)
– Payments in cash in excess of specified limit – Exceptions u/r. 6DD – Payment
to producer of meat – Condition stipulated u/r. 6DD satisfied – Further
condition provided in CBDT circular of certification by veterinary doctor
cannot be imposed – Payment allowable as deduction

The
assessee exported meat. It purchased raw meat paying cash. Payments made in
cash in excess of Rs. 20,000 were disallowed u/s. 40A(3) of the Income-tax Act,
1961 on the ground that in view of Circular No. 8 of 2006 issued by the CBDT
for failure to comply with the condition for grant of benefit u/r. 6DD of the
Income-tax Rules, 1962 requiring certification from a veterinary doctor that
the person issued the certificate was a producer of meat and slaughtering was
done under his supervision.

The
Tribunal allowed the assessee’s appeal. It held that section 40A(3) provided
that no disallowance thereunder should be made if the payment in cash was made
in the manner prescribed u/r. 6DD. The Tribunal held that the payment made to
the producer of meat in cash satisfied such requirement and that neither the
Act nor the Rules provided that the benefit would be available only if further
conditions set out by the CBDT were complied with. The Tribunal further held
that the scope of Rule 6DD could not be restricted or fettered by the circular.

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

“i) The assessee having satisfied the
requirements u/r. 6DD could not be subjected to the disallowance of the
deduction of expenditure on purchases in cash of meat u/s. 40A(3).

ii) The
CBDT circular could not put in new conditions not provided either in the Act or
in the Rules.”

shailesh.kwebmaker

TDS UNDER SECTION 194A ON PAYMENT OF ‘INTEREST’ UNDER MOTOR ACCIDENT CLAIM

ISSUE FOR CONSIDERATION

Under the Motor Vehicles
Act, 1988 (MVA), a liability has been cast on the owner of the motor vehicle or
the insurer to pay compensation in the case of death or permanent disablement
due to a motor vehicle accident. This compensation is payable to the legal
heirs in case of death and to the victim in case of permanent disablement. For
the purposes of adjudicating upon claims for compensation in respect of motor
accidents, the Motor Accident Claims Tribunals (MACTs) have been established.
The MVA further provides that in case of death the claim may be preferred by
all or any of the legal representatives of the deceased. The quantum of
compensation is decided by taking into consideration the nature of injury in
case of an injured person and the age, monthly income and dependency in death
cases. The MVA contains the 2nd Schedule for compensation in fatal accidents
and injury cases claims. While awarding general damages in case of death, the
funeral expenses, loss of consortium, loss of estate and medical expenses are
also the factors that are considered.

The claims under the MVA may involve delay which may be due
to late filing of the compensation claim, investigation, adjudication of claim
and various other factors. A provision is made u/s. 171 of the MVA to
compensate the injured or his legal heir for the delay, which reads as under:

“Section 171. Award of interest where any claim is
allowed.

Where any Claims Tribunal allows a claim for compensation
made under this Act, such Tribunal may direct that in addition to the amount of
compensation, simple interest shall also be paid at such rate and from such
date not earlier than the date of making the claim as it may specify in this
behalf.”

CBDT circular No. 8 of 2011 requires deduction of income tax
at source on payment of the award amount and interest on deposit made under
orders of the court in motor accident claims cases. The issue has arisen before
courts as to whether tax is deductible at source u/s. 194A on such interest
awarded by the MACTs u/s. 171 of the MVA for delay.

While the Allahabad, Himachal Pradesh and Punjab and Haryana
High Courts have held that such payment is not income by way of interest as
defined in section 2(28A) and no tax is deductible at source u/s. 194A, the
Patna and Madras High Courts have taken a contrary view, holding that such
payment is interest on which tax is deductible at source u/s. 194A.

THE ORIENTAL INSURANCE CO. LTD. CASE

The issue first arose before the Allahabad High Court in the
case of CIT vs. Oriental Insurance Co. Ltd. 27 taxmann.com 28.

In this case, the
assessee, an insurance company, paid compensation and interest thereon under
the MVA to claimants without complying with the provisions of section 194A. The
assessing authority took a view that the assessee had failed to deduct income
tax on the amount of interest u/s. 194A and held that it was accordingly liable
to deposit the amount of short deduction of tax u/s. 201(1) along with interest
u/s. 201(1A) for a period of five assessment years. According to the assessing
officer, debt incurred included claims and interest on such claims was clearly
covered u/s. 2(28A). His reasoning was as below:

1. Interest paid under the MVA was a revenue receipt like
interest received on delayed payment of compensation under the Land Acquisition
Act. Since section 194A applied to interest on compensation under the Land
Acquisition Act, it also applied in respect of interest on compensation under
the MVA.

2. The interest element in a total award was different from
compensation. However, interest on such compensation was on account of delayed
payment of such compensation, and therefore it was clearly an income in the
hands of the recipient, taxable under the Income-tax Act.

3. The interest element
was different from compensation as provided in section 171 of the MVA as that section provided that the tribunal
might direct that in addition to the amount of compensation, simple interest
should also be paid.

4. There was no exemption u/s. 194A for TDS on interest
payment by insurance companies on MACT awards.

5. The actual payer of interest was the insurance company and
the responsibility to deduct tax lay squarely on it. The provisions of section
204(iii) were very clear that the person responsible for payment meant “in the
case of credit or as the case may be, payment of any other sum chargeable under
the provisions of this Act, the payer himself, or, if the payer is a company,
the company itself including the principal officer thereof.”

6. Payment awarded under the MVA was identical to the award
under the Land Acquisition Act. Tax was deducted u/s. 194A on interest paid or
credited for late payment of compensation under the Land Acquisition Act.
Therefore, section 194A was also applicable in respect of interest paid or
credited on delayed payment of compensation under the MVA.

7. Interest under the MVA was similar to interest paid under
the Income-tax Act, as both arose by operation of law. The nature of payment
mentioned in both the Acts was “interest”. TDS on interest payment under the
Income-tax Act was not deductible in view of the specific exemption u/s. 194A(3)(viii).
Since there was no similar exemption for interest payment under the MVA, the
provisions of section 194A applied to these payments.

The Commissioner (Appeals) dismissed the appeal of the
assessee, confirming the action of the assessing authority and holding that the
interest payment awarded u/s. 171 of the MVA was nothing but interest, subject
to the provisions of section 194A.

In the second appeal before the tribunal, the Agra Tribunal
decided the issue in favour of the assessee, following its own earlier
decisions in the cases of Divisional Manager, New India Insurance Co.
Ltd., Agra vs. ITO [ITA Nos. 317 to 321/Agra/2003], which, in turn, had
followed the decision of the Delhi Tribunal in the case of Oriental
Insurance Co. Ltd. vs. ITO dated 27.9.2004, and in Oriental
Insurance Company Ltd. vs. ITO [ITA Nos. 276 & 280/Agra/2003 dated
31.1.2005].

It was argued before the Allahabad High Court on behalf of
the Revenue that it was the responsibility of the payer of interest to deduct
tax on such payment of interest, because section 2(28A) clearly envisaged that
interest meant interest payable in any manner in respect of moneys borrowed or
debt incurred (including a deposit, claim or other similar right / obligation)
and includes any service fee or other charges in respect of the money borrowed
or debt incurred, or in respect of any credit facility which had not been
utilised. It was argued that the Tribunal had not referred to the decision of
the Supreme Court in the case of Bikram Singh vs. Land Acquisition
Collector 224 ITR 551, in which it had been held that interest paid on
the delayed payment of compensation was a revenue receipt eligible to tax u/s.
4 of the Income-tax Act, 1961.

On behalf of the Revenue, reliance was placed upon the following
decisions:

a) The Karnataka High Court in the case of CIT vs.
United Insurance Co. Ltd. 325 ITR 231, where the court held that
interest paid above Rs. 50,000 was to be split and spread over the period from
the date interest was directed to be paid till its payment.

b) The Karnataka High Court in the case of Registrar
University of Agricultural Science vs. Fakiragowda 324 ITR 239 where
interest received on belated payment of compensation for acquisition of land
was held to be a revenue receipt chargeable to income tax on which tax was
deductible at source.

c) The Supreme Court, in the case of T.N.K. Govindaraju
Chetty vs. CIT 66 ITR 465, in the context of interest on compensation
awarded for acquisition of land, held that if the source of the obligation
imposed by the statute to pay interest arose because the claimant was kept out
of his money, the interest received was chargeable to tax as income.

d) The Supreme Court, in the case of K.S. Krishna Rao
vs. CIT 181 ITR 408, where interest paid on compensation awarded for
compulsory acquisition of land u/s. 28 of the Land Acquisition Act, 1894 was
held to be in the nature of income and not capital.

On behalf of the assessee, it was argued before the Allahabad
High Court that:

1. The interest paid on the award of compensation was not
interest as understood in general parlance and it was not an income of the
claimant.

2. The compensation
awarded by the MACT to the claimants was a capital receipt in the hands of the
recipients, not taxable under any provision of the Income-tax Act. Since the
award was not taxable in the hands of the recipient, it was not an income but
was a capital receipt.

3. Interest paid by the insurance company u/s. 171 of the MVA
was not interest as contemplated u/s. 194A, because interest that was contented
under that section was an income taxable in the hands of the recipient, whereas
interest received by the recipient u/s. 171 of the MVA was a capital receipt in
the hands of the recipient, being nothing but an enhanced compensation on account
of delay in the payment of compensation.

The Allahabad High Court referred to the definition of
interest u/s. 2(28A), which reads as under:

“ ‘interest’ means interest payable in any manner in
respect of any moneys borrowed or debt incurred (including a deposit, claim or
other similar right or obligation) and includes any service fee or other charge
in respect of the moneys borrowed or debt incurred or in respect of any credit
facility which has not been utilised.”

After referring to the language of section 194A, the
Allahabad High Court referred to the CBDT circular 24 of 1976 (105 ITR
24), where the concept of interest had been explained. It also referred
to clause (ix) of section 194A(3), which had been inserted by the Finance Act,
2003 with effect from 1^st June, 2003, which read as under:

“to such income credited or paid by way of interest on the
compensation amount awarded by the Motor Accidents Claims Tribunal where the
amount of such income or, as the case may be, the aggregate of the amount of
such income credited or paid during the financial year does not exceed Rs.
50,000.”

The Allahabad High Court referred to the following decisions:

1. The Punjab and Haryana High Court in the case of CIT
vs. Chiranji Lal Multani Mal Rai Bahadur (P) Ltd. 179 ITR 157, where it
had been held that interest awarded by the court for loss suffered on account
of deprivation of property amounted to compensation and was not taxable.

2. The National Consumer Disputes Redressal Commission in Ghaziabad
Development Authority vs. Dr. N.K. Gupta 258 ITR 337, where it had been
held that if proper infrastructure facilities had not been provided to a person
who was provided with a flat and was therefore entitled to refund of the amount
paid by him along with interest at 18%, the paying authority was not entitled
to deduct income tax on the amount of interest, as it was not interest as
defined in section 2(28A), but was compensation or damages for delay in
construction or handing over possession of the property, consequential loss to
the complainant by way of escalation in the price of property, and also on
account of distress and disappointment faced by him.

3. The Himachal Pradesh High Court in the case of CIT
vs. H.P. Housing Board 340 ITR 388, where the High Court had held that
payment for delayed construction of house was not payment of interest but was
payment of damages to compensate the claimant for the delay in the construction
of the house and the harassment caused to him.

4. The Supreme Court, in the case of CIT vs. Govind
Choudhury & Sons 203 ITR 881, had held that when there were
disputes with the state government with regard to payments under the contracts,
receipt of certain amount under the arbitration award and the interest for
delay in payment of amounts due to it, such interest was attributable to and
incidental to the business carried on by it. It was also held that interest
awarded could not be separated from the other amounts granted under the awards
and could not be taxed under the head “income from other sources”.

5. The Bombay High Court decision in the case of Islamic
Investment Co. vs. Union of India 265 ITR 254, where it had been held
that there was no provision under the Income-tax Act or under the Code of Civil
Procedure to show that from the amount of interest payable under a decree, tax
was deductible from the decretal amount on the ground that it was an interest
component on which tax was liable to be deducted at source.

The Allahabad High Court also referred to the decisions of
the Delhi High Court in the case of CIT vs. Cargill Global Trading (P)
Ltd. 335 ITR 94 and CIT vs. Sahib Chits (Delhi) (P) Ltd. 328 ITR
342, which had analysed the meaning of the term “interest”.

The Allahabad High Court observed that most of the rulings
relied upon by the Revenue related to interest paid on delayed payment of
compensation awarded under the Land Acquisition Act. According to the Allahabad
High Court, an award under the Land Acquisition Act and an award under the MVA
could not be equated for the simple reason that in land acquisition cases the
payment was made regarding the price of the land and on such price the
provisions of capital gains tax were attracted. On the other hand, in motor
accident claims, the payment was made to the legal representatives of the
deceased for loss of life of their bread-earner, the recipients of awards being
poor and illiterate persons who did not even come within the ambit of the
Income-tax Act, and the amount of compensation under the MVA also did not come
within the definition of “income”.

According to the Allahabad High Court, the term “interest” as
defined in section 2(28A) had to be strictly construed. The necessary
ingredient was that it should be in respect of any money borrowed or debt
incurred. The award under the MVA was neither money borrowed by the insurance
company nor debt incurred by the insurance company. The word “claim” in section
2(28A) should also be regarding a deposit or other similar right or obligation.

The Allahabad High Court observed that the intention of the
legislature was that if the assessee had received any interest in respect of
moneys borrowed or debt incurred, including a deposit, claim or other similar
right or obligation, or any service fee or other charge in respect of moneys
borrowed or debt incurred had been received, then certainly it would come
within the definition of interest. The word “claim” used in the definition may
relate to claims under contractual liability, but certainly did not cover
claims under a statutory liability, the claim under the MVA regarding
compensation for death or injury being a statutory liability.

Further, the Allahabad High Court referred to the insertion
of clause (ix) to section 194A(3), stating that it showed that prior to 1^st
June, 2003 the legislature had no intention to charge any tax on interest
received as compensation under the MVA. According to the High Court, there was
therefore no justification to cast a liability to deduct TDS on interest paid
on compensation under the MVA prior to 1^st June, 2003.

The Allahabad High Court also noted that u/s. 194A(1), tax
was deductible at source if a person was responsible for paying to a resident
any income by way of interest other than interest on securities. In the opinion
of the Allahabad High Court, the award of compensation under motor accident
claims could not be regarded as income, being compensation to the legal heirs
for the loss of life of their bread-earner. Therefore, interest on such award
also could not be termed as income to the legal heirs of the deceased or the
victim himself.

It was noted by the Allahabad High Court that an award under
the MVA was like a decree of the court, which would not come within the
definition of income referred to in section 194A(1) read with section 2(28A) of
the Income-tax Act. According to the court, proceedings regarding claims under
the MVA were in the nature of garnishee proceedings, where the MACT had a right
to attach the judgement debt payable by the insurance company. Even in the
award, there was no direction of any court that before paying the award the
insurance company was required to deduct tax at source. As held by the Supreme
Court in the case of All India Reporter Ltd. vs. Ramachandra D. Datar 41
ITR 446, if no provision had been made in the decree for deduction of
tax before paying the debt, the insurance company could not deduct the tax at
source from the amount payable to the legal heirs of the deceased.

The Allahabad High Court
observed that the different High Courts in the cases of Chiranji Lal
Multani Mal Rai Bahadur (P) Ltd. (supra), Dr. N.K. Gupta (supra), H.P. Housing
Board (supra) and Sahib Chits (Delhi) (P) Ltd. (supra),
held that if interest was awarded by the court for loss suffered on account of
deprivation of property or paid for breach of contract by means of damages or
was not paid in respect of any debt incurred or money borrowed, it would not
attract the provisions of section 2(28A) read with section 194A(1). The
Allahabad High Court, therefore, held that interest paid on compensation under motor
accident claims awards was not liable to income tax.

A similar view has been taken by the Himachal Pradesh High
Court in the case of Court on Its Own Motion vs. H.P. State Co-operative
Bank Ltd. 228 Taxmann 151, where the High Court quashed the CBDT circular
No. 8 of 2011 which required deduction of income tax on award amount and
interest accrued on deposit made under orders of the court in motor accident
claims cases, and in the case of National Insurance Co. Ltd. vs. Indra
Devi 100 taxmann.com 160, and by the Punjab and Haryana High Court in
the case of New India Assurance Co. Ltd. vs. Sudesh Chawla 80 taxmann.com
331.

THE NATIONAL INSURANCE CO. LTD. CASE

The issue again came up before the Patna High Court in the
case of National Insurance Co. Ltd. vs. ACIT 59 taxmann.com 269.

In this case, the District Judge gave an award to the
claimant under the MVA of Rs. 3,70,000 plus interest at 6% per annum from the
date of filing of the claim. The amount was to be paid within two months of the
passing of the order, failing which the further direction was to pay interest
at 9% per annum from the date of the order till the date of final payment. The
insurance company deducted and deposited TDS of Rs. 24,715 u/s. 194A while
making the payment of the amount of the award. The claimant objected to the
deduction of TDS by filing a petition before the District Judge. The District
Judge held that the deduction of Rs. 24,175 by way of TDS was not sustainable
and directed the insurance company to disburse the amount to the claimant
without TDS. The insurance company filed a writ petition in the High Court
against this order of the District Judge for seeking permission to deduct tax
at source on payment of the interest on compensation.

Before the Patna High Court, on behalf of the insurance
company, reliance was placed upon the relevant provisions of the Income-tax Act
in support of the stand that the insurance company was under a statutory
liability u/s. 194A of the Act to have made deduction of the amount of TDS
while making payment by way of interest on the compensation amount awarded by
the MACT. The total interest component under the award came to a little over
Rs. 1,20,000, and therefore, the insurance company was bound under the Act to
make deduction of TDS while making payment; accordingly, an amount of Rs.
24,175 was to be deducted as TDS.

Reliance was also placed upon a decision of the Patna High
Court in C.W.J.C. No. 5352 of 2013, National Insurance Co. Ltd. vs. CIT,
where the court had held as under:

“It appears that the Tribunal below has ignored the
statutory duty conferred upon the insurer under section 194 (1) (sic) of the
Income-tax Act. Under the said provision, the insurer is obliged to deduct tax
at source from the amount of interest paid by the insurer to the claimant. The
said amount has to be deposited with the Government of India as the income tax
deducted at source. The Tribunal below has grossly erred in directing the
insurer to pay the said sum to the claimant.”

Reliance was further placed upon a decision of the Madras
High Court in the case of New India Assurance Co. Ltd. vs. Mani 270 ITR
394, in which it had been held as follows:

“A plain reading of section 194A of the IT Act would
indicate that the insurance company is bound to deduct the income tax amount on
interest, treating it as a revenue, if the amount paid during the financial
year exceeds Rs. 50,000. In this case, admittedly, when the compensation amount
has been deposited during the financial year, including interest, the interest amount
alone exceeded Rs. 50,000 and therefore the insurance company has no other
option except to deduct the income tax at source for the interest amount
exceeding Rs. 50,000, failing which they may have to face the consequences,
such as prosecution, even. In this view alone, when the execution petition was
filed for the realisation of the award amount, deducting the income tax at
source for the interest, since it exceeded Rs. 50,000, on the basis of the
above said provision, the balance alone had been deposited, for which the court
cannot find fault.”

It was highlighted that the Madras High Court in the said
case had relied upon the decision of the Supreme Court in the case of Bikram
Singh vs. Land Acquisition Collector 224 ITR 551, where the Supreme
Court had held that interest received on delayed payment of compensation under
the Land Acquisition Act was a revenue receipt eligible to income tax. It was
explained that the Madras High Court in the said case had further held that the
trial court had not considered the actual effect of the amendment to section
194A, which came into effect from 1^st June, 2003. The Madras High
Court observed that if the claimant was not liable to pay tax, his remedy was
to approach the department concerned for refund of the amount. According to the
Madras High Court, the executing court did not have the power to direct the
insurance company not to deduct the amount and pay the entire amount, thereby
compelling the insurance company to commit an illegal act, violating the statutory
provisions.

The Patna High Court examined the provisions of sections
194A(1) and (3)(ix) of the Income-tax Act. According to the Patna High Court,
it was evident from the above provisions that any person responsible for paying
any income by way of interest (other than the interest on securities) was
obliged to deduct income tax thereon. The only exception was in case of income
paid by way of interest on compensation amount awarded by MACT, where the
amount of such income or the aggregate of the amounts of such income credited
or paid during the financial year did not exceed Rs. 50,000. The court was
therefore of the view that if the interest component of the payment to be made
during the financial year on the basis of award of the MACT exceeded Rs. 50,000,
then the person making the payment was obliged to deduct TDS while making
payment.

The Patna High Court further held that while exercising his
jurisdiction with regard to execution of the award, the District Judge had to
be conscious of the fact that any such payment would be subjected to statutory
provisions. Since there was a clear provision under the Income-tax Act with
regard to TDS, the District Judge could not have held to the contrary. The only
remedy for the claimant under such circumstances was to approach the assessing
officer u/s. 197 for a certificate for a lower rate of TDS or non-deduction of
TDS, or alternatively to approach the tax authorities for refund of the amount
in case no tax was due or payable by the claimant.

The Patna High Court therefore allowed the writ petition of
the company and set aside the order of the District Judge.

OBSERVATIONS

Section194A requires a person responsible for payment of
interest to deduct tax at source in the circumstances specified therein. Clause
(ix), inserted with effect from 1^st
June, 2003 in section 194A(3) exempted income credited or paid by way of
interest on the compensation amount awarded by the MACT where the amount of
such income or the aggregate of the amounts of such income credited or paid
during the financial year did not exceed Rs. 50,000. This clause (ix) has been
substituted by clauses (ix) and (ixa) with effect from 1^st June, 2015. The new clause
(ix) altogether exempts income credited by way of interest on the compensation
amount awarded by the MACT from the liability to deduct tax at source u/s.
194A, while clause (ixa) continues to provide for exemption to income paid by
way of interest on compensation amount awarded by the MACT where the amount of
such income or the aggregate of the amounts of such income paid during the
financial year does not exceed Rs. 50,000. In effect, therefore, no TDS is
deductible on interest on such compensation which is merely credited but not
paid, or on payment of interest where the amount of interest paid during the
financial year does not exceed Rs. 50,000. The issue of applicability of TDS
therefore is really relevant only to cases where there is payment of such
interest exceeding Rs. 50,000 during the year and that, too, when it was not
preceded by the credit thereof.

Section 2(28A) defines the term “interest” in a manner that
includes the interest payable in any manner in respect of any moneys borrowed
or debt incurred. In a motor claim award, there is obviously no borrowing of
monies. Is there any debt incurred? The “incurring” of the debt, if at
all, may arise only on grant of the
award. Before the award of the claim, there is really no debt that can be said
to have been incurred in favour of the person receiving compensation. In fact,
till such time as a claim is awarded there is no certainty about the
eligibility to the claim, leave alone the quantum of the claim. In our
considered view, no part of the amount awarded as compensation under the MVA
till the date of award could be considered as in the nature of interest. The
amount so awarded till the time it is awarded cannot be construed as interest
even where it includes the payment of “interest” u/s. 171 of the MVA for the
reason that such “interest” cannot be construed as “‘interest” within the meaning
of section 2(28A) of the Act and as a consequence cannot be subjected to TDS
u/s. 194A of the Act.

If one looks at the award of “interest” u/s. 171 of the MVA,
typically in most cases, such interest is a part of the amount of compensation
awarded and is not attributable to the late payment of the compensation, but is
for the reasons mentioned in section 171 and at the best relates to the period
ending with the date of award. This “interest” u/s. 171 for the period up to
the date of award, would not fit in within the definition of interest u/s.
2(28A). Interest for the period after the date of award, if related to the
delayed payment of the awarded compensation, would fall within the definition
of interest, being interest payable in respect of debt incurred. It would only
be the interest for the period after the date of award which would be liable to
TDS u/s. 194A of the Income-tax Act provided, of course, that the amount being
paid is exceeding Rs. 50, 000 and was not otherwise credited to the payee’s
account before the payment.

Looked at differently, the interest up to the date of award
would also partake of the same character as the compensation awarded, being
damages for a personal loss, and would therefore not be regarded as an income
at all, opening a new possibility of contending that the provisions of section
194A may not apply to a case where the payment otherwise is not taxable in the
hands of the recipient.

In cases where the payment of the awarded compensation is
delayed, the ultimate amount of payment to be made may include interest for the
post-award period. In such a case, the ultimate amount will have to be
bifurcated into two parts, one towards compensation including interest for the
pre-award period, and the other being interest which may be subjected to TDS.
This need for bifurcation of interest into pre-award interest and post-award
interest, and the character of each, is supported by the decision of the
Supreme Court in the case of CIT vs. Ghanshyam (HUF) 315 ITR 1,
where the Supreme Court held as under in the context of interest on
compensation under the Land Acquisition Act:

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

One of the side questions is whether such interest included
in MACT compensation awarded under the MVA is chargeable to tax at all? There
is no doubt that the amount of compensation awarded is for the loss of a
personal nature and is therefore a capital receipt of a personal nature, which
is not chargeable to tax at all. The payment, though labelled “interest” u/s.
171 of the MVA, bears the same character of such compensation inasmuch as it
has no relation to the dent or the period and is nothing but a compensation to
an injured person determined on due consideration of the relevant factors,
including for the period during the date of injury to the date of award.

The mere fact that such income credited by way of interest on
MACT compensation awards is subjected to the provisions of section 194A and the
payer is required to deduct tax at source does not necessarily mean that such
amounts are otherwise chargeable to tax. It is important to note that section
194A, in any case, refers to a person responsible for paying to a resident “any
income” by way of interest and demands compliance only where the payment is in
the nature of income. As interpreted by the Allahabad High Court and the other
courts, such income would mean income which is chargeable to tax. If the
interest is not chargeable to tax, then the question of deduction of TDS u/s.
194A does not arise.

The question of chargeability to tax of such income has also
been recently considered by the Rajasthan High Court in case of Sarda
Pareek vs. ACIT 104 taxmann.com 76, where the High Court took the view
that on a plain reading of section 2(28A), though the original amount of MACT
compensation is not income but capital, the interest on the capital
(compensation) is liable to tax. The Supreme Court has admitted the special
leave petition against this order of the Rajasthan High Court in 104
taxmann.com 77. In the case of New India Assurance Company Ltd.
vs. Mani (supra) the Madras High Court held that the interest awarded
as a part of the compensation was income chargeable to tax; however, in a later
decision in the case of Managing Director, Tamil Nadu State Transport
Corpn. (Salem) Ltd. vs. Chinnadurai, 385 ITR 656, the High Court took a
contrary view and held that such interest awarded did not fall under the term
“income” as defined under the Income-tax Act. An SLP is admitted by the Supreme
Court against this decision, too. Therefore, clearly the issue of chargeability
of even the post-award interest to income tax is still a matter of dispute.

As observed by the Allahabad High Court, the one significant
difference between the compensation under the Land Acquisition Act and under
the MVA is that the compensation under the Land Acquisition Act may be
chargeable to tax under the head capital gains, whereas the compensation under the
MVA is not chargeable to tax at all.

One has to also keep in mind the provisions of section
145A(b), as applicable from assessment year 2010-11 to assessment year 2016-17,
which provided that notwithstanding anything to the contrary contained in
section 145, interest received by an assessee on compensation or on enhanced
compensation, as the case may be, shall be deemed to be the income of the year
in which it is received. With effect from assessment year 2017-18, an identical
provision is found u/s. 145B(1). However, the provisions of section 145A and
section 145B merely deal with how the income is to be computed and in which
year it is to be taxed, and do not deal with the issue of whether a particular
item of interest is chargeable to income tax or not. Therefore, these
provisions would apply only to interest on compensation which is otherwise
chargeable to income tax, and would not be applicable to interest which is not
so chargeable.

One also needs to refer to the provisions of section
56(2)(viii), which provides for chargeability under the head “income from other
sources” of interest received on compensation or on enhanced compensation
referred to in section 145A(b). Again, this provision merely prescribes the
head of income under which such interest would fall, provided such interest
income is chargeable to tax. It does not necessarily mean that the interest in
question is in the nature of income in the first place.

This is further clear from the fact that section 2(24), which
contains the definition of income, specifically includes receipts under various
clauses of section 56(2), such as clauses (v), (vi), (vii), (viia) and (x) –
gifts and deemed gifts, (viib) – excess premium received by a company for
shares, (ix) – forfeited advance for transfer of capital asset, and (xi) –
compensation in connection with termination or modification of terms of
employment for ensuring that such receipts so specified are treated as an
“income” for the purposes of the Act. In contrast, receipt of the nature
specified under clause (viii) of section 56(2) is not included in section 2(24)
indicating that such interest on compensation is not deemed always to be an
income.

One Mr. Amit Sahni has recently knocked the doors of the
Delhi High Court by filing a writ petition seeking quashing of the provision
which mandates deduction of tax on the interest on compensation awarded under
the MVA. The court, vide order dated 16^th April, 2019, has directed
the CBDT to pass a reasoned order latest by 30^th June, 2019 in
response to the representation made by the petitioner in this regard.

The better view, therefore, seems to be that of the
Allahabad, Himachal Pradesh and Punjab and Haryana High Courts, that no tax is
deductible in respect of interest awarded u/s. 171 of the Motor Vehicles Act,
even if such interest exceeds Rs. 50,000, unless such interest is (i)
attributable to the delay in payment of the awarded compensation and (ii)
pertains to the period after the date of the award and is (iii) calculated
w.r.t. the amount of the compensation awarded. This view is unaffected by the
fact of the insertion of clause (x) in section 194A(3), w.e.f. 1^st
June, 2003 and the substitution thereof w.e.f.
1^st June, 2015.

Given this position, and since the issue involves TDS, which
is merely a procedural requirement, one hopes that the CBDT will come out with
a clarification explaining that the provisions of section 194A have a
restricted application to the cases involving payment of interest for the delay
in payment of awarded compensation, so that neither the insurance companies nor
the poor claimants have to unnecessarily suffer through unwarranted tax
deduction or litigation in this regard.

shailesh.kwebmaker

Section 74 – Long-term capital loss on sale of listed equity shares is allowed to be carried forward

5. United Investments vs. ACIT (Kol.) Members: A.T.
Varkey (J.M.) and M. Balaganesh (A.M.) ITA No.:
511/Kol/2017 A.Y.: 2013-14 Date of order:
1^st July, 2019

Counsel for
Assessee / Revenue: S. Jhajharia / Sankar Halder

Section 74 –
Long-term capital loss on sale of listed equity shares is allowed to be carried
forward

FACTS

The assessee
was engaged in the business of horse-racing and also as a commission agent. It
had deployed its surplus funds by way of investments in listed shares and
securities. During the year it had derived long-term capital gain of Rs. 0.77
lakh and suffered long-term capital loss of Rs. 6.05 lakhs on the sales of
listed shares. In the return of income, the assessee carried forward the
long-term capital loss. However, the CIT(A) rejected the same since, according
to him, the gain derived from the sales of listed shares was exempt.

Being
aggrieved, the assessee appealed before the Tribunal where the Revenue
supported the orders of the lower authorities and submitted that the term
‘income’ included negative income, i.e., loss as well. Thus, when the profit
from transfer of shares of listed companies was exempt u/s 10(38), then as a
corollary the loss arising from such source also cannot be set off against any
other income which is chargeable to tax.

HELD

The Tribunal
noted that the judicial authorities, including the Apex Court in the case of CIT
vs. J.H. Gotla (156 ITR 323), have held that the expression ‘income’
includes loss. The Tribunal further noted that the decision of the Apex Court
was in the context of clubbing of a minor’s income with that of the parents u/s
64, when the Court held that the loss legally assessable in the hands of the
minor was also required to be clubbed in the hands of the parent. In the said
case, according to the Tribunal, the Revenue had not proved that the source
from which the minor earned income or incurred loss was outside the purview of
the tax provisions. Although, admittedly, the source of income in the hands of
the minor was such that it was liable to tax and if there had been any income,
then the same would have been included in the hands of the parent. In the light
of this factual and legal position, the Tribunal noted that the Supreme Court
held that if the income was liable for clubbing in the hands of the parent,
then equally the same principle will apply with respect to loss which was negative
income.

According to
the Tribunal, the judicial concept that the term ‘income’ includes loss can be
applied only when the entire source of such income falls within the charging
provisions of the Act. Accordingly, in a case where the source of income is otherwise
chargeable to tax, but only a specific specie of income derived from such
source is granted exemption, then in such a case the proposition that the term
‘income’ includes loss will not be applicable. It is only when the source which
produces ‘income’ is outside the ambit of the taxing provisions of the Act, in
such a case alone the ‘income’ including negative income can be said to be
outside the ambit of taxing provisions, and therefore the negative income is
also required to be ignored for taxation purposes. Therefore, where only one of
the streams of income from the ‘source’ is granted exemption by the Legislature
upon fulfilment of specified conditions, then the concept of ‘income’ includes
‘loss’ will not apply.

According to
the Tribunal, on conjoint reading of the provisions of section 2(14) which
defines the term capital assets; section 45 which lays down the charge of tax
on gain arising on transfer of ‘capital asset’; section 48 which provides for
the manner and mode of computation of long-term capital gain; and section 74
providing for manner for claiming set-off of long-term capital loss / its carry
forward, nowhere had any exception been made with regard to long-term capital
gain / loss arising on sale of equity shares. The Tribunal further noted that
the same is liable to income tax like any other item of capital asset.
Therefore, it cannot be said that the source, viz., transfer of long-term
capital asset being equity shares, by itself is exempt from tax so as to say
that any ‘income’ from such source shall include ‘loss’ as well.

Therefore, relying on the decisions of the
Calcutta High Court in the case of Royal Calcutta Turf Club vs. CIT
[1983] 144 ITR 709/12 Taxman 133 and the Mumbai Tribunal in the case of
Raptakos Brett & Co. Ltd. vs. DCIT (69 SOT 383), the Tribunal
held that the claim of the assessee for carry forward of long-term capital loss
be allowed.

shailesh.kwebmaker

Section 154 – Denial of deduction u/s 80HHC on sale proceeds of DEPB license, which was contrary to the subsequent decision of the Supreme Court, can be termed as a ‘mistake’ apparent from record and can be rectified u/s 154

4. Anandkumar
Jain vs. ITO (Mum.) Members: G.S.
Pannu (V.P.) and Ravish Sood (J.M.) ITA No.:
4192/Mum/2012 A.Y.: 2003-04 Date of order:
20^th August, 2019

Counsel for
Assessee / Revenue: Jitendra Sanghavi and Amit Khatiwala / Rajesh Kumar Yadav

Section 154 –
Denial of deduction u/s 80HHC on sale proceeds of DEPB license, which was
contrary to the subsequent decision of the Supreme Court, can be termed as a
‘mistake’ apparent from record and can be rectified u/s 154

FACTS

The assessee is
an individual engaged in the business of manufacturing and export of garments.
In his return of income for assessment year 2003-04 he had claimed deduction
u/s 80HHC. During the course of the assessment, the AO, amongst other
adjustments made, re-computed the deduction u/s 80HHC by reducing 90% of the
duty drawback, excise duty refund and sale proceeds of DEPB license from the
profits of the business of the assessee. On further appeals, both the CIT(A) as
well as the Tribunal upheld the order of the AO.

Thereafter, the
Special Bench of the Tribunal in the case of Topman Exports vs. ITO (OSD)
(33 SOT 337 dated 11^th August, 2009) decided a similar issue
in favour of the appellant. In view thereof, the assessee filed a rectification
application u/s 154. The AO rejected the application holding that the issue was
debatable and the Department was in appeal against the order in the Topman
Exports case. According to the CIT(A) this cannot be termed as a
mistake apparent from record and hence the same cannot be rectified u/s 154. He
also agreed with the AO that the issue was debatable. On merits, the CIT(A)
held that the issue of allowance of deduction u/s 80HHC had been decided
against the assessee by the Bombay High Court in the case of Kalpataru
Colours, 192 taxman 435. Accordingly, the CIT(A) dismissed the appeal
of the assessee vide order dated 24^th January, 2011. The assessee
did not prefer further appeal against the order of the CIT(A).

Subsequently,
the Supreme Court in the case of Topman Exports vs. CIT (342 ITR 49)
reversed the decision of the Bombay High Court in the Kalpataru Colours
case vide its order dated 8^th February, 2012. Thereafter, the
assessee filed the instant appeal before the Tribunal against the order of the
CIT(A) on 15^th June, 2012 which was after a delay of 420 days, with
a request for condonation of delay.

Before the
Tribunal, the Revenue objected to the assessee’s application for condonation of
delay and relied upon the decision in the case of Kunal Surana vs. ITO in
ITA No. 3297/Mum/2012 wherein the application filed by the assessee for
condonation of delay of four months was rejected. Further, it was contended
that since the issue was debatable at the relevant point of time, it cannot be
said to be a mistake apparent from record and hence cannot be rectified u/s
154.

HELD

The Tribunal
noted that the delay in filing the appeal was solely on the ground that the
CIT(A) had decided the issue against the assessee following the decision of the
jurisdictional High Court in the case of Kalpataru Colours; and,
as such, based on the advice of the consultant, the assessee did not prefer
further appeal before the Tribunal. Subsequently, when the Supreme Court passed
a favourable order in the case of Topman Exports, based on the
advice from his consultant the assessee filed the present appeal which was
after a delay of 420 days. According to the Tribunal, the assessee had a valid
reason for the delay and hence, relying on the decisions in the cases of Magnum
Exports vs. ACIT (ITA No. 1111/Kol/2012) and Pahilajal Jaikishan
vs. JCIT (ITA No. 1392/Mum/2012), it condoned the delay.

As regards the
issue whether it was a ‘mistake’ apparent from record in terms of section 154,
the Tribunal referred to the decision of the Supreme Court in the case of ACIT
vs. Saurashtra Kutch Stock Exchange Ltd. (173 Taxman 322) relied on by
the assessee. As per the said decision, according to the Tribunal, the Hon’ble
Courts do not make any new law when the order is pronounced; the Courts only
clarify the legal position, which was not correctly understood. Therefore, the
legal position so clarified by the Courts has an effect which is retrospective
in nature. Therefore, the Tribunal observed, any order passed in contravention
of such legal position would be considered as a mistake apparent from record
which can be rectified u/s 154. Accordingly, the contention of the assessee was
accepted and it held that the order passed by the AO and CIT(A) can be
rectified u/s 154.

On merit, the Tribunal relied on the Supreme
Court decision in the case of Topman Exports (Supra) and directed
the AO to re-compute the deduction u/s 80HHC on the sale proceeds of the DEPB
license in light of the said decision of the Supreme Court and allowed the
appeal filed by the assessee.

shailesh.kwebmaker

Sections 28(ii), 45 – Amount of Rs. 1.75 crores received by assessee towards professional goodwill was not chargeable u/s 28(ii)(a) as no case was made out by AO to establish that the assessee was the person who was managing the whole or substantially the whole of the affairs of the company Section 55(2) does not specify cost of acquisition of management right. There is no deemed cost of acquisition in the statute. Therefore, the charge u/s 45 never intended to levy a tax on transfer of management rights

6. [2019] 201 TTJ (Rai.) 683 DCIT vs. Dr. Sandeep Dave ITA No.: 175/Rpr/2013 A.Y.: 2009-10 Date of order: 1^st July, 2019

Sections 28(ii), 45 – Amount of Rs. 1.75
crores received by assessee towards professional goodwill was not chargeable
u/s 28(ii)(a) as no case was made out by AO to establish that the assessee was
the person who was managing the whole or substantially the whole of the affairs
of the company

Section 55(2) does not specify cost of
acquisition of management right. There is no deemed cost of acquisition in the
statute. Therefore, the charge u/s 45 never intended to levy a tax on transfer
of management rights

FACTS

The assessee received a certain amount from company CARE. According to
it, the amount was received as professional goodwill and was liable to be
treated as capital receipt not liable to capital gain. The AO observed that the
amount was received by the assessee on account of relinquishment of his rights
in the management of a company in favour of CARE, and not on account of
relinquishment of any right relating to professional expertise or acumen as
surgeon. The AO, accordingly, brought the amount to tax holding that it was
covered under the provision of section 28(ii)(a). On appeal, the Commissioner
(Appeals) deleted the addition made by the AO. Aggrieved by this order, the
Revenue filed an appeal.

HELD

The Tribunal held
that the work of management was entrusted to different committees and such
committees had other members / doctors apart from the assessee. Therefore, it
was incumbent on the Revenue to establish that in spite of there being other
members on various managerial committees, it was the assessee alone who was
actually managing the affairs of different committees. In such a case, it is
the board of directors collectively who can be said to be managing the business
affairs of the company.

Management right
has now been included in the definition of ‘property’ and, therefore, is a
‘capital asset’ u/s 2(14). This being so, the taxability of any amount received
against relinquishment of ‘management right’ has to be tested on the touchstone
of provisions relating to computation of capital gain. The assessee argued that
since management right is a capital asset, provisions relating to capital gain
will apply and when such computation provisions are applied, they are
unworkable. It is true that under the scheme of taxation of capital gain it is
not the entire sale consideration of an asset which is chargeable to tax but it
is the ‘profit or gain’ arising on transfer thereof which is taxable. This
observation is subject to the specific provisions of law which prescribe that
in case of some category of capital assets, cost of acquisition is considered
to be nil and, in those cases, full consideration accruing on transfer will
become taxable. In the instant case, it is the stand of the assessee that cost
of acquisition of management right being indeterminate, no capital gain can be
worked out and so the provisions are not workable.

Section 55(2) does
not specify the cost of acquisition of ‘management right’. There is no deemed
cost of acquisition provided in the statute. No case has been made out by the
AO to show as to what was the cost of management right in the hands of the
assessee. Therefore, what has been brought to tax is the entire consideration
for relinquishment of management right which runs contrary to the settled
proposition of law, which was laid down by the Supreme Court in the case of CIT
vs. B.C. Srinivasa Setty [1981] 5 Taxman 1/128 ITR 294. In this
decision, the Supreme Court has laid down the proposition that machinery and
charging provisions constitute an integrated code and in the situation where
the computation provision fails, it has to be assumed that such a transaction
was not intended to be falling within the charging section and, therefore, the
charge on account of capital gain must fail.

It is evident that
the Revenue has not established that the assessee was managing the whole or
substantially the whole of the affairs of the company as no case has been made
out by the Revenue that the amount received by the assessee from CARE was on
account of relinquishment of any managerial rights. Even assuming that the
amount received by the assessee is relatable to relinquishment of any
managerial right, in view of the ratio laid down by the Supreme Court in the
case of B.C. Srinivasa Setty (Supra), the cost of any such
managerial right being indeterminate, provisions relating to computation of
capital gain are not workable and, consequently, it has to be held that the
charge u/s 45 never intended to levy a tax on such a transaction. Therefore,
the amount received by the assessee is neither chargeable u/s 28(ii)(a) nor
under the head capital gain.

shailesh.kwebmaker

TDS – YEAR OF TAXABILITY AND CREDIT UNDER CASH SYSTEM OF ACCOUNTING

ISSUE FOR
CONSIDERATION

Section 145
requires the assessee to compute his income chargeable under the head “Profits
and gains of business or profession” or “Income from other sources” in
accordance with either cash or mercantile system of accounting, which is
regularly followed by the assessee. The assessee following cash system of
accounting would be offering to tax only those incomes which have been received
by him during the previous year. On the other hand, most of the provisions of
Chapter XVII-B provide for deduction of tax at source at the time of credit of
the relevant income or at the time of its payment, whichever is earlier.
Therefore, often tax gets deducted at source on the basis of the mercantile
system of accounting followed by the payer, which requires crediting of the
amount to the account of the assessee in his books of account. However, the
underlying amount on which the tax has been deducted at source is not
includible in the income of the assessee till such time as it has been received
by him.

Section 198
provides that all sums deducted in accordance with the provisions of Chapter
XVII shall be deemed to be income received, for the purposes of computing the
income of an assessee.

Till Assessment Year 2007-08, section 199 provided for grant of credit
for tax deducted at source to the assessee from income in the assessment made
for the assessment year for which such income is assessable. From Assessment
Year 2008-09, section 199 provides that the CBDT may make rules for the
purposes of giving credit in respect of tax deducted or tax paid in terms of
the provisions of Chapter XVII, including rules for the purposes of giving
credit to a person other than the payee, and also the assessment year for which
such credit may be given.

The corresponding
Rule 37BA, issued for the purposes of section 199(3), was inserted with effect
from 01.04 2009. The relevant part of this Rule, dealing with the assessment
year in which credit of TDS can be allowed, is as follows:

(3) (i) 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.

(ii) Where tax
has been deducted at source and paid to the Central Government and the income
is assessable over a number of years, credit for tax deducted at source shall
be allowed across those years in the same proportion in which the income is
assessable to tax.

After the amendment, though the section does not expressly provide for
the year of credit as it did prior to the amendment, Rule 37BA effectively
provides for credit similar to the erstwhile
section. In fact, under Rule 37BA, more clarity has now been provided in
respect of a case where the income is assessable over a number of years.

In view of these
provisions, an issue has arisen in cases where the assessee’s income is
computed as per the cash system of accounting regarding the year in which the
TDS amount is taxable as an income, and the year of credit of such TDS to the
assessee, when the underlying income from which tax has been deducted is not
received in the year of deduction. The Delhi bench of the Tribunal took a view
that the income to the extent of TDS has to be offered to tax as an income as
provided in section 198 in the year of deduction, and the credit of TDS is
available in such cases in the year of deduction, irrespective of Rule 37BA. As
against this, the Mumbai bench of the Tribunal did not concur with this view,
and denied credit of TDS in the year of deduction.

CHANDER SHEKHAR
AGGARWAL’S CASE

The issue had come
up before the Delhi bench of the Tribunal in the case of Chander Shekhar
Aggarwal vs. ACIT [2016] 157 ITD 626.

In this case, the
assessee was following cash system of accounting. He filed his return of income
for A.Y. 2011-12, including the entire amount of TDS deducted during the year
as his income, claiming TDS credit of Rs. 80,16,290.

While processing
the return u/s. 143(1), the Assessing Officer allowed credit of only Rs.
71,20,267, on the ground that the income with respect to the balance amount was
not included in the return filed by the assessee. The assessee appealed to the
CIT (A), disputing the denial of credit of the differential amount of TDS.
Placing reliance on Rule 37BA, the CIT (A) concluded that the assessee was not
entitled to credit for the amount though mentioned in the certificate for the
assessment year, if income relatable to the amount was not shown and was not
assessable in that assessment year.

The assessee
contended before the Tribunal that the amount equivalent to the TDS had been
offered as income by him in his return of income. This was in accordance with
the provisions of section 198, which mandates that all sums deducted under
Chapter XVII would be deemed to be income received for the purposes of computing
the income of an assessee. It was argued that the provisions of Rule 37BA are
not applicable to assessees following cash system of accounting. Since, as per
provisions of section 199, any deduction of tax under Chapter XVII and paid to
the Central Government shall be treated as payment of tax on behalf of the
person from whose income deduction of tax was made, it was pleaded that the
credit of the disputed amount should be allowed to the assessee.

The Tribunal duly
considered the amended provisions of section 199 as well as Rule 37BA. It
concurred with the view that once TDS was deducted by the deductor on behalf of
the assessee and the assessee had offered it as his income as per section 198,
the credit of that TDS should be allowed fully in the year of deduction itself.
Once an income was assessable to tax, the assessee was eligible for credit,
despite the fact that the remaining amount would be taxable in the succeeding
year.

With regard to Rule
37BA(3)(ii) providing for proportionate credit across the years when income was
assessable over a number of years, the Tribunal held that it would apply where
the entire compensation was received in advance but was not assessable to tax
in that year, but was assessable over a number of years. It did not apply where
the assessee followed cash system of accounting.

This was supported by an illustration – suppose an assessee who was
following cash system of accounting raised an invoice of Rs. 100 in respect of
which deductor deducted and deposited TDS of Rs. 10. Accordingly, the assessee
would offer an income of Rs. 10 and claim TDS of Rs. 10. However, in the
opinion of the Revenue, the assessee would not be entitled to credit of the
entire TDS of Rs. 10, but would be entitled to proportionate credit of Re. 1
only. Now let us assume that Rs. 90 was never paid to the assessee by the
deductor. In such circumstances, Rs. 9 which was deducted as TDS by the
deductor would never be available for credit to the assessee though the said
sum stood duly deposited to the account of the Central Government. Therefore,
as per the Tribunal, Rule 37BA(3) could not be interpreted so as to say that
TDS deducted at source and deposited to the account of the Central Government,
though it was income of the assessee, but was not eligible for credit of tax in
the year when such TDS was offered as income.

The Tribunal also
placed reliance upon the decisions of the Visakhapatnam bench in the case of ACIT
vs. Peddu Srinivasa Rao Vijayawada [ITA No. 234 (Vizag.) of 2009, dated
03.03.2011] and of the Ahmedabad bench in the case of Sadbhav
Engineering Ltd. vs. Dy. CIT [2015] 153 ITD 234. In these cases, it was
held that the credit of tax deducted at source from the mobilisation advance
adjustable against the bills subsequently was available in the year of
deduction, though it was not considered while computing the income of the
assessee.

Accordingly, the
Tribunal held that the assessee would be entitled to credit of the entire TDS
offered as income in the return of income.

SURENDRA S. GUPTA’S
CASE

A similar issue
recently came up for consideration before the Mumbai bench of the Tribunal in
the case of Surendra S. Gupta vs. Addl. CIT [2018] 170 ITD 732 .

In this case, the assessee, following cash system of accounting, did
not offer consultancy income of Rs. 83,70,287 to tax, since the same was not
received during the relevant A.Y. 2010-11. However, he offered corresponding
TDS to tax in respect of the same, amounting to Rs. 8,41,240, and claimed the
equivalent credit thereof in the computation of income. The Assessing Officer, applying Rule 37BA(3)(i),
restricted the credit to proportionate TDS of Rs. 84,547, against income of Rs.
8,41,240 offered to tax by the assessee, and disallowed the balance credit of
Rs. 7,56,693.

The assessee contested the denial of TDS credit before the CIT (A),
who upheld the order of the Assessing Officer, and directed that credit for the
balance amount should be given in the subsequent years in which income
corresponding to such TDS is received.

On the basis of
several decisions of the co-ordinate bench on the issue, the Tribunal noted
that there were two lines of thought on the issue; one which favours grant of
full TDS credit in the year of deduction itself, and the other which, following
strict interpretation, allows TDS credit in the A.Y. in which the income has
actually been assessed / offered to tax. Reference was made to the following
decisions wherein the former view was taken –

(i). Chander
Shekhar Aggarwal vs. ACIT (supra)

(ii). Praveen Kumar Gupta vs. ITO [IT Appeal No.
1252 (Delhi) of 2012]

(iii). Anil Kumar Goel vs. ITO [IT Appeal No. 5849
(Delhi) of 2011]

The Tribunal found
that in none of the above cases was the decision of the Kerala High Court in
the case of CIT vs. Smt. Pushpa Vijoy [2012] 206 Taxman 22 considered by
the co-ordinate bench. In this case, the Kerala High Court had held that the
assessee was entitled to credit of tax only in the assessment year in which the
net income, from which tax had been deducted, was assessed to tax. Following
this decision, the Tribunal rejected the claim of the assessee to allow the
full credit of TDS.

OBSERVATIONS

There are two
aspects to the issue – the year in which the amount of TDS should be regarded
as income of the assessee chargeable to tax (the year of deduction, or the year
in which the net income is received by the assessee), and accordingly accounted
for under the cash system of accounting; and secondly, to what extent credit of
the TDS is available against such income.

Therefore, it
becomes imperative to analyse the impact of the provisions of section 198 with
respect to the assessment of the income of an assessee who is following cash
system of accounting. Section 198 provides as under:

All sums
deducted in accordance with the foregoing provisions of this Chapter shall, for
the purpose of computing the income of an assessee, be deemed to be income
received.

It can be seen that
section 198 creates a deeming fiction by considering the amount of TDS as
deemed receipt in the hands of the deductee, though it has not been received by
him. This deeming fiction operates in a very limited field to consider the
unrealised income as realised. It appears that the legislative intent behind
this provision is to negate the probability of exclusion of the amount of TDS
from the scope of total income by the assessee, on the ground that it amounted
to a diversion of income by overriding title. It also precluded the deductee
from making a claim on the payer for recovery of the amount which had been deducted
at source in accordance with the provisions of Chapter XVII-B. But, this
section, by itself, does not create a charge over the amount of tax deduction
at source.

A careful reading
of this provision would reveal that it does not provide for the year in which
the said income shall be deemed to have been received. In contrast, reference
can be made to section 7, which also provides for certain incomes deemed to be
received. It has been expressly provided in section 7 that “the following
incomes shall be deemed to be received in the previous year….” unlike section
198. Therefore, it would not be correct to say that, once the sum is deducted
at source, it is deemed to be the income received in the year in which it has
been deducted and assessable in that year, de hors the other provisions
determining the year in which the said income can be assessed.

For instance, the
buyer of an immovable property may deduct tax at source u/s. 194-IA on the
advance amount paid to the assessee transferring that property. In such a case,
the capital gain in the hands of the transferor is taxable in the year in which
that immovable property has been transferred as provided in section 45.
Obviously, tax deducted at source u/s. 194-IA cannot be assessed as capital
gain in the year of deduction merely by virtue of section 198, if the capital
asset has not been transferred in the same year.

Similarly, in case
of an assessee who is following cash system of accounting, it cannot be said
that the amount of tax deducted at source is deemed to have been received in
the very same year in which it was deducted. Section 145 governs the
computation of income, which is in accordance with the method of accounting
followed by the assessee. The income equivalent to the amount of tax deducted
at source cannot be charged to tax de hors the method of accounting
followed by the assessee. In case of cash system of accounting, unless the
balance amount is received by the assessee, the amount of tax deducted at
source cannot be included in the income on the ground that it is deemed to be
received as per section 198. The reference to ‘sums deducted’ used in section
198 should be seen from the point of view of the recipient assessee and not the
payer. The ‘deduction’, from the point of view of the recipient, would happen
only when he receives the balance amount, as prior to that, the concerned
transaction would not be recognised at all in the books of account maintained
under the cash system of accounting.

In the context of
section 198 and the pre-amended provisions of section 199, in a Third Member
decision in the case of Varsha G. Salunkhe vs. Dy CIT 98 ITD 147, the
Mumbai Bench of the Tribunal has held as under:

“Both the sections, viz., 198 and 199, fall within
Chapter XVII which is titled as ‘Collection and recovery – deduction at
source’. In other words, these are machinery provisions for effectuating
collection and recovery of the taxes that are determined under the other
provisions of the Act. In other words, these are only machinery provisions
dealing with the matters of procedure and do not deal with either the
computation of income or chargeability of income….

Sections 198 and
199 nowhere provide for an exemption either to the determination of the income
under the aforesaid provisions of sections 28, 29 or as to the method of
accounting employed under section 145 which alone could be the basis for
computation of income under the provisions of sections 28 to 43A. Section 198
has a limited intention. The purpose of section 198 is not to carve out an
exception to section 145. Section 199 has two objectives – one to declare the
tax deducted at source as payment of tax on behalf of the person on whose
behalf the deduction was made and to give credit for the amount so deducted on
the production of the certificate in the assessment made for the assessment
year for which such income is assessable. The second objective mentioned in
section 199 is only to answer the question as to the year in which the credit
for tax deducted at source shall be given. It links up the credit with
assessment year in which such income is assessable. In other words, the
Assessing Officer is bound to give credit in the year in which the income is
offered to tax.

Section 199 does
not empower the Assessing Officer to determine the year of assessability of the
income itself but it only mandates the year in which the credit is to be given
on the basis of the certificate furnished. In other words, when the assessee produces
the certificates of TDS, the Assessing Officer is required to verify whether
the assessee has offered the income pertained to the certificate before giving
credit. If he finds that the income of the certificate is not shown, the
Assessing Officer has only not to give the credit for TDS in that assessment
year and has to defer the credit being given to the year in which the income is
to be assessed. Sections 198 and 199 do not in any way change the year of
assessability of income, which depends upon the method of accounting regularly
employed by the assessee. They only deal with the year in which the credit has
to be given by the Assessing Officer.

It could not be
disputed that according to the method of accounting employed by the assessee,
the income in respect of the three TDS certificates did not pertain to the
assessment year in question but pertained to the next assessment year and, in
fact, in that year, the assessee had offered the same to tax. Therefore, the
credit in respect of those three TDS certificates would not be given in the
assessment year under consideration, but in the next assessment year in which
the income was shown to have been assessed.”

Following this
decision, the Bilaspur bench of the Tribunal, in the case of ACIT vs. Reeta
Loiya 146 TTJ 52 (Bil)(URO), has held as under:

“It is a settled
proposition that the provisions of s. 198 are merely machinery provisions and
are not related to computation of income and chargeability of income as held by
the Bombay Tribunal in the case of Smt. Varsha G. Salunke (supra). In
the absence of the charging provisions to tax such deemed income as the income
of the assessee, the provisions of s. 198 of the Act cannot by themselves
create a charge on certain receipts.”

The Mumbai bench of
the Tribunal, in the case of Dy CIT vs. Rajeev G. Kalathil 67 SOT 52
(Mum)(URO), observed:

“It is a fact
that deduction of tax for the payment is one of the deciding facts for
recognising the revenue of a particular year. But TDS in itself does not mean
that the whole amount mentioned in it should be taxed in a particular year,
deduction of tax and completion of assessment are two different things while
finalising the tax liability of the assessee and Assessing Officer is required
to take all the facts and circumstances of the case not only the TDS
certificate.”

In the case of ITO
vs. Anupallavi Finance & Investments 131 ITD 205, the Chennai bench of
the Tribunal, while dealing with the controversy under discussion, has dealt
with the impact of section 198 as follows:

We are unable to
understand as to how the said provision assists the assessee’s case. All the
section says, to state illustratively, is that if there is deduction of tax at
source out of income of Rs. 100 [say at the rate of 10 per cent], crediting or
paying assessee Rs. 90, the same, i.e., Rs. 10 is also his income. It nowhere
speaks of the year for which the said amount of TDS is to be deemed as income
received. The same would, understandably, only correspond to the balance 90 per
cent. As such, if 30 per cent of the total receipt/credit is assessable for a
particular year, it shall, by virtue of section 198 of the Act be reckoned at
Rs. 30 [Rs. 100 × 30 per cent] and not Rs. 27 [Rs. 90 × 30 per cent]. Thus,
though again a natural consequence of the fact that tax deducted is only out of
the amount paid or due to be paid as income, and in satisfaction of the tax
liability on the gross amount to that extent, yet clarifies the matter, as it
may be open to somebody to say that TDS of Rs. 10 has neither been credited nor
received, so that it does not form part of income received or arising and,
thus, outside the scope of section 5 of the Act. That, to our mind, is sum and
substance of section 198.

Similar
observations have been made by the Mumbai bench of the Tribunal in the case of ITO
vs. PHE Consultants 64 taxmann.com 419 which are reproduced hereunder:

It is pertinent
to note that the provisions of sec. 198, though states that the tax deducted at
source shall be deemed to be income received, yet it does not specify the year
in which the said deeming provision applies. However, section 198 states that
the same is deemed to be income received “for the purpose of computing the
income of an assessee.” The provisions of section 145 of the Act state
that the income of an assessee chargeable under the head “Profits and
gains of business or profession” or “Income from other sources”
shall be computed in accordance with either cash or mercantile system of
accounting regularly employed by the assessee. Hence a combined reading of
provisions of section 198 and section 145 of the Act, in our view, makes it
clear that the income deemed to have been received u/s. 198 has to be computed
in accordance with the provisions of section 145 of the Act, meaning, thereby,
the TDS amount, per se, cannot be considered as income of the assessee by
disregarding the method of accounting followed by the assessee.

The Kerala High
Court has also expressed a similar view as extracted below in the case of Smt.
Pushpa Vijoy (supra), although without referring expressly to section 198.

We also do not
find any merit in the contention of the respondents-assessees that the amount
covered by TDS certificates itself should be treated as income of the previous
year relevant for the assessment year concerned and the tax amount should be
assessed as income by simultaneously giving credit for the full amount of tax
remitted by the payer.

Further, deeming
the amount of tax deducted at source as a receipt in the year of deduction and
assessing it as income of that year would pose several difficulties. Firstly,
the assessee might not even be aware about the deduction of tax at source on
his account while submitting his return of income. This may happen due to delay
on the part of the deductor in submitting the TDS statement and consequential
reflection of the information in Form 26AS of the assessee. Secondly, the tax
might be deducted at source while making the provision for the expenses by the
payer following mercantile system of accounting. For instance, tax is deducted
at source u/s. 194J while providing for the auditor’s remuneration. In such a
case, treating the amount of tax deducted at source as income of the auditor in
that year, would result into taxing the amount, even before the corresponding
services have been provided by the assessee.

Moreover, for an
amount to constitute a receipt under the cash method of accounting, it should
either be actually received or made available unconditionally to the assessee.
As held by the Supreme Court in the case of Keshav Mills Ltd. vs. CIT 23 ITR
230, “The ‘receipt’ of income refers to the first occasion when the
recipient gets the money under his own control.” In case of TDS, one can
take a view that such TDS is not within the control of the payee until such
time as he is eligible to claim credit of such TDS. That point of time is only
when he receives the net income after deduction of TDS, when he is eligible to
claim credit of such TDS.

Since the amount of
tax deducted at source cannot be charged to tax in the year of deduction merely
by virtue of section 198, no part of that income is assessable in that year, in
the absence of any receipt, in view of the cash system of accounting followed
by the assessee. The Delhi bench of the Tribunal in the case of Chander Shekhar
Aggarwal (supra) has decided the whole issue on the basis of the fact
that the amount equivalent to TDS was being offered to tax by the assessee in
accordance with the provision of section 198. Since the income was assessed to
that extent, the Tribunal opined that the assessee was eligible for full credit
of TDS, notwithstanding Rule 37BA(3)(ii), which provided for allowance of
proportionate TDS credit when the income was not fully assessable in the same
year. Thus, the very foundation on the basis of which the Delhi bench of the
Tribunal has allowed the full credit of TDS to the assessee in the case of
Chander Shekhar Aggarwal (supra) appears to be incorrect.

Having analysed the provisions of section 198, let us now consider the
issue about the year in which the credit for tax deducted at source is
allowable. As per section 4, the tax is chargeable on the ‘total income’ of the
assessee for a particular previous year. When the assessee pays the income-tax
under the Act, he does not pay it on any specific income but he pays it on the
‘total income’. Thus, it cannot be said that a particular amount of tax has
been paid or payable on a particular amount of income. However, when it comes
to TDS, the erstwhile provision of section 199 expressly provided that its
credit shall be given for the assessment year in which the relevant income is
assessable. After its substitution with effect from 01.04.2008, new section 199
has authorised CBDT to prescribe the rules which can specifically provide for
the assessment for which the credit may be given. As per the mandate given in
section 199, Rule 37BA provides that the credit shall be given for the
assessment year for which the concerned income is assessable. In view of such
express provisions, the credit cannot be availed in any year other than the
assessment year in which the income subject to deduction of tax at source is
assessable.

The Delhi bench of the Tribunal took a view that Rule 37BA does not
apply where the assessee follows cash system of accounting insofar as it
provides for the year in which the credit is available. In order to support its
view, it has been pointed out that the credit would not be available otherwise
in a case where the assessee does not receive the underlying income at all.
Certainly, the law does not provide about how the credit would be given for
that amount of TDS which was deferred for the reason that the relevant income
is assessable in future but, then, found to be not assessable at all for some
reason. However, this lacuna under the law can affect both types of assessees,
i.e., assessees following cash system of accounting, as well as assessees
following mercantile system of accounting.

Circular No. 5
dated 02.03.2001 has addressed one such situation wherein the tax has been
deducted at source on the rent paid in advance u/s. 194-I and subsequently the
rent agreement gets terminated or the rented property is transferred due to
which the balance of rent received in advance is refunded to the tenant or to
the transferee. It has been clarified that in such a case, credit for the
entire balance amount of tax deducted at source, which has not been given
credit so far, shall be allowed in the assessment year relevant to the
financial year during which the rent agreement gets terminated / cancelled or
rented property is transferred and balance of advance rent is refunded to the
transferee or the tenant, as the case may be. Similarly, in a few cases, the
Courts and Tribunal have held that where income has been offered to tax in an
earlier year, but tax has been deducted at source subsequently, credit for the
TDS should be allowed in such subsequent year [CIT vs. Abbott Agency,
Ludhiana 224 Taxman 350 (P&H), Societe D’ Engineering Pour L’ Industrie Et.
Les Travaux Publics, (SEITP) vs. ACIT 65 SOT 45 (Amr)(URO)].

Therefore, in our
view, the mere probability of income not getting assessed in future cannot by
itself be the reason for not applying the express provision of the law, unless
suitable amendment has been carried out to overcome such difficulty. Taking a
clue from the CBDT’s clarification vide aforesaid Circular, it is possible to
take a view that the credit of TDS should be made available in the year in
which the assessee finds that the relevant income would not be assessable at
all due to its irrecoverablity or any other reasons.

The view taken by the Mumbai bench of the
Tribunal in the case of Surendra S. Gupta (supra) by following the
decision of Kerala High Court in the case of Pushpa Vijoy (supra)
therefore seems to be the more appropriate view. The amount of tax deducted at
source is neither assessable as income nor available as credit in the year of
deduction, if the assessee is following the cash system of accounting, and has
not received the balance amount in that year. The taxation of the entire
amount, as well as credit for the TDS, would be in the year in which the net
amount, after deduction of TDS, is received. In case the net amount is received
over multiple years, the TDS amount would be taxed proportionately in the
multiple years, and proportionate TDS credit would also be given in those
respective years.

shailesh.kwebmaker

Section 147 – Reassessment – Natural justice – Order passed without disposing of objections raised by assessee to the report of DVO – reopening was improper and null and void

6. Pr
CIT-17 vs. Urmila Construction Company [ITA No. 1726 of 2016, Dated 18^th
March, 2019 (Bombay High Court)]

[Urmila
Construction Company vs. ITO-12(3)(4); dated 06/11/2009; ITA. No.
2115/Mum/2009, A.Y. 2005-06 Mum. ITAT]

Section
147 – Reassessment – Natural justice – Order passed without disposing of
objections raised by assessee to the report of DVO – reopening was improper and
null and void

The assessee was engaged in
the business of building development. During such proceedings, the A.O. had
disputed the valuation of the work in progress in relation to the incomplete
construction work on a certain site. The A.O., therefore, referred the
valuation to the Departmental Valuation Officer (DVO) on 30.12.2007. The report
of the DVO did not come for some time. In the meantime, the assessment was
getting barred by limitation on 31.12.2007. The A.O., therefore, on 27.12.2007
passed an order of assessment u/s. 143(3) of the Act. This assessment was
subject to receiving the report of the DVO. The DVO report was received on
3.12.2009. Thereupon, the A.O. reopened the assessee’s return for the said assessment year, relying upon the report of the DVO.

Being aggrieved with the
A.O order, the assessee filed an appeal to the CIT(A). The CIT(A) upheld the
action of the A.O.

Being aggrieved with the
CIT(A) order, the assessee filed an appeal to the ITAT. The Tribunal held that
the report of the DVO cannot be the basis for reopening the assessment. The
Tribunal relied upon the decision of the Supreme Court in the case of Asst.
CIT vs. Dhairya Construction (2010) 328 ITR 515 and other decisions of High
Courts.

Being aggrieved with the
ITAT order, the Revenue filed an appeal to the High Court. The Court held that
the notice of reopening of assessment was issued within a period of four years
from the end of the relevant assessment year. The original assessment was
completed, awaiting the report of the DVO. Under such circumstances, whether,
upon receipt of such report of DVO, reopening of the assessment can be validly
made or not, is the question.The court observed that it was not inclined to
decide this question. This was so because of the reason that once the A.O.
reopened the assessment, the assessee had strongly disputed the contents of the
DVO report. Before the A.O. the assessee had highlighted various factors as to
why the report of the DVO was not valid. The A.O., instead of deciding such
objections, once again called for the remarks of the DVO. The response of the
DVO did not come and in the meantime, the re-assessment proceedings were
getting time-barred. The A.O., therefore, passed an order of assessment under
section 143(3) r.w.s. 147 of the Act on the basis of the report of the DVO,
without dealing with the objections of the assessee to such a report.

The methodology adopted by
the A.O. in such an order of reassessment was wholly incorrect. Even if the notice
of reassessment was valid, the A.O. was to pass an order of reassessment in
accordance with the law. He could not have passed a fresh order without dealing
with and disposing of the objections raised by the assessee to the report of
the DVO. On this ground, the Revenue’s appeal was dismissed.

shailesh.kwebmaker

Section 28(ii)(c) – Business income – Compensation – the agreement between assessee and foreign company was not agreement of agency but principal-to-principal – compensation received for terminated contract could not be taxed u/s. 28(ii)(c)

5. Pr.
CIT-2 vs. RST India Ltd. [Income tax appeal No. 1798 of 2016, Dated 12^th
March, 2019 (Bombay High Court)]

[ITO-2(3)(1)
vs. RST India Ltd., dated 03/02/2016; ITA. No. 1608/Mum/2009, A.Y. 2005-06;
Bench: D, Mum. ITAT]

Section
28(ii)(c) – Business income – Compensation – the agreement between assessee and
foreign company was not agreement of agency but principal-to-principal –
compensation received for terminated contract could not be taxed u/s. 28(ii)(c)

The assessee had entered
into an agreement with US-based company Sealand Service Inc. Under the
agreement the assessee was to solicit business on behalf of the said Sealand
Service Inc. After some disputes between the parties, this contract was
terminated pursuant to which the assessee received a compensation of Rs. 2.25
crore during the period relevant to the A.Y. in question. The assessee claimed
that the receipt was capital in nature and therefore not assessable to tax. The
AO, however, rejected the contention and held that it would be chargeable to
tax in terms of section 28(ii)(c) of the Act.

The CIT (A) allowed the
assessee’s appeal holding that there was no principal agent relationship
between the parties and the contract was on principal-to-principal basis and
therefore section 28(ii)(c) would not apply.

In further appeal by the
Revenue, the Tribunal confirmed the view of the CIT Appeals, inter alia
holding that the entire source of the income was terminated by virtue of the
said agreement and that in view of the fact that there was no
principal-to-agent relationship, section 28(ii)(c) will not apply.

Being aggrieved with the
ITAT order, the Revenue filed an appeal to the High Court. The Court held that
it is not disputed that upon termination of the contract the assessee’s entire
business of soliciting freight on behalf of the US-based company came to be
terminated. It may be that the assessee had some other business. Insofar as the
question of taxing the receipts arising out of the contract terminating the
very source of the business, the same would not be relevant. The real question
is, was the relationship between the assessee and the US-based company one in
the nature of an agency?

Section 28(ii)(c) of the
Act makes any compensation or other payment due, i.e, the receipt by a person
holding an agency in connection with the termination of the agency or the
modification of the terms and conditions relating thereto, chargeable as profits
and gains of business and profession. The essential requirement for application
of the section would therefore be that there was a co-relation of agency
principal between the assessee and the US- based company. In the present case,
the CIT (A) and the tribunal have concurrently held that the relationship was
one of principal-to-principal and not one of agency.

The Court further observed
that the true character of the relationship from the agreement would have to be
gathered from reading the document as a whole. This Court in the case of Daruvala
Bros. (P). Ltd. vs. Commissioner of Income Tax (Central), Bombay, reported in
(1971) 80 ITR 213 had found that the agreement made between the parties was
of sole distribution and the agent was acting on his behalf and not on behalf
of the principal. In that background, it was held that the agreement in
question was not one of agency, though the document may have used such term to
describe the relationship between the two sides. In such circumstances the Revenue’s
appeal was dismissed.

shailesh.kwebmaker

Section 271(1)(c) – Penalty – Concealment – Merely because the quantum appeal is admitted by High Court penalty does not become unsustainable – However as issue is debatable, therefore penalty could not be imposed

4. The
Pr. CIT-1 vs. Rasiklal M. Parikh [Income tax Appeal No. 169 of 2017, Dated 19^th
March, 2019 (Bombay High Court)]

[Rasiklal
M. Parikh vs. ACIT-19(2); ITA. No. 6016/Mum/2013, Mum. ITAT]

Section
271(1)(c) – Penalty – Concealment – Merely because the quantum appeal is
admitted by High Court penalty does not become unsustainable – However as issue
is debatable, therefore penalty could not be imposed

The assessee is an
individual. He filed his ROI for the A.Y. 2006-07. The assessment of his return
gave rise to disallowance of exemption u/s. 54F of the Act. During the year the
assessee had transferred the tenancy rights in a premises for consideration of
Rs. 1.67 crore and claimed exemption of Rs. 1.45 crore u/s. 54F of the
investment in residential house. Such exemption was disallowed by the A.O. He
also initiated penalty proceedings. The disallowance was confirmed up to the
stage of the Tribunal, upon which the Assessee filed an appeal before the High
Court, which was admitted. The A.O. imposed a penalty of Rs. 50 lakh.

This was challenged by the
Assessee before the CIT (A) and then the Tribunal. The Tribunal, by the
impugned judgement, deleted the penalty only on the ground that since the High
Court has admitted the assessee’s quantum appeal, the issue is a debatable one.

Being aggrieved with the ITAT order, the
Revenue filed an appeal to the High Court. The High Court was not in agreement
with the observations of the Tribunal that merely because the High Court has
admitted the appeal and framed substantial questions of law, the entire issue
is a debatable one and under no circumstances the penalty could be imposed. In
this context, reference was made to a decision of a division bench of the
Gujarat High Court in the case of Commissioner of Income Tax vs. Dharamshi
B. Shah [2014] 366 ITR 140 (Guj).

However, the Hon’ble Court
held that despite the above-cited decision, this appeal need not be
entertained. This is so because independently, too, one can safely come to the
conclusion that the entire issue was a debatable one. The dispute between the
assessee and the Revenue was with reference to actual payment for purchase of
the flat and whether, when the assessee had purchased one more flat, though
contagious, could the assessee claim exemption u/s. 54F of the Act.

It can thus be seen that
the Assessee had made a bona fide claim. Neither any income nor any
particulars of the income were concealed. As per the settled legal position,
merely because a claim is rejected it would not automatically give rise to
penalty proceedings. Reference in this respect can be made to the decision of
the Supreme Court in the case of Commissioner of Income Tax, Ahmedabad vs.
Reliance Petroproducts Pvt. Ltd. Under the above circumstances, for the
reasons different from those recorded by the Tribunal in the impugned
judgement, the Revenue’s appeal was dismissed.

shailesh.kwebmaker

Section 194-IA and 205 – TDS – Bar against direct demand on assessee (Scope of) – Assessee sold property – Purchaser deducted TDS amount in terms of section 194-IA on sale consideration – Amount of TDS was not deposited with Revenue by purchaser – As provided u/s. 205, assessee could not be asked to pay same again – It was open to department to make coercive recovery of such unpaid tax from payer whose primary responsibility was to deposit same with government Revenue promptly because, if payer, after deducting tax, fails to deposit it in government Revenue, measures could always be initiated against such payers

13. Pushkar
Prabhat Chandra Jain vs. UOI; [2019] 103 taxmann.com 106 (Bom): Date
of order: 30^th January, 2019

Section
194-IA and 205 – TDS – Bar against direct demand on assessee (Scope of) –
Assessee sold property – Purchaser deducted TDS amount in terms of section
194-IA on sale consideration – Amount of TDS was not deposited with Revenue by
purchaser – As provided u/s. 205, assessee could not be asked to pay same again
– It was open to department to make coercive recovery of such unpaid tax from
payer whose primary responsibility was to deposit same with government Revenue
promptly because, if payer, after deducting tax, fails to deposit it in
government Revenue, measures could always be initiated against such payers

The petitioner sold an immovable property for Rs. 9 crore. The
purchasers made a net payment of Rs. 8.91 crore to the petitioner after
deducting tax at source at 1% of the payment in terms of section 194-IA of the
Income-tax Act, 1961. The petitioner filed the return of income and claimed
credit of TDS of Rs. 10.71 lakh. The Income-tax department noticed that only an
amount of Rs. 1.71 lakh was deposited with government Revenue and, thus, gave
the petitioner credit of TDS only to the extent of such sum. In an intimation
issued by the respondent u/s. 143(1), a demand of Rs. 10.36 lakh was raised
against the petitioner. This comprised of the principal tax of Rs. 9 lakh and
interest payable thereon. Subsequently, the return of the petitioner was taken
in limited scrutiny. During the pendency of such scrutiny assessment
proceedings, the Revenue issued a notice to the branch manager of the bank
attaching the bank account of the assessee. A total of Rs. 3.68 lakh came to be
withdrawn by the department from the petitioner’s bank account for recovery of
the unpaid demand.

The
assessee objected to attachment of the bank account on the ground that the
purchasers had deducted the tax at source in terms of section 194-IA. Further,
the petitioner had already offered the entire sale consideration of Rs. 9 crore
to tax in the return filed. The petitioner referred to section 205 and
contended that in a situation like the present case, recovery could be made
only against the deductor-payer. The petitioner could not be asked to pay the
said amount again. However, the respondent did not accept the representation of
the petitioner, upon which the instant petition has been filed.

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

“i) The purchasers paid the petitioner only Rs.
8.91 crore retaining Rs. 9 lakh towards TDS. The department does not argue that
this amount of Rs. 9 lakh so deducted is not in tune with the statutory
requirements. It appears undisputed that the deductor did not deposit such
amount in the government Revenue. Under the circumstances, the petitioner is
asked to pay the said sum again, since the department has not recognised this
TDS credit in favour of the petitioner.

ii) Section 205 carries the caption ‘Bar against
direct demand on assessee’. The section provides that where tax is deducted at
the source under the provisions of Chapter XVII, the assessee shall not be
called upon to pay the tax himself to the extent to which tax has been deducted
from that income.

iii) The situation arising in the present petition
is that the department does not contend that the petitioner did not suffer
deduction of tax at source at the hands of payer, but contends that the same
has not been deposited with the government/Revenue. As provided u/s. 205 and in
the circumstances of the instant case, the petitioner cannot be asked to pay
the same again. It is always open for the department, and in fact the Act
contains sufficient provisions, to make coercive recovery of such unpaid tax
from the payer whose primary responsibility is to deposit the same with the government
Revenue scrupulously and promptly. If the payer after deducting the tax fails
to deposit it in the government Revenue, measures can always be initiated
against such payers.

iv) The Revenue is correct in pointing out that
for long after issuing notice u/s. 226(3), the petitioner has not brought this
fact to the notice of the Revenue which led the Revenue to make recoveries from
the bank account of the petitioner. In that view of the matter, at the best the
petitioner may not be entitled to claim interest on the amount to be refunded.

v) Under the circumstances, the respondents
should lift the bank account attachment. Further, the respondent should refund
a sum of Rs. 3.68 lakhs to the assessee.”

shailesh.kwebmaker

Sections 245 and 245D – Settlement Commission – Procedure on application u/s. 245C (Opportunity of hearing) – Section 245D(2C) does not contemplate affording an opportunity of hearing to Commissioner (DR) at time of considering application for settlement for admission and, at best, Commissioner (DR) may be heard to deal with any submissions made by assessee, if called upon by Settlement Commission; however, under no circumstances can Commissioner (DR) be permitted to raise objections against admission of application at threshold and to make submissions other than on basis of report submitted by Principal Commissioner – Since, in instant case, Settlement Commission had first heard objections raised by Commissioner (DR) against admission of application for settlement based on material other than report of Principal Commissioner and thereafter had afforded an opportunity of hearing to assessee to deal with objections raised by Commissioner (DR) and had thereafter proceeded to declare appl

12. Akshar
Developers vs. IT Settlement Commission; [2019] 103 taxmann.com 76 (Guj): Date
of order: 4^th February, 2019

Sections
245 and 245D – Settlement Commission – Procedure on application u/s. 245C
(Opportunity of hearing) – Section 245D(2C) does not contemplate affording an
opportunity of hearing to Commissioner (DR) at time of considering application
for settlement for admission and, at best, Commissioner (DR) may be heard to
deal with any submissions made by assessee, if called upon by Settlement
Commission; however, under no circumstances can Commissioner (DR) be permitted
to raise objections against admission of application at threshold and to make
submissions other than on basis of report submitted by Principal Commissioner –
Since, in instant case, Settlement Commission had first heard objections raised
by Commissioner (DR) against admission of application for settlement based on
material other than report of Principal Commissioner and thereafter had
afforded an opportunity of hearing to assessee to deal with objections raised
by Commissioner (DR) and had thereafter proceeded to declare application
invalid based on material pointed out by Commissioner (DR), Settlement
Commission had clearly violated provisions of section 245D(2C) by providing an
opportunity of hearing to Commissioner (DR) to object to admission of application
instead of rendering a decision on the basis of report of Principal
Commissioner as contemplated under said
sub-section

A raid
came to be carried out in the case of the assessee u/s. 132 of the Income-tax
Act, 1961 and some documents came to be seized. The assessee preferred
application u/s. 245(C)(1). The form was filled by the assessee along with
which the statement of particulars of issues to be settled, as well as the
statement showing full and true disclosure came to be submitted. The matter came
up for the purpose of admission and the Settlement Commission admitted the
application u/s. 245(D)(1). Thereafter, the Principal Commissioner submitted a
report u/s. 245D(2B). The assessee filed a rejoinder to the above report u/s.
245D(2B) meeting with the objections raised by the Principal Commissioner. The
matter was heard for the purposes of decision u/s. 245D(2C). The Commissioner
(DR) had raised objection based on several materials other than the report of
the Principal Commissioner, whereupon the Settlement Commission passed an
adverse order u/s. 245D(2C) rejecting the application of the assessee.

The
assessee filed a writ petition and challenged the order. The assessee contended
that the Settlement Commission, instead of passing the order on the basis of
the report of the Principal Commissioner as clearly laid down in section
245D(2C), had passed the order on the basis of what was not in the report,
which rendered such order bad in law. It was not open for the Commissioner (DR)
to raise objections and the Commissioner had gone beyond what his superior
Principal Commissioner had stated in the report, and if there was any
objection, it was for the Principal Commissioner to take such objection in the
report. There was grave error on the part of the Settlement Commission
permitting the Commissioner (DR) to raise objections to the admission of the
application and more so in permitting him to go beyond the report.

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

“i) After amendment, section 245D
contemplates three stages for dealing with an application made u/s. 245C(1).
The scheme of admission of a case has been completely altered with effect from
01.06.2007 and now there are two stages for admission of the application. The
third stage is for deciding the application. In the first stage, on receipt of
an application u/s. 245C, the Settlement Commission is mandated to issue a
notice to the applicant within seven days from the date of receipt of the
application, requiring him to explain as to why the application made by him be
allowed to be proceeded with, and on hearing the applicant, the Settlement
Commission is further mandated to either reject the application or allow the
application to be proceeded with by an order in writing, within a period of
fourteen days from the date of the application. The proviso thereto provides
that where no order has been passed within the aforesaid period by the
Settlement Commission, the application shall be deemed to have been allowed to
be proceeded with. Thus, at the first stage, no report or communication from
the department is required for the Settlement Commission to decide whether or
not to allow an application to be proceeded with.

ii) Thus, the Principal Commissioner has not
stated in the report that there is no full and true disclosure by the assessee,
but has raised certain doubts about the adequacy of the disclosure and has
reserved the right to comment at a later stage of the application on the basis
of the material seized.

iii) The Settlement Commission in the impugned
order has recorded that the Commissioner (DR) has objected to the admission of
the settlement applications for the reason that the applicants have not made
full and true disclosure in the petitions. In the opinion of this court,
section 245D(2C) does not contemplate any such objection being raised by the
Commissioner (DR). Section 245D(2C) contemplates hearing to the applicant only
in case the Settlement Commission is inclined to declare the application
invalid. In case the report does not say that there is no full and true
disclosure and the Settlement Commission is inclined to accept such report, it
is not even required to hear the applicant. Therefore, when the sub-section
which requires an opportunity of being heard to be given to the applicant only
if the application is to be declared invalid, the question of Principal
Commissioner or Commissioner raising any objection to the application at this
stage, does not arise.

iv) A perusal of the impugned order reveals that
the Settlement Commission has first heard the objections raised by the
Commissioner (DR) to the admission of the applications based on material other
than the report, and thereafter has afforded an opportunity of hearing to the
applicants to deal with the objections raised by the Commissioner (DR) and has
thereafter proceeded to declare the application invalid based on the material
pointed out by the Commissioner (DR) from the seized material. On a plain
reading of section 245D(2C) it is evident that it contemplates passing of order
by the Settlement Commission on the basis of the report of the Principal
Commissioner or Commissioner. Therefore, the scope of hearing would be limited
to the contents of the report. The applicant would, therefore, at this stage be
prepared to deal with the contents of the report and if any submission is made
outside the report, it may not be possible for the applicant to deal with the
same. On behalf of the respondents it has been contended that the Commissioner
(DR) has not relied upon any extraneous material and that the arguments are
made on the basis of the seized material and the evidence on record. In the
opinion of this Court, insofar as the record of the case and other material on
record is concerned, consideration of the same is contemplated at the third
stage of the proceedings u/s. 245D(4) and not at the stage of s/s. (2C).

v) Sub-section (2C) of section 245D contemplates
a report by the Principal Commissioner/Commissioner and consideration of such
report by the Settlement Commission and affording an opportunity of hearing to
the applicant before declaring the application to be invalid. The sub-section
does not contemplate an incomplete report which can be supplemented at the time
of hearing. While the sub-section does not contemplate hearing the Principal
Commissioner or Commissioner at the stage of section 245D (2C), at best,
requirement of such hearing can be read into the said sub-section for the purpose
of giving an opportunity to the Commissioner (DR) to deal with the submissions
of the applicant in case the Settlement Commission hears the applicant. But the
sub-section does not contemplate giving an opportunity to the Commissioner (DR)
to raise any objection to the admission of the application and hearing him to
supplement the contents of the report. The report has to be considered as it is
and it is on the basis of the report that the Settlement Commission is required
to pass an order one way or the other at the stage of section 245D(2C). Going
beyond the report at a stage when the order is to be passed on the basis of the
report, would also amount to a breach of the principles of natural justice.
Moreover, no grave prejudice is caused to the Revenue if the application is
admitted and permitted to be proceeded with inasmuch as in the third stage, the
entire record and all material including any additional report of investigation
or inquiry if called for by the Settlement Commission would be considered and
the Principal Commissioner or Commissioner would be granted an opportunity of
hearing.

vi) The Settlement Commission was, therefore, not
justified in permitting the Principal Commissioner to supplement the report
submitted by the Commissioner by way of oral submissions which were beyond the
contents of the report. At best, if the applicant had made submissions in
respect of the report, the Commissioner may have been permitted to deal with
the same, but under no circumstances could the Commissioner be permitted to
raise objection to the admission of the application and be heard before the
assessee and that, too, to supplement an incomplete report on the basis of the
material and evidences on record. As already discussed hereinabove, any hearing
based upon the material and evidences on record is contemplated at the stage of
section 245D(4), and insofar as sub-section (2C) of section 245D is concerned,
the same contemplates a decision solely on the basis of the report of the
Commissioner.

vii) Section 245D(2C) does not contemplate
affording an opportunity of hearing to the Commissioner (DR), and at best, the
Commissioner (DR) may be heard to deal with any submissions made by the
assessee, if called upon by the Settlement Commission. However, under no circumstances
can the Commissioner (DR) be permitted to raise objections against the
admission of the application at the threshold and to make submissions on the
basis of material on record to supplement the report submitted by the Principal
Commissioner in the manner as had been done in this case.

viii) In the light of the above discussion, the
impugned order passed by the Settlement Commission being in breach of the
provisions of section 245D(2C) and also being in breach of the principles of
natural justice inasmuch as at the stage of section 245D(2C), the Settlement
Commission has placed reliance upon material other than the report, cannot be
sustained. The impugned order passed by the Settlement Commission is hereby
quashed and set aside.”

shailesh.kwebmaker

Sections 147 and 148 – Reassessment – Notice after four years – Validity – Transfer of assets to subsidiary company and subsequent transfer by subsidiary company to third party – Transaction disclosed and accepted during original assessment – Notice after four years on ground that transaction was not genuine – Notice not valid

10. Bharti
Infratel Ltd. vs. Dy. CIT; 411 ITR 403 (Delhi): Date
of order: 15^th January, 2019 A.Y.:
2008-09

Sections
147 and 148 – Reassessment – Notice after four years – Validity – Transfer of
assets to subsidiary company and subsequent transfer by subsidiary company to
third party – Transaction disclosed and accepted during original assessment –
Notice after four years on ground that transaction was not genuine – Notice not
valid

BAL
transferred telecommunications infrastructure assets worth Rs. 5,739.60 crores
to the assessee, its subsidiary (BIL), on 31.01.2008 for Nil consideration
under a scheme of arrangement approved by the Delhi High Court. According to
the scheme of arrangement, BIL revalued the assets to Rs. 8,218.12 crore on the
assets side of the balance sheet for the year ending 31.03.2008. Within 15 days
of the approval of the scheme of arrangement, a shareholders’ agreement on
08.12.2007 was entered into by BIL whereby the passive infrastructure was
transferred by it to a third party, namely, I. The return for the A.Y. 2008-09
was taken up for scrutiny assessment by notices u/s. 143(2) and 142 of the
Income-tax Act, 1961. Questionnaires were issued to which BIL responded
furnishing details and documents. Assessment was made. Thereafter, reassessment
proceedings were initiated and notice u/s. 148 issued on 01.04.2015.

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

“i) Explanation 1 to section 147 would not apply
as all the primary facts were disclosed, stated and were known and in the
knowledge of the Assessing Officer. This would be a case of ‘change of opinion’
as the assessee had disclosed and had brought on record all facts relating to
transfer of the passive infrastructure assets, their book value and fair market
value were mentioned in the scheme of arrangement, as also that the transferred
passive assets became property of I including the dates of transfer and the
factum that one-step subsidiary BIV was created for the purpose.

ii) These facts were within the knowledge of the
Assessing Officer when he passed the original assessment order for A.Y.
2008-09. The notice of reassessment was not valid.”

shailesh.kwebmaker

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