Subscribe to the Bombay Chartered Accountant Journal Subscribe Now!

Category: Direct Taxes

Section 45(4) read with section 2(14) – Receipt of money equivalent to share in enhanced portion of the assets re-valued by the Retiring Partners do not give rise to capital gain u/s. 45(4) read with section 2(14)

4. D.S. Corporation vs. Income Tax Officer
(Mum) Members: P.M. Jagtap (V.P.) – Third Member I.T.A. Nos.: 3526 & 3527/MUM/2012 A.Y.s: 2006-2007 and 2007-2008 Dated: 10th January, 2019 Counsel for Assessee / Revenue: Dr. K.
Shivaram and Rahul Hakani / Ajay Kumar

 

Section 45(4) read with section 2(14) –
Receipt of money equivalent to share in enhanced portion of the assets
re-valued by the Retiring Partners do not give rise to capital gain u/s. 45(4)
read with section 2(14)

 

FACTS


The assessee, a partnership firm, was
originally constituted vide the deed of partnership entered into on 01.08.2005
with the object to carry on the business of real estate development and
construction. The firm was reconstituted from time to time. On 23.09.2005, the
assessee firm purchased a property at a suburb in Mumbai for a consideration of
Rs. 6.5 crore. After arriving at a settlement with most of the tenants
occupying the said property and obtaining permission of the competent authority
concerned for construction of a five-star hotel, the said property was revalued
at Rs. 193.91 crore as per the valuation report of the registered valuer. The
resultant revaluation surplus was credited to the capital accounts of the
partners in their profit sharing ratio. Two of the five partners retired from
the partnership firm, on 27.03.2006 and on 22.05.2006. On their retirement,
both these partners were paid the amounts standing to the credit of their
capital accounts in the partnership firm including the amount of Rs. 30.88 crore
credited on account of revaluation surplus.

 

According to the AO, there was transfer of
capital asset by way of distribution by the assessee firm to the retiring
partners in terms of section 45(4) of the Act and the assessee firm was liable
to tax on the capital gain arising from such transfer. According to the CIT(A)
there was no dissolution of partnership firm at the time of retirement, there
was only reconstitution of the partnership firm with change of partners.
Therefore, he held that the provisions of section 45 (4) were not attracted.

 

On appeal before the Tribunal, there was a
difference of opinion between the Accountant Member and the Judicial Member.
The Accountant Member relied on the decision of the Supreme Court in the case
of Tribhuvan G. Patel vs. CIT (236 ITR 515), wherein it was held that
even where a partner retires and some amount is paid to him towards his share
in the assets, it should be treated as falling under clause (ii) of section 47
of the Act. Accordingly, the Accountant Member held that payment of amount to
the retiring partner towards his share in the assets of the partnership firm
amounted to distribution of capital asset on retirement and the same falls
within the ambit of section 45(4). He held that use of the word “otherwise”
in section 45(4) takes within its ambit not only the case of transfer of
capital asset by way of distribution of capital asset on dissolution of the
firm, but also on retirement.

 

Further relying on the decision of the
Supreme Court in the case of CIT vs. Bankey Lal Vaidya (79 ITR 594) and
the decision of the Bombay High Court in the case of CIT vs. A.N. Naik
Associates (265 ITR 346), he upheld the addition made by the AO on account
of capital gain to the total income of the assessee firm by application of section
45(4), but only to the extent of surplus arising out of revaluation of property
which stood distributed by way of money equivalent to the retiring partners.
According to him, the balance addition made by the AO on account of capital
gain in the hands of the assessee firm on account of revaluation surplus
credited to the capital of the other partners, who continued and did not retire
during the years under consideration, could not be sustained as there was no
transfer or distribution of capital asset to those non-retiring partners.

 

According to the Judicial Member, however,
the cases relied upon by the Accountant Member were rendered on altogether
different facts and the ratio of the same, therefore, was not applicable to the
facts of the assessee. In the case of the assessee, except payment of money
standing to the credit of the partners’ capital account in the partnership,
there was no physical transfer of any asset by the partnership firm so as to
attract the provisions of section 45(4). He also relied on the decisions of the
Karnataka High Court in the case of CIT vs. Dynamic Enterprises [359 ITR 83]
and the Mumbai Tribunal in the cases of Keshav & Co. vs. ITO [161 lTD
798] and Mahul Construction Corporation vs. ITO (ITA No. 2784/MUM/2017
dated 24.11.2017).

 

On account of the difference in opinion
between the members, the matter was referred to the Third Member, i.e., in
these facts and circumstances of the case, whether the money equivalent to
enhanced portion of the assets revalued constitutes capital asset and whether
there was any transfer of such capital asset on dissolution of the firm or
otherwise within the meaning of section 45(4) read with section 2(14).

 

Before the Third Member, the Revenue
contended that the assessee’s case was a clear case of transfer of right in the
land by the retiring partners to the continuing / incoming partners giving rise
to the capital gain. According to it, the decision of the Bombay High Court in
the case of A.N. Naik Associates and the decision of the Supreme Court in the
case of Bankey Lal Vaidya relied upon by the Accountant Member are relevant and
the same squarely cover the issue in favour of the Revenue.

 

HELD


According to the Third Member, the
partnership firm in the present case continued to exist even after the
retirement of two partners from the partnership. There was only a
reconstitution of partnership firm on their retirement without there being any
dissolution and the land property acquired by the partnership firm continued to
be owned by the said firm even after reconstitution without any extinguishment
of rights in favour of the retiring partners. The retiring partners did not
acquire any right in the said property and what they got on retirement was only
the money equivalent to their share of revaluation surplus (enhanced portion of
the asset revalued) which was credited to their capital accounts. There was
thus no transfer of capital asset by way of distribution of capital asset
either on dissolution or otherwise within the meaning of section 45(4) read
with section 2(14) of the Act.

 

According to him, the money equivalent to
enhanced portion of the assets re-valued does not constitute capital asset
within the meaning of section 2(14) and the payment of the said money by the
assessee firm to the retiring partners cannot give rise to capital gain u/s.
45(4) read with section 2(14). Accordingly, the Third Member agreed with the
view of the Judicial Member and answered both the questions referred to him in
favour of the assessee.

 

Section 251 – Power of enhancement conferred on CIT(A) can be exercised only on the issue which is the subject matter of the assessment. The CIT (Appeals), even while exercising its power for enhancement u/s. 251, cannot bring a new source of income which was not subject matter of assessment

12. (2019) 69 ITR (Trib) 261 (Jaipur) Zuberi Engineering Company vs. DCIT ITA Nos.: 977-979/JPR/2018 A.Y.s: 2012-13 to 2014-15 Dated: 21st December, 2018

 

Section 251 – Power of enhancement
conferred on CIT(A) can be exercised only on the issue which is the subject
matter of the assessment. The CIT (Appeals), even while exercising its power
for enhancement u/s. 251, cannot bring a new source of income which was not
subject matter of assessment

 

FACTS


The assessee was a
partnership firm and a contractor engaged in erection and fabrication work. The
assessment was completed making disallowances of various expenses claimed by
the assessee. On appeal, the Commissioner (Appeals) enhanced the assessment by
rejecting books of accounts and estimating higher net profit. On further appeal
to the Tribunal, the Tribunal allowed the assessee’s appeal and held as under.

 

HELD


The power of
Commissioner (Appeals) to enhance an assessment exists in section 251. However,
this power can be exercised only on the issue which is a subject matter of the
assessment. In the instant case, the issue of not accepting the books of
accounts was never taken up by the Assessing Officer in the scrutiny
proceedings. Therefore, the same did not constitute the subject matter of the
assessment. Consequently, it is beyond the scope of the power of enhancement
available with Commissioner (Appeals).

 

It is a settled proposition of law that the
Commissioner (Appeals), even while exercising the power for enhancement u/s.
251, cannot bring a new source of income which was not a subject matter of the
assessment. An issue or claim discussed / taken up in the course of assessment
proceedings becomes the subject matter of assessment but all the probable
issues that are capable of being taken up for scrutiny but are not so taken up
can at most collectively constitute scope of assessment, for which Commissioner
(Appeals) cannot exercise power of enhancement.

 

However, the
Commissioner can exercise revisionary powers in respect of the same subject to
fulfilment of conditions specified u/s. 263. Thus, in the instant case, since
the issue of rejection of books of accounts was not the subject matter of
assessment, the Tribunal set aside the order of the Commissioner (Appeals) qua
the issue of the power of the Commissioner (Appeals) to reject the books of
accounts.

Even in a limited scrutiny case there is no bar on the AO as regards adjudication of issues raised by the assessee

11. (2019) 69 ITR (Trib) 79 (Amritsar) Thakur Raj Kumar vs. DCIT ITA No.: 766/Asr/2017 A.Y.: 2014-2015 Dated: 29th November, 2018

 

Even in a limited scrutiny case there is no
bar on the AO as regards adjudication of issues raised by the assessee

 

FACTS


The assessee’s case was selected for complete scrutiny under
Computer-Assisted Scrutiny Selection. However, later, it was converted to
limited scrutiny to examine an issue pertaining to capital gains on securities.
The assessee had sold an agricultural land and offered relevant capital gains
to tax. However, in the course of assessment proceedings, the assessee made a
fresh claim to substitute the cost of acquisition of the land claimed by him in
return of income, for another value. The AO denied his claim citing that the
scrutiny being a limited one, he had no jurisdiction to discuss and pass
judgment on issues not covered within the reasons of scrutiny and the only
recourse available to the assessee was to file a revised return. On appeal to
Commissioner (Appeals), the issue was decided against the assessee. The
assessee therefore preferred an appeal to the Tribunal.

 

HELD


The Tribunal held
that though the AO has no jurisdiction to touch upon issues which are not a
subject matter of limited scrutiny, however, there is no bar to adjudicate the
issues raised by the assessee. This is because an AO is obliged to make correct
assessment in accordance with provisions of the law. Further, in terms of
Circular No. 14 dated 11.04.1955, the department cannot take advantage of
ignorance of the assessee to collect more tax than what is legitimately due.

 

The matter was,
thus, remanded to the file of the Assessing Officer to adjudicate the
assessee’s claim. Though the decision in Goetz (India) Limited vs. CIT
(2006) 284 ITR 323(SC) was relied on by the D.R., the same does not seem to
be discussed by the Tribunal.

 

Section 54 – An assessee is entitled to claim deduction u/s. 54 if he purchases a new house property one year before or two years after the date of transfer of the original asset, irrespective of the fact whether money invested in purchase of new house property is out of sale consideration received from the transfer of original asset or not

10. (2019) 198 TTJ (Mum) 370 Hansa Shah vs. ITO ITA No.: 607/Mum/2018 A.Y.: 2011-12 Dated : 5th October, 2018

 

Section 54 – An assessee is entitled to
claim deduction u/s. 54 if he purchases a new house property one year before or
two years after the date of transfer of the original asset, irrespective of the
fact whether money invested in purchase of new house property is out of sale consideration
received from the transfer of original asset or not

 

FACTS


During the year,
the assessee had sold a flat jointly held with others and declared her share of
capital gain at Rs. 55,82,426. However, she claimed deduction of the capital
gain u/s. 54 of the Act towards investment made of Rs. 98,90,358 in purchase of
a new flat. The AO noted that the investment of Rs. 98,90,358 included housing
loan of Rs. 50 lakh availed from Citibank. The assessee submitted that the
housing loan was not utilised for the purchase of the new house. The assessee
had produced the loan sanction letter of the bank as well as bank statement to
demonstrate that the housing loan was disbursed much after the purchase of the
new house by the assessee. In fact, the assessee had also explained the source
of funds utilised in the purchase of the new house. However, the AO rejected
the claim of the assessee and reduced the housing loan from the cost of the new
house and allowed the balance amount of Rs. 48,93,358 towards deduction u/s. 54
of the Act. Accordingly, he made an addition of Rs. 6,92,068 towards long-term
capital gain.

 

Aggrieved by the
assessment order, the assessee preferred an appeal to the CIT(A). The CIT(A)
sustained the addition made by the AO.

 

HELD


The Tribunal held that even assuming that the housing loan was utilised
for the purpose of purchase of new house property, it needed to be examined
whether by the reason of utilisation of housing loan in purchase of new house
property, the assessee would not be eligible to claim deduction u/s. 54 of the
Act. For this purpose, it was necessary to look into the provisions of section
54. On a careful reading of the aforesaid provision as a whole and more
particularly sub-section (1) of section 54 of the Act, it became clear that the
only condition which required to be fulfilled was, one year before or two years
after the date of transfer of the original asset the assessee must have
purchased the new house property.

 

In case the logic of the department that for availing deduction the
consideration received by the assessee from the sale of the original asset had
to be utilised for investment in the new house property was accepted, the
provision of section 54(1) would become redundant because such a situation
would never arise in case assessee purchased the new house property one year
before the date of transfer of new asset.

 

Thus, on a plain
interpretation of section 54(1) of the Act, it had to be concluded that if the
assessee purchased a new house property one year before or two years after the
date of transfer of the original asset, he was entitled to claim deduction u/s.
54 of the Act irrespective of the fact whether money invested in the purchase
of the new house property was out of the sale consideration received from transfer
of original asset or not. In the present case, the assessee had purchased the
new house property within the stipulated period of two years from the date of
transfer of the original asset. That being the case, the assessee was eligible
to avail deduction u/s. 54 of the Act.

Section 12A read with section 11 and 12 – Where return of income had been filed in response to notice u/s. 148, requirement u/s. 12A filing of return of income stood fulfilled

9. [2019] 198 TTJ (Chd) 498 Genius Education Society vs. ACIT ITA No.: 238/Chd/2018 A.Y.: 
2012-13 Dated: 20th August, 2018

     

Section 12A read with section 11 and 12 –
Where return of income had been filed in response to notice u/s. 148,
requirement u/s. 12A filing of return of income stood fulfilled


FACTS


The assessee applied for registration u/s. 10(23C)(vi) which was denied
by the Chief Commissioner. The assessee had also applied for registration as a
charitable society u/s. 12AA on the same day which was granted by the Principal
Commissioner, with effect from 01.04.2012 effective from assessment year
2013-14. Subsequently, the Assessing Officer (AO) noticed that for the impugned
assessment year, no return of income had been filed by the assessee and the
assessee’s application for approval u/s. 10(23C)(vi) had been rejected.
Consequently, reopening proceedings were initiated by issuing notice under section
148. In response to the same, the assessee filed Nil return of income. During
assessment proceedings, the assessee contended that having been granted
registration u/s. 12AA effective from assessment year 2013-14, the benefit of
the same was available to it in the impugned year also by virtue of the first
proviso to section 12A(2).

 

Aggrieved, the
assessee preferred an appeal to the CIT(A). The CIT(A) upheld the order of the
AO, holding that benefit of second proviso was not available to the assessee since
in the present case the assessee was ineligible to claim exemption not on
account of absence of registration u/s. 12A, but because of the fact that
assessee had failed to file its return of income and report of audit, as
required under the provisions of section 12A(b).

 

HELD


The Tribunal held
that it was not the case of the Revenue that the reopening was valid on the
ground of absence of registration u/s. 12A for the impugned year, therefore
making its income taxable. In fact, the CIT(A) had accepted that reopening
could not have been resorted to on account of absence of registration u/s.12A
for the impugned year on account of the second proviso to section 12A(2).
Therefore, the contention of the assessee on this count was accepted by the
Revenue. But the argument of the Revenue was that because the assessee failed
to comply with the conditions of section 12A(1)(b) which was necessary for
claiming exemption u/s. 11 and 12, its income for the impugned year was
taxable, which had thus escaped assessment and, therefore, the reopening was
valid. The said conditions, as pointed out by the CIT(A), were the filing of
return of income accompanied with the report of an auditor in the prescribed
form.

 

The requirement of filing of return of income and the report of audit
have been specified for being eligible for claiming exemption u/s. 11 and 12
along with the grant of registration u/s. 12AA. The section nowhere prescribed
the filing of return by any due date, therefore the findings of the CIT(A) that
the assessee having not filed its return within the prescribed time it had
failed to comply with the requirement prescribed, was not tenable. As for the
requirement of filing report of audit in the prescribed form, the said
condition has been held by courts to be merely procedural and, therefore,
directory in nature and not mandatory for the purpose of claiming exemption
u/s. 11 and 12.

 

Therefore, in view
of the above, no merit was found in the argument of the Revenue that the
assessee was not eligible for exemption u/s. 11 and 12 on account of not having
complied with the requirements of section 12A(1)(b). Since this was the sole
basis for upholding the validity of the reassessment proceedings, it was noted
that the reassessment in the present case was invalid, on account of the second
proviso to section 12A(2) which specially debarred resort to the same in view
of registration having been granted from the immediately succeeding assessment
year. The reassessment framed was therefore set aside and the addition made was
deleted.

 

Sections 10(37), 45 – Interest on enhanced compensation received from government on compulsory acquisition of agricultural land is exempt u/s. 10(37) of the Income-tax Act, 1961 and consequently TDS deducted on account of enhanced compensation was liable to be refunded

8. [2019] 104 taxmann.com 99 (Del) Baldev Singh vs. ITO ITA No.: 2970/Del./2015 A.Y.: 2011-12 Dated: 8th March, 2019

 

Sections 10(37), 45 – Interest on enhanced
compensation received from government on compulsory acquisition of agricultural
land is exempt u/s. 10(37) of the Income-tax Act, 1961 and consequently TDS
deducted on account of enhanced compensation was liable to be refunded

 

FACTS

The assessee, in
the return of income filed by him, claimed exemption u/s. 10(37) of the Act in
respect of enhanced compensation of Rs. 4,69,20,146, received by him during the
previous year in respect of agricultural land inherited by him from his
parents.

 

During the course
of assessment proceedings, the Assessing Officer (AO) observed that the said
compensation of Rs. 4,69,20,146 comprised of Rs. 2,70,33,074 as principal and
balance Rs. 1,98,85,972 as interest and TDS amounting to Rs. 93,84,030 was
deducted, out of which Rs. 74,45,433 was refunded to the assessee and credited
to his account.

 

The AO, based on
the amendments made in sections 56(2), 145A(b) and 57(iv) of the Act which were
applicable with effect from 1.04.2010 held that interest on enhanced
compensation was liable to be taxed as income in the year in which it was
received, irrespective of the method of accounting followed and accordingly
taxed Rs. 99,42,986 being the interest received after allowing 50% deduction.

 

Aggrieved, the
assessee preferred an appeal to the CIT(A). In the appellate proceedings before
CIT(A) it was contended that the Supreme Court has in CIT vs. Ghanshyam Dass
(HUF) [2009] 315 ITR 1 held interest on enhanced compensation to be a part
of compensation and therefore the same is exempt u/s. 10(37) of the Act. This
decision of the Supreme Court in CIT vs. Ghanshyam Dass (HUF) (supra)
has been followed in the case of CIT vs. Gobind Bhai Mamaiya [2014] 367 ITR
498 (SC)]. The CIT(A) upheld the action of the AO and observed that the
decision of the Supreme Court in the case of Gobind Bhai Mamaiya (supra)
did not deal with exemption u/s. 10(37) of the Act but held that interest u/s.
28 of the Land Acquisition Act is interest on enhanced compensation and is to
be treated as an accretion to the value and part of compensation. He held that
the decision of the SC in Gobind Bhai Mamaiya (supra) is not applicable
to the facts of the case.

 

Aggrieved, the
assessee preferred an appeal to the Tribunal.

 

HELD

The Supreme Court
has, in Union of India vs. Hari Singh [(2018) 254 Taxman 126 (SC)]
relied by the assessee, set aside the matter to the AO and specifically directed
the AO to examine the facts of the case and apply the law as contained in the
Act. The SC also directed the AO to find out whether the land was agricultural
land and if that be the case then the tax deposited with the Income-tax
Department shall be refunded to the assessee.

 

The Tribunal
observed that the CIT(A), in his order, did not state that an amount shall be
brought to tax u/s. 45(5) without applying provisions of section 10(37) of the
Act which exempts receipts from being taxed. The Tribunal held that section
45(5) did not make reference to the nature of property acquired but dealt with
the category of cases which fell within the description of “capital assets”.
However, section 10(37) specifically exempted income chargeable under the head
capital gains arising from transfer of agricultural land. It was therefore
clear that the Supreme Court specifically directed the AO to examine if the
compensation received was in respect of the agricultural land, (and if so) the
tax deposited with the Income-tax Department shall be refunded to the
depositors.

 

The Tribunal,
therefore, following ratio laid down by the Supreme Court in the case of CIT
vs. Ghanshyam Dass (supra) and Union of India vs. Hari Singh (supra)
directed the AO to refund the TDS amount deducted on account of enhanced
compensation.

 

The Tribunal
allowed the appeal filed by the assessee.

 

Explanation 2 to section 37(1) – Explanation 2 to section 37(1) inserted with effect from 01.04.2015 is prospective

7. [2019] 103 taxmann.com 288 (Del) National Small Industries Corp Ltd. vs. DCIT ITA No.: 1367/Del/2016 A.Y.: 2012-13 Dated: 25th February, 2019

 

Explanation 2 to section 37(1) –
Explanation 2 to section 37(1) inserted with effect from 01.04.2015 is
prospective

 

FACTS


The assessee, a
public sector undertaking, established to promote and develop “Skill India”
through cottage and small industries, incurred expenses under the head
“Corporate Social Responsibility” (CSR) and claimed the same as deduction in
the return of income.

 

The Assessing
Officer (AO) was of the opinion that the claim of such expenses was towards CSR
and therefore could not be allowed. He invoked Explanation 2 to section 37(1)
of the Act and disallowed the expenditure so claimed.

 

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

 

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

 

HELD


The Tribunal held
that Explanation 2 has been inserted in section 37(1) with effect from
01.04.2015 and the same is prospective. The amendment could not be construed as
a disadvantage to the assessee for the period prior to the amendment. The Tribunal
observed that the expense sought to be disallowed under Explanation 2 to
section 37(1) of the Act was the expenditure on CSR which provision itself came
into existence under the Companies Act in the year 2013. It observed that the
lower authorities disallowed the expenditure merely on the ground that
Explanation 2 to section 37(1) of the Act applied to the year under
consideration and the expenditure was therefore to be disallowed.



The Tribunal,
following the decision of the Supreme Court in the case of CIT vs. Vatika
Townships Pvt. Ltd. [(2014) 367 ITR 466 (SC)] held that the amendment would
not affect the allowability of expenses for the assessment year under
consideration.

 

The appeal filed by
the assessee was allowed.

Sections 50, 72 and 74 – Brought-forward business loss and brought-forward long-term capital loss can be set off against deemed short-term capital gains u/s. 50 arising on sale of factory building

6. [2019] 104 taxmann.com 129 (Mum) ITO vs. Smart Sensors & Transducers Ltd. ITA No.: 6443/Mum/2016 A.Y.: 2011-12 Dated: 6th March, 2019

 

Sections 50, 72 and 74 – Brought-forward
business loss and brought-forward long-term capital loss can be set off against
deemed short-term capital gains u/s. 50 arising on sale of factory building


FACTS


The assessee
company in its original return of income declared long-term capital loss on the
sale of its factory building. During the course of assessment proceedings, the
Assessing Officer (AO) noted that the factory building was a depreciable asset
and the gain on sale of such depreciable asset was to be treated as deemed
short-term capital gains as per section 50 of the Act. Subsequently, the
assessee revised its return of income and offered the gains from the sale of
factory building as short-term capital gains after setting-off brought-forward
business loss and brought-forward long-term capital loss.

 

The AO noted that
in view of section 74 of the Act, long-term capital loss can be set off only
against long-term capital gains and that as per section 72 of the Act,
brought-forward business loss can be set off against business income and not
against short-term capital gains. The AO, thus, disallowed the assessee’s claim
for brought-forward business loss and brought-forward capital loss.

 

The aggrieved
assessee preferred an appeal to the CIT(A) who, considering the decision of the
Bombay High Court in CIT vs. Manali Investments [(2013) 219 Taxman 113 (Bom
HC)] allowed the assessee’s appeal.

 

Aggrieved, the
Revenue preferred an appeal to the Tribunal.

 

HELD


The Tribunal,
following the decision of the Bombay High Court in the case of CIT vs.
Manali Investments (supra), allowed the assessee’s claim for set-off of
brought-forward long-term capital loss against deemed short-term capital gains
u/s. 50. The Tribunal noted that the Hon’ble Bombay High Court in its decision
had held that by virtue of section 50, only the capital gain is to be computed
u/s. 50 and the deeming fiction is restricted only for the purposes of section
50 and the benefit of set-off of long-term capital loss u/s. 74 has to be
allowed.

 

As regards the
set-off of brought-forward business loss, this issue was also covered by the
decision of the Bombay High Court in CIT vs. Manali Investments (supra).
The Tribunal held that the CIT(A) had rightly allowed the assessee’s claim for set-off of brought-forward business loss as well as
brought-forward long-term capital loss against deemed short-term capital gains
computed u/s. 50.

 

The Tribunal
dismissed the appeal filed by the Revenue.

Section 271(1)(c), 271AAA – In a case where penalty is leviable u/s. 271AAA, penalty initiated and levied u/s. 271(1)(c) is unsustainable in law.

3.  ACIT
vs. Nitin M. Shah  (Mumbai) Members: G. S. Pannu, VP and Sandeep Gosain,
JM ITA No.: 2863/Mum./2017 A.Y.: 2012-13 Dated: 1st November, 2018 Counsel for revenue / assessee: B. S. Bist /
Dr. P. Daniel

 

Section 271(1)(c), 271AAA –  In
a case where penalty is leviable u/s. 271AAA, penalty initiated and levied u/s.
271(1)(c) is unsustainable in law.

 

FACTS

The assessee was a director and key person
of one company N. A search and seizure operation was carried out on the
assessee and his group concerns. During the course of assessment proceedings,
the Assessing Officer (AO) made addition of Rs. 5,81,07,680 and assessed his
income at Rs. 12,06,72,926. Subsequently, the AO initiated penalty proceedings
u/s. 271(1)(c) of the Act in respect of the additions made during the course of
assessment. Aggrieved the assessee preferred an appeal to CIT(A) who confirmed
the addition of Rs. 2,67,68,882. As regards, the balance additions for which
relief was allowed by the CIT(A), the department filed appeal before the
Tribunal. The Tribunal upheld the order of the CIT(A) and thereafter, the AO
initiated the action for levy of penalty.

 

Aggrieved, the assessee preferred an appeal
before the CIT(A). The CIT(A) allowed the appeal of the assessee.

 

Aggrieved, revenue preferred an appeal to
the Tribunal on the ground that explanation furnished by the assessee was not bonafide
and incriminating material was found and seized in search and that the assessee
had defrauded the revenue by not offering true and correct income in the return
of income filed by the assessee. The assessee was therefore liable for penalty
as per Explanation to section 271(1)(c) of the Act.

 

HELD

The Tribunal observed that the CIT(A) held
that assessee’s case for levy of penalty fell u/s. 271AAA of the Act and not
u/s. 271(1)(c) of the Act. Further, sub-clause (3) to sub-section (1) of
section 271 of the Act clearly prohibited imposition of penalty in respect of
undisclosed income referred to in sub-section (1) of section 271 of the Act.
Since the AO had initiated penalty u/s. 271(1)(c) of the Act, the same was
unsustainable in law and therefore was directed to be deleted. The Tribunal
concurred with the view of the CIT(A) and held that penalty initiated and
levied by the AO u/s. 271(1)(c) of the Act was unsustainable in the eyes of law
and was thus rightly held to be deleted by the CIT(A).

 

The Tribunal dismissed the appeal filed by
the revenue.    

Section 54F – Claim u/s. 54 is admissible in respect of flats allotted by the builder to the assessee under the terms of the Development Agreement as the same constitute consideration retained by the Developer and utilised for construction of flats on behalf of the assessee.

2.  Shilpa
Ajay Varde vs. Pr. CIT (Mumbai) Members: Joginder Singh, VP and Ramit Kochar, AM  ITA No.: 2627/Mum./2018 A.Y.: 2013-14. Dated: 14th November, 2018 Counsel for assessee / revenue: M.
Subramanian / L. K. S. Dehiya

 

Section 54F – Claim u/s. 54 is admissible in respect of flats allotted by the
builder to the assessee under the terms of the Development Agreement as the
same constitute consideration retained by the Developer and utilised for
construction of flats on behalf of the assessee.

 

FACTS

The assesse, an individual, in his return of
income declared Capital Gains at Rs. 15,982 after claiming deduction u/s. 54F
and 54EC of the Act. The Assessing Officer (AO) completed the assessment
accepting the returned income. Subsequently, the Pr. CIT issued notice u/s. 263
of the Act and held that the order passed by the AO u/s. 143(3) of the Act was
erroneous as the same was prejudicial to the interest of the revenue. The Pr.
CIT observed that during the year under consideration, the assessee along with her
relatives entered into development agreement for the development of property
owned by the assessee with her relatives. As per the terms of agreement with
the developer, consideration for the said transfer of development rights was a
sum of Rs. 40 lakhs and four residential flats and six car parking spaces. The
assessee computed the gains by adopting Rs. 1,32,62,500 to be full value of
consideration. This sum of Rs.1,32,62,500 comprised of Rs. 40,00,000 being the
monetary consideration and Rs. 92,62,500 being the value of residential flats
which the assessee was entitled to receive from the developer. From the full
value of consideration the assessee reduced indexed cost of acquisition and the
value of two new residential houses which were to be received by the assessee
u/s. 54F of the Act.

 

The Pr. CIT, however, held that the assessee
could not be allowed to claim exemption u/s. 54F of the Act in respect of the
said two residential flats as the said flats were yet to be constructed by the
developer and were future properties and hence the assessee was not entitled to
claim exemption u/s. 54F of the Act. 
Further, he also observed that the assessee claimed deduction of Rs.
71,50,000 u/s. 54EC of the Act which was restricted to Rs. 50,00,000 as per the
amended provisions of the Act and therefore directed the AO to revise the order
passed u/s. 143(3) of the Act.

 

Against the said order passed by the Pr.CIT,
the assessee preferred an appeal to the Tribunal challenging the Pr. CIT’s
action of directing the AO to revise the order passed u/s. 143(3) of the Act.

 

On appeal, the Tribunal held as follows:

 

HELD

The Tribunal observed that the assessee,
during the course of assessment, disclosed complete details of transaction with
the developer and furnished all the details of computation of long term capital
gains and exemption claimed u/s. 54F and 54EC of the Act.  The Tribunal also observed that the AO had,
after due application of mind and considering all the details and documents on
record allowed the assessee’s claim for exemption u/s. 54F and 54EC of the Act
and it would not be correct to say that the AO did not make any inquiry or did
not make proper inquiry before allowing the claim of the assessee. The Tribunal
thus held the action of Pr. CIT of initiating section 263 of the Act to be
bad-in-law.

 

On merits, the Tribunal observed that flats
were specifically allotted by the developer in favour of the assessee under the
development agreement and effectively it could be said that the share of
consideration in lieu of property for development given by the assessee to the
developer to the extent of four residential flats will be retained by the
builder and invested by the developer by utilising its own funds for
constructing the flats on behalf of the assessee. Effectively, therefore
consideration under development agreement which the assessee was otherwise
entitled to receive was withheld by the developer for constructing the flats on
behalf of the assessee which satisfied the requirement of making investment in
construction of new residential flat as provided u/s. 54F of the Act. The
Tribunal also observed that CBDT in circulars had held that allotment of flat under
self-financing scheme is held to be construction for the purposes of capital
gains. Thus the Tribunal allowed the assessee’s claim for exemption u/s. 54F of
the Act. As regards assessee’s claim for exemption u/s. 54EC of the Act of Rs.
71,50,000, following the decision of the Madras High Court in CIT vs.
Jaichander [2015] 370 ITR 579 (Madras) and co-ordinate bench of the
Tribunal in Tulika Devi Dayal vs. JCIT [2018] 89 taxmann.com 442 (Mum.)
held that the exemption claimed u/s. 54EC of the Act was in accordance with the
provisions of the Act.

 

The Tribunal allowed the appeal filed by the
assessee.

Section 54 – Purchase of residential property is said to have been substantially effected on the date of possession. Accordingly, where assessee had received possession of a residential house one year before the date of transfer of residential house, though the agreement to purchase was entered into much prior thereto, the assessee was held to be eligible to claim deduction u/s. 54.

1. Ranjana R. Deshmukh vs. ITO (Mumbai) Members : Shamim Yahya,  AM and Ravish Sood, JM ITA No.: 697/Mum./2017 A.Y.: 2013-14 Dated: 9th November, 2018. Counsel for assessee / revenue: Moti B.
Totlani / Chaitanya Anjaria

 

Section 54
–  Purchase of residential property is
said to have been substantially effected on the date of possession.  Accordingly, where assessee had received
possession of a residential house one year before the date of transfer of
residential house, though the agreement to purchase was entered into much prior
thereto, the assessee was held to be eligible to claim deduction u/s. 54.

 

FACTS

The assessee,
an individual, sold immovable property on 28th March, 2013 and
claimed exemption u/s. 54 on the resultant gains. During the course of
assessment, the Assessing Officer (AO) observed that the property in respect of
which exemption was claimed by the assessee was purchased on 29th
January, 2009 by entering into an agreement to purchase. The AO therefore
concluded that since the residential property purchased by the assessee was
beyond the stipulated period of one year before the transfer of property under consideration
and hence the assessee was not entitled to claim exemption u/s. 54 of the Act.

 

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

 

Aggrieved, the assessee preferred an appeal
to the Tribunal.

 

HELD

The Tribunal observed that possession of the
residential property purchased by the asssessee was handed over to the assessee
18th May, 2012 which was within the prescribed period of one year
prior to the date of transfer of property under consideration and therefore the
assessee was entitled to claim exemption u/s. 54 of the Act. The Tribunal held
that purchase of residential property is said to have been substantially
effected on the date of possession and for this view it relied on the decision
of the Bombay High Court in the case of CIT vs. Beena K. Jain [1994] 75
Taxman 145 (Bom.) wherein it was held that purchase was completed by
payment of full consideration and handing over of possession of the flat.

The Tribunal allowed the appeal of the
assessee.

Section 154 – What is permissible is merely rectification of an obvious and patent mistake apparent from record and not wholesale review of an earlier order.

4. 
[2019] 103 taxmann.com 154
(Mum.) Maccaferri
Environmental Solutions (P.) Ltd. vs. ITO ITA No.:
7105/Mum./2014 A.Y.: 2010-11 Dated: 12th
December, 2018

 

Section 154 – What is permissible is merely
rectification of an obvious and patent mistake apparent from record and not
wholesale review of an earlier order.

 

FACTS


The assessee, a private limited company,
filed its return of income declaring total income at NIL after setting off
brought forward losses under the normal provisions of the Act. Further, since
the book profit determined by the assessee was a negative figure, there was no
liability to pay MAT on book profits u/s. 115JB of the Act and the same was
accordingly declared and disclosed in the return of income filed by the
assessee. The case was selected for scrutiny and assessment was completed u/s.
143(3) of the Act determining the total income at NIL. Subsequently, the
Assessing Officer (AO) issued notice u/s. 154 of the Act so as to rectify the
mistake of accepting the book profits as such and thereby determined the book
profits at Rs. 6,95,57,438.

 

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

 

Aggrieved, the assessee preferred an appeal
to the Tribunal,

 

HELD


The Tribunal made a reference to the well
settled position that the power u/s. 154 to rectify a mistake apparent from
record did not involve a wholesale review of the earlier order and rather, what
was permissible was only to rectify an obvious and patent mistake. The Tribunal
further noted that even debatable points of law would not fall in the meaning
of the expression “mistake apparent” for the purposes of section 154
of the Act. The Tribunal observed that the adjustments made by the AO disagreeing
with the determination of book profits by the assessee u/s. 115JB of the Act
involved a debatable issue which was outside the purview of section 154 of the
Act. The Tribunal held that action of the AO in invoking section 154 was unjust
in law as well as on facts. The appeal filed by the assessee was allowed.

Section 54F – Deposit of the amount of capital gains in a separate savings bank account and utilisation thereof for the purposes specified u/s. 54F is said to be substantial compliance with the requirements of section 54F.

3.      
[2019] 102 taxmann.com 50
(Jaipur) Goverdhan Singh
Shekhawat vs. ITO ITA No.:
517/JP/2013 A.Y.: 2009-10  Dated: 11th
January, 2019

 

Section 54F – Deposit of the amount of
capital gains in a separate savings bank account and utilisation thereof for
the purposes specified u/s. 54F is said to be substantial compliance with the
requirements of section 54F.

 

FACTS


The assessee, an individual, received
certain compensation on compulsory acquisition of land. The assessee offered
the said receipts as long-term capital gains and claimed exemption u/s. 54F of
the Act by depositing the amount of capital gains in a separate savings bank
account. The assessee contended that the amount of gains was deposited under
Capital Gains Accounts Scheme 1988. The Assessing Officer (AO) observed that
the account in which amount was deposited by the assessee was not a Capital
Gains Scheme Account and therefore denied exemption u/s. 54F of
the Act.

 

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

 

Aggrieved, the assessee preferred an appeal
to the Tribunal.

 

HELD

The Tribunal noted that the undisputed facts
viz. that despite having an existing account in another bank, the assessee
opened a new bank account and deposited not only the amount of consideration
but also the TDS refund received by it in this respect. Subsequently, the
assessee utilised the said amount for the construction of house. Thus, the
Tribunal noted that since the assessee had not utilised the amount for the
purposes stated u/s. 54F, he had duly deposited the entire compensation in the
bank account at the time of filing of return of income and claimed exemption
u/s. 54F of the Act. The Tribunal held that the assessee was entitled to claim
exemption as the assessee had substantially complied with the provisions of
sub-section (4) of section 54F.

 

The Tribunal held that the idea of opening
capital gains account under the scheme is to delineate the funds from other
funds regularly maintained by the assessee and to ensure that benefit availed
by an assessee by depositing the amount in the said account is ultimately
utilised for the purposes for which the exemption has been claimed i.e, for
purchase or construction of a residential house.

 

The Tribunal further observed that though
savings bank account was not technically a capital gains account, however the
essence and spirit of opening and maintaining a separate capital gains account
was achieved and demonstrated by the assessee. The Tribunal thus held that
merely because the saving bank account is technically not a capital gains
account, it cannot be said that there is violation of the provisions of s/s.
(4) of the Act in terms of not opening a capital gains account scheme.

 

The Tribunal allowed the appeal filed by the
assessee.

Section 22, 24(4) and 56 – Income earned by assessee from letting out space on terrace for installation of mobile tower/antenna was taxable as ‘income from house property’ and, therefore, deduction u/s. 24(a) was available in respect of it.

2.      
(2019) 197 TTJ (Mumbai) 966 Kohinoor
Industrial Premises Co-operative Society Ltd. vs. ITO ITA No.:
670/Mum/2018 A. Y.: 2013-14 Dated: 5th
October, 2018

           

Section 22, 24(4) and 56 – Income earned by
assessee from letting out space on terrace for installation of mobile
tower/antenna was taxable as ‘income from house property’ and, therefore,
deduction u/s. 24(a) was available in respect of it.

 

FACTS

 The assessee, a co-operative society, had
derived income from letting out some space on terrace for installation of
mobile towers/antenna which was offered “as income from house
property”. Further, against such income the assessee had claimed deduction
u/s. 24(a). The Assessing Officer observed that, the terrace could not be
termed as house property as it was the common amenity for members. Further, the
Assessing Officer observed that the assessee could not be considered to be
owner of the premises since as per the tax audit report, conveyance was still
not executed in favour of the society. He also observed that the annual letting
value of the terrace was not ascertainable. Accordingly, he concluded that the
income received by the assessee from the mobile companies towards installation
of mobile towers/antenna was to be treated as “income from other
sources”.

 

Aggrieved by the assessment order, the
assessee preferred an appeal to the CIT(A). The CIT(A) confirmed the order of
the Assessing officer on grounds that the income received by the assessee was
in the nature of compensation received for providing facilities and services to
cellular operators on the terrace of the building.

 

HELD

The Tribunal
held that the terrace of the building could not be considered as distinct and
separate but certainly was a part of the house property. Therefore, letting-out
space on the terrace of the house property for installation and operation of
mobile tower/antenna certainly amounted to letting-out a part of the house
property itself. That being the case, the observation of the Assessing Officer
that the terrace could not be considered as house property was unacceptable. As
regards the observation of the CIT(A) that the rental income received by the
assessee was in the nature of compensation for providing services and facility
to cellular operators, it was relevant to observe, the department had failed to
bring on record any material to demonstrate that in addition to letting-out
space on the terrace for installation and operation of antenna, the assessee
had provided any other service or facilities to the cellular operators. Thus,
from the material on record, it was evident that the income received by the
assessee from the cellular operators/mobile companies was on account of letting
out space on the terrace for installation and operation of antennas and nothing
else. Therefore, the rental income received by the assessee from such
letting-out had to be treated as income from house property.

 

 

Section 68 – Bank account of an assessee cannot be held to be ‘books’ of the assessee maintained for any previous year, and therefore, no addition u/s. 68 can be made in respect of a deposit in the bank account.

1.      
[2019] 198 TTJ (Asr) 114 Satish Kumar vs. ITO ITA No.: 105/Asr/2017 A.Y.: 2008-09 Dated: 15th January, 2019

                                               

Section 68 – Bank account of an assessee
cannot be held to be ‘books’ of the assessee maintained for any previous year,
and therefore, no addition u/s. 68 can be made in respect of a deposit in the
bank account.

 

FACTS


The assessee had filed his return of income
for A.Y. 2008-09. In the course of the assessment proceedings the Assessing
Officer observed that the assessee had during the previous year made a cash
deposits of Rs.11,47,660 in his saving bank account. In the absence of any
explanation on the part of the assessee as regards the ‘nature’ and ‘source’ of
the aforesaid cash deposit in the aforesaid bank account, the Assessing Officer
made an addition of the peak amount of cash deposit of Rs.11,47,660 u/s. 68 of
the Act.

 

Aggrieved by the assessment order, the
assessee preferred an appeal to the CIT(A). The CIT(A) upheld the addition made
by the Assessing Officer and dismissed the appeal.

 

HELD


The Tribunal held that an addition u/s. 68
could only be made where any sum was found credited in the books of an assessee
maintained for any previous year, and the assessee either offered no
explanation about the nature and source as regards the same, or the explanation
offered by him in the opinion of the assessing officer was not found to be
satisfactory. A credit in the ‘bank account’ of an assessee could not be
construed as a credit in the ‘books of the assessee’, for the very reason that
the bank account could not be held to be the ‘books’ of the assessee. Though it
remained as a matter of fact that the ‘bank account’ of an assessee was the
account of the assessee with the bank, or in other words the account of the
assessee in the books of the bank, but the same in no way could be held to be
the ‘books’ of the assessee. Therefore, an addition made in respect of a cash
deposit in the ‘bank account’ of an assessee, in the absence of the same found
credited in the ‘books of the assessee’ maintained for the previous year, could
not be brought to tax by invoking the provisions of section 68.

Income or capital – Subsidies – Book profit – Computation – Sections 2(24) and 115JB of ITA, 1961 – Receipts and power subsidies granted as incentives by State Government under schemes for setting up units in specified backward areas in State – Capital in nature – Not income – Cannot be included for purpose of computation of book profit u/s 115JB

9. Principal CIT vs. Ankit
Metal and Power Ltd.; [2019] 416 ITR 591 (Cal.) Date of order: 9th
July, 2019 A.Y.: 2010-11

 

Income
or capital – Subsidies – Book profit – Computation – Sections 2(24) and 115JB
of ITA, 1961 – Receipts and power subsidies granted as incentives by State
Government under schemes for setting up units in specified backward areas in
State – Capital in nature – Not income – Cannot be included for purpose of computation
of book profit u/s 115JB

 

The assessee was a
manufacturer who invested in a sponge iron plant and mega project that made him
eligible for subsidy under the West Bengal Incentive Scheme, 2000 and the West
Bengal Incentive to Power Intensive Industries Scheme, 2005. For the A.Y.
2010-11 the assessee disclosed Nil income under the normal computation and an
amount as book profits u/s 115JB of the Income-tax Act, 1961. In the course of
the assessment proceedings, he filed a revised computation of income under the
normal provisions and section 115JB in order to claim deduction of the sums of
interest subsidy and power subsidy amounts received by him under those schemes
as capital receipts which he had treated as revenue receipts in the original
return. The AO treated the subsidies as revenue receipts and brought them to
tax.

 

The Tribunal held that the
‘interest subsidy’ and ‘power subsidies’ were capital receipts and would be
excluded while computing the book profits u/s 115JB.

 

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

 

‘(i)  According to the West Bengal Incentive Scheme, 2000 and the West
Bengal Incentive to Power Intensive Industries Scheme, 2005 the subsidies were
granted with the sole intention of setting up new industry and attracting
private investment in the State of West Bengal in the specified areas which
were industrially backward, and hence the subsidies were of the nature of
non-taxable capital receipts. Thus, according to the “purpose test” laid out by
the Supreme Court and the High Courts, the subsidy should be treated as a
capital receipt in spite of the fact that the computation of “power subsidy”
was based on the power consumed by the assessee.

 

(ii)   Once the purpose of the subsidy was established, the mode of
computation was not relevant. The mode of giving incentive was reimbursement of
energy charges. The nature of subsidy depended on the purpose for which it was
given. The entire reason behind receiving the subsidies was for setting up of a
plant in the backward region. Therefore, the incentive subsidies of interest
subsidy and power subsidy received by the assessee were “capital receipts” and
not “income” liable to be taxed in the A.Y. 2010-11.

 

(iii)  The amendment to the definition of income u/s 2(24) wherein
sub-clause (xviii) has been inserted including “subsidy” for the first time by
Finance Act, 2015, w.e.f. 1st April, 2016, i.e., A.Y. 2016-17 has
prospective effect and has no effect on the law on the subject applicable to
the year in question.

 

(iv)  Where a receipt was not in the nature of income it could not be
included in the book profits for the purpose of computation u/s 115JB.
Therefore, the interest and the power subsidies received by the assessee under
the government schemes would have to be excluded while computing the book
profits u/s 115JB, when they were capital receipts and did not fall within the
definition of income u/s 2(24).’

 

Sections 47 r.w.s. 2(47), 271(1)(c) – Entire material facts relating to computation of total income having been disclosed by the assessee before the AO – The disallowance of partial relief u/s 47(xiv) on a difference of opinion would not make it a case of furnishing inaccurate particulars of income attracting penalty u/s 271(1)(c)

11. [2019] 202 TTJ (Mum.) 517 ITO vs. Kantilal G. Kotecha ITA No. 205/Mum/2018 A.Y.: 2009-10 Date of order: 5th July, 2019

 

Sections 47 r.w.s. 2(47), 271(1)(c) –
Entire material facts relating to computation of total income having been
disclosed by the assessee before the AO – The disallowance of partial relief
u/s 47(xiv) on a difference of opinion would not make it a case of furnishing inaccurate
particulars of income attracting penalty u/s 271(1)(c)

 

FACTS

During the year, the assessee converted his
proprietary concern into a public limited company. Thus, the business of the
proprietary concern was succeeded by a public limited company. On succession of
business, the assessee transferred all the assets (including self-generated
goodwill) and liabilities of the proprietary concern, and in consideration for
the said transfer, received fully paid-up equity shares of the public limited
company. The AO denied the exemption u/s 47(xiv) in respect of part of the
goodwill transferred by taking a view that the said goodwill was never
mentioned in the books of the proprietary concern. He further opined that the
goodwill which was transferred from the assessee to the company was not covered
by the exemption u/s 47(xiv). Accordingly, the AO levied penalty u/s 271(1)(c)
for filing inaccurate particulars of income read with Explanation 1 thereon.

 

Aggrieved by the assessment order, the
assessee preferred an appeal to the CIT(A). The CIT(A) held that merely because
there was no balance mentioned towards ‘Goodwill’ in the balance sheet of the
proprietary concern, it could not be brushed aside that there was no goodwill
at all in the said business which was in existence for 30 years. The CIT(A)
also noted that all the information of goodwill was provided by the assessee in
the return of income and part of the goodwill was also allowed by the AO.
Hence, it was not a case of furnishing any incorrect information in the return
of income. Accordingly, he deleted the penalty levied u/s 271(1)(c) of the Act.

 

Aggrieved by the CIT(A) order, Revenue filed
an appeal to the Tribunal.

 

HELD

The Tribunal held that it had to be seen
whether the denial of exemption u/s 47(xiv) to the extent of goodwill which was
self-generated in the books of the proprietary concern would amount to
furnishing of inaccurate particulars of income. The assessee had given
reasonable explanation as to why there was no value reflected in the balance
sheet of the proprietary concern in respect of the self-generated goodwill. It
was not in dispute that the assessee was in business for the last 30 years
which had earned substantial goodwill for the assessee. Even the AO had
accepted this fact and had partially granted exemption in respect of the same
u/s 47(xiv) in the assessment.

 

The assessee also had a bona fide
belief that since there was no value for the self-generated goodwill in terms
of section 55(2), the allotment of shares for the same pursuant to conversion
of proprietary concern into public limited company would also not be considered
as transfer within the meaning of section 2(47), as the computation mechanism
fails in the absence of cost of the asset. In fact, the AO had accepted the
value of self-generated goodwill to be Rs. Nil. This goes to prove that there
was existence of self-generated goodwill in the hands of the proprietary
concern. Hence, apparently, the claim of exemption u/s 47(xiv) by the assessee
for the transfer of self-generated goodwill together with the other assets and
liabilities could not, per se, be considered as wrong.

 

It was found from the materials available on
record that all these facts were duly reflected in the return of income itself
by the assessee and subsequently during the course of assessment proceedings.
The entire facts of proprietary concern getting converted into public limited
company were made known to the Department. Thus, the assessee’s case falls
under Explanation 1 of section 271(1)(c) of the Act wherein he had offered bona
fide explanation narrating the entire facts before the AO. Moreover, it was
well settled that the discharge of consideration by way of issue of shares was
a valid consideration and hence for the goodwill portion, the assessee was
allotted shares in the public limited company and would have to be treated as
valid consideration for the transfer of goodwill together with other assets and
liabilities. No explanation furnished by the assessee was found to be false by
the AO. It was only a genuine difference of opinion between the assessee and
the AO in not allowing the claim of exemption u/s 47(xiv).

 

In view of the above, the CIT(A) had rightly
deleted the penalty in respect of denial of exemption u/s 47(xiv) of the Act on
the self-generated goodwill portion partially.

 

DCIT-4 vs. M/s Khushbu Industries; Date of order: 19th October, 2016; [ITA. No. 371/Lkw/2016; A.Y.: 2008-09; Lucknow ITAT] Section 151 – Income escaping assessment – Sanction for issue of notice – Section 151(2) mandates that sanction to be taken for issuance of notice u/s 148 in certain cases has to be of Joint Commissioner, reopening of assessment with approval of Commissioner is unsustainable

11.Pr.
CIT-2 vs. M/s Khushbu Industries [Income tax Appeal No. 1035 of 2017] Date
of order: 11th November, 2019 (Bombay
High Court)

 

DCIT-4
vs. M/s Khushbu Industries; Date of order: 19th October, 2016; [ITA.
No. 371/Lkw/2016; A.Y.: 2008-09; Lucknow ITAT]

 

Section
151 – Income escaping assessment – Sanction for issue of notice – Section
151(2) mandates that sanction to be taken for issuance of notice u/s 148 in
certain cases has to be of Joint Commissioner, reopening of assessment with
approval of Commissioner is unsustainable

 

The
assessee filed the return of income u/s 139(1) of the Act on 30th
September, 2008 declaring an income of Rs. 7,120. The notice u/s 148 was issued
by the Income Tax Officer-1(2), Lucknow who did not have jurisdiction over the
assessee. The jurisdiction lay with the Dy. C.I.T., Range-4, Lucknow, who
completed the assessment proceedings u/s 147 read with section 143(3) of the
Act.

 

Being aggrieved by
the order of the AO, the assessee company filed an appeal to the CIT(A). The
CIT(A) held that the AO has not taken approval in accordance with the provisions of section 151(2) before issue of
notice u/s 148 of the Act. In the present case, as per section 151(2) of the
Act, if the case is to be reopened after the expiry of four years the approval
/ satisfaction should be only of the Joint Commissioner of Income Tax. But here
it was reopened and notice u/s 148 issued on the approval of the Commissioner
of Income Tax who is a different authority than the Joint Commissioner of
Income Tax as per section 2 of the Act. For this reason, the notice issued u/s
148 is bad in law and liable to be quashed. The approval granted by the
administrative authorities under whom the said AO worked also did not have
valid jurisdiction over the appellant to grant the said approval u/s 151.
Hence, it was held that the reassessment on the basis of an illegal notice u/s
148 was not sustainable.

 

Aggrieved
by the order of the CIT(A), the Revenue filed an appeal to the Tribunal. The
Tribunal held that the reopening proceedings u/s 148 are bad because the
necessary sanction / approval had not been obtained in terms of section 151 of
the Act. The impugned order of the Tribunal records that the sanction for
issuing the impugned notice had been obtained from the Commissioner of Income
Tax when, in terms of section 151, the sanction had to be obtained from the Joint
Commissioner of Income Tax. Thus, in the absence of sanction / approval from
the appropriate authority as mandated by the Act, the reopening notice itself
was without jurisdiction.

 

Now
aggrieved by the order of the ITAT, the Revenue appealed to the High Court. The
Court observed that the Commissioner of Income Tax is a higher authority;
therefore the sanction obtained from him would meet the requirement of
obtaining sanction from the Joint Commissioner of Income Tax in terms of
section 151 of the Act will no longer survive. This is in view of the decision
of the Court in Ghanshyam K. Khabrani vs. Asst. CIT (2012) 346 ITR 443
(Bom.) which held that where the Act provides for sanction by the Joint
Commissioner of Income Tax in terms of section 151, then the sanction by the
Commissioner of Income Tax would not meet the requirement of the Act and the
reopening notice would be without jurisdiction. In view of the above, the
appeal was dismissed.  

 

M/s Rohan Projects vs. Dy. CIT-2(2); [ITA No. 306/Pun/2015; Date of order: 9th February, 2017; A.Y.: 2012-13; Mum. ITAT] Income accrual – The income accrues only when it becomes due, i.e., it must also be accompanied by corresponding liability of the other party to pay the amount

10.  The Pr. CIT-2 vs. M/s Rohan Projects [Income
tax Appeal No. 1345 of 2017] Date
of order: 18th November, 2019 (Bombay
High Court)

 

M/s
Rohan Projects vs. Dy. CIT-2(2); [ITA No. 306/Pun/2015; Date of order: 9th
February, 2017; A.Y.: 2012-13; Mum. ITAT]

 

Income
accrual – The income accrues only when it becomes due, i.e., it must also be
accompanied by corresponding liability of the other party to pay the amount


The assessee is in
the business of promoter and developer of land. It had sold land to M/s
Symboisis in a transaction that took place in the previous year relevant to the
subject assessment year. The land was sold under a Memorandum of Understanding
(MOU) dated 2nd February, 2012 for a total consideration of Rs. 120
crores. However, the assessee offered only a sum of Rs. 100 crores for tax in
the return for the A.Y. 2012-13. This was because the MOU provided that a sum
of Rs. 20 crores would be paid by the purchaser (M/s Symboisis) on execution of
the sale deed after getting the plan sanctioned and on inclusion of the name of
the purchaser in the 7/12 extract. However, as the assessee was not able to
meet these conditions during the subject assessment year, a sum of Rs. 20
crores, according to the assessee, could not be recognised as income for the
subject assessment year. The AO did not accept the same and held that the
entire sum of Rs. 120 crores was taxable in the subject assessment year.

 

Aggrieved by this
order, the assessee company filed an appeal to the CIT(A). The CIT(A) dismissed
the appeal, upholding the order of the AO. On further appeal, the Tribunal,
after recording the above facts and relying upon the decision of the Supreme
Court in Morvi Industries Ltd. vs. CIT (1971) 82 ITR 835, held
that the income accrues only when it becomes due, i.e., it must also be
accompanied by corresponding liability of the other party to pay the amount. On
the facts of the case it was found that the amount of Rs. 20 crores was not
payable in the previous year relevant to the subject assessment year as the
assessee had not completed its obligation under the MOU entirely. Moreover, it
also found that Rs. 20 crores was offered to tax in the subsequent assessment
year and also taxed. Thus, the appeal of the assessee was allowed.

 

But the Revenue was
aggrieved by this order of the ITAT and filed an appeal to the High Court. The
Court found that the assessee was not able to comply with its obligations under
the MOU in the previous year relevant to the subject assessment year so as to
be entitled to receive Rs. 20 crores is not shown to be perverse. In fact, the
issue is covered by the decision of the Apex Court in CIT vs. Shoorji
Vallabdas & Co. (1962) 46 ITR 144 (SC) wherein it is held that ‘Income
tax is a levy on income. No doubt, the Income-tax Act takes into account two
points of time at which the liability to tax is attracted, viz., the accrual of
the income or its receipt; but the substance of the matter is the income, if
income does not result at all, there cannot be a tax…’


Similarly, in Morvi
Industries Ltd. (Supra) the Supreme Court has held that income accrues
when there is a corresponding liability on the other party. In the present
case, in terms of the MOU there is no liability on the other party to pay the
amount. In any event, the amount of Rs. 20 crores has been offered to tax in
the subsequent assessment year and also taxed. The Bombay High Court in the
case of C.I.T. vs. Nagri Mills Co. Ltd. (1958) 33 ITR 681 (Bom.)
held that the question as to the year in which a deduction is allowable may be
material when the rate of tax chargeable on the assessee in two different years
is different; but in the case of income of a company, tax is attracted at a
uniform rate, and whether the deduction in respect of bonus was granted in the
A.Y. 1952-53 or in the assessment year corresponding to the accounting year
1952, that is, in the A.Y. 1953- 54, should be a matter of no consequence to
the Department; and one should have thought that the Department would not
fritter away its energies in fighting matters of this kind.

 

In the aforesaid
circumstances, the tax on the amount of Rs. 20 crores has been paid in the next
year. Therefore, the appeal is dismissed.

 

 

ACIT-3 vs. Shree Rajlakshmi Textile Park Pvt. Ltd.; Date of order: 18th October, 2016; [ITA No. 4607/Mum/2012; A.Y.: 2008-09; Mum. ITAT] Section 68: Cash credits – Share application money and share premium – Identity, genuineness of transaction and creditworthiness of persons from whom assessee received funds is proved – Addition u/s 68 is not justified

9.  The Pr. CIT-2 vs. Shree Rajlakshmi Textile
Park Pvt. Ltd. [Income tax Appeal No. 991 of 2017] Date of order: 4th
November, 2019 (Bombay High Court)

 

ACIT-3 vs. Shree
Rajlakshmi Textile Park Pvt. Ltd.; Date of order: 18th October,
2016; [ITA No. 4607/Mum/2012; A.Y.: 2008-09; Mum. ITAT]

 

Section
68: Cash credits – Share application money and share premium – Identity,
genuineness of transaction and creditworthiness of persons from whom assessee
received funds is proved – Addition u/s 68 is not justified

 

The
assessee company is in the business of construction of godowns. In the course
of scrutiny, the AO noticed that the assessee had received share application money,
including share premium of Rs. 19.40 crores. The AO added the same to the
assessee’s returned income as cash credit, determining its income at Rs. 19.40
crores.

 

Aggrieved
by this order, the assessee company filed an appeal to the CIT(A). The CIT(A)
deleted the addition of Rs. 19.40 crores after calling for a remand report from
the AO. The remand report indicated that all 20 parties who had subscribed to
the shares of the assessee appeared before the AO and submitted confirmation
letter of purchase of shares, copy of audited balance sheet and profit &
loss account, copy of bank statement along with return of income, as well as
Form 23AC filed with the Registrar of Companies. It also found that Rs. 4.90
crores represented an amount received in the earlier assessment year and from
promoters. Therefore, it could not be added as cash credit for the subject
assessment year. So far as the balance amount of Rs. 14.50 crores is concerned,
the CIT(A) examined the issue and concluded that the shareholders had clearly
established their identity, capacity and genuineness of the transactions on the
basis of the documents submitted.

 

The
Revenue filed an appeal to the Tribunal against the order of the CIT(A). It
stated that during the assessment and also remand proceedings, the letters sent
through RPAD to the companies who invested in the respondent’s company were
returned back with an endorsement ‘No such company exists in the given
address’. This by itself, according to him, establishes the perversity of the
impugned order.

 

The
Tribunal found that the identity and capacity of the shareholders as well as
the genuineness of the transactions stood established. Further, it records that
the Revenue is not able to submit anything in support of its challenge to the
order of the CIT(A), except stating that the order of the AO requires to be
restored.

 

Aggrieved
by the order of the ITAT, the Revenue filed an appeal to the High Court. The
Court observed that in the report the officer indicates that notices sent to
some of the companies came back un-served, yet, thereafter, the companies
appeared before him through a representative and made submissions in support of
their investments. Further, the change of address was given to the AO and yet
it appears that notice was served on an incorrect address. Further, one of the
directors of a company which has subscribed to the shares, has also given an
affidavit stating that the company has paid Rs. 30 lakhs for 30,000 equity
shares of Rs.10 each at a premium of Rs. 90 to the assessee company. Thus, the
amounts received for share subscription is not hit by section 68 of the Act as
the identity and the capacity of the shareholder is proved. Besides, the
genuineness of the transactions also stands established. Accordingly, the appeal
is dismissed.

 

Settlement of cases – Section 145D(1) of ITA, 1961 – Condition precedent – Pendency of assessment proceedings – Assessment proceedings pending till service of assessment order upon assessee

31. M3M India Holdings
Pvt. Ltd. vs. IT Settlement Commission; [2019] 419 ITR 17
(P&H) Date of order: 22nd
October, 2019 A.Y.: 2013-14

 

Settlement of cases –
Section 145D(1) of ITA, 1961 – Condition precedent – Pendency of assessment
proceedings – Assessment proceedings pending till service of assessment order
upon assessee

 

While the assessment proceedings were pending, the assessee sent a mail
to the AO on 26th February, 2018 indicating that the assessment
proceedings should be deferred because it intended to file an application u/s
245D(1) of the Income-tax Act, 1961 before the Settlement Commission. On 27th
December, 2018, the AO finalised the assessment, passed the order and
dispatched it through post. Before it was received or even delivered by the
postal authorities, the assessee filed the application before the Settlement
Commission on 28th February, 2018. The Settlement Commission
accepted the contention of the Department that on the date of the application
the assessment proceedings having been concluded, the application would not lie
and rejected the application.

 

The assessee challenged the order by filing a writ petition and
contended that the assessment proceedings could not have been said to be
concluded till such time as the assessment order was not served upon the
assessee.

 

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

 

‘i)   The assessee had communicated
to the Assessing Officer prior to the passing of the assessment order that it
was intending to move an application before the Settlement Commission. The
assessee was entitled to proceed on the basis that till the service of the
assessment order, the case continued to be pending with the Assessing Officer
till the date the assessment order was not served upon it.

 

ii)   Consequently, the order of
the Settlement Commission rejecting the application filed by the assessee u/s
245D(1) was to be set aside.’

 

Section 273B read with section 272A(2)(k) – Delay in filing TDS return for want of PAN considered as reasonable cause and penalty imposed was deleted

11.  Sai Satyam
Hospitals Private Ltd. vs. Addl. CIT-TDS Range

Members: Sandeep Gosain (J.M.) and Manoj Kumar Aggarwal
(A.M.)

I.T.A. No.: 3220/Mum./2018

A.Y.: 2011-12

Date of order: 15th July, 2019

Counsel for Assessee / Revenue: Dr. Prayag Jha / Chaudhury
Arun Kumar Singh

 

Section 273B read with
section 272A(2)(k) – Delay in filing TDS return for want of PAN considered as
reasonable cause and penalty imposed was deleted

 

FACTS

For a delay of 389 days in filing TDS return in Form No. 26Q,
a penalty of Rs. 38,900 u/s 272A(2)(k) was imposed by the AO. The CIT(A), on
appeal, confirmed the order.

 

Before the Tribunal, in order to make out a case of
reasonable cause, the assessee inter alia pleaded that the delay was due
to non-availability of the PAN of the deductees, without which the return could
not be uploaded; there was no evasion of tax or loss to the government since
the assessee had deducted and paid the taxes to the Government.

 

HELD

The Tribunal noted that the directors of the assessee company
were doctors who may not be well-versed with the technicalities of TDS
provisions; besides, in the TDS return filed, there were 30 deductees’ records
and the PAN was quoted in all the records; moreover, due TDS had been deducted
and deposited by the assessee in the Government treasury.

 

The Tribunal also noted the fact that many changes had been
brought about in the financial year 2010-11 by the Act in filing of e-TDS
returns wherein it was necessary to quote cent percent valid Permanent Account
Numbers of the payees in the e-TDS returns and only thereafter could the e-TDS
returns be validated and uploaded in the Income-tax System.

Therefore, for the reason that there was no loss
to the Revenue and the delay in filing of the e-TDS returns was unintentional
on the part of the assessee, and keeping in view the assessee’s background, the
penalty imposed by the AO was deleted.

Section 37(1) – Compensation received in lieu of extinction of right to sue is capital receipt not chargeable to tax

10.  Chheda Housing
Development Corporation vs. Addl. CIT (Mumbai)

Members: G.S. Pannu (V.P.) and Pawan Singh (J.M.)

ITA No.: 86/Mum./2017

A.Y.: 2012-13

Date of order: 29th May, 2019

Counsel for Assessee / Revenue: Dr. K. Shivaram and Rahul K.
Hakkani / H.N. Singh and Rajeev Gubgotra

 

Section 37(1) – Compensation received in lieu of extinction
of right to sue is capital receipt not chargeable to tax

 

FACTS

The assessee, a partnership firm, was engaged in the business
of construction and development of property. During FY 2004-05, the assessee
had entered into a memorandum of understanding (MOU) with one Mr. Merchant, the
landowner, for the development of his land and paid the sum of Rs. 2.5 crores.
In terms of the MOU, the parties had agreed to execute a joint development
agreement and the landowner was to obtain the commencement certificate from the
local authorities. However, the landowner did not provide the certificate.
Besides, the assessee came to know that the landowner had transferred the
development rights of the land to a company owned by his family.

 

The assessee filed a suit before the Bombay High Court
seeking specific Performance of the MOU and to execute the joint development
agreement. In the alternative, the assessee claimed damages for breach of
contract. A criminal complaint was also filed alleging fraud. Litigation in
various forums continued till 2011 when, through the intervention of a
well-wisher, the parties agreed to a settlement. As per the terms of the
settlement, the assessee agreed to withdraw the criminal complaint and the
civil suit. The assessee also agreed not to create any third party right, title
or interest in respect of the right created under the MOU. On execution of the cancellation deed in
September, 2011, the assessee was paid Rs. 20 crores.

 

For the year under appeal, the assessee had filed a Nil
return. The AO treated the receipt of Rs. 20 crores as income and taxed the
same as long-term capital gain. The CIT(A), on appeal, confirmed the AO’s
order.

 

Before the Tribunal, the Revenue justified the orders of the
lower authorities and contended that the right to execute the joint development
right of immovable property falls within the expression of ‘property of any
kind’ as used in section 2(24) and consequently was a capital asset. And giving
up a right of specific performance as claimed by the assessee, amounted to
relinquishment of capital asset. Therefore, there was a transfer of capital
asset.

 

HELD

The Tribunal noted that the assessee received a sum of Rs. 20
crores on execution of the cancellation deed in September, 2011. Referring to
the relevant clause in the deed, the Tribunal observed that as per the deed,
the assessee had not transferred any rights, which was sought to be confirmed
in the MOU. In fact, those rights were already transferred by the landowner in
favour of the company owned by his family before the date of the MOU. The
assessee received compensation which consisted of refund of the amount paid by
way of advance along with interest, towards loss of profit / liquidated damage,
for loss of opportunity to develop the property and sale of flats in the open
market, and towards the cost of litigation.

 

Therefore, relying on decisions of the Delhi High Court in CIT
vs. J. Dalmia (149 ITR215), the Bombay High Court in CIT vs.
Abbasbhoy A. Dehgamwalla (195 ITR 28), the Supreme Court in CIT
vs. Saurashtra Cement Ltd. (325 ITR 422) and of the
Mumbai Tribunal in ACIT vs. Jackie Shroff (194 TTJ 760), it was
held that the amount received by the assessee in excess of the advance was on
account of compensation for extinction of its right to sue the owner, and so
the receipt is a capital receipt not chargeable to tax. According to the
Tribunal, the case of K.R. Srinath vs. ACIT (268 ITR 436 Madras)
relied on by the Revenue was distinguishable on facts. In the said case the
amount was received as consideration for giving up the right of specific
performance which was acquired under an agreement for sale. However, in the
case of the assessee here, the owner of the land had already transferred such
right to a third party. Rather, the original agreement was cancelled.

 

Accordingly, the appeal of the assessee was
allowed.

Section 72 r.w.s. 254, Section 154 – Business loss determined and carried forward by the AO pursuant to an order passed in accordance with directions of the Tribunal u/s 143(3) r.w.s. 254 can be set off in subsequent years though such claim is not made in the return of income. The AO is duty-bound to give relief to the assessee which has resulted pursuant to the order passed by the appellate authority and which has a cascading effect on the subsequent assessment years

26.  [2019] 107
taxmann.com 92 (Pune)

Maharashtra State Warehousing Corporation vs. DCIT

ITA Nos.: 2366 to 2399/Pune/2017

A.Y.s: 2003-04 to 2006-07

Date of order: 3rd June, 2019

 

Section 72 r.w.s. 254,
Section 154 – Business loss determined and carried forward by the AO pursuant
to an order passed in accordance with directions of the Tribunal u/s 143(3)
r.w.s. 254 can be set off in subsequent years though such claim is not made in
the return of income. The AO is duty-bound to give relief to the assessee which
has resulted pursuant to the order passed by the appellate authority and which
has a cascading effect on the subsequent assessment years

 

FACTS

The assessee, a State Government Undertaking, was engaged in
providing warehouse facilities in the State of Maharashtra. For A.Y. 2002-03,
while assessing the total income of the assessee, the AO made certain additions
to the returned income. The assessee contested the additions in an appeal
before the CIT(A) as well as before the Tribunal. The Tribunal restored the
matter back to the AO with certain directions.

The AO passed an order u/s 143(3) r.w.s. 254 and allowed the
final net business loss to be carried forward.

 

Subsequently, the CIT
invoked section 263 of the Act and held the order passed by the AO u/s 143(3)
r.w.s. 254 to be erroneous and prejudicial to the interest of the Revenue.

 

The assessee challenged the action of the CIT before the
Tribunal. The Tribunal quashed the order passed by the CIT u/s 263. As a
result, the order passed by the AO based on the directions of the Tribunal
stood restored.

 

Thereafter, the assessee, in order to claim the set-off of
brought-forward business loss of A.Y. 2002-03, filed an application for
rectification of assessment orders for A.Y. 2003-04 to A.Y. 2006-07. The AO
rejected this application.

 

Aggrieved, the assessee preferred an appeal to the CIT(A) who
dismissed the appeals of the assessee on the ground that since the set-off was
not claimed in the return of income, the same could not be allowed to the
assessee at a belated stage.

 

The assessee preferred an appeal to the Tribunal.

 

HELD

The Tribunal observed that by the time the order u/s 143(3)
r.w.s. 254 was passed whereby loss was determined and allowed to be carried
forward, the assessee had already filed return of income for the subsequent
assessment years and hence the assessee had no occasion to claim set-off of
brought-forward business loss and it was a case of supervening impossibility.
The Tribunal held that the AO is duty-bound to give relief to the assessee
which has resulted pursuant to the order passed by the appellate authority and
which has a cascading effect on the subsequent assessment years.

 

Further, the Tribunal relied on the decision of the Bombay
High Court in the case of CIT vs. Pruthvi Brokers & Shareholders (P)
Ltd. [2012] 349 ITR 336 wherein it was held that the assessee is
entitled to raise additional ground not merely in terms of legal submissions
but also additional claims which were not made in the return filed by it. It
was thus held that the assessee was entitled to claim set-off of
brought-forward business loss in A.Y.s 2003-04 to 2006-07.

 

The Tribunal decided the appeal in favour of the
assessee.

Section 22 r.w.s. 23 –Under section 22 annual value is chargeable to tax in the hands of the owner – The assessee, SPV, promoted by the State Housing Board, was merely a developer and not the owner. Accordingly, notional annual value of unsold flats, held as stock-in-trade by the assessee, could not be assessed u/s 23

25.  [2019] 106
taxmann.com 346 (Kol.)

Bengal DCL Housing Development Co. Ltd. vs. DCIT

ITA Nos.: 210/Kol/2017 & 429/Kol/2018

A.Y.s: 2011-12 & 2012-13

Date of order: 24th May, 2019

 

Section 22 r.w.s. 23 –Under section 22 annual value is
chargeable to tax in the hands of the owner – The assessee, SPV, promoted by
the State Housing Board, was merely a developer and not the owner. Accordingly,
notional annual value of unsold flats, held as stock-in-trade by the assessee,
could not be assessed u/s 23

 

FACTS

The assessee was a
joint-sector company promoted by the State Housing Board with DCPL for
undertaking large-scale construction of housing complexes within the state to
solve basic housing problems subject to the supervision and overall control by
the State Government. Pursuant to a development agreement, the assessee
undertook construction of a housing complex known as ‘U’. The assessee treated
unsold constructed flats as its stock-in-trade.

 

These flats, in respect of which annual value was sought to
be computed by the AO, were allotted by the assessee to various persons. The AO
noted that the expression ‘allotment’ in the terms and conditions of allotment
was defined to mean ‘provisional allotment’; the definition also stated that
allotment will remain provisional till a formal deed of transfer is executed
and registered in favour of the allottee for his apartment. In respect of the
flats for which no formal deeds were executed and registered, the AO held the
assessee to be the owner. The AO computed and charged to tax the notional
annual value of unsold finished apartments held by the assessee.

 

Aggrieved, the assessee preferred an appeal before the
Commissioner of Income-tax (Appeals) [CIT(A)] who confirmed the action of the
AO. Still aggrieved, the assessee preferred an appeal to the Tribunal.

 

HELD

The Tribunal observed that in order to attract charge of tax
under the head ‘house property’, the AO must prove that the assessee is the
owner of the same. The term ‘owner’ for the purposes of Chapter IVC is defined
in section 27. The Tribunal observed that though the value of finished
apartments was included under the head ‘Inventory’ disclosed in the balance
sheet, yet, for the purposes of section 22 the assessee could not be considered
to be the owner of the apartments. The Tribunal noted that the apartments were
allotted prior to the balance sheet date and in respect of such allotments a
substantial part of the consideration was received and reflected by way of
liability in the books of the assessee. Consequent to allotment and receipt of
consideration, the right of specific performance and right to obtain conveyance
accrued in favour of the purchaser. The assessee was debarred from claiming ownership
rights in the apartments already allotted to the flat purchasers.

 

The Tribunal also observed that the apartments did not have
occupancy certificate. And in the absence of a valid occupancy certificate, the
property could not be said to be in a position to be let or occupied. Thus, the
notional annual value of unsold apartments could not be assessed in the hands
of the assessee u/s 23 of the Act.

 

The Tribunal decided the appeal in favour of the assessee.

Rectification of mistakes – Section 154 of ITA, 1961 – Section 154(1A) places an embargo on power of rectification of assessment order in cases where matter had been considered and decided in appeal or revision – However, there is no embargo on power of amendment if an appeal or revision is merely pending since such pending appeal / revision does not assume character of a subjudice matter

21. Piramal Investment Opportunities
Fund vs. ACIT; [2019]
111 taxmann.com 5 (Bom.) Date
of order: 4th September, 2019 A.Y.:
2015-16

 

Rectification of mistakes – Section 154 of ITA, 1961 –
Section 154(1A) places an embargo on power of rectification of assessment order in cases where matter had been considered
and decided in appeal or revision – However, there is no embargo on power of amendment if
an appeal or revision is merely pending since such pending appeal / revision
does not assume character of a subjudice matter

 

For the A.Y. 2015-16, the assessee had paid advance tax of Rs. 16.80
crores. In the original return, the assessee had computed total income at Rs.
65.66 crores. In the revised return the total income was computed at Nil. The
AO completed the assessment u/s 143(3) of the Income-tax Act, 1961. The
assessee filed an appeal before the Commissioner (Appeals) on the ground that
the AO did not give credit for the advance tax of Rs.16.80 crores. The assessee
also made an application u/s 154 to the AO for rectification of the mistake.
The assessee stated that by a mistake apparent on record, the credit of payment
of advance tax of Rs.16.80 crores had not been given and the assessee was
entitled to a refund. The AO rejected the rectification application stating
that the assessee did not inform that an appeal was filed on the same issue for
which rectification was sought. Since the assessee was agitating on similar
ground before the appellate authority, it was not proper on the part of the AO,
following the doctrine of judicial discipline, to adjudicate on the same issue
pending before the appellate authority; therefore, the rectification
application assumed the character of a subjudice matter.

 

Thereafter, the assessee filed a writ petition challenging the order of
the AO. The Bombay High Court allowed the writ petition and held as under:

 

‘(i)      Section 154(1A) provides
that where any matter has been considered and decided in any proceeding by way
of appeal or revision, contained in any law for the time being in force, such
order shall not be amended. Section 154(1A), thus, places an embargo on the
power of rectification in cases where the matter has been considered and
decided in appeal or revision. It is of importance that the legislature has
used the phrase “considered and decided” in the past tense.

 

(ii)      The phrase “considered
and decided” cannot be read as “pending consideration in appeal or revision”.
To do so would be adding and changing the plain language of the statute. By
modifying and adding the words in this manner, which is not permissible, the
Assistant Commissioner has divested himself of the power of amendment. In view
of the plain language of section 154, there is no embargo on the power of
amendment if an appeal or revision is merely pending.

 

(iii)      The rejection of the
rectification application on this ground was unwarranted. The appeal is still
pending. The Assistant Commissioner has failed to exercise the jurisdiction
vested in him and, thus, the impugned order will have to be set aside and the
application will have to be decided.

 

(iv)     The Writ Petition succeeds.
The impugned order is to be quashed and set aside. The rectification
application filed by the petitioner u/s 154 stands restored to the file of
Assistant Commissioner to be disposed of on its own merits.’

 

Settlement of cases – Sections 245C, 245D(2C) and 245D(4) of ITA, 1961 – Settlement Commission – Jurisdiction – Applications filed for settlement of cases for several assessment years allowed to be proceeded with – Order directing that application for years in which nil or no disclosure of additional income or loss was declared not to be proceeded with – Order giving retrospective effect on request of Department – Settlement Commission has no jurisdiction to pre-date its order

30. Pr.
CIT vs. IT Settlement Commission; [2019]
418 ITR 339 (Bom.) Date
of order: 28th February, 2019 A.Ys.:
2008-09 to 2013-14

 

Settlement
of cases – Sections 245C, 245D(2C) and 245D(4) of ITA, 1961 – Settlement Commission
– Jurisdiction – Applications filed for settlement of cases for several
assessment years allowed to be proceeded with – Order directing that
application for years in which nil or no disclosure of additional income or
loss was declared not to be proceeded with – Order giving retrospective effect
on request of Department – Settlement Commission has no jurisdiction to
pre-date its order

 

The assessee applied to the Settlement Commission for
settlement of its cases u/s 245C of the Income-tax Act, 1961 for the A.Ys.
2008-09 to 2013-14 and did not disclose an additional income in some of the
years. The Settlement Commission passed an order dated 29th January,
2015 u/s 245D(2C) wherein it held that the five applicants had made a true and
full disclosure, that there were no technical objections from the Department,
that the five applicants had complied with the basic requirement u/s 245C(1)
and that all the applications were valid and allowed them to be proceeded with.
Thereafter, the Department contended before the Settlement Commission that the
settlement applications for the assessment years in which no additional income
was disclosed by the assessee should be treated as invalid u/s 245D(2C). The
Settlement Commission thereupon passed an order on 31st May, 2016
u/s 245D(4) of the Act excluding from the purview of the settlement those
assessment years where ‘nil’ or ‘no disclosure of additional income’ was made
u/s 245C(1) or where the disclosure was a loss, and directing that the
settlement applications for those assessment years were not to be proceeded
from the stage of section 245D(2C) and that such declaration was effective from
29th January, 2015. The Income Tax Department filed a writ petition
and challenged this order.

 

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

 

‘i)   Once the Settlement Commission had passed an
order u/s 245D(2C), whether legally permissible or not, it had no authority or
jurisdiction to pre-date such an order. While giving retrospective effect to
its order of invalidation it had acted without jurisdiction.

ii)   Under no circumstances could it have made a
declaration of invalidity on 31st May, 2016 giving it a retrospective
effect of 29th January, 2015. The portion of the order giving
retrospective effect to the declaration of invalidity of the settlement
application was severable from the main order of invalidation. While therefore,
striking down the severable portion of the order as illegal, the principal
declaration made by the Commission was not disturbed.

iii)  The direction giving retrospective effect to
the order was set aside and the order passed by the Settlement Commission on 31st
May, 2016 would take effect from such date.’

 

Section 145 – The project completion method is one of the recognised methods of accounting and as the assessee has consistently been following such recognised method of accounting, in the absence of any prohibition or restriction under the Act for doing so, the CIT(A) is correct in holding that the AO’s assertion that the project completion method is not a legal method of computation of income is not supported by facts and judicial precedents

9 ITO vs. Shanti Constructions
(Agra) Members: Sudhanshu
Srivastava (JM) and Dr. Mitha Lal Meena (AM) ITA No. 289/Agra/2017 A.Y.: 2012-13 Date of order: 16thMay,
2019 Counsel for Revenue /
Assessee: Sunil Bajpai / Pradeep K. Sahgal and Utsav Sahgal

 

Section 145 – The
project completion method is one of the recognised methods of accounting and as
the assessee has consistently been following such recognised method of
accounting, in the absence of any prohibition or restriction under the Act for
doing so, the CIT(A) is correct in holding that the AO’s assertion that the
project completion method is not a legal method of computation of income is not
supported by facts and judicial precedents

 

FACTS

The
assessee, a partnership firm engaged in the business of real estate and
construction of buildings for the past several years, filed its return of
income declaring therein a total income of Rs. 1,12,120. The AO completed the
assessment u/s. 143(3) of the Act, assessing the total income of the assessee
to be Rs. 3,94,62,580. While assessing the total income of the assessee, the AO
rejected the books of accounts on the ground that the assessee did not produce
bills / vouchers before him for ascertaining the accuracy and correctness of
the books of accounts; that it did not furnish evidence regarding closing
stock; and that the assessee is following the project completion method and not
the percentage completion method. The AO observed that the project completion
method has no existence since 1st April, 2003 and laid emphasis on
revised AS-7 introduced by the ICAI in 2002.

 

Aggrieved, the assessee preferred an appeal to CIT(A) who
noted that in the assessee’s own case in the assessment proceedings for AY
2014-15, the AO has accepted the project completion method. The CIT(A) allowed
the appeal filed by the assessee.

 

But the Revenue preferred an appeal to the Tribunal where
it placed reliance on the decision of the Supreme Court in the case of CIT
vs. Realest Builders & Services Ltd. [(2008) 22 (I) ITCL 73 (SC)].

 

HELD

The Tribunal observed that the assessee’s business came
into existence on 11th March, 2003 and since then it has been
consistently following the project completion method of accounting. It is well
settled that the project completion method is one of the recognised methods of
accounting and as the assessee has consistently been following such recognised
method of accounting, in the absence of any prohibition or restriction under
the Act for doing so, it can’t be held that the decision of the CIT(A) was
erroneous or illegal in any manner. The judgement in the case of CIT vs.
Realest Builders & Services Ltd. (supra) relied on by the DR on the
method of accounting is rather in favour of the assessee and against the
Revenue in the peculiar facts of the case. As such, the appeal filed by the
Revenue was dismissed.

Section 54A – Acquisition of an apartment under a builder-buyer agreement wherein the builder gets construction done in a phased manner and the payments are linked to construction is a case of purchase and not construction of a new asset – Even in a case where construction of new asset commenced before the date of sale of original asset, the assessee is eligible for deduction of the amount of investment made in the new asset

8  Kapil Kumar Agarwal vs. DCIT (Delhi) Members: Amit Shukla (JM)
and Prashant Mahrishi (AM) ITA No. 2630/Del./2015 A.Y.: 2011-12 Date of order: 30th
April, 2019 Counsel for Assessee /
Revenue: Piyush Kaushik / Mrs. Sugandha Sharma

 

Section 54A –
Acquisition of an apartment under a builder-buyer agreement wherein the builder
gets construction done in a phased manner and the payments are linked to
construction is a case of purchase and not construction of a new asset – Even
in a case where construction of new asset commenced before the date of sale of
original asset, the assessee is eligible for deduction of the amount of
investment made in the new asset

 

FACTS

During
the previous year relevant to the assessment year under consideration, the
assessee, an individual, sold shares held by him as long-term capital asset.
The long-term capital gain arising from the sale of shares was claimed as
deduction u/s. 54F of the Act. In the course of assessment proceedings, the AO
noted that the shares were sold on 13th July, 2010 for a
consideration of Rs. 80,00,000 and a long-term capital gain of Rs. 79,85,761
arose to the assessee on such sale. The assessee claimed this gain of Rs.
79,85,761 to be deductible u/s. 54F by contending that it had purchased a
residential apartment by entering into an apartment buyer’s agreement and
having made a payment of Rs. 1,42,45,000.

 

The
AO was of the view that the assessee has not purchased the house but has made
payment of instalment to the builder for construction of the property. He also
noted that the assessee has started investing in the new asset with effect from
18th August, 2006, that is, three years and 11 months before the
date of sale. Further, around 90% of the total investment in the new asset has
been made before the date of sale of the original asset. The AO denied claim
for deduction of Rs. 79,85,761 made u/s. 54F of the Act. He observed that the
assessee would have been eligible for deduction u/s. 54F had the entire
investment in the construction of the new asset been made between 13th July,
2010 and 12th July, 2013.

 

Aggrieved,
the assessee preferred an appeal to the CIT(A) who upheld the action of the AO.
Still not satisfied, the assessee preferred an appeal to the Tribunal.

 

HELD

The Tribunal held that the question as to whether the
acquisition of an apartment under a builders-buyers agreement wherein the
builder gets construction done in a phased manner and the payments are linked
to construction is a case of purchase of a new asset or construction of a new
asset has been answered by the Delhi High Court in the case of CIT vs.
Kuldeep Singh [(2014) 49 taxmann.com 167 (Delhi)]. Referring to the
observations of the Delhi High Court in the case,  the Tribunal held that acquisition of an
apartment under a builders-buyers agreement wherein the builder gets construction
done in a phased manner and the payments are linked to construction is a case
of purchase and not construction of a new asset.

 

The Tribunal observed that the second question, viz.,
whether the construction of new asset even if commenced before the date of sale
of the original asset, the assessee is eligible for deduction of the amount of
investment made in the property, has been examined in the case of CIT vs.
Bharti Mishra [(2014) 41 taxmann.com 50 (Delhi)]. The Tribunal observed
that the issue in the present case is squarely covered by this decision of the
Delhi High Court. It held that the assessee has purchased a house property,
i.e., a new asset, and is entitled to exemption u/s. 54F of the Act despite the
fact that construction activities of the purchase of the new house started
before the date of sale of the original asset which resulted into capital gain
chargeable to tax in the hands of the assessee. The Tribunal reversed the order
of the lower authorities and directed the AO to grant deduction u/s. 54F of Rs.
79,85,761 to the assessee. In the event, the appeal filed by the assessee was
allowed.

Capital gains – Transfer – Sections 45(4) and 47 of ITA, 1961 – Conversion of firm to private limited company – Transaction not transfer giving rise to capital gains

4.      
Principal CIT vs. Ram Krishnan
Kulwant Rai Holdings P. Ltd.; [2019] 416 ITR 123 (Mad.) Date of order: 16th July, 2019 A.Y.: 2009-10

 

Capital gains – Transfer – Sections 45(4)
and 47 of ITA, 1961 – Conversion of firm to private limited company –
Transaction not transfer giving rise to capital gains

 

The assessee was a
private limited company. Originally, the assessee was a partnership firm and it
was converted into a private limited company. The firm revalued its assets and
in the revaluation, the value of the assets was increased to Rs. 117,24,04,974,
but the book value of the assets on the date of revaluation was Rs. 52,16,526.
The AO held that the total value of the capital account of all the four
partners after being revalued stood at Rs. 117,32,87,069, that the shares were
allotted to the partners of the firm for a total amount of Rs. 10 lakhs and
that the balance of Rs. 117,22,87,070 was given as credit of loan to the
partners of the erstwhile firm in the same proportion as their share capital of
the firm, that this was a deviation stipulated u/s 47(xiii) of the Income-tax
Act, 1961 for exemption from the capital gains and made an addition of Rs.
117,22,87,070 towards short-term capital gains and brought the amount to tax.

 

The Tribunal held
that the capital gains tax could not be levied in the hands of the
assessee-company, which succeeded to the assets and the liabilities of the firm
and allowed the appeal of the assessee.

 

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

 

‘(i)   The legal position having been well settled
that when vesting takes place, it vested in the company as it existed.
Therefore, unless and until the first condition of transfer by way of
distribution of assets is satisfied, section 45(4) of the Act would not be
attracted. In the facts and circumstances, there was no transfer by way of
distribution of assets.

 

(ii)   The Commissioner (Appeals) did not take into
consideration the legal issue involved, i.e., when a firm was succeeded by a
company with no change either in the number of members or in the value of
assets with no dissolution of the firm and no distribution of assets with
change in the legal status alone, whether there was a “transfer” as
contemplated u/s 2(47) and 45(4) of the Act. The Tribunal rightly decided the
issue.’

Business expenditure – Difference between setting up of business and starting commercial activities – Company formed to design, manufacture and sell commercial vehicles – Commencement of research and development and construction of factory – Business had been set up – Assessee entitled to deduction of operating expenses, financial expenses and depreciation

3.      
Daimler India Commercial
Vehicles P. Ltd. vs. Dy. CIT.; [2019] 416 ITR 343 (Mad.) Date of order: 5th July, 2019 A.Y.: 2010-11

 

Business expenditure – Difference between
setting up of business and starting commercial activities – Company formed to
design, manufacture and sell commercial vehicles – Commencement of research and
development and construction of factory – Business had been set up – Assessee
entitled to deduction of operating expenses, financial expenses and
depreciation

 

The assessee was a
company. In terms of its memorandum of association, it was incorporated for a
bundle of activities, viz., designing, manufacturing, distributing, selling,
after-sales engineering services and research and development of commercial
vehicles and related products and components for the domestic Indian and
overseas market. The AO disallowed the operating expenses, financial expenses
and depreciation. The reason given by him was that the commercial operation of
manufacture and sale of commercial vehicles had not commenced so far and,
therefore, the expenditure incurred by the assessee under the three heads could
not be allowed.

 

The Tribunal upheld
the order on the ground that the business of the assessee had not been set up.

 

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

 

‘(i)   There is a clear distinction between a person
commencing a business and a person setting up a business. When a business is
established and ready to commence business, then it can be said of that
business that it is set up. The test is of common sense and what in the eye of
a business can be said to be the commencement of business. One business
activity may precede the other and what is required to be seen is whether one
of the essential activities for the carrying on of the business of the assessee
as a whole was or was not commenced. In the case of a composite business, a
variety of matters bearing on the unity of the business have to be
investigated, such as unity of control and management, conduct of the business
through the same agency, the interrelation of business, the employment of same
capital, the maintenance of common books of accounts, employment of same staff
to run the business, the nature of the different transactions, the possibility
of one being closed without affecting the texture of the other, etc.

 

(ii)   There was no dispute with regard to the date
on which the assessee had set up its business. The business of the assessee had
been set up in the relevant assessment year. The Tribunal erred in holding that
merely because the manufacturing and sale of the vehicle did not take place the
business of the assessee had not been set up. This was never an issue before
the AO and the Tribunal had no jurisdiction to unsettle the finding of the date
on which the business of the assessee was set up. The order of the Tribunal had
necessarily to be set aside.

 

(iii)   The assessee had commenced and performed
activities relating to designing of commercial vehicles and related products
research and development, buying and selling of parts and in the process of construction
of factory building for manufacture of commercial vehicles. The unity of
control, management, etc., of the assessee in respect of each of its activity
had not been disputed by the Revenue. In such circumstances, the assessee on
showing that it had commenced several of its activities for which it was
incorporated would definitely qualify for deduction of the expenditure incurred
by it under the head operating expenses, financial expenses and depreciation.’

Business expenditure – Disallowance u/s 43B of ITA, 1961 – Deduction only on actual payment – Service tax – Liability to pay service tax into treasury arises only upon receipt of consideration by assessee – Service tax debited to profit and loss account – Cannot be disallowed

2.     Principal CIT vs. Tops Security
Ltd.; [2019] 415 ITR 212 (Bom.) Date of order: 10th September,
2018 A.Y.: 2006-07

 

Business expenditure – Disallowance u/s 43B
of ITA, 1961 – Deduction only on actual payment – Service tax – Liability to
pay service tax into treasury arises only upon receipt of consideration by
assessee – Service tax debited to profit and loss account – Cannot be
disallowed

 

The assessee
provided detection and security services to its clients. The AO found from the
balance sheet that the assessee had claimed the amount of unpaid service tax as
its liability. The AO held that according to section 43B of the Income-tax Act,
1961 the service tax could be allowed only when paid and that the amount was
not allowable as deduction. The assessee submitted that the gross receipts
included the service tax but whenever it was due and payable, namely, when the
amount for the services was realised, it would be remitted.

 

The Commissioner
(Appeals) held that the tax became payable only when it was collected from the
customer. The Tribunal found that though the service tax was included in the
bill raised on the customers, it was not actually collected from them and
confirmed the order of the Commissioner (Appeals).

 

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

 

‘(i)   The Tribunal was justified in holding that
the service tax debited to the profit and loss account but not credited to the
Central Government by the assessee could not be disallowed u/s 43B.

 

(ii)   The liability to pay service tax into the
treasury arose only when the assessee had received the funds and not otherwise.
The consideration has to be actually received and thereupon the liability to
pay tax would arise. No question of law arose.’

Section 40A(9) – Business disallowance – Contribution to a fund created for the healthcare of the retired employees – The provision was not meant to hit genuine expenditure by an employer for the welfare and benefit of the employees

15.  The Pr. CIT-2 vs. M/s State Bank of India
[Income tax Appeal No. 718 of 2017;

Date of order: 18th June,
2019

(Bombay High Court)]

 

M/s State Bank of India vs. ACIT
Mum., ITAT

 

Section 40A(9) – Business
disallowance – Contribution to a fund created for the healthcare of the retired
employees – The provision was not meant to hit genuine expenditure by an
employer for the welfare and benefit of the employees

 

The assessee
claimed deduction of expenditure of Rs. 50 lakhs towards contribution to a fund
created for the healthcare of retired employees. The Revenue contented that
such fund not being one recognised u/s 36(1)(iv) or (v), the claim of
expenditure was hit by the provisions of section 40A(9) of the Income-tax Act.
The CIT(A) upheld the AO’s order.

 

On appeal, the
Tribunal held that the assessee had made such contribution to the medical
benefit scheme specially envisaged for the retired employees of the bank.
Sub-section (9) of section 40A of the Act, in the opinion of the Tribunal, was
inserted to discourage the practice of creation of bogus funds and not to hit
genuine expenditure for welfare of the employees. The AO had not doubted the bona
fides of the assessee in the creation of the fund and that such fund was
not controlled by the assessee-bank. The Tribunal proceeded on the basis that
the AO and the CIT(A) had not doubted the bona fides in creation of the
trust or that the expenditure was not incurred wholly and exclusively for the
employees. The Tribunal thus allowed the assessee’s appeal on this ground and
deleted the disallowance.

 

Aggrieved with
the ITAT order, the Revenue filed an appeal in the High Court. The Court held
that sub-section (9) of section 40A disallows deduction of any sum paid by an
assessee as an employer towards setting up of or formation of or contribution
to any fund, trust, company, etc. except where such sum is paid for the
purposes and to the extent provided under clauses (iv) or (iva) or (v) of
sub-section (1) of Section 36, or as required by or under any other law for the
time being in force. It is clear that the case of the assessee does not fall in
any of the above-mentioned clauses of sub-section (1) of section 36. However,
the question remains whether the purpose of inserting sub-section (9) of
section 40A of the Act was to discourage genuine expenditure by an employer for
the welfare activities of the employees. This issue has been examined by the
Court on
multiple occasions.

 

The very
purpose of insertion of sub-section (9) of section 40A thus was to restrict the
claim of expenditure by the employers towards contribution to funds, trusts,
associations of persons, etc. which was wholly discretionary and did not impose
any restriction or condition for expanding such funds which had possibility of
misdirecting or misuse of such funds, after the employer claimed benefit of
deduction thereof. In plain terms, this provision was not meant to hit genuine
expenditure by an employer for the welfare and the benefit of the employees.

 

In the case of
Commissioner of Income Tax vs. Bharat Petroleum Corporation Limited (2001) Vol.
252 ITR 43, the Division Bench of this Court considered a similar issue
when the assessee had claimed deduction of contribution towards staff sports
and welfare expenses. The Revenue opposed the claim on the ground that the same
was hit by section 40A(9) of the Act. The High Court had allowed the assessee’s
appeal.

 

In the case of
Commissioner of Income-tax-LTU vs. Indian Petrochemicals Corporation
Limited (2019) 261 Taxman 251 (Bombay), the Division Bench of the
Bombay High Court considered the case where the assessee-employer had
contributed to various clubs meant for staff and family members and claimed
such expenditure as deduction. Once again the Revenue had resisted the
expenditure by citing section 40A(9) of the Act. The Court had confirmed the
view of the Tribunal and dismissed Revenue’s appeal.

 

In view of same, the Revenue appeal was dismissed.

Appeal to High Court – Territorial jurisdiction – Sections 116, 120, 124, 127, 260A and 269 of ITA, 1961 – Territorial jurisdiction of High Court is not governed by seat of the AO – Appeal would lie to High Court having jurisdiction over place where Tribunal which passed order is situated

1.      
Principal CIT vs. Sungard
Solutions (I) Pvt. Ltd.; [2019] 415 ITR 294 (Bom.) Date of order: 26th February,
2019 A.Y.: 2008-09

 

Appeal to High Court – Territorial
jurisdiction – Sections 116, 120, 124, 127, 260A and 269 of ITA, 1961 –
Territorial jurisdiction of High Court is not governed by seat of the AO –
Appeal would lie to High Court having jurisdiction over place where Tribunal
which passed order is situated

 

In this case, the
Bangalore Bench of the Tribunal had passed an order on 30th July,
2015. On 8th September, 2015, an order was passed u/s 127 of the
Income-tax Act, 1961 transferring the respondent-assessee’s case from an
Assessing Officer (AO) at Bangalore to an AO at Pune. On the basis of the place
of the new AO, the Revenue filed an appeal against the order of the Tribunal in
the Bombay High Court. The assessee’s advocate raised a preliminary objection
about the maintainability of the appeal before the Bombay High Court.

 

The Bombay High
Court accepted the assessee’s plea and held as under:

 

‘(i)   A bare reading of sections 116, 120, 124,
127, 260A and 269 of the Income-tax Act, 1961 establishes that Chapter XIII of
the Act would be applicable only to the income-tax authorities under the Act as
listed out in section 116 thereof. Thus, it follows that the provisions of
sections 120, 124 and 127 of the Act will also apply only to the authorities
listed in section 116 of the Act. The Tribunal and the High Court are not
listed in section 116 of the Act as income-tax authorities under the Act.

 

(ii)   The jurisdiction of the court which will hear
appeals from the orders passed by the Tribunal would be governed by the
provisions of Chapter XX of the Act which is a specific provision dealing with
appeals, amongst others to the High Court. In particular, sections 260A and 269
of the Act when read together would mean that the High Court referred to in
section 260A of the Act will be the High Court as defined in section 269, i.e.,
in relation to any State, the High Court of that State. Therefore, the seat of
the Tribunal (in which State) would decide jurisdiction of the High Court to
which the appeal would lie under the Act.

 

(iii)   The High Court to which the appeal would lie
is not governed by the seat of the Assessing Officer. The words “all
proceedings under this Act” in section 127 have to be harmoniously read with
the other provisions of the Act and have to be restricted only to the
proceedings under the Act before the authorities listed in section 116 of the
Act. Thus, a harmonious reading of the various provisions of law would require
that the appeal from the order of the Tribunal is to be filed to the Court
which exercises jurisdiction over the seat of the Tribunal.

 

(iv)  Accordingly, the Bombay High Court did not
have jurisdiction to entertain appeals u/s 260A of the Act in respect of orders
dated 30th July, 2015 passed by the Bangalore Bench of the
Tribunal.’

 

A ‘RESIDENTIAL HOUSE’ FOR SECTIONS 54 AND 54F

ISSUE FOR CONSIDERATION

An assessee, whether an individual or an
HUF, is exempted u/s 54 of the Income-tax Act from capital gains arising from
the transfer of a long-term capital asset, being a residential house, on the
purchase or construction of a residential house within the specified period.
Similar exemption is granted u/s 54F of the Act for capital gains arising from
the transfer of any long-term capital asset, not being a residential house, on
the purchase or construction of a residential house, within the specified
period and subject to other conditions as provided therein. One of the
essential conditions for availing the exemption under both these provisions is
that the house purchased or constructed should be a ‘residential house’.

 

Quite often, an issue arises as to whether
the exemption can be availed when the new property purchased or constructed,
though approved and referred to as a residential house, has been used for
non-residential or commercial purposes. Such issues arise in implementation of
sections 54 and 54F, including for compliance with conditions that apply
post-exemption. The issue may arise even where one is required to determine the
nature of premises under transfer, for ascertaining the application of sections
54 or 54F, which are believed to be mutually exclusive, that call for
compliance with
different conditions.

 

The Hyderabad bench of the Tribunal has held
for the purposes of section 54F that the new house constructed for residential
use, consisting of all the required amenities, accordingly would not lose its
character of a residential house even if it was used for some commercial
purposes. As against this, the Delhi bench of the Tribunal has held that the
existing residential house which was used by the assessee as his office would
not be taken into consideration while determining whether the assessee owned
more than one residential house as on the date of transfer of the original
asset while applying the provisions of section 54F.


THE N. REVATHI CASE

The issue
first came up for consideration of the Hyderabad Bench of the Tribunal in the
case of N. Revathi vs. ITO 45 taxmann.com 30 (Hyderabad – Trib.).
In this case, the assessee claimed the exemption u/s 54F on transfer of a
long-term capital asset, not being a residential house, on utilisation of the
net consideration in constructing a residential building over the plot of land
owned by her jointly with her sister for assessment year 2007-08. The building
consisted of ten flats, five each belonging to the assessee and her sister.
Since the AO was of the view that the exemption could be claimed only for one
flat, he deputed the Inspector to make a spot inquiry for verifying the
assessee’s claim. Upon verification, it was also found that the said building
was used for running a school by the assessee and her friend and it had
classrooms, a big hall and a play area for children in the cellar of the
premises. The exemption u/s 54F was denied by the AO on the ground that the
building constructed was not a residential house. While passing an ex parte
order on account of non-appearance on the part of the assessee, the CIT (A)
concurred with the view of the AO by holding that the term ‘residential’
clearly implied usage as a ‘home’.

 

Before the Tribunal, it was argued on behalf
of the assessee that the Inspector, while submitting his report on 23rd
December, 2009, had categorically stated that the school had started
functioning six months earlier. Therefore, it implied that no school was
functioning in the said residential building during the relevant assessment
year.

 

The Tribunal held that only because the
building was used as a school could not change the nature and character of the
building from residential to commercial; even a residential building could be
used as a school or for any other commercial purpose; the relevant factor to
judge was whether the construction made was for residential purpose or for
commercial purpose; if the building had been constructed for residential use
with all amenities like kitchen, bathroom, etc., which were necessary for
residential accommodation, then even if it was used as a school or for any
other commercial purpose, it could not lose its character as a residential
building. However, it further held that if the construction was made in such a
way that it was not normally for residential use but for purely commercial use,
then it could not be considered to be a residential house; the primary fact
which was required to be examined was whether the building had been constructed
for residential use or not, a fact that could be verified from the approved
plan and architectural design of the building.

 

As the approved plan of the building
constructed by the assessee was not brought on record, the Tribunal remitted
the matter back to the file of the AO to conduct an inquiry to find out the
exact nature of construction, i.e., whether the said building was constructed
for residential use or for commercial use. The AO was directed to allow the
exemption if it was found that the building had been constructed for
residential use with all amenities which were necessary for a residential
accommodation. Insofar as the allowability of the exemption with respect to
more than one flat was concerned, the Tribunal decided the issue in favour of
the assessee.

 

THE SANJEEV PURI CASE

The issue, thereafter, came up for
consideration of the Delhi Bench of the Tribunal in the case of Sanjeev
Puri vs. DCIT 72 taxmann.com 147 (Delhi – Trib.).

 

In this case (assessment year 2010-11) the
assessee, who was a senior advocate, owned three different properties as
follows:

(i)   E-549A, which was used for residential
purposes;

(ii) E-575A, used
as office for conducting the legal profession; and

(iii)  Gurgaon flat which was still under
construction.

 

The assessee sold the rights in the
under-construction Gurgaon flat which resulted in long-term capital gains of
Rs. 1,48,23,645. Proceeds from the aforesaid sale were invested in purchase of
a new residential house for which the assessee claimed an exemption u/s 54F of
the Act. The exemption claimed u/s 54F was denied by the AO on the ground that
the assessee on the date of transfer of the rights held more than one
residential house, namely, E-549A and another at E-575A, holding that the
latter was also a residential property and, therefore, the assessee owned more
than one residential house at the time of transfer. He held that a residential
property could not be used as an office and that there was no distinction
between the ‘type’ of the property and its ‘actual use’. In other words, the
actual use of E-575A for commercial purposes did not make the premises
non-residential. The CIT (A) upheld the view of the AO and confirmed the
disallowance.

 

Before the Tribunal, it was argued by the
assessee that the house at E-575A was not used for residential purposes and was
put to use for the purposes of his profession being carried on by the assessee
from the said premises; holding the said property to be residential house
merely on the basis that the same was classified as residential property as per
municipal laws and in the registered sale deed executed at the time of purchase
of such property and disregarding the actual use thereof for professional
purposes, was not justified.

 

The Revenue argued before the Tribunal that
the manner of the construction would decide the nature of the house, as to
whether it was residential or commercial. The usage of the property was
immaterial if the property was shown as residential on the records of the
corporation. The capability of the premises for use as a residential house was
enough and it was not necessary to reside there. Therefore, it was claimed that
the exemption was rightly denied on the basis of the fact that the property was
classified as residential property as per municipal laws and in the registered
sale deed executed at the time of purchase of such property, disregarding the
actual use thereof for professional purposes.

 

The Tribunal
held that for availing deduction u/s 54F, the test to be applied would be that
of the actual use of the premises by the assessee during the relevant period.
In other words, it did not make a difference whether the property had been
shown as residential house on the records of the government authority but it
was actually used for non-residential purpose. The actual usage of the house by
the assessee would be considered while adjudicating upon the eligibility of exemption
u/s 54F. Accordingly, the AO was directed to allow the exemption u/s 54F as
claimed by the assessee for the reason that E-575A was used for commercial
purposes, i.e., non-residential purposes, and therefore the assessee could not
be held to have held more than one residential premises.

 

OBSERVATIONS

The primary issue under consideration is the
basis on which a particular house should be recognised as a residential house,
i.e., whether the premises by its plans and approval and its design should be a
residential house, or whether it should have been used as a residential house,
or whether both these conditions should have been satisfied. While the
Hyderabad Bench of the Tribunal has considered the nature of the house, i.e.,
how it has been built and how it has been classified in the records of the
local authorities as the basis, the Delhi Bench of the Tribunal has considered
the actual usage of the premises as the basis for determination.

 

The provisions of sections 54 and 54F use
the term ‘residential house’, but without defining it. One possibility is to
apply a common parlance test to understand the meaning of such term, which has
not been defined expressly under the Act. It should be attributed a meaning
supplied to it by a common man, i.e., a meaning accorded to the term in the
popular sense. In that sense, a house is considered to be a residential house
when it has all the facilities which makes that house capable of residing in,
i.e., facilities for living, cooking and sanitary requirements, when its
location is in a residential area, when it has been recognised as a residential
house by the local authorities for the purpose of levying different types of
taxes. The house satisfying these conditions, not necessarily all of them, can
be regarded as a residential house irrespective of the purpose for which that
house has been put to use, unless it is found that it was always intended to be
used for non-residential purposes and it was shown to be a residential house
only for the purpose of availing the benefit of exemption.

 

A useful reference can be made to the
observations of the Delhi High Court in the case of CIT vs. Purshottam
Dass 112 Taxman 122 (Delhi) for understanding the meaning of the term
‘residential house’. In this case, the High Court was dealing with the issue of
eligibility of exemption granted under erstwhile provisions of section
23(1)(b)(ii), which was available only in respect of ‘residential unit’. The
relevant observations of the High Court in this regard are reproduced below:

 

Question whether a particular unit is
residential or not is to be determined by taking into account various factors,
like, the intention of the constructor at the time of construction, intended
user, actual user, potentiality for a different user and several other related
factual aspects. The provision only stresses on erection of a building
comprising of residence(s) during a particular period.

 

In a given case, the constructor may have
constructed a particular unit as the residential unit, but to avoid deterioration
on account of non-user, may have temporarily let out for office purposes. There
may be a case where for some period of a particular assessment year, the
building has been used for residential purposes and for the residual period for
office purposes. There may be another case when during the period of five years
referred to in the provision for three years building is used for residential
purposes and for balance period for office purposes. Can it be said in the
above three contingencies, the unit ceases to be a residential unit for some
periods? These factual aspects have great relevance while adjudicating the
question whether the exemption is to be allowed. We may state that user is one
of several relevant factors and not the conclusive or determinative one. The
intention of constructor at the time of erection is one of the relevant
factors, as stated above. If intention at the time of erection was use for
residential purposes, it is of great relevance and significance.

 

In view of these observations, the High
Court allowed the exemption as claimed u/s 23(1)(b)(ii), on the ground that the
construction of the house was made for residential purpose and in a residential
area though there was temporary non-use as residence and, consequently,
temporary use for office purposes. Thus, one of the important criteria which is
required to be considered is the intention of the assessee while purchasing or
constructing a house. If the intention was to use the house as a residential
house at that point in time, then the subsequent usage of that house for a
non-residential purpose for a temporary period should not disqualify that
assessee from claiming the exemption.

 

Reference can also be made to the definition
of a ‘residential unit’ as provided in section 80-IBA, though it has restricted
applicability only for that section. This definition is reproduced below:

 

‘residential unit’ means an independent
housing unit with separate facilities for living, cooking and sanitary
requirements, distinctly separated from other residential units within the
building, which is directly accessible from an outer door or through an
interior door in a shared hallway and not by walking through the living space
of another household.

 

In this definition also, importance has been
given to the structure of the unit, rather than the usage of the unit.

 

Further, a usage test may not help in
several cases, like in a case where the house has not been put to any use at
all, or a case where the house has been used for both residential as well as commercial
purposes, or a case where the house has been used for different purposes over
different periods. In such cases, it will be difficult to determine the nature
of the house for the purpose of allowing the exemption u/s 54 or 54F. However,
again, the intention may play an important role; commercial premises purchased
with the intention to use them for residential purposes may qualify to satisfy
the test of the provisions.

 

Importantly, the erstwhile provision of
section 54 as applicable prior to A.Y. 1983-84 was materially different from
its present provision. Under the erstwhile provision, the exemption was
available only when the house property was purchased or constructed by the
assessee for the purpose of his own residence or of the parents. This condition
was omitted by the Finance Act, 1982 with effect from A.Y. 1983-84. The
expression ‘the assessee has within a period of one year before or after
that date purchased, or has within a period of two years after that date
constructed, a house property for the purposes of his own residence’ was
substituted by the expression ‘the assessee has within a period of one year
before or after the date on which the transfer took place purchased or has
within a period of three years after that date constructed, a residential
house’. Circular No. 346 dated 30th June, 1982 explained the
reason for this change as follows:

 

The conditions of self-occupation of the
property by the assessee or his parents before its transfer and the purchase or
construction of the new property to be used for the residence of the assessee
for the purposes of exemption of capital gains created hardships for assessees.
This was usually due to the fact of employment or business of the assessee at a
place different from the place where such property was situated.

 

Thus, the fact that the assessee cannot
always occupy the house for his own residential purpose has been recognised
while relaxing the condition for claiming the exemption. In such a case, the
exemption cannot be denied merely because the residential house has been let
out and the tenant has used it for non-residential purpose.

 

In the case of Dilip Kumar and Co.
(TS-421-SC-2018), it has been held that the notification conferring an
exemption should be interpreted strictly and the assessee should not be given
the benefit of ambiguity. However, the Delhi High Court, in the case of Purshottam
Dass (Supra), has considered this aspect. In this case, the Revenue had
also argued that the exemption provisions or exception provisions have to be
construed strictly and it should be construed against the subject in case of
ambiguity. Reliance was placed upon the decisions of the Supreme Court in the
case of Novopan India Ltd. vs. CCE JT 1994 (6) SC 80; CCE vs. Parle
Exports (P) Ltd. 1989 (1) SCC 345; and Union of India vs. Wood
Papers Ltd. 1990 (4) SCC 246. With regard to this contention, the High
Court held that the language with which the case at hand was concerned was
clear and unambiguous and, therefore, there was no need for seeking the intention
and going into the question whether a strict or liberal interpretation was
called for.

 

The better view is that a house, which is
otherwise a residential house by its nature, cannot cease to be a residential
house merely on the ground that it has been used for non-residential purpose,
unless it is found that the intention of the assessee was never to put that
house for residential use. This principle should equally apply while
determining the number of houses owned by the assessee as on the date of transfer
of the original asset while applying the proviso to sub-section (1) of section
54F without any exception. Two diagonally opposite views may not be taken while
interpreting the same expression ‘residential house’ used at two different
places in the same section, unless warranted by the rule of beneficial
interpretation, where two views are possible.

 

It is
interesting to see that the assessee in both the cases, in either of the
situations, has been allowed the exemption by the Tribunal, perhaps indicating
that the benefit of the exemption should not be denied by laying undue emphasis
on the approval by the authorities and the use thereof. As long as the assessee
is seen to have complied with the other conditions, the benefit under the
beneficial provisions should be granted and not denied. Accepting this would
even be the best view.

 


THE FINANCE (No. 2) ACT, 2019

THE FINANCE ACT, 2019

Mr. Piyush Goyal, the eminent chartered accountant, in his capacity as
Finance Minister presented a very bold Interim Budget of the Narendra Modi
government on 1st February, 2019. He tried to give benefits to
farmers, the poor, the unorganised sector, salaried employees and the
middle-class families. The Interim Budget was unique as it gave relief to
certain deserving persons in respect of the income tax payable by them in the
financial year beginning from 1st April, 2019. No Finance Minister
in the past has given any concession in the direct tax provisions in an Interim
Budget. With this Interim Budget, the Finance Act, 2019 was passed in February,
2019 and received the assent of the President on 21st February,
2019.

 

BENEFITS TO SALARIED EMPLOYEES AND MIDDLE
CLASS FAMILIES

While delivering
the Interim Budget, the Finance Minister stated that as per convention the main
tax proposals would be presented in the regular budget. However, he pointed out
that small taxpayers, especially the middle class, salary earners, pensioners
and senior citizens, need certainty in their minds at the beginning of the year
about their taxes. He said that while the existing rates of income tax would
continue for the financial year 2019-20, the following amendments have been
made by the Finance Act, 2019 for giving benefits to salaried employees and
middle-class families; these benefits will be available in the computation of
income and in the taxes payable on income for the financial year commencing on
1st April, 2019.

 

Salary income: In the last Budget the provision for allowing
standard deduction of Rs. 40,000 was made in place of the earlier provision for
allowance for reimbursement of medical expenses and transport allowance. This
standard deduction is now increased to Rs. 50,000 w.e.f. 1st April,
2019. This will benefit all salaried employees and pensioners.

 

House
property income: At present an individual is
entitled to claim exemption in respect of one self-occupied house property. But
from 1st April, 2019 he will be entitled to claim exemption in
respect of two residential houses. Therefore, if an individual owns two or more
houses, which are not let out, he can claim exemption in respect of two
residential houses of his choice. In respect of houses in excess of two which
are not let out, he will have to pay tax on the basis of notional income.

 

Properties
held as stock-in-trade: In the case of
assessees holding house properties as stock-in-trade, i.e., builders,
developers and persons dealing in real estate, the Finance Act, 2017 had
provided that such assessees would have to pay tax on the basis of notional
income of the house property which is not let out after one year from the date
of completion of construction. By an amendment of section 23(5) of the Income
tax Act, it is now provided that no tax will be payable in respect of the house
properties which are not let out for the first two years after the date
of completion of the construction.

 

Interest on
housing loans: Section 24 of the Income-tax Act
at present provides for deduction of interest (subject to a maximum of Rs. 2
lakhs) paid in respect of one house which is claimed to be self-occupied. This
provision is now amended to provide that this limit of Rs. 2 lakhs shall apply
in respect of two houses which are claimed to be for self-use and not
let out. Considering the present level of prices of real estate, when the
benefit of exemption to self-occupied houses is extended to two houses, the
above limit of Rs. 2 lakhs for deduction of housing loans for two such houses
should have been enhanced to
Rs. 5 lakhs.

 

Exemption of
capital gains: Section 54 of the Act provides
for exemption in respect of long-term capital gains on sale of any residential
house by an individual or HUF. This exemption is available if the assessee
sells any residential house and reinvests the capital gain in the purchase of
another residential house within two years of sale, or constructs such residential
house within three years of the sale. This section is now amended, effective
from the financial year 2019-20, to provide that if the long-term capital gain
does not exceed Rs. 2 crores the individual or HUF can purchase or construct two
houses within the prescribed time limit to claim the exemption from tax. It is
also provided that if this benefit is claimed by the individual or HUF in any
assessment year, he cannot claim a similar benefit in any other year later on.
However, if the individual or HUF subsequently sells the residential house, the
benefit u/s 54 will be available if the capital gain is invested in the
purchase or construction of one residential house during the specified period.

 

Benefit for
affordable housing projects: At present section
80IBA provides for exemption in respect of income of the assessee who is
developing and building affordable houses. This is available if such a housing
project is approved between 1st June, 2016 and 31st
March, 2019. To encourage this activity, it is now provided that the benefit of
this exemption u/s 80IBA can be claimed if such a housing project is approved
between 1st June, 2016 and 31st March, 2020.

 

Rebate in
computing income tax: Section 87A of the
Income-tax Act provides that if the total income of a resident individual does
not exceed Rs. 3,50,000 he shall be entitled to a deduction from tax on his
total income of Rs. 2,500, or the actual tax payable on such income, whichever
is less. This section is now amended to provide that if the total income of an
individual does not exceed Rs. 5 lakhs, he shall be entitled to rebate of Rs.
12,500, or the actual tax payable on such income, whichever is less. This
amendment is effective from the financial year 2019-20. It may be noted that
the above benefit of tax rebate is available u/s 87A only to
individuals. An HUF or AOP will not get this benefit.

 

Tax deduction
at source: Tax is deducted at source (TDS) at
10% if the interest receivable on bank / post office deposits exceeds Rs.
10,000 in a financial year. By an amendment of section 194A of the Act, the
threshold limit for TDS on such interest is increased from Rs. 10,000 to Rs.
40,000, effective from 1st April, 2019. This will benefit small
depositors and the non-working spouse who will not suffer TDS in respect of
interest from bank / post office deposits if such interest is less than Rs.
40,000.

 

Similarly, u/s
194-I, tax is required to be deducted from rent paid by the tenant to the
specified assessee at the rate of 10% if the total rent for a financial year is
more than Rs. 1,80,000. This threshold limit has been increased to Rs. 2,40,000 from 1st April, 2019. Thus, no tax will deductible if
the yearly rent is less than Rs. 2,40,000 from 1st April, 2019.

 

THE FINANCE (No. 2) ACT, 2019

After the recent
General Elections, Ms Nirmala Sitharaman took charge as the first lady Finance
Minister of the country and presented her Budget to Parliament on 5th
July, 2019. The Finance (No. 2) Bill, 2019 was presented with the Budget and
was passed in July, 2019. The Finance (No. 2) Act, 2019 received the assent of
the President on 1st August, 2019. Some of the important provisions
of this Act are discussed in this article. After the above Act was passed, the
President promulgated ‘The Taxation Laws (Amendment) Ordinance, 2019’ on 20th
September, 2019 to further amend the Income-tax Act and the Finance (No. 2)
Act, 2019. Some of the important provisions of this Act and the Ordinance are
discussed in this article.

 

Rates of
taxes

The slab rates of
taxes for A.Y. 2020-21 (F.Y. 2019-20) for an individual, HUF, AOP, etc., are
the same as in A.Y. 2019-20. Similarly, the rates of taxes for firms,
co-operative societies and local authority for A.Y. 2020-21 are the same as in A.Y.
2019-20. However, in the case of a domestic company the rate of tax will be 25%
if the total turnover or gross receipts of the company in F.Y. 2017-18 was less
than Rs. 400 crores. In A.Y. 2019-20 the limit for total turnover or gross
receipts for this rate was Rs. 250 crores for F.Y. 2016-17. Thus, about 99% of
domestic companies will now pay tax at the rate of 25%. Other larger companies
will pay tax at the rate of 30%.

 

The existing rates of surcharge on income tax will continue to be levied
on companies, firms, co-operative societies and local authorities. However, the
rates of surcharge (S.C.) in cases of individuals, AOPs, HUFs, BOIs, trusts,
etc. (residents and non-residents) have been revised as under:

 

 

Total income

Existing rate of S.C.

Rate of S.C. for A.Y. 2020-21
(F.Y.2019-20)

1

Up to Rs. 50 lakhs

Nil

Nil

2

Rs. 50 lakhs to Rs. 1 crore

10%

10%

3

Rs. 1 crore to Rs. 2 crores

15%

15%

4

Rs. 2 crores to Rs. 5 crores

15%

25%

5

Rs. 5 crores and above

15%

37%

 

Thus, the
super-rich individuals, HUFs, AOPs, BOIs, Trusts, etc., will now pay more tax
if their income exceeds Rs. 2 crores. While proposing to levy this additional
surcharge on super-rich individuals and others, the Finance Minister stated in
para 127 of her Budget speech:

 

‘In view of
rising income levels, those in the highest income brackets need to contribute
more to the nation’s development. I, therefore, propose to enhance surcharge on
individuals having taxable income of Rs. 2 crores to Rs. 5 crores and Rs. 5
crores and above so that the effective tax rates for these two categories will
increase by around 3% and 7%, respectively.’

 

The impact of the above enhanced super surcharge was felt by many of the
Foreign Institutional Investors (FPI) who are assessed in the status of AOPs.
There was large-scale protest by them. In order to alleviate the tax burden in
such cases and for others who pay tax at special rates u/s 111A and 112A, the
Central government issued a press note on 24th August, 2019 announcing
that this additional super surcharge will not be payable in the following
cases… in order to give effect to this announcement, the ordinance dated 20th
September, 2019 has made the required amendments in the First Schedule to
the Finance (No. 2) Act, 2019:

 

(i)    Capital gains on transfer of equity shares
in a company, redemption of units of an equity-oriented M.F. and units of a
business trust as referred to in section 111A and 112A.;

(ii)    Capital gains tax payable on derivatives
(futures and options) in the case of Foreign Institutional Investors (FPI)
which are taxable at special rates u/s 115AD;

(iii)   In the case of foreign companies there is no
change in the rates of taxes and surcharge. In the cases to which sections
92CE(2A), 115O, 115QA, 115R, 115TA or 115TD apply, the rate of S.C. will
continue to be 12%.

(iv)   The rate of health and education cess at 4%
of total tax will continue as at present.

 

Corporate
taxation

The ordinance dated
20th September, 2019 has amended certain provisions of the Income-tax
Act effective from A.Y. 2020-21 (F.Y. 2019-20). It is clarified in the press
note dated 20th September, 2019 that these amendments are made in
order to promote growth and investment. These amendments are as under:

 

Section 115BA This section provides for tax on income of
certain domestic companies. The taxation at the rate of 25% is at the option of
the company – if specified tax incentives are not claimed. Now, section 115BAB
has been inserted from A.Y. 2020-21 giving similar tax concession to certain
manufacturing companies. Therefore, it is now provided that where the company
exercises the option u/s 115BAB, the option exercised u/s 115BA will be
withdrawn.

 

Section
115BAA This is a new section inserted effective
from A.Y. 2020-21 (F.Y. 2019-20). It provides that the tax payable by a
domestic company, at its option, shall be 22% plus applicable surcharge and
cess if such company satisfies the following conditions:

(a)   The Company does not claim any deduction u/s
10AA, 32(1)(iia), 32AD, 33AB, 33ABA, 35(1)(ii), (iia),(iii), 35(2AA), 35(2AB),
35AD, 35CCC, 35CCD or any of the provisions of chapter VIA under the heading ‘C
– deductions in respect of certain incomes’ excluding section 80JJAA;

(b)   The company does not claim deduction for
set-off of any carried forward loss which is attributable to deductions under
the above sections;

(c)   The company will be able to claim
depreciation u/s 32, excluding 32(1)(iia), which is determined in the
prescribed manner;

(d)   The company has to exercise the option for
the lower rate of 22% in the prescribed manner before the due date for filing
return of income u/s 139(1) relevant to A.Y. 2020-21. The option once exercised
will be valid for subsequent years. Further, the company cannot withdraw the
option once exercised in any subsequent year.

 

It may be noted
that section 115JB is also amended, effective A.Y. 2020-21, to provide that
section 115JB will not apply to a company which exercised the option under the
new section 115BAA.

 

The companies which
are engaged in trading activities, letting out of properties, rendering
services and other similar activities may find this concession in rate of tax
attractive if they are not claiming deductions under the sections stated in (a)
above.

 

Section
115BAB This is also a new section inserted from
A.Y. 2020-21 (F.Y. 2019-20). It provides that the tax payable by a
manufacturing domestic company, at the option of such company, shall be at the
rate of 15% plus applicable surcharge and cess if the company satisfies the
following conditions:

 

(i) The company
should be set up and registered on or after 1st October, 2019 and
should commence manufacturing on or before 31st March, 2023 and

– is not formed by
splitting up, or reconstruction, of a business already in existence. However,
this condition will not apply to reconstruction or revival of a company u/s
33B;

– it does not use
any machinery or plant previously used for any purpose.

However, this
condition will not apply to machinery or plant previously used outside India if
the conditions stated in Explanation – 1 in the section are satisfied. Further,
by Explanation 2, concession is given if the value of the old plant and
machinery used by the company does not exceed 20% of the total value of the
plant and machinery;

– The company
should not use any building previously used as a hotel or convention centre;

(ii)    The company should not be engaged in any
business other than the business of manufacture or production of any article or
thing. Further, the company has to ensure that the transactions of purchase,
sales, etc., are entered into at arm’s length prices;

(iii)   The total income of the company should be
computed without any deduction u/s 10AA, 32(1)(iia), 32AD, 33AB, 33ABA,
35(1)(2AA)(2AB)(iia)/(iii), 35AD, 35CCC, 35CCD, or under any provisions of
chapter VI A other than the provisions of section 80JJA;

(iv)   The option u/s 115BAB for concessional rate
is to be exercised in the first return to be submitted after 1st
April, 2020 before the due date u/s 139(1). This option once exercised cannot
be withdrawn.

 

It may be noted
that the provisions of section 115JB will not apply to a company which
exercises the option under this new section 115BAB. This new section will
encourage investment in new companies engaged in manufacture of goods and
articles in India.

 

TAX DEDUCTION AT SOURCE

The existing
provisions for TDS will continue. However, there are some modifications in
sections 194-A and 194-I made by the Finance Act, 2019 as discussed earlier.
Further, the following modifications and additions are made by the Finance (No.
2) Act, 2019:

 

Section 194
I-A It provides for TDS at the rate of 1% when
payment of consideration is made at the time of purchase of immovable property.
The term ‘consideration for immovable property’ is not defined at present. This
section is now amended w.e.f. 1st September, 2019 to provide that
the consideration for immovable property will include charges in the nature of
club membership fees, car parking fees, electricity and water facility fees,
maintenance fees, advance fees or any other charges of similar nature, which
are incidental to the transfer of the immovable property. This deduction of 1%
tax will have to be made for payment made on or after 1st September, 2019.

 

Section 194M: A new section 194M has been inserted in the Income-tax Act with
effect from 1st September, 2019. At present, any individual or HUF,
not liable to tax audit, is not required to deduct tax from payments made to a
contractor, commission agent or a professional u/s 194C, 194H or 194J. It is
now provided in section 194M that if any individual or HUF makes payment for a
contract to a contractor, commission or brokerage or fees to a professional of
a sum exceeding Rs. 50 lakhs, in the aggregate in any financial year, tax at
the rate of 5% shall be deducted at source. This provision will apply even if
the payment is for personal work. The individual / HUF governed by section 194M
will not be required to obtain TAN for this purpose. The individual / HUF can
use his PAN for this purpose. This provision for TDS will come into force from
1st September, 2019 and will cover all payments made in F.Y.
2019-20.

 

Section 194N: A new section 194 N has been inserted w.e.f. 1st
September, 2019 which provides that a banking company, co-operative bank or a
post office shall deduct tax at source at 2% in respect of cash withdrawn by
any account holder from one or more accounts with the bank / post office in
excess of Rs. 1 crore in a financial year. This section does not apply to
withdrawal by any government, bank, co-operative bank, post office, banking correspondent,
white label ATM operators and such other persons as may be notified by the
Central government. This limit of Rs. 1 crore will apply to all accounts of a
person in any bank, co-operative bank or post office. Hence, if a person has
accounts in different branches of the same bank, total cash withdrawals in all
these accounts will be considered for this purpose. This TDS provision will
apply to all persons, i.e., individuals, HUFs, firms, companies, etc., engaged
in business or profession, as also to all persons maintaining bank accounts for
personal purposes. Thus, there will be no deduction of tax up to Rs. 1 crore.
This TDS provision applies on amounts drawn in excess of Rs. 1 crore in a
financial year. The provision is effective from 1st September, 2019.
Therefore, if a person has withdrawn cash of more Rs. 1 crore in the F.Y.
2019-20, tax of 2% will be deductible on or after 1st September,
2019. This provision has been made in order to discourage cash withdrawals and
promote digital economy.

 

It may be noted
that u/s 198 it is now provided that the tax deducted u/s 194N will not be
treated as income of the assessee. If the amount of this TDS is not treated as
income of the assessee, credit for this TDS amount will not be available to the
assessee u/s 199 read with Rule 37BA. If credit is not given, this will be an
additional tax burden on the assessee. It may be noted that by a press release
dated 30th August, 2019 the CBDT has clarified that if the total
cash withdrawal from one or more accounts with a bank / post office is more
than Rs. 1 crore up to 31st August, 2019, TDS will be deducted from
cash withdrawn on or after 1st September, 2019 only.

 

Section
194DA: Section 194DA, providing for TDS in
respect of payment for life insurance policy has been amended w.e.f. 1st
September, 2019. At present the insurance company is required to deduct tax at
1% of the payment to a resident on maturity of life insurance policy if such
payment is not exempt u/s 10(10D). The present provision for TDS at 1% applies
to gross payment made by the insurance company although the assessee is
required to pay tax on the net amount after deduction of premium actually paid.
In order to mitigate the hardship, this section now provides that tax at the
rate of 5% shall be deducted at source w.e.f. 1st September, 2019,
from the net amount, i.e., actual amount paid by the insurance company on
maturity of policy after deduction of actual premium paid on the policy.

 

EXEMPTIONS AND DEDUCTIONS

Section
10(4C): A new section 10(4C) is inserted in the
Income-tax Act after the press release dated 17th September, 2018.
Under this announcement the Central government had given exemption from tax in
respect of interest paid to a non-resident or a foreign company by an Indian
company or a business trust on Rupee-denominated bonds. Under the new section
10(4C), such interest received by the non-resident or foreign company during
the period 17th September, 2018 to 31st March, 2019 will
be exempt from tax.

 

Section
10(12A): At present, payment from the National
Pension System Trust to an assessee on closure of his account or on opting out
of the pension scheme u/s 80CCD to the extent of 40% of the total amount
payable to him is exempt u/s 10(12A). This limit for exemption is now increased
to 60% of the amount so payable to the assessee by amendment of section 10(12A)
effective from F.Y. 2019-20.

 

Section 80C: In order to enable Central government employees to have more
options of tax savings investments u/s 80C, this section has been amended to
provide that such employees can now contribute to a specified account of the
pension scheme referred to in section 80CCD – (a) for a fixed period of not
less than three years, and (b) the contribution is in accordance with the
scheme as may be notified. For this purpose, the specified account means an
additional account referred to in section 20(3) of the Pension Fund Regulatory
and Development Authority Act, 2013.

 

Section
80CCD: Section 80CCD(2) has been amended. The
Central government has enhanced its contribution to the account of its
employees in the National Pension Scheme (NPS) from 10% to 14% by a
notification dated 31st January, 2019. To ensure that such employees
get full deduction of this contribution, the limit of 10% in section 80CCD(2)
has been increased from F.Y. 2019-20 to 14%. For other employees the old limits
of 10% will continue.

 

Section
80EEA: This is a new section that provides that
an individual shall be allowed deduction of interest payable up to Rs. 1,50,000
on loan taken by him from any financial institution for the purpose of
acquiring any residential house property. This deduction is subject to the
following conditions:

 

(a)   The individual is not eligible for deduction
u/s 80EE;

(b)   The loan has been sanctioned during the F.Y.
1st April, 2019 to 31st March, 2020;

(c)   The Stamp Duty Value of the residential house
does not exceed Rs. 45 lakhs;

(d)   The assessee does not own any other
residential house as on the date of sanction of the loan.

 

Once deduction of
interest is allowed under this section, deduction of the same interest shall
not be allowed under any other provisions of the Act for the same or any other
assessment year. It may be noted that the assessee will have the option to
claim deduction for interest up to Rs. 2 lakhs u/s 24(b) if he does not desire
to avail of the
above deduction.

 

Section
80EEB: This is also a new section inserted to
encourage purchase of electric vehicles (EV) and preserve the environment. This
section provides that an individual can claim deduction for interest up to Rs.
1,50,000 payable on loan taken by him from a financial institution for purchase
of an EV. For this purpose the loan should have been sanctioned between 1st
April, 2019 and 31st March, 2023. Once a deduction of interest is
allowed under this section, no deduction for this interest will be allowable
under any other section for the same or any other assessment year. The terms
‘Electric Vehicle’ and ‘Financial Institution’ are defined in the section. It
may be noted that this deduction is allowable to an individual only and not to
any other assessee. From the wording of this section it is evident that an
individual can claim this deduction for interest even if the electric vehicle
is purchased for his personal use.

Section 80 –
IBA: This section deals with deduction from
profits and gains from housing projects. The Finance Act, 2019 has extended the
date for approval of the project by the competent authority from 31st
March, 2019 to 31st March, 2020. However, in respect of the projects
approved on or after 1st September, 2019, some of the conditions
about the size of the project have been modified by amendment of the section as
under:

(i)    The restriction of plot area for the project
of 1,000 sq. metres which applied to only four metropolitan cities will now
apply to the cities of Bengaluru, Chennai, Delhi National Capital Region
(limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurugram, Faridabad),
Hyderabad, Kolkata and the whole of the Mumbai Metropolitan Region (specified
cities);

(ii)    The carpet area of a residential unit in the
housing project should not exceed…

– In specified
cities 60 sq. metres (as against 30 sq. metres at present);

– In other cities
90 sq. metres (as against 60 sq. metres at present).

(iii)   The Stamp Duty Valuation of a residential unit
in the housing project should not exceed Rs. 45 lakhs.

 

The above
amendments will benefit some affordable housing projects.

 

CHARITABLE TRUSTS

The provisions of
section 12AA deal with the procedure for granting registration and cancellation
of registration in the case of a public trust or institution claiming exemption
u/s 11. This section is now amended, effective from 1st September,
2019, to give the following additional powers to the Commissioner (CIT):

(i)    At the time of granting registration, the
CIT can call for necessary information or documents in order to satisfy himself
about the compliance of such requirements of any other law for the time being
in force by the trust or institution as are material for the purpose of
achieving its objects;

(ii)    Where a trust or institution has been
granted registration u/s 12A or 12AA, and subsequently it is noticed that the
trust or institution has violated the requirements of any other law which is
material for the purpose of achieving its objects and the order, direction or
decree, holding that such violation under the other law has become final, the
CIT can cancel the registration granted to the trust or institution.

 

It may be noted
this is a very wide power given to the CIT. To give an example, if a trust
governed by the Bombay Public Trust Act takes a loan from a trustee or a third
party, or sells its immovable property without obtaining the permission of the
Charity Commissioner as provided in the BPT Act, and the non-compliance or
delay in compliance with the provisions of the BPT Act is not condoned by the
Charity Commissioner and his order becomes final, the CIT can cancel the
registration u/s 12A/12AA. The consequence of such cancellation of registration
will be that the trust or the institution will be denied exemption u/s 11. In
addition, tax on accreted income u/s 115TD will be payable at the maximum
marginal rate.

 

It may be noted
that similar amendment is made in section 10(23C) effective from 1st
September, 2019. Therefore, all hospitals, universities, educational
institutions claiming exemption u/s 10(23C) will have to ensure that they
comply with any other law which is material for the purpose of achieving their
objects.

 

INTERNATIONAL FINANCIAL SERVICES CENTRE

Section
47(viia b): This section provides that any
transfer of a capital asset such as bonds, global depository receipts,
Rupee-denominated bonds of an Indian company or derivatives, made by a
non-resident through a recognised stock exchange located in the International
Financial Services Centre (IFSC) will not be treated as a transfer. In other
words no tax will be payable on
such transfer.

 

By amendment of
this section, the Central government is given power to notify similar other
securities in respect of which this exemption can be claimed. The consequential
amendment is made in section 10(4D).

 

Section 80LA: At present any unit located in an IFSC is eligible for deduction
u/s 80LA in respect of the specified business. Under the existing provision 100%
of the income of the unit from the specified business is exempt for the first
five consecutive assessment years and 50% of such income is exempt for the
subsequent five years. By amendment of this section, effective from A.Y.
2020-21 (F.Y. 2019-20), it is now provided that 100% of such income will be
exempt for ten consecutive assessment years, at the option of the assessee, out
of fifteen years beginning with the assessment year in which permission or
registration is obtained under the applicable law.

 

Section 115A: This section provides for special rate of tax for a non-resident or
a foreign company having income from dividend, interest, royalty, fees for
technical services, etc. In computing total income in such cases, deduction
under chapter VIA is not allowed from the gross total income. To give benefit
of section 80LA to the eligible unit set up in the IFSC, this section is
amended to the effect that in the case of such an eligible unit, deduction u/s
80LA will be allowed against the income referred to in section 115A. This
amendment is effective from A.Y. 2020-21 (F.Y. 2019-20).

 

Section 115-O: Under this section dividend distribution tax
(DDT) is not applicable on dividend distributed out of current income by a unit
in the IFSC deriving income solely in convertible foreign exchange on or after
1st April, 2017. By amendment of this section, effective from 1st
September, 2019, it is now provided that DDT will not be payable even if the
dividend is distributed out of the income accumulated after 1st
April, 2017 by such a unit in the IFSC.

 

Section 115R: This section provides for levy of additional
income tax (income distribution tax) by a Mutual Fund (MF). This section is now
amended, effective from 1st September, 2019 to provide that the
above income distribution tax will not be payable if such distribution is out
of income derived from transactions made on a recognised stock exchange located
in any IFSC. For this exemption, the following conditions will have to be
satisfied:

(a)   The M.F. specified u/s 10(23D) should be
located in an IFSC;

(b)   The M.F. should derive its income solely in
convertible foreign exchange;

(c)   All units in the M.F. should be beneficially
held by non-residents.

 

Section
10(15): This section provides for exemption of
interest income from specified sources. A new clause (ix) has been inserted,
effective from 1st September, 2019 to provide for exemption in
respect of interest received by a non-resident from a unit located in an IFSC
on monies borrowed by such unit on or after 1st September, 2019.

 

From the above
amendments it is evident that the government wants to encourage units to be set
up in IFSCs (e.g., Gifts City).

 

INCOME
FROM BUSINESS OR PROFESSION

Section 32: At a press conference on 23rd August, 2019 the Finance
Minister announced that on vehicles purchased during the F.Y. 2019-20
depreciation will be allowed at the rate of 30% instead of 15%. For this
purpose the I.T. Rules will be amended. It is not clear from this announcement
whether this benefit will be given for only motor cars or all other vehicles
and whether it will apply to purchase of new vehicles or to purchase of second
hand vehicles also.

 

Section 43B: This section provides that deduction for certain expenditure will
be allowed in the year in which actual payment is made. This is irrespective of
the fact that liability for the expenditure is incurred in an earlier year.
This section is amended with effect from A.Y. 2020-21 (F.Y. 2019-20) to provide
that interest on any loan or borrowing taken from a deposit-taking NBFC or
systemically important non-deposit-taking NBFC will be allowable only in the
year in which the interest is actually paid. It is also provided that in
respect of F.Y. 2018-19 or any earlier year, if the deduction for such interest
is actually allowed on accrual basis, no deduction will be allowed for the same
amount in the year in which actual payment is made.

 

Section 43D: This section provides that in the case of a scheduled bank,
co-operative bank and other specified financial institutions interest on
specified bad and doubtful debts is not taxable on accrued basis but is taxable
in the year in which the same is credited to the profit and loss account. By
amendment of this section this benefit is now extended, effective from A.Y.
2020-21 (F.Y. 2019-20), to deposit-taking NBFCs and systemically important non-
deposit-taking NBFCs.

 

CAPITAL GAINS

Section 50CA: At present the difference between the fair market value and actual
consideration is taxed in the hands of the assessee who transfers unquoted
shares, held as a capital asset, for inadequate consideration. The section 50CA
is now amended, effective from A.Y. 2020-21 (F.Y. 2019-20) to provide that this
section will not apply to any consideration received or accruing as a result of
transfer of such shares by such class of persons and subject to such conditions
as may be prescribed. The intention behind this amendment is that if the prices
of the shares are fixed by certain authority (e.g., RBI) and the assessee has
no control over fixing the price, the assessee should not suffer.

 

Section 54GB:
This section grants exemption in respect of
long-term capital gain arising from transfer of residential property if the net
consideration is invested in shares of an eligible startup company. The said
startup company has to utilise the amount so invested for purchase of certain
specified assets, subject to certain conditions. By amendment of section 54GB,
effective from A.Y. 2020-21 (F.Y. 2019-20) some of the above conditions have
been relaxed as under:

(a)   Lock-in period of holding the new asset
(computer or computer software) by the company is now reduced from five to
three years;

(b)   Benefit of section 54GB is now extended to
transfer of residential property from 31st March, 2019 to 31st
March, 2021;

(c)   The minimum shareholding and voting power
requirement in the startup company is now reduced from 50% to 25%.

 

The wording of the
amended section suggests that the above relaxations will also apply to
investments made by an assessee in a startup company prior to 31st March,
2019.

 

Section 111A: At present short-term capital gain on transfer of Units of Fund of
Funds is not eligible for concessional rate of 15% under this section. The
section is now amended, from A.Y. 2020-21 (F.Y. 2019-20) to provide that
short-term capital gain on transfer of units of Fund of Funds will be taxable
at the concessional rate of 15% plus applicable surcharge and cess.

 

INCOME FROM OTHER SOURCES

Section
56(2)(viib): Under this section, share premium
received from a resident by a closely-held company from issue of shares at a
consideration in excess of the fair market value is taxable in the hands of the
company as income from other sources. This is popularly referred to as ‘Angel
Tax’. At present this provision does not apply to investments by a venture
capital fund under the ‘Category I Alternative Investment Funds’. By amendment
of this provision, it is now provided, effective from A.Y. 2020-21 (F.Y.
2019-20) that this section will not apply to investments by Category II
Alternative Investment Funds.

 

This section
provides that the Central government can declare that the provisions of this
section shall not apply to investment by specified class or classes of persons.
By amendment of this provision it is now provided that if there is failure on
the part of the company to comply with the conditions specified in the above
notification, the company will be liable to pay the ‘Angel Tax’ as provided in
the section in the year in which there is such default. Further, the difference
between the fair market value of shares and the actual consideration received
on issue of shares will be considered as under-reported income and penalty u/s
270A will be levied on such amount.

It may be noted
that by a press release dated 22nd August, 2019 the CBDT has
clarified that the provisions of this section will not apply to startup
companies recognised by the DPIIT. CBDT has also issued a comprehensive
circular on 30th August, 2019 to clarify the assessment procedure for
such startup companies and also clarifying the circumstances when the
provisions for levy of ‘Angel Tax’ will not apply to such companies. This
indicates that the government is keen to encourage startups and may amend the
Income-tax Act to give effect to the assurances given by the Finance Minister
at the press conference on 23rd August, 2019 and at various meetings
with stakeholders.

 

Section
56(2)(x): This section provides that any sum of
money, immovable property or specified movable assets received by an assessee
for inadequate consideration, the difference between the fair market value and
the actual consideration will be taxable in the hands of the assessee. There
are certain exceptions to this provision as listed in the fourth proviso to the
section. An amendment has been made in this proviso and item XI is added to
provide that receipt from such class of persons, and subject to such conditions
as may be prescribed, will not be taxable under this section.

 

It may be noted
that the provisions of this section are now made applicable to a non-resident.
This has been provided by amendment of section 9(1)(viii). Therefore, if a
non-resident receives any money, immovable property or specified movable
property outside India on or after 5th July, 2019 for inadequate
consideration, tax u/s 56(2)(x) will be payable by the non-resident.

 

INCOME OF A NON-RESIDENT

Section 9: Section 9 of the Act deals with income deemed to accrue or arise in
India. Under the Act, non-residents are taxable in India in respect of income
that accrues or arises (including income deemed to accrue or arise) or received
in India. At present, a gift of money or property (movable or immovable)
received by a resident is taxed in the hands of the donee, subject to certain
exceptions as provided in section 56(2)(x) of the Act. However, in the case of
a non-resident (including a foreign company) who is outside India a view is
taken that such gift is not taxable as it does not accrue or arise or is
received in India and is a capital receipt. To ensure that such gifts by a
resident to a non-resident are subject to tax u/s 56(2)(x) of the Act, section
9 has been amended w.e.f. 5th July, 2019. The amendment provides in
new clause (viii), added in section 9(1), that such income is taxable u/s
56(2)(x) under the head ‘Income from Other Sources’. Thus, any sum of money
paid or transfer of any movable or immovable property situated in India on or
after 5th July, 2019 by a resident to a person outside India shall
now be taxable. In other words, section 56(2)(x) which provides for taxation of
a gift or a deemed gift where the value of the gift exceeds Rs. 50,000 will now
apply to such gift given by a resident to a non-resident. If there is a treaty
with any country, the relevant article of the applicable DTAA shall continue to
apply for such gifts as well.

 

Some of the cases
in which the above amendment will apply are considered below:

(a)   If Mr. ‘A’ (resident) who is not a relative
of Mr. ‘B’ (non-resident), as defined in section 56(2)(vii), remits more than
Rs. 50,000 as a gift to Mr. ‘B’ in a financial year, Mr. ‘B’ will be liable to
tax on this amount.;

(b)   In the above case, if Mr. ‘A’ has sold some
shares of an Indian company to Mr. ‘B’ at a price below its market value as
provided in section 56(2)(x), Mr. ‘B’ will have to pay tax on the difference
between the market value and the sale price, if such difference is more than
Rs. 50,000;

(c)   In the above case, if Mr. ‘A’ sells any
immovable property situated in India to Mr. ‘B’ at a price which is below the
Stamp Duty Valuation and the difference between the Stamp Duty Valuation and
the sale price is more than Rs. 50,000, the said difference will be deemed to
be the income of Mr. ‘B’;

(d)   It may be noted that the above amendment is
applicable to all transfers of property made on or after 5th July,
2019. Further, the amended provisions apply in all cases of transfers of
property situated in India by a resident (including an individual, HUF, AOP,
firm, company, etc.) to a non-resident person (including individual, firm, AOP,
company, etc.). In all such cases the resident will have to deduct tax at
source u/s 195 at applicable rates.

 

BUY-BACK OF SHARES

Section
115QA: This section provides for levy of
additional income tax at the rate of 20% plus applicable surcharge and cess of
the distributed income on account of buy-back of shares by an unlisted domestic
company. As a result of this, the consequential income in the hands of the
shareholder is exempt u/s 10(34A). This provision does not apply to buy-back of
shares by a listed company. This section as well as section 10(34A) are now
amended. The amendment provides that even in the case of buy-back of shares by
a listed company on or after 5th July, 2019, the above additional
income tax will be payable by the company. So far as the shareholder is
concerned, exemption u/s 10(34A) will be allowed. It may be noted that the
ordinance dated 20th September, 2019 provides that this provision
will not apply to a listed company which has made a public announcement for
buy-back of shares before 5th July, 2019 in accordance with SEBI
regulations.

 

CARRY FORWARD OF LOSSES

Section 79: The existing section 79 which restricts carry-forward and set-off
of losses in the case of companies where there is change in shareholding of
more than 51%, has been substituted by a new section 79. This new section is
more or less on the same lines as the existing one. The only change made by the
new section is that this section will not apply from A.Y. 2020-21 (F.Y.
2019-20) to a company and its subsidiary and the subsidiary of such subsidiary
in the case where the National Company Law Tribunal (NELT), on an application
by the Central government, has suspended the Board of Directors of such a
company and has appointed new directors nominated by the Central government u/s
242 of the Companies Act, 2013 and a change in shareholding has taken place in
the previous year pursuant to a resolution plan approved by NCLT u/s 242 of the
Companies Act, 2013 after affording an opportunity of hearing to the Principal
C.I.T. concerned.

 

Section
115UB: This section provides for pass-through
of income earned by Category I and II Alternate Investment Funds (AIF), except
for business income which is taxed at AIF level. Pass-through of income (other
than profit and gains from business) has been allowed to individual investors
so as to give them the benefit of lower rate of tax, if applicable.
Pass-through of losses is not permitted and these are retained at AIF level to
be carried forward and set off in accordance with chapter VI.

 

Sections
115UB(2)(i) and (ii) have been substituted and sub-section (2A) has been
inserted from A.Y. 2020-21 (F.Y. 2019-20) to provide that the business loss of
the investment fund, if any, shall be allowed to be carried forward and it
shall be set off by it in accordance with the provisions of chapter VI and it
shall not be passed on to the unit holder. The loss other than business loss,
if any, shall be regarded as loss of the unit holders. It shall, however, be
ignored for the purposes of pass-through to its unit holders, if such loss has
arisen in respect of a unit which has not been held by the unit holder for a
period of at least 12 months.

 

The loss other than
business loss, if any, accumulated at the level of investment fund as on 31st
March, 2019 shall be deemed to be the loss of a unit holder who held the unit
on 31st March, 2019 and be allowed to be carried forward for the
remaining period calculated from the year in which the loss had occurred for
the first time, taking that year as the first year and shall be set off in
accordance with the provisions of chapter VI. The loss so deemed in the hands
of unit holders shall not be available to the investment fund.

 

FILING OF INCOME TAX RETURNS

Section 139: At present, section 139(1) provides that an individual, HUF, AOP,
BOI or Artificial Juridical Person has to file the return of income if their
total income exceeds the threshold limit without giving effect to exemptions /
deductions provided u/s 10(38), 10A, 10B, 10BA and chapter VIA. By amendment of
this section from the current financial year, in case of such assessees the
return of income will have to be filed if the total income exceeds the
threshold limit before claiming the benefit of sections 10(38), 10A, 10B, 10BA,
54, 54B, 54D, 54EC, 54F, 54G, 54GA, 54GB and chapter VIA.

 

Further, from the
A.Y. 2020-21 (F.Y. 2019-20) it will be necessary for an individual, HUF, AOP,
BOI, etc., to file the return of income although their income is below the
threshold limit in the following cases:

(i)    If the person has deposited an aggregate
amount exceeding Rs. 1 crore in one or more current accounts, with one or more
banks or co-operative banks during the year. It may be noted that this
requirement includes deposits in cash or by way of cheques, drafts, transfers
by electronic means, etc.;

(ii)    If the person has incurred expenditure
exceeding Rs. 2 lakhs on foreign travel for himself or any other person during
the year;

(iii)   If the person has incurred expenditure
exceeding Rs. 1 lakh on electricity consumption during the year; or

(iv)   If the person fulfils any
other conditions that may be prescribed.

 

Section 139A:
This section provides for allotment of PAN and
has been amended effective from 1st September, 2019 to provide as
under:

(a)   It is now provided that every person
intending to enter into any transaction, as may be prescribed, shall apply for
PAN;

(b)   Every person possessing Aadhaar number who is
required to furnish or quote his PAN which has not been allotted can furnish or
quote his Aadhaar number in lieu of PAN. He shall then be allotted a PAN in the
prescribed manner;

(c)   Every person who has been allotted PAN and
who has intimated his Aadhaar number u/s 139AA(2) can furnish or quote his
Aadhaar number in lieu of his PAN;

(d)   If a person is required to quote his PAN in
any document or transaction, as may be prescribed, he has to ensure that his
PAN or Aadhaar number is duly quoted in the document pertaining to such
transaction and authenticated in the prescribed manner;

(e)   It may be noted that in section 272, which
deals with levy of penalty for non-compliance of section 139A, consequential
amendment has been made effective from 1st September, 2019.

 

The above
amendments are made for ease of compliance and inter-changeability of PAN with
Aadhaar number effective from 1st September, 2019.

 

Section
139AA: This section provides for linking of
Aadhaar number with PAN. The amendment in this section, effective from 1st
September, 2019, provides that if a person fails to intimate the Aadhaar
number, the PAN allotted to such person shall be made inoperative after the
date so notified in such manner as may be prescribed.

 

Section 140A: This section provides for payment of tax by way of self-assessment.
It has been amended effective from 1st April, 2007 to provide that
while calculating the amount of tax payable on self-assessment basis, any
relief of tax claimed u/s 89 can be deducted from the tax liability. Section 89
grants relief in tax payable when salary or allowances are paid to an employee
in advance. The consequential amendment is made in sections 143(1)(c), 234A,
234B and 234C. This amendment is only clarificatory.

 

Section 239: This section provides for a time limit for a person claiming refund
of tax. It has been amended with effect from 1st September, 2019.
Before the amendment, the provision was that, (a) the assessee claiming refund
of tax was required to file Form 30 prescribed by the I.T. Rules; and (b) such claim
for refund of tax could be made within one year from the last day of the
assessment year. Thus, claim for refund of tax could be made in respect of the
F.Y. ending 31st March, 2019 on or before 31st March,
2021. This time limit has now been reduced by one year and the requirement of
filing the prescribed Form No. 30 has been done away with by this amendment
from 1st September, 2019. Therefore, claim for refund of tax u/s 239
can be made by the assessee only within the time limit provided u/s 139. In other
words, claim for refund in respect of F.Y. 2018-19 will have to be made before
31st March, 2020.


MINIMUM ALTERNATE TAX (MAT)

At present, clause
(iih) of Explanation 1 below section 115JB(2) provides for book profits to be
reduced by the aggregate amount of unabsorbed depreciation and loss brought
forward in case of a company in respect of which an application for corporate
insolvency resolution process has been admitted by the Adjudicating Authority
u/s 7, 9 or 10 of the Insolvency and Bankruptcy Code, 2016.

 

By amendment of
this section, this benefit is extended to a company and its subsidiary and the
subsidiary of such subsidiary, where the NCLT, on an application moved by the
Central government u/s 241 of the Companies Act, 2013 has suspended the Board
of Directors of such company and has appointed new directors who are nominated
by the Central government u/s 242 of the said Act. This amendment is effective
from the A.Y. 2020-2021 (F.Y. 2019-20).

 

The ordinance dated 20th September, 2019 has amended section
115JB(1) to provide that from A.Y. 2020-21, the rate of tax on book profits
will be reduced from 18.5% to 15%.

 

Section 115JB(5A)
is also amended to provide that this section will not apply to companies opting
to be taxed u/s 115BAA and 115BAB from A.Y. 2020-21.

 

TRANSFER PRICING PROVISIONS

Section 92CD: Section 92CD(3) provides that where the assessment or re-assessment
has already been completed and modified return of income has been filed by the
assessee pursuant to an Advance Pricing Agreement (APA), then the AO has to
pass the order of assessment, re-assessment or computation of total income.
This section is now amended, effective from 1st September, 2019, to
provide that the AO can pass such revised order only to the extent of modifying
the total income of the relevant assessment year in accordance with the APA.
The consequential amendment is also made in section 246A dealing with
appealable orders before CIT (Appeals).

 

Section
92CE(a): Section 92CE(1) provides that the
assessee shall make secondary adjustment in a case where primary adjustment to
transfer price takes place as specified therein. Further, it is provided that
the said section shall not apply in cases fulfilling cumulative conditions, i.e.,
(a) where the amount of primary adjustment
made in any previous year does not exceed Rs. 1 crore; and (b) the primary
adjustment is made in respect of an assessment year commencing on or before 1st
April, 2016. Now this proviso is amended to make these two conditions
alternative. This amendment is effective from A.Y. 2018-19.

 

Section
92CE(1)(iii): This section provides that
secondary adjustment shall be applicable where primary adjustment to transfer
price is determined by an advance pricing agreement. Now, section 92CE(1)(iii)
is amended to provide that the secondary adjustment will be applicable only
where the primary adjustment to transfer price is determined by an advance
pricing agreement entered into by the assessee u/s 92CC on or after 1st
April, 2017. Further, a new proviso after section 92CE(1) has been inserted
with effect from A.Y. 2018-19 to provide that no refund of the taxes already
paid till date under the pre-amended section shall be claimed and allowed.

 

Section
92CE(2): This section
provides that the excess money available to the associated enterprise shall be
repatriated to India from such associated enterprise within the prescribed time
and, in case of non-repatriation, interest thereon is to be computed deeming
the excess money as advance to such associated enterprise. Now the said section
is amended to provide that the assessee shall be required to calculate interest
on the money that has not been repatriated. Further, an explanation has been
inserted to clarify that the excess money may be repatriated from any of the
associated enterprises of the assessee which is not resident in India in lieu
of the associated enterprise with which the excess money is available. This
amendment is effective from A.Y. 2018-19.

 

This section has
also been amended by insertion of new sub-sections (2A), (2B), (2C) and (2D) to
provide that where the excess money or part thereof has not been repatriated in
time, the assessee will have the option to pay additional income tax at the
rate of 18% on such excess money or part thereof. Such tax shall be in addition
to the computation of interest till the date of payment of this additional tax.
Further, if the assessee pays additional income tax, such assessee will not be
required to make secondary adjustment or compute interest from the date of
payment of such tax. Also, the deduction in respect of the amount on which
additional tax has been paid shall not be allowed under any other provision of
the Act and no credit of additional tax paid shall be allowed under any other
provision of the Act. This amendment is effective from 1st
September, 2019.

 

Section 286: This section provides for a specific reporting regime containing
revised standards for transfer pricing documentation and a template for
country-by-country reporting. Section 286(9)(a)(i) defines ‘accounting year’ to
mean a previous year in a case where the parent entity or alternate reporting
entity is resident in India. This definition is now amended effective from A.Y.
2017-18 and ‘accounting year’ in such a case will be the annual accounting
period with respect to which the parent entity of the international group
prepares its financial statements under any law of the country or territory of
which such parent entity is resident.

 

PENALTIES AND PROSECUTION

Section 270A:
This section provides for levy of penalty in a
case where a person has under-reported his income. The several cases of
under-reporting of income have been provided in section (2) of this section
which includes a case where no return of income has been furnished. In a case
where the person files his return of income for the first time in response to a
notice u/s 148, the mechanism for determining under-reporting of income and
quantum of penalty to be levied are not provided in this section. By amendment
of the section, effective from A.Y. 2017-18, it is now provided that where a
return of income has been filed for the first time in response to a notice u/s
148, if the income assessed is greater than the maximum amount which is not
chargeable to tax, then it will be considered that the assessee has
under-reported his income.

 

In such a case, the
amount of under-reported income shall be computed in the following manner:
(a)   In case of a company, firm or local
authority, the assessed income itself will be considered as under-reported
income;

(b)   In other cases, the excess of assessed income
over the maximum amount not chargeable to tax will be considered as
under-reported income.

 

Section
271DB: This is a new section added with effect
from 1st November, 2019 which provides that if a person who is
required to provide facility for accepting payment through the prescribed
electronic modes of payment as referred to in new section 269SU, fails to
provide such facility, a penalty of Rs. 5,000 for each day of default will be
levied. This penalty can be levied only by the Joint Commissioner. No penalty
under this section will be levied if the person concerned proves that there
were good and sufficient reasons for such failure.

 

It may be noted
that new section 269SU has been added with effect from 1st November, 2019 to
provide that every person whose turnover or gross receipts in a business
exceeds Rs. 50 crores in the immediately preceding previous year shall provide
facility for accepting payment through prescribed electronic modes.

 

Section
271FAA: This section provides for levy of a
penalty of Rs. 50,000 for default in compliance with clause (k) of section
285BA(1). Clause (K) referred to only reporting of prescribed particulars. By
amendment of this section, effective from 1st September, 2019, this
section has been made applicable to defaults in complying with reporting
requirements u/s 285BA(1)(a) to (k).

 

Section
276CC: This section empowers prosecution in the
case of wilful default to furnish return of income within the prescribed time
limit. At present, in the case of a non-corporate assessee, prosecution cannot
be initiated if the tax payable on total income, as reduced by advance tax and
TDS, does not exceed Rs. 3,000. The amendment in this section from A.Y. 2020-21
(F.Y. 2019-20) provides that such prosecution cannot be initiated if the tax
payable on the total income assessed in a regular assessment, as reduced by
advance tax and self-assessment tax paid before the end of the assessment year
and TDS, does not exceed Rs. 10,000.

      

It appears that
raising of limit from Rs. 3,000 to Rs. 10,000 is inadequate when the government
is trying to reduce litigation. This limit should have been raised to Rs. 25
lakhs.

      

It may further be
noted that by CBDT circular No. 24/2019 dated 9th September, 2019 it
has now been clarified that no prosecution u/s 276B to 276CC should ordinarily
be initiated if the amount of tax is less than Rs. 25 lakhs. In cases where the
amount of tax is less than Rs. 25 lakhs, the prosecution should be initiated
only with the prior approval of the Collegium of two CCIT / DGIT. This is a
welcome move and will result in reduction of litigation.

 

It may further be
noted that by another circular No. 25/2019 dated 9th September,
2019, the CBDT has granted further time up to 31st December, 2019
for making an application for compounding of offences under Direct Tax Laws as
a one-time measure. Normally, an application for compounding of offences can be
filed within 12 months as per the guidelines issued by CBDT. In some cases, the
assessees have not been able to make such an application. In order to reduce
litigation the CBDT, by the above circular, has granted time up to 31st December,
2019 as a one-time concession. Therefore, assessees who have not been able to
make such compounding applications till now will be able to make such
applications up to 31st December, 2019.

 

Section 201: At present section 201 provides for treating certain persons as
assessees in default for failure to deduct tax and also provides for charging
interest in such cases. From this, relaxation is provided in cases of failure
of such deduction in respect of payments, etc. made to a resident subject to
the condition that such resident payee (a) has furnished his return of income
u/s 139; (b) has taken into account such sum for computing income in such
return of income; and (c) has paid the tax due on the income declared by him in
such return of income. In such cases, it is provided that the person shall not
be deemed to be an assessee in default in respect of such non-deduction of tax.

 

The above benefit
is now extended, by amendment of sections 201 and 40(a)(i), for payments made
to non-residents effective from 1st September, 2019.

 

Section
201(3): This section provides that an order deeming
a person to be an assessee in default for failure to deduct whole or part of
the tax from a payment made to a resident shall not be made after expiry of
seven years from the end of the financial year in which payment is made or
credit is given.

 

Section 201(3) is
now amended, effective from 1st September, 2019, to provide that
such an order can be made up to:

(i)    expiry of seven years from the end of the
financial year in which payment is made or credit is given; or

(ii)    two years from the end of the financial year
in which the correction statement is delivered under proviso to section 200(3),
whichever is later.

 

OTHER AMENDMENTS

Section
2(19AA): This section gives the definition of
‘demerger’. Section 2(19AA)(iii) provides that for such demerger, the property
and liabilities of the undertaking transferred by the demerged company to the
resulting company should be at book value. The applicable Indian Accounting
Standards (Ind AS) provides that in the case of demerger, the property and
liabilities of the demerged company should be transferred at a value different
from its book value.

 

This section has
been amended from A.Y. 2020-21 (F.Y. 2019-20) to provide that in a case where
Ind AS is applicable, the property and liabilities of the demerged company can
be recorded by the resulting company at values different from the book value.

 

Rule 68B of
Second Schedule: At present the Rule provides
that sale of immovable property attached towards recovery shall not be made
after expiry of three  years from the end
of the financial year in which the order in consequence of which any tax,
interest, fine, penalty or any other sum becomes final.

 

The following
amendments have been made affective from 1st September, 2019 to
protect the interest of Revenue, especially to include those cases where demand
has been crystallised on conclusion of the proceedings:

(a)   Sub-rule 1 is amended to increase the time
limit for sale of attached property from a period of three years to seven
years; and

(b)   A new proviso has been inserted in the said
sub-rule so as to give powers to CBDT to extend the above period of limitation
by a further period of three years after recording the reasons in writing.

 

Section 206A: The existing section 206A dealing with submission of statement, in
the prescribed form to the prescribed authority, about Tax Deducted at Source
from payment of any income to a resident has been replaced by a new section
effective from 1st September, 2019. The new section is more or less
on the same lines as the old one with a few major modifications as under:

 

(i)  In the case of a bank or a co-operative bank
the threshold limit for submission of this statement for interest payment to
the resident will now be Rs. 40,000 instead of Rs. 10,000;

(ii) Earlier, the Central
government was authorised to issue a notification to require any other person
to submit a statement for TDS from other payments. This power is now given to
CBDT which will frame Rules for this purpose;

(iii) The persons required to submit these statements
can make corrections in the statement in the prescribed form.

 

Section
285BA: This section provides for furnishing of statement
of financial transactions or reportable accounts by the specified persons. This
section is amended effective from 1st September, 2019, as under:

(a) At present, CBDT has power to prescribe different values for
different specified transactions. This is subject to the minimum limit of Rs.
50,000. This limit is now removed;

(b) If there is any
defect in the statement, at present it can be rectified within the specified
time provided in section 285BA(4). If this defect is not rectified by the
person concerned, it is now provided that such person has furnished inaccurate
information in the statement. This will invite penalty of Rs. 50,000 u/s
271FAA.

 

Promotion of
digital economy: At present various sections of
the Income-tax Act encourage payment / receipts through account payee cheques,
drafts, electronic clearing systems, etc. From the current year sections 13A,
35AD, 40A, 43(1), 43CA, 44AD, 50C, 56(2) (X), 80JJA, 269SS, 269ST, 269T, etc.,
are amended to provide that in addition to the existing modes of payment /
receipt, any other electronic mode, as may be prescribed, will also be
considered permissible.

 

AMENDMENTS IN OTHER LAWS

Along with the
Finance (No. 2) Act, 2019, some of the sections of the following Acts are also
amended:

(a) The Reserve Bank
of India Act, 1934; (b) The Insurance Act, 1938; (c) The Securities Contracts
(Regulation) Act, 1956; (d) The Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970 and 1980; (e) The General Insurance Business
(Nationalisation) Act, 1972; (f) The National Housing Bank Act, 1987; (g) The
Prohibition of Benami Property Transactions Act, 1988; (h) The Securities and
Exchange Board of India Act, 1992; (i) The Central Road and Infrastructure Fund
Act, 2000; (j) The Finance Act, 2002, 2016, 2018 and The Finance (No. 2) Act,
2004; (k) The Unit Trust of India (Transfer of Undertaking and Repeal) Act,
2002; (m) The Prevention of Money-Laundering Act, 2002; (n) The Payment and
Settlement System Act, 2007; and (o) The Black Money (Undisclosed Foreign Income
and Assets) and Imposition of Tax Act, 2015.

 

Finance Act,
2016: The Income Declaration Scheme, 2016 –
Sections 187 and 191 of the Finance Act, 2016, have been amended effective from
1st June, 2016 as under:

(i) At present,
under the Income Declaration Scheme, 2016 there is no provision for delayed
payment of the tax, surcharge and penalty payable in respect of undisclosed
income. Further, section 191 of the Finance Act, 2016 states that any tax,
surcharge and penalty paid shall not be refunded. A proviso is now inserted in
section 187 of the Finance Act, 2016 to provide that where the tax, surcharge
and penalty has not been paid within the due date for the same, the government
may notify a class of persons who may make payment of the same within the notified
date along with interest at the rate of 1% for every month or part thereof from
the due date of payment till the date of actual payment.

(ii) Further, a proviso has been inserted to section 191 to enable the
government to notify a class of persons to whom excess tax, surcharge and
penalty paid shall be refunded.

 

TO SUM UP

From the above
analysis it is evident that Mr. Piyush Goyal, the then Finance Minister,
provided some relief to all deserving sections of the society in the Finance
Act, 2019 which was passed with the Interim Budget in February, 2019. In that
Interim Budget he had placed the vision document of the government covering ten
areas, such as building physical as well as social infrastructure, creating
digital India, making India a pollution-free nation, expanding rural
industrialisation, making our rivers and water bodies our life-supporting
assets, developing our coastlines, developing our space programmes, making
India self-sufficient in food, making India a healthy society and transforming
India into a ‘Minimum Government-Maximum Governance’ nation. He had also stated
that this would be the India of 2030. Further, there would be a proactive and
responsible bureaucracy which will be viewed as friendly to the people. If this
can be achieved, we can create an India where poverty, malnutrition and
illiteracy would be things of the past. He further stated that it is the vision
of the present government that by the year 2030 India will be a modern,
technology-driven, high growth, equitable, transparent society and a ‘Ten
Trillion Dollar Economy’. Let us hope that our present government is able to
achieve its vision.

 

The present Finance
Minister, Ms Nirmala Sitharaman, in her Budget speech has repeated the above
ten points of the vision of the government for the next decade. She has further
stated in para 10 of her Budget speech that ‘Today, we are nearing the three
trillion dollar level. So when we aspire to reach the five trillion dollar
level, many wonder if it is possible. If we can appreciate our citizens’
“purusharth” or their “goals of human pursuit” filled with their inherent
desire to progress, led by the dedicated leadership present in this House, the
target is eminently achievable’.

 

In the Finance Act,
2019 which was passed in February, 2019, some benefit was given to small
taxpayers, especially the middle class, salary earners, pensioners and senior
citizens. In the Finance (No. 2) Act, 2019, several amendments have been made
in the Income-tax Act. The major amendment is in the field of surcharge on
income above Rs. 2 crores earned by all Individuals, HUFs, AOPs, Trusts, etc.
There was a lot of resistance from Foreign Institutional Investors. Considering
the issues raised by them, the Finance Minister has now announced that this super
surcharge will not be payable on capital
gains on sale of quoted shares by residents and non-residents. Further, as
promised by the government, the rate of tax for domestic companies is now
reduced to 25% where the turnover or gross receipts is less than Rs. 400
crores. This year’s Finance (No. 2) Act, 2019 passed in July, 2019 is unique as
it has been amended by an Ordinance within two months – on 20th
September, 2019. It is explained that this has been done to resolve several
issues raised and opposing some of the tax proposals. Further, some of the
amendments have been made by the ordinance to encourage the corporate sector to
invest in new manufacturing activities and thus boost the economy.

 

Another important
amendment relates to TDS provisions. Now tax is required to be deducted at 5%
by an individual or HUF, who has paid more than Rs. 50 lakhs in a financial
year to a contractor, commission agent or a professional even for personal
work. Further, TDS at 2% will now be deducted by a bank if an assessee
withdraws more than Rs. 1 crore in cash in a financial year. Since this tax is
not to be deducted from any income chargeable to tax, the assessee will not get
credit for the TDS amount. This will amount to an additional tax burden on the
assessee.

 

There are several
provisions in the Act to give incentives to units situated in International
Financial Services Centres (IFSC). Incentives are also provided to attract new
units to be established in IFSCs. Similarly, incentives are also given to
startups. It is proposed that the ‘Angel Tax’ shall not be charged on startups
registered with the DPIIT. Incentives are also provided for those engaged in
construction of affordable houses.

 

Last year, section
143 of the Income-tax Act was amended authorising the government to notify a
new scheme for ‘e-assessment’ to impart greater efficiency, transparency and
accountability. Under this scheme it is proposed to eliminate the interface
between the assessing officer and the assessee, optimise utilisation of resources
and introduce a team-based assessment procedure. The Finance Minister has
stated in her Budget speech that it is proposed to launch this scheme of
‘e-assessment’ in a phased manner this year. To start with, such ‘e-assessment’
will be carried out in cases requiring verification of certain specified
transactions or discrepancies. Cases selected for scrutiny shall be allocated
to assessment units in a random manner and notices will be issued
electronically by a central cell, without disclosing the name, designation or
location of the AO. The central cell will be the single point of contact
between the taxpayer and the Department. It is stated that this new scheme of
assessment will represent a paradigm shift in the functioning of the Income tax
Department. It may be noted that the CBDT has issued a notification dated 12th
September, 2019 notifying a detailed scheme called the ‘E-Assessment Scheme,
2019’ which provides for the procedure for e-assessment u/s 143(3A). The Scheme
will come into force on a date to be notified hereafter. There is going to be
some confusion in the initial years when the new scheme is introduced. Let us
hope that this new scheme is successful.

 

With the amendments
made in several sections of the Income-tax Act by this year’s Budget, the
Income-tax Act has become more complex. The committee appointed by the
government has submitted its report to simplify the Income-tax Act. The
proposal is to replace the present six-decade-old Act by a new Direct Tax Code.
This report is not yet in the public domain. Let us hope that we get a new
simplified law during the tenure of the present government.

 

 

 

Section 50C(2) – By virtue of section 23A(1)(i) being incorporated with necessary modifications in section 50C, the correctness of a DVO’s report can indeed be challenged before CIT(A) in an appeal – In the event of the correctness of the DVO’s report being called into question in an appeal before Commissioner (Appeals), the DVO is required to be given an opportunity of a hearing

7 Lovy Ranka vs. DCIT (Ahmedabad) Members: Pramod Kumar (VP)
and Madhumita Roy (JM) ITA No. 2107/Ahd./2017 A.Y.: 2013-14 Date of order: 1stApril,
2019 Counsel for Assessee /
Revenue: Chitranjan Bhardia / S.K. Dev

 

Section 50C(2) – By
virtue of section 23A(1)(i) being incorporated with necessary modifications in
section 50C, the correctness of a DVO’s report can indeed be challenged before
CIT(A) in an appeal – In the event of the correctness of the DVO’s report being
called into question in an appeal before Commissioner (Appeals), the DVO is
required to be given an opportunity of a hearing

 

FACTS

The
assessee, an individual, sold a bungalow for Rs. 1,15,00,000; the stamp duty
value of the same was Rs. 1,40,00,000. The assessee contended that the fair
market value of the bungalow was lower than its stamp duty value. The AO made a
reference to the DVO u/s. 50C(2). The valuation as per the DVO was Rs.
1,27,12,402. The assessee made elaborate submissions on the incorrectness of
this valuation. But the AO completed the assessment by adopting the valuation
done by the DVO as he was of the view that the valuation done by the DVO binds
him and it is his duty to pass an order in conformity with the DVO’s report.
Aggrieved, the assessee preferred an appeal to the CIT(A), who upheld the
action of the AO.

 

Aggrieved,
the assessee preferred an appeal to the Tribunal where the Revenue contended
that the AO is under a statutory obligation to adopt the valuation as done by
the DVO and as such no fault can be found in his action; therefore, the
appellate authorities cannot question that action either.

 

HELD

The Tribunal considered the question whether it can deal
with the correctness of the DVO’s report particularly when the AO apparently
has no say in this regard. Upon examining the provisions of section 50C(2) and
also the provisions of sections 23A(6) and 24(5) of the Wealth-tax Act, 1957
the Tribunal held that what follows from these provisions is that in the event
that the correctness of the DVO’s report is called in question in an appeal
before the Commissioner (Appeals), the DVO is required to be given an
opportunity of a hearing. The provisions of section 24(5) of the Wealth-tax
Act, 1957 make a reference to section 16A and the provisions of section 50C
specifically refer to the provisions of section 16A of the Wealth-tax Act,
1957.

 

The Tribunal held that the correctness of the DVO report
can indeed be challenged before it as well, as a corollary to the powers of the
CIT(A) which come up for examination before it, once again the rider being that
the Valuation Officer is to be given an opportunity of a hearing. This
opportunity of a hearing to the DVO is a mandatory requirement of law. This is
the unambiguous scheme of the law.

 

It also held that the CIT(A) ought to have examined the
matter on merits. Of course, before doing so the CIT(A) was under a statutory
obligation to serve notice of hearing to the DVO and thus afford him an
opportunity of a hearing. The Tribunal held that the correctness of the DVO’s
report is to be examined on merits and since there was no adjudication, on that
aspect, by the CIT(A), the Tribunal remitted the matter to the file of the
CIT(A) for adjudication on merits in accordance with the scheme of the law,
after giving a due and reasonable opportunity of hearing to the assessee, as
also to the DVO, and by way of a speaking order.

 

As
such, the Tribunal allowed the appeal filed by the assessee.

Section 271(1)(c) – AO initiated penalty proceedings on being satisfied that inaccurate particulars of income were furnished but levied penalty on the grounds of furnishing ‘inaccurate particulars’ as well as ‘concealment’ – Order passed by AO held void

7.  Fairdeal Tradelink Company vs. ITO Members:
Vikas Awasthy (J.M.) and G. Manjunatha (A.M.) ITA No.:
3445/Mum/2016 A.Y.:
2011-12 Date of
order: 5th November, 2019 Counsel
for Assessee / Revenue:  R.C. Jain and
Ajay D. Baga / Samatha Mullamudi

 

Section
271(1)(c) – AO initiated penalty proceedings on being satisfied that inaccurate
particulars of income were furnished but levied penalty on the grounds of
furnishing ‘inaccurate particulars’ as well as ‘concealment’ – Order passed by
AO held void

 

FACTS

In the assessment proceedings, STT on
speculative transactions was disallowed by the AO. Penalty proceedings u/s
271(1)(c) were initiated for filing inaccurate particulars of income.

 

However, while levying the penalty, the AO
mentioned both the charges of section 271(1)(c), i.e., furnishing of
‘inaccurate particulars of income’ as well as ‘concealment’. The assessee
challenged the penalty on the ground that a penalty can only be levied on the
grounds for which the proceedings were initiated.

 

HELD

On a perusal of
the records of the proceedings, the Tribunal noted that the AO, at the time of
recording satisfaction, had mentioned only about furnishing ‘inaccurate
particulars’ as the reason for initiation of penalty proceedings. However, at
the time of levy of penalty, he mentioned both the charges of section 271(1)(c)
of the Act, i.e., furnishing ‘inaccurate particulars’ and ‘concealment’.

 

According to the Tribunal, this reflected
the ambiguity in the mind of the AO with regard to levying penalty. Relying on
the decision of the Bombay High Court in the case of CIT vs. Samson
Perinchery (392 ITR 04), the Tribunal held that the order passed u/s
271(1)(c) suffered legal infirmity and hence was void.

 

Section 147 / 154 – AO cannot take recourse to explanation 3 to section 147 while invoking section 154 after the conclusion of proceedings u/s 147

6.  JDC Traders Pvt. Ltd. vs. Dy. Commissioner of
Income-tax Members: G.S.
Pannu (V.P.) and K. Narasimha Chary (J.M.) ITA No.:
5886/Del/2015 A.Y.: 2007-08 Date of order:
11th October, 2019 Counsel for
Assessee / Revenue: Sanat Kapoor / Sanjog Kapoor

Section 147 / 154 – AO cannot take recourse
to explanation 3 to section 147 while invoking section 154 after the conclusion
of proceedings u/s 147

 

FACTS

For the assessment year 2007-08, the
assessee filed his return of income declaring a total income of Rs. 65.33 lakhs
and the same was processed u/s 143(1). Subsequently, the AO reopened the
proceedings u/s 148 claiming escapement of income on account of purchase of
foreign exchange to the tune of Rs. 4.78 lakhs and made an addition thereof.
Later, on a perusal of the assessment records, he found that the assessee had
shown closing stock in the profit and loss account at Rs. 2.97 crores, whereas
in the schedule the same was shown as Rs. 3.32 crores, leaving a difference of
Rs. 34.54 lakhs. He, therefore, issued a notice u/s 154/155.

 

The assessee explained the reason for the
discrepancy and also submitted that the scope of section 154 does not permit
anything more than the rectification of the mistake that is apparent from the
record and that, insofar as the proceedings u/s 147 are concerned, there was no
mistake in the assessment order.

 

However, the AO as well as the CIT(A) did
not agree with the assessee’s contention. According to the CIT(A), explanation
3 to section 147 empowers the AO to assess or re-assess the income which had
escaped assessment and which comes to the notice of the AO subsequently in the
course of proceedings u/s 147.

 

The issue before
the Tribunal was whether the AO could take recourse to explanation 3 to section
147 to make the above addition after the conclusion of proceedings u/s 147.

 

HELD

According to the
Tribunal, had the AO re-assessed the issue relating to the closing stock in the
proceedings u/s 147, the assessee could not have objected to the AO’s action.
However, in the entire proceedings u/s 147 there was not even a whisper about
the closing stock. In such an event, the Tribunal found it difficult to accept
the argument of the Revenue that even after conclusion of the proceedings u/s
147, the AO can take recourse to explanation 3 to section 147 to make the
addition.

 

According to the Tribunal, if the argument
of the Revenue that u/s 154 the AO is empowered to deal with the escapement of
income in respect of which the reasons were not recorded even after the
assessment reopened u/s 147 is completed, then it would empower the AO to go on
making one addition after another by taking shelter of explanation 3 to section
147 endlessly. Such a course is not permissible. The power that is available to
the AO under explanation 3 to section 147 is not available to him u/s 154 after
the conclusion of the proceedings u/s 147.

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:
10th May, 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);

(c) CIT vs.
Pruthvi Brokers and Shareholders Pvt. Ltd. (2012) 349 ITR 336 (Bom.).

 

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.

 

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:
13th 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 15th February,
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.

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:
30th 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.

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: 22nd
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.

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:
25th 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 18th
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.

 

 

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: 21st June, 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 7th 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 30th March, 2017 and selected the
case for scrutiny. In response to the notice u/s 148, the assessee filed return
on 23rd June, 2017. The assessment was completed on 13th
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 15th October, 2010. From the calculation of interest
levied by the AO, the assessee noted that since the assessee paid tax on 24th
March, 2014 he was liable to pay interest for 42 months (from 15th
October, 2010 to 24th March, 2014) and not for the period of 81
months (from 15th October, 2010 to 30th June, 2017) as
charged by the AO.

 

On 22nd
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 9th 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.

 

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:
21st 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 7th March, 2014 and 25th 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.

 

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:
20th 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.

 

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:
11th 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 31st
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.

 

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.

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: 7th
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: 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

 

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 1st 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.

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: 10th
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.”

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: 22nd
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.”

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: 14th
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.”

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: 4th June,
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.”

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: 7th
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 27th 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. 18th 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.”

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: 3rd
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.”

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: 25th
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.”

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: 28th
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 30th 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 18th 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.”

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: 28th
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 22nd
October, 2011, as the order of assessment u/s 143(1) came to be passed on 23rd
October, 2010. Within this one year, i.e., on 5th 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 31st January, 2018, the second
rectification application was filed by the assessee on 2nd 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.’

 

 

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: 19th August, 2019 (Bombay High Court)

 

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]

 

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 6th
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 19th March, 2009
while the impugned notice issued is dated 6th 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 6th March, 2009.

 

However, no
entries prior to 6th March, 2009 were produced before the Tribunal
so as to establish that the reasons were recorded prior to the issue of notice
dated 6th 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 6th 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.



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: 27th August, 2019 (Bombay High Court)

 

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

 

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 1st 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.

 

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: 26th 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: 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)]

 

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 21st 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.

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: 12th 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.’

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: 24th 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 9th 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.’

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: 18th 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.’

 

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: 8th 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
13th August, 2010. An amount of Rs. 10 lakhs towards the earnest
money was received by the assessee as part of the agreement. On 15th
October, 2011, possession of the land was handed over by the assessee to the
purchasers of the land. On 3rd 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 3rd July, 2012 and the
purchase of the residential house on 22nd 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 13th 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.’

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: 9th January, 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 20th 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.’

 

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: 13th 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.’

 

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: 24th 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.’

 

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: 12th March 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 28th
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 6th
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 6th
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.’

 

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: 7th
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 18th 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.

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: 5th 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.

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: 5th 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 31st 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 31st March,
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.

 

 

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: 28th 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 31st 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.

 

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: 15th March, 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 26th
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 8th April, 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.

 

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: 9th August, 2019; Counsel for Assesssee / Revenue: Manoj
Kataruka / Robin Chowdhury

 

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

 

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 14th 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 1st April,
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 1st
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 1st
April, 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.

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: 3rd 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 17th
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 1st 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.

 

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: 7th 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.

 

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: 14th August, 2019;

 

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

 

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 8th 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 8th August,
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 8th 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 8th 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.


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: 11th 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 31st 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.

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: 11th
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 31st 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 30th 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 26th
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 27th 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 5th 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.

 

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: 24th 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 29th
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.

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: 8th November, 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.

 

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: 19th 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: 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

 

The assessee is a pharmaceutical company manufacturing a wide range of
medicines and formulations. It filed its e-return on 15th 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.   

 

 

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: 5th 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.

 

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: 12th April, 2019; A.Y.: 2009-10

 

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

 

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.

 

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: 22nd 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.’

 

 

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: 4th
June, 2019; A.Ys.: B.P. from 1st April, 1989 to 31st March,
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 12th
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 13th
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 12th
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 13th 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 12th 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.’

 

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: 28th 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.’

 

 

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 31st 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 15th
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 13th
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 30th August, 2012.

 

The assessee also wrote a letter on 4th
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 13th
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. 

 

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: 13th February, 2019 (Bombay High Court)]


[Creative Textile Mills Pvt. Ltd vs.
ACIT-6(2); dated 28th 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.   

 

 

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: 6th February, 2019 (Bombay High
Court)]

 

[ACIT-12(3)
vs. Lemuir Air Express; dated 9th 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.

 

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: 6th February, 2019 (Bombay High Court)]. 

 

[Pushti
Consultants Pvt Ltd vs. DCIT-1(2); dated 23rd 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.

 

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: 20th 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.”

 

 

 

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: 31st 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.”

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: 23rd 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.”

 

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: 5th 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.”

 

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: 27th 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.”

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: 1st
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.”

 

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: 4th
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).