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Category: Direct Taxes

Section 37 (1): Business expenditure – books of accounts, and details not produced – being destroyed due to flood – filed evidence indicating the destruction of physical accounts due to heavy rains – Allowable as deduction – ‘best judgment assessment’ should not be made as a ‘best punishment assessment’.

14. Pr CIT-19 vs. Rahul J Jain [ ITA no
857 of 2016 Dated: 11th December, 2018 (Bombay High Court)]. 

 

[Asst CIT 16(3)  vs. Rahul J Jain ; dated 28/09/2015 ; ITA. No
5986/Mum/2013, AY : 2009-10, Bench : D 
Mum.  ITAT ]

 

Section 37 (1): Business expenditure – books
of accounts, and details not produced – being destroyed due to flood – filed
evidence indicating the destruction of physical accounts due to heavy rains –
Allowable as deduction –  ‘best judgment
assessment’ should not be made as a ‘best punishment assessment’.

 

The
assessee is engaged in the business of trading in ferrous and nonferrous
metals. During the scrutiny proceeding, the assessee was unable to produce its
physical books of accounts, evidences for sales, purchases and expenses claimed
in the view of the same being destroyed due to flood on 8th July,
2009. The assessee filed necessary evidence indicating the destruction of
physical accounts due to heavy rains on 8th July, 2009. Besides, it
also filed evidences of its sellers and buyers to support its claim of loss.
However, the A.O assessed the income of the assessee at Rs. 57.95 lakh under
the head ‘business’ as against the loss of Rs.18.74 2 lakh as shown by the
assessee in its return of income.

 

The
CIT(A) allowed the assessee’s appeal inter alia by noting the fact that the
assessee had produced various documents in support of its claims for expenses,
after recording the fact that various confirmation letters from the parties who
had made purchases were also filed. However, the A.O did not carry out any
further verification in regard to it. The CIT(A) also recorded the fact that
the return as submitted should be accepted keeping in view of the fact that
there was a sharp and continuous fall in nickel prices which is the main
ingredient in stainless steel. Further, the assessee has made more than 90 % of
the sale during the year, out of the opening stock held by it as a carried
forward from the earlier year. Moreover, it also takes cognizance of the fact
that the assessee’s book results were also accepted by the Sales Tax and
Central Excise authorities. For all the above reasons, the appeal of the
assessee was allowed by order of the CIT(A).

 

Being
aggrieved with the order of the CIT(A), the Revenue filed further appeal to the
Tribunal. The Tribunal find that the documentary evidence to support the
assessee’s claim containing sufficient particulars on the basis of which
requisite verification from the parties mentioned therein could have been done
by the A.O, if he has any doubt in regard to the documents submitted. Further,
the Tribunal notes that the documents submitted in support of their claim were
not disputed by the Revenue before the Tribunal. Further, the impugned order
also records fall in the prices of the steel in the global market which lead to
a loss of the sales made by the assessee. In these circumstances, the appeal of
the Revenue was dismissed.

 

The Tribunal in its order
observed as under :- “We can very well appreciate that at times,  the A.O has no choice but to make a best judgment
assessment.

But in our considered view,
the fairness of justice demands that ‘best judgment assessment’ should not be
made as a ‘best punishment assessment’.


Being aggrieved with the order of the ITAT,
the Revenue filed further appeal to the High Court. The court find that both
the CIT(A) and the Tribunal on examination of the facts have come to the
conclusion that there was material evidence available before the A.O for him to
carry out necessary investigation to determine whether or not the loss suffered
by the assessee  was justifiable. The
best judgment assessment can certainly be resorted to by the A.O in the absence
of any record, but it cannot be arbitrary. This is more particularly so when
various supporting documents justifying their loss return was filed before the
A.O and he had completely ignored the same. We find that this appeal
essentially is in respect of question of facts. In the above view, the appeal
was dismissed. 

Section 68 : Cash credits – Unsecured loans received – Confirmation, balance sheet and bank accounts of creditor was produced – A.O has not made enquiry in respect of the creditors – Deletion of addition was held to be justified.

13.  The Pr. CIT-27 vs. Parth Enterprises [ Income
tax Appeal no 786 of 2016 Dated: 11th December, 2018 (Bombay High
Court)].

[ITO-22(1)(4) vs.
Parth Enterprises; dated 10/06/2015; ITA. No 976/Mum/2013, Bench : C , AY:
2009-10     Mum.  ITAT ]

 

Section 68 : Cash credits – Unsecured loans
received – Confirmation, balance sheet and bank accounts of creditor was
produced – A.O has not made enquiry in respect of the creditors –  Deletion of addition was held to be justified.

 

The
assessee is engaged in the business of builders and developers. During the
year, the assessee had taken unsecured loans from 90 persons. However,
confirmations were filed only in respect 77 persons. The AO conducted enquiry
from external sources on the basis of information available on record and on
test check basis on 01.12.2011. Enquiries were conducted in a few cases, based
on the statement given by those parties . During  a survey action u/s.  133A of the IT Act at the premise of one
Deepak Kapadia CA by the DDIT (investigation), unit IX(3), Mumbai his statement
was also recorded, that in his statement he admitted that he had provided
entries for loans in lieu of cash received from the assessee and also explained
that the modus operandi is of giving cheques and receiving cash back which were
then returned to those parties whose names are appearing as unsecured creditors
in the books of account of the appellant.

 

This
resulted in the A.O concluding that unsecured loans to the extent of Rs. 3.35
crore were hit by section 68 of the Act. Thus, added to the income of the
assessee.

 

Being
aggrieved by the assessment order the assessee filed an appeal to the CIT(A).
The CIT(A) found that creditworthiness of the parties were not doubted. On
facts, it came to the conclusion that out of 90 parties, loan reflected in the
names of 13 parties was hit by Section 68 of the Act. Accordingly, an addition
of Rs.36 lakh was confirmed against the addition of Rs. 3.35 crore made by the
A.O. In regard to the balance of Rs. 2.99 crore, the CIT(A) found that the
loans were genuine and therefore not hit by section 68 of the Act resulting in
its deletion.

 

Being
aggrieved by order, further appeals were filed by the Assessee as well as
Revenue to the Tribunal. The Revenue challenged the deletion of Rs. 2.99 crore
while the assessee challenged the upholding of addition of Rs. 36 lakh.

 

The
Tribunal find that there were total 90 loan creditors from whom unsecured cash
credit amounting to Rs. 3,35,00,000 had been introduced in the books of accounts
by the assessee, that out of the 90 loan creditors confirmations were submitted
only in the case of 77 parties and for the remaining 13 parties confirmation
were not furnished during the assessment proceedings, that during the course of
appellate proceedings  the remaining loan
confirmation were filed along with other supporting documents. The FAA after
considering the remand report and reply of the assessee – decided the matter.
Thus the ITAT decided the effective ground of appeal against the assessee with
regard to the creditors who had advance Rs.36 lakh to it. Further it held that
the FAA had rightly deleted the addition of Rs. 2.99 crore. The AO had made no
effort to verify the details filed by the assessee before him.


Being aggrieved with the order of the ITAT, the Revenue filed the Appeal before
High Court. The Hon. Court find that there are concurrent finding on facts
rendered by the CIT(A) and the Tribunal holding that only Rs. 36 lakh can be
added to the declared income and the balance amount of Rs. 2.99 crore was not
hit by section 68 of the Act. This finding is premised on the fact that no
enquiry was made in respect of 76 creditors out of 77 creditors and the
assessee had provided required documentary evidence in respect of the 76 creditors.
Thus, these are essentially finding of fact and the view taken by the Tribunal
is a possible view on these facts. In view of the above, the question raised
does not give rise to any substantial question of law. Accordingly, appeal was
dismissed.

Time limit for issuing notice u/s. 148 – Amendment to section 149 by Finance Act, 2012, which extended limitation for reopening assessment to sixteen years, could not be resorted for reopening proceedings concluded before amendment became effective

50. Brahm Datt vs. ACIT; [2018] 100 taxmann.com 324
(Delhi) Date of order: 6th December, 2018 A. Y. 1998-99 Section 149 of ITA and Finance Act, 2012

 

Time limit for issuing notice u/s. 148 – Amendment to
section 149 by Finance Act, 2012, which extended limitation for reopening
assessment to sixteen years, could not be resorted for reopening proceedings
concluded before amendment became effective

 

The assessee was a senior citizen aged about 84 years. From A. Ys.
1984-85 to 2003-04, he was a non-resident/not ordinarily resident of India. He
was previously working and residing in foreign countries, viz; Jordan and Iraq
and while so, he derived income primarily from salary and professional
receipts. The assessee during the course of search clarified that he did not
maintain any foreign bank account in his personal capacity, he, however had
contributed an amount of approximately US$ 2-3 million at the time of settling
of the offshore Trust, when he was a non-resident, out of his income earned
from sources outside India. The revenue primarily relying upon his statement,
issued impugned notice dated 24/03/2015 u/s. 148 of the Income-tax Act, 1961
seeking to initiate reassessment proceedings for A. Y. 1998-99, on the
suspicion that the, income of the assessee had escaped assessment. The
Assessing Officer rejected the assessee’s contention that limitation for
re-assessment for A. Y. 1998-99 had expired on 31/03/2005 and therefore, re-assessment
was bared by limitation. The Assessing Officer contended that the proceedings
were initiated within the extended period of 16 years from the end of the
relevant assessment year by relying on section 149(1)(c), introduced by the
Finance Act, 2012, with effect from 01/07/2012.

 

The assessee filed writ petition challenging the notice u/s. 148 on the
ground of limitation. Delhi High Court allowed the writ petition and held as
under:

 

“i)   The revenue had sought to
contend that the amendment (to section 149) is merely procedural and no one has
a vested right to procedure; and that procedural amendments can be given effect
any time, even in ongoing proceedings.

ii)   The question of revival of
the period of limitation for reopening assessment for A. Y. 1998-99 by taking
recourse to the subsequent amendment made in section 149 in the year 2012,
i.e., more than 8 years after expiration of limitation on 31/03/2005, has been
dealt with by the Supreme Court in K.M. Sharma v. ITO [2002] 122 Taxman 426/254
ITR 772(SC).

iii)  Assessment for A. Y. 1998-99
could not be reopened beyond 31/03/2005 in terms of provisions of section 149
as applicable at the relevant time. The assessees return for A.Y. 1998-99
became barred by limitation on 31/03/2005.

iv)  In view of the above
discussion, it is held that the petition has to succeed; the impugned
reassessment notice and all consequent proceedings are hereby quashed and set
aside. The writ petition is allowed.”

 

TDS – Payment to non-resident – Effect of amendment to section 195 by F. A. 2012 with retrospective effect from 01/04/1962 – No change in condition precedent for application of section 195 – Income arising to non-resident must be taxable in India

49. Principal CIT vs. Motif India Infotech (P) Ltd.; 409
ITR 178 (Guj) Date of order: 16th October, 2018 A. Y. 2009-10 Sections 9(1) and 195 of ITA 1961

 

TDS – Payment to non-resident – Effect of amendment to
section 195 by F. A. 2012 with retrospective effect from 01/04/1962 – No change
in condition precedent for application of section 195 – Income arising to
non-resident must be taxable in India

 

The assessee was a company engaged in software development. It provided
software related services to its overseas clients. In the course of assessment
proceedings for the A. Y. 2009-10, the Assessing Officer found that the assesse
had made payment of Rs. 5.51 crore to a foreign based company towards fees for
technical services without deducting tax at source. The assessee argued that
the payment received by the non-resident was not taxable and that therefore,
there was no requirement for deducting tax at source while making such payment.
However, the Assessing Officer disallowed the expenditure relying on section
40(a)(i) of the Act holding that the tax was deductible at source.

 

The Commissioner (Appeals) accepted the assessee’s claim and held in
favour of the assessee observing that there was no dispute that the services
were in the nature of technical services, but would be covered under the
Explanation clause contained in section 9(1)(vii)(b) of the Act. He was of the
opinion that the services were utilised outside India in a business or
profession carried outside India, or for the purpose of earning any income
outside India. This was upheld by the Tribunal.

 

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

 

“i)   In the case of GE India
Technology Centre P. Ltd. Vs. CIT; 327 ITR 456 (SC), the ratio laid down by the
Supreme Court was that mere remittance of money to a non-resident would not
give rise to the requirement of deducting tax at source, unless such remittance
contains wholly or partly taxable income. After the judgment was rendered, the
Legislature amended section 195 by inserting Explanation 2 by the Finance Act,
2012, but with retrospective effect from 01/04/1962. The Explanation provides
that for removal of doubts, it is clarified that the obligation to comply with
sub-section (1) of section 195, and to make deduction as provided therein
applies and shall be deemed to have always applied to all persons, resident or
non-resident, whether or not the non-resident person has a residence or place
of business or business connection in India; or any other presence in any
manner whatsoever in India. Mere requirement of permanent establishment in
India was thus done away with. Nevertheless, the basic principle that
requirement of deduction of tax at source would arise only in a case where the
payment made to a non-resident was taxable, still remains.

ii)   The Commissioner (Appeals)
and the Tribunal had accepted the assessee’s factual assertion that the
payments were for technical services provided by a non-resident, for providing
services to be utilised for serving the assessee’s foreign clients. Clearly,
the source of income namely the assessee’s customers were the foreign based
companies.

iii)  We are fortified in the view
by a judgment of the Karnataka High Court in the case of CIT Vs. ITC Hotels;
(2015) 233 Taxman 302 (Karn), in which it was held that where the recipient of
income of parent company is not chargeable to tax in India, then the question
of deduction of tax at source by the payer would not arise.

iv)  In the result, the tax appeal
is dismissed.”

 

Settlement of cases – Construction business – Receipt of on money – Additional disclosure of undisclosed income for one assessment year during settlement proceedings – Does not amount to untrue disclosure for other assessment years under settlement proceedings – Commission accepting disclosures made by assessees and passing orders on their settlement applications – Order of Settlement Commission not erroneous

48. Principal CIT vs. Income-Tax Settlement Commission
and another; 409 ITR 495 (Guj) Date of order: 13th June, 2017 A. Ys. 2012-13 to 2014-15 Sections 245C and 245D of ITA 1961 and Article 226 of
Constitution of India

 

Settlement of cases – Construction business – Receipt of
on money – Additional disclosure of undisclosed income for one assessment year
during settlement proceedings – Does not amount to untrue disclosure for other
assessment years under settlement proceedings – Commission accepting
disclosures made by assessees and passing orders on their settlement
applications – Order of Settlement Commission not erroneous

 

For the A. Ys. 2012-13 to 2014-15 the assesse filed applications before
the Settlement Commission for settlement of disputes that arose out of pending
assessments. In the settlement applications the assessees made additional
disclosure of undisclosed income on account of receipt of on money through sale
of constructed properties. The assessees projected 15 % profit on the turnover.
On the basis of the turnover of unaccounted receipts disclosed and 15 % profit
rate claimed by them, the assessees made disclosure of additional income in
their applications for settlements. The Department contended before the
Settlement Commission that further inquiry was necessary and that the rate of
15 % profit was on the lower side as in similar business the rate of return was
much higher. The Settlement Commission accepted the disclosure of the turnover
made by the assesse as the Department did not bring any contrary material on
record in that respect and held that the 15 % rate of profit out of the
turnover was reasonable. The Settlement Commission further recorded that during
the course of the proceedings, each of the assessees made a voluntary
disclosure of an additional sum of Rs. 2 crore, i.e., a sum of Rs. 50 lakh each
for the A. Y. 2014-15 “in a spirit of settlement and to put a quietus to the
issue”. Accordingly, the Settlement Commission passed an order u/s. 245D on
21/01/2016.

 

The Revenue filed a writ petition and challenged the validity of the
order. The Gujarat High Court dismissed the writ petition and held as under:

 

“i)   It is true that before the
Settlement Commission, the assesses indicated that the additional disclosure of
Rs. 50 lakh each may be accounted for the A. Y. 2014-15. However, we cannot
lose sight of the fact that such disclosures were made in the spirit of
settlement and to put an end to the controversy. The assessees therefore cannot
be pinned down to effect such disclosures in the A. Y. 2014-15 alone.

ii)   We cannot fragment a larger
picture and telescope the additional disclosures for a particular year and
taking into account the comparable figures for that year decide whether such
disclosures would shake the initial disclosures and to hold that the initial
disclosures were untrue projecting the additional disclosures for all the
assessment years, the assessees had sought for settlement.

iii)  We find the Commission
committed no error in accepting them (additional disclosures) and in proceeding
to pass final order on such settlement applications. In the result, the
petitions are dismissed.”

Recovery of tax – Stay of demand when assessee in appeal before Commissioner (Appeals) – Discretion of AO to grant stay – CBDT Office Memorandum cannot oust jurisdiction of AO to grant stay – Prima facie case showing high pitched assessment and financial burden on assesse – Stay on condition of deposit of 20% of amount demanded – Not justified

47.  SAMMS Juke Box
vs. ACIT; 409 ITR 33 (Mad); Date of order: 28th June, 2018 A. Y. 2015-16

Section 220(6) of ITA 1961 and Article 226 of
Constitution of India

 

Recovery of tax – Stay of demand when assessee in appeal
before Commissioner (Appeals) – Discretion of AO to grant stay – CBDT Office
Memorandum cannot oust jurisdiction of AO to grant stay – Prima facie
case showing high pitched assessment and financial burden on assesse – Stay on
condition of deposit of 20% of amount demanded – Not justified

 

For the A. Y. 2015-16, the assessee’s assessment was completed u/s.
143(3) of the Act. The assessee had receipts of Rs. 28,05,852/- from Conde Nast
(India) Limited for the year. However, by mistake, M/s. Conde Nast (India)
Limited had deducted excessive TDS and accordingly in Form 26AS the receipts
were shown to be Rs. 6,62,03,927/. The assessee did not claim the excessive
credit of TDS. The assessee also took steps to make the necessary corrections.
However, in the meanwhile, the Assessing Officer completed the assessment on
the basis of the receipts as shown in Form 26AS resulting in high pitched
assessment. The assesse preferred appeal before the Commissioner (Appeals) and
made an application to the Assessing Officer for stay of the demand u/s. 220(6)
during the pendency of the appeal before the Commissioner (Appeals). The
Assessing Officer passed order and directed the assesse to deposit 20 % of the
demand for grant of the stay as per the CBDT Office Memorandum dated
31/07/2017. The assesse filed writ petition and challenged the said order.

 

The Madras High Court allowed the writ petition, set aside the said
order and held as under:

 

“i)   Before whatever forum when an
application for interim relief is sought, the authority has to be necessarily
guided by the principles governing the exercise of jurisdiction under Order
XXXIX, rule 1 of the Civil Procedure Code 1908. Thus, the authority while
examining an application for grant of stay should consider whether the
applicant has made out a prima facie case, whether the balance of convenience
is in his favour, and if stay is not granted whether the applicant would be put
to irrepairable hardship.

 

ii)   Thus, when a statutory
authority exercises power to grant interim relief, he cannot be weighed down by
directives, which leave no room for discretion of the authority. Though the
CBDT’ Office Memorandum dated 31/07/2017 appears to fix a percentage of tax to
be paid for being entitled to an order of stay, it carves an exception in the
very same instruction and this is clear from the Office Memorandum dated
29/02/2016, in paragraph 4(B(b)). Thus, CBDT did not completely oust the
jurisdiction of the Officer, while examining a prayer for stay of the demand of
tax pending appeal.

 

iii)  The respondent could not have
passed the order without taking note of the assessee’s case and without
considering whether the assesse had made out a prima facie case for grant of
interim relief. The assesse had specifically pointed out its financial position
and the prejudice that was being caused to it on account of the high pitched
assessment. It had specifically pleaded that its income of the year was one
fourth of the tax assessed. This aspect was not dealt with by the respondent,
while passing the order. The order was not valid.

iv)  I find that the information
furnished by the Assessing Officer in the para-wise comments are not contained
in the impugned order. The respondent cannot improve upon the impugned order by
substituting fresh reasons in the form of a counter-affidavit. Thus, the
information furnished to the learned standing counsel for the Revenue would
clearly demonstrate that at the time of passing the impugned order, no such
reasons weighed in the minds of the respondent and therefore, the respondent
cannot justify his order by substituting fresh reasons, after the order is put
to challenge.

 

v)   In the result, the writ
petition is allowed, the impugned order is set aside and the matter is remanded
to the respondent for fresh consideration and to pass an order on merits and in
accordance with law after affording an opportunity of hearing to the assessee.”

 

Loss – Capital or revenue loss – Investment in shares as stock-in-trade – Loss in sale of portion of shares – Transaction in course of business – Revenue in nature – Not capital loss

46.  Calibre
Financial Services Ltd. vs. ACIT; 409 ITR 410 (Mad) Date of the order: 31st October, 2018 A. Y. 2001-02 Section 45 of ITA 1961


Loss – Capital or revenue loss – Investment in shares as
stock-in-trade – Loss in sale of portion of shares – Transaction in course of
business – Revenue in nature – Not capital loss

 

The assessee was engaged in financial advisory and syndication services
and the memorandum of association of the company authorised it to deal in
shares and stocks. For the A. Y. 2001-02, the Assessing Officer treated the
loss that arose from the transaction of sale of mutual fund units as capital
loss as against the claim of the assesee that it was revenue loss and passed an
order u/s. 143(3) of the Act accordingly.

 

The Commissioner (Appeals) allowed the appeal and held that it was a
revenue loss. The Tribunal reversed the order and held that there was no
evidence available to indicate that the intention of the assessee to treat the
holding as stock-in-trade.

 

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

 

“i)   The Tribunal erred in concluding
that there was no evidence available on record to indicate that the intention
of the assessee was to treat the holding as stock-in-trade. The Assessing
Officer had extracted the written submission made by the assesse, in which it
had stated that the assesse was a financial service company which rendered
financial advisory and syndication services and also traded in shares, units of
mutual funds, etc. The memorandum of association of the assessee authorised it
to deal in shares and services. Further, it stated that as authorized, the
assessee had purchased mutual fund units during the financial year 2000-2001
and sold the units during the same year. The trading in such units was done in
the ordinary course of its business and the loss was revenue in nature.

ii)   Further, the assessee had
stated that it had treated the transaction as revenue transaction and debited
the loss incurred to the profit and loss account as in the earlier financial
year also, in which it was allowed by the Assessing Officer. Similar
transactions had been held to be revenue in nature. For the A. Y. 2006-07, the
Assessing Officer did not agree with the assessee but the Commissioner
(Appeals), had held that the assessee had acquired equity shares, which it held
as stock-in-trade and out of which, a portion was sold incurring a loss which
was accounted as business expenditure and that the method of accounting and the
principle of accounting for loss or gains from investments or stock-in-trade
had been consistently and regularly followed by the assesse and accordingly,
the claim of the assessee with regard to loss that arose from trading in shares
was to be allowed as a business loss as claimed by the assesse.

iii)  Thus, for the above reasons,
we are of the considered view that the Tribunal fell in error in reversing the
order passed by the Commissioner (Appeals). In the result, the appeals filed by
the assessee are allowed and the orders passed by the Tribunal, which are
impugned herein, are set aside. Accordingly, the substantial questions of law
are answered in favour of the assesse and against the Revenue.”

Income Declaration Scheme 2016 – Determination of sum payable and payment of first instalment by assessee – Rejection of application pursuant to issue of notice for assessment – Tax already deposited under scheme to be adjusted by Department

45.  Sangeeta
Agrawal vs. Principal CIT; 409 ITR 254 (MP) Date of order: 3rd August, 2018 A. Y. 2014-15 Section 191 of F. A. 2016 (Income Declaration Scheme,
2016); Article 226 of Constitution of India and section 143(2) of ITA 1961

 

Income Declaration Scheme 2016 – Determination of sum
payable and payment of first instalment by assessee – Rejection of application
pursuant to issue of notice for assessment – Tax already deposited under scheme
to be adjusted by Department

 

The assessee made an application under the Income Declaration Scheme,
2016, and offered an amount as undisclosed income for the A. Y. 2014-15. The
total tax payable thereon was determined and she paid the first instalment of
tax. Thereafter, a notice u/s. 143(2) of the Act, was issued and the
application under the Scheme was rejected. Since according to section 191 of
the Finance Act, 2016, any amount paid under the Scheme was not refundable, the
assesse prayed for adjustment of the amount already paid. The Department
rejected the application for adjustment or refund of the amount paid under the
Scheme.

 

The assesee filed a writ petition and challenged the order of rejection.
The Madhya Pradesh High Court allowed the writ petition and held as under:

 

“Considering the law laid down by the Supreme Court in the case of
Hemalatha Gargya Vs. CIT; (2003) 259 ITR 1 (SC) as well as the Bombay High
Court in Sajan Enterprises Vs. CIT; (2006) 282 ITR636 (Bom), we quash the
impugned order and direct the respondent-Revenue to adjust the amount of Rs.
3,28,068 which has been deposited by the petitioner in the relevant A. Y.
2014-15.”

Charitable or religious trust – Denial of exemption – Section 13(2)(c) – In order to invoke provisions of section 13(2)(c), it is essential to prove that amount paid to person referred to in sub-section (3) of section 13 is in excess of what may be reasonably paid for services rendered

44. CIT vs. Sri Balaji Society; [2019] 101 taxmann.com 52
(Bom) Date of order: 11th December, 2018 A. Ys. 2008-09 and 2009-10 Sections 12AA and 13 of ITA, 1961

 

Charitable or religious trust – Denial of exemption –
Section 13(2)(c) – In order to invoke provisions of section 13(2)(c), it is
essential to prove that amount paid to person referred to in sub-section (3) of
section 13 is in excess of what may be reasonably paid for services rendered

 

The assessee was a charitable trust and enjoyed the registration u/s.
12AA. During relevant years, the assessee had incurred expenditure, some of
which was paid to one SBC towards advertisements in various magazines and
souvenirs. The Assessing Officer noticed that said SBC was a partnership firm
consisting of three partners who happened to be trustees of the assessee-trust.
The Assessing Officer opined that the firm i.e., SBC was a firm covered u/s.
13(3)(e) vis-a-vis trust. The Assessing Officer thereafter carried out the
analysis of the expenditure in connection with the advertisements with a
special focus on the payments made to the SBC. He thus denied the benefit u/s.
11 relying upon the provisions of section 13(2)(c).

 

The Commissioner (Appeals) allowed the appeal. He examined the material
on record at length and came to the conclusion that the Assessing Officer had
incorrectly invoked the said provision in making the disallowance. He was of
the opinion that the payments made by assessee were not in excess of what may
be reasonably paid for the services in question. The Tribunal confirmed order
passed by the Commissioner (Appeals).

 

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



“i)   Clause (c) of sub-section (2)
of section 13 can be invoked, if any amount is paid by way of salary, allowance
or otherwise to any person referred to in sub-section (3) out of resources of
the trust for services rendered to the trust and the amount so paid is in
excess of what may be reasonably paid for such services. Thus, essential
requirement for invoking the said provision is that the amount paid was in
excess of what may be reasonably paid for the services.

 

ii)   In the present case, the
Commissioner (Appeals) and the Tribunal had elaborately examined the accounts
of the assessee, the payments made to the SBC, the payments made to other
agencies for similar work, comparative rates of payments and came to the
conclusion that no excess payment was made to the related person.

 

iii)  Essentially, this is a pure
question of fact. No question of law arises.”

Section 40A(3) – No Disallowance u/s. 40A(3) when genuineness of the transaction is not doubted and incurring of such cash expenses was necessary as part of business expediency.

37.  [2018] 66 ITR (Trib.) 371 (Delhi-Trib.) KGL
Networks (P) Ltd. vs. ACIT ITA No.:
301/Del./2018 A.Y.:
2014-2015 Dated: 2nd July, 2018

 

Section 40A(3) – No Disallowance u/s.
40A(3) when genuineness of the transaction is not doubted and incurring of such
cash expenses was necessary as part of business expediency.

 

FACTS


The assessee-company
was a clearing and forwarding agent and had made payments to various reputed
airlines. The Assessing Officer (AO) noted from the tax audit report that the
assessee-company had incurred expenditure amounting to Rs.8,17,807/- in cash.
The A.O. accordingly disallowed the same in light of section 40A(3), being in
excess of Rs. 20,000/-.

The assessee-company challenged the addition
before the Ld. CIT(A) stating that payments were made to various reputed
airlines whose PAN had been duly submitted. The genuineness of the payment was
not doubted, therefore, no disallowance could be made u/s. 40A(3) of the Act.
The CIT(A), however, did not accept the contention of assessee-company and
noted that Rule 6DD had been amended in 2008. The CIT(A) held that the Rule in
its present form does not include any such circumstances like business
expediency or exceptional circumstances, under which, such cash payments could
be made as a business expenditure u/s. 40A(3).

Aggrieved by the order, Assessee Company filed
appeal to ITAT.

 

HELD


The
Tribunal relied on the decision of Attar Singh Gurmukh Singh vs. ITO (1991)
191 ITR 667 (SC) wherein it was held that section 40A(3) of the Income-tax
Act, 1961, is not arbitrary and does not amount to a restriction on the fundamental
right to carry on business. Consideration of business expediency and other
relevant factors are not excluded. Genuine and bonafide transactions are
not taken out of the sweep of the section. It will be clear from the provisions
of section 40A(3) and Rule 6DD that they are intended to regulate business
transactions and to prevent the use of unaccounted money or reduce the chances
to use black money for business transactions. The contention of the assessee
that owing to business expediency, obligation and exigency, the assessee had to
make cash payment for purchase of goods so essential for carrying on of his
business, was also not disputed by the AO.



It was also held that the primary object of
enacting section 40A(3) was twofold, firstly, putting a check on trading
transactions with a mind to evade the liability to tax on income earned out of
such transaction and, secondly, to inculcate the banking habits amongst the
business community. The ITAT concluded that Even though there was an amendment
in Rule 6DD of I.T. Rules as is noted by the Ld. CIT(A), but in section 40A(3)
of the I.T. Act, 1961 itself, an exception is provided on account of nature and
extent of banking facilities available, consideration of business expediency
and other relevant factors. The nature of business of assessee-company and the
agency carried on by the assessee-company on behalf of others clearly showed
that for business expediency in the line of business of assessee-company,
sometimes cash payments were made to complete the work on behalf of Principal.



The
assessee-company, under such compelling reasons, made payments in cash. The AO
and CIT(A) had not doubted the identity of the payee and the genuineness of the
transaction in the matter. The source of payment was also not doubted by the
authorities. ITAT mainly relied on the decision of ITAT, Delhi in the case of ACIT
vs. Marigold Merchandise (P) Ltd (ITA No. 5170/Del./2014).

 

Thus, in the
opinion of the ITAT no disallowance u/s. 40A(3) could be made when genuineness
of the transaction was not doubted and incurring of such expenses was necessary
as part of business expediency.

Section 40(a)(ia) – No Disallowance u/s. 40(a)(ia) for non-deduction of TDS u/s. 194C if no oral or written contract between the contractor and contractee.

36.  [2018] 66 ITR (Trib.) 525 (Vizag. – Trib.) ACIT vs.
A. Kasivishwanadhan ITA No.:
138/Viz/2017 A.Y.:
2012-13 Dated: 20th July, 2018

 

Section 40(a)(ia) – No Disallowance u/s.
40(a)(ia) for non-deduction of TDS u/s. 194C if no oral or written contract
between the contractor and contractee.



FACTS


In this case assessee was engaged in the business
which required large labour force within short notice of time. Assessee had
incurred labour expenses and payments were made through maistries who procured
the labour as per the need of the assessee. The Assessing Officer (AO) inferred
that there is a principal/agent relationship between the assessee and Maistry
and the transactions were in the nature of supply of labour contract and
accordingly held that such payments are liable for deduction of tax at source
u/s. 194C of Act. Since the assessee had not deducted TDS on labour charges,
the AO disallowed the expenditure u/s. 40(a)(ia) of Act.

 

Aggrieved by
the order of the AO, the assessee appealed before the CIT(A). The assessee
submitted before the CIT(A) that there was no agreement written or oral between
the assessee and the maistries and in the absence of any contract between both
the parties, it cannot be construed that there exists any principal agent
relationship/contract between them. The Assessee argued that the maistries were
not the labour contractors and they were randomly the first among the group of
few people claiming to be the leader of that group. They procured the labour
along with them as when required and for the sake of convenience, the assessee
made the payments to one of the maistries or group leader who in turn
distributed the payments to the rest of the group members. There was no implied
or express contract for supply of labour between the assessee and the maistry.
Thus there was no contract and the question of deduction of tax at source did
not arise. The CIT(A) observed that the labour maistries were not the labour
contractors and the payments made to labour maistries did not bear the
character of contract payment as contemplated u/s.194C of Act, accordingly held
that the payments made to the maistries did not attract deduction of tax at
source u/s. 194C of the Act and accordingly directed the AO to delete the
addition.

 

Aggrieved by the order, revenue filed appeal
to ITAT.

 

HELD


The Tribunal concluded that the assessee was
engaged in labour oriented industry which required labour at irregular
intervals yet urgently. It was not convenient to find individual labourers and
hence, the assessee identified some of the maistries or group leaders to
procure the labour who can work as per the requirement of the job. As stated by
the AR, the group leaders were only responsible for procuring the labour and
work was done under the assessee’s personal supervision. There was no written
or oral agreement or contract between the maistries and the assessee for
getting the work done through the maistry or to supply the labour as it was a
general practice used for convenience of obtaining distant labourers. Neither
there was a contract for supply of labour nor there was contract for getting
the work done through labour by the assessee with the maistries. The AO simply
considered the payments made to the group leaders and landed in a presumption
that there was contract in existence for supply of labour between the maistries
and the assessee. The AO did not examine the maistries before coming to such
conclusion. As per the provisions of section 194C of the Act, there must be
contract for deduction of TDS including supply of labour for carrying out any
work.

 

Thus, in the
opinion of the ITAT No Disallowance u/s. 40(a)(ia) for non deduction of TDS
u/s. 194C if no oral or written contract exist between the contractor and
contractee.

 

Section 153A – Copies of sale deeds of land found during the course of search operation which were already considered by the AO while framing the assessment u/s. 143(3) cannot be considered as incriminating material and, therefore, the assessment framed u/s. 153A on the basis of the contents of the same sale deeds is bad in law.

35.  [2019] 197 TTJ 502 (Delhi – Trib.) Lord Krishna
Dwellers (P) Ltd vs. DCIT ITA No.:
5294/Del/2013 A.Y.:  2006-07. Dated: 17th December, 2018.

 

Section 153A – Copies of sale deeds of land
found during the course of search operation which were already considered by
the AO while framing the assessment u/s. 143(3) cannot be considered as
incriminating material and, therefore, the assessment framed u/s. 153A on the
basis of the contents of the same sale deeds is bad in law.

 

FACTS


A search operation
was conducted at the premises of the assessee on 21.01.2011. Original return of
income was filed on 21.11.2006 and the assessment was framed u/s. 143(3) of the
Act vide order dated 13.05.2008. During the course of original assessment
proceedings the details of vendors from whom the land was purchased during the
F.Y. 2005-06 alongwith copies of land deed were furnished for verification.
After considering all this, the Assessing Officer framed the assessment. The
same sale deeds were found during the course of search operation and on the
basis of the very same sale deeds, the Assessing Officer came to the conclusion
that an amount of Rs.1.05 crore has been paid to various persons in cash.

 

Aggrieved by
the assessment order, the assessee preferred an appeal to the CIT(A). The
CIT(A) confirmed the same.

 

HELD 


The Tribunal
held that the sale deeds, transactions when duly recorded in the regular books
of account, could not be considered as incriminating material found during the
course of search operation. It was not the case of the Revenue that if the
search and seizure operation had not been conducted, the Revenue could never
have come to know that the assesse had entered into various purchase
transactions of land. The contention of the Departmental Representative that
though the deeds were before the AO, but he examined the deeds only to
ascertain the circle rate vis a vis the transaction rate and never went into
the cash transactions reflected in the land deed was not acceptable. Once a
document is filed before the AO during the course of search proceedings it is
assumed that he has gone through the contents of those documents and has
verified the same.

 

The copies of sale deed filed by the revenue
were the same which were considered by the AO while framing assessment u/s.
143(3). Therefore the assessment framed u/s. 153A was bad in law and was
quashed.

Section 54F r.w.s 50 – Deeming fiction of section 50 cannot be extended to the deduction allowable u/s. 54F and therefore, assessee is entitled for deduction u/s. 54F on the capital gains arising on the sale of depreciable assets as these assets were held for a period of more than thirty-six months.

34.  [2019] 197 TTJ 583 (Mumbai – Trib.) DCIT vs.
Hrishikesh D. Pai ITA No.:
2766/Mum/2017 A.Y.:
2012-13 Dated: 26th September, 2018

           

Section 54F r.w.s 50 – Deeming fiction of
section 50 cannot be extended to the deduction allowable u/s. 54F and
therefore, assessee is entitled for deduction u/s. 54F on the capital gains
arising on the sale of depreciable assets as these assets were held for a
period of more than thirty-six months.

 

FACTS


The assessee, a doctor by profession, had
sold a property, which was used by him for commercial purposes for his clinic and
on which depreciation was also claimed u/s. 32. The said property was held by
the assessee for a period of more than thirty six months before being sold.
Further, the assessee had purchased a new residential flat from the
consideration received from sale of the above property. The assessee claimed
deduction under section 54F on the capital gains arising from the sale of
aforesaid property.

 

The Assessing Officer treated the aforesaid
property as short-term capital assets within the deeming provision of section
50 and held that the assessee was not entitled for deduction u/s. 54F with
respect to short-term capital gains arising on sale of such short term capital
assets, as the deduction u/s. 54F was available only on the long-term capital
gains arising from transfer of long-term capital assets.

 

Aggrieved by the assessment order, the
assessee preferred an appeal to the CIT(A). The CIT(A) allowed the deduction
u/s. 54F to the assessee. Being aggrieved by the CIT(A) order, the Revenue
filed an appeal before the Tribunal.

 

HELD


The Tribunal
held that section 50 created a deeming fiction by modifying provisions of
sections 48 and 49 for the purposes of computation of capital gains chargeable
to tax u/s. 45 with
respect to the depreciable assets forming part of block of assets and there was
nothing in section 50 which could suggest that deeming fiction was to be
extended beyond what was stated in provisions of section 50 and it couldnot be
extended to deduction allowable to the assessee u/s. 54F which was an independent section operating in
altogether different field.

 

Thus, the assessee was entitled for
deduction u/s. 54F on the capital gains arising on the sale of depreciable
assets being commercial property.

 

In view of the aforesaid, the appeal filed
by the revenue deserved to be dismissed.

Section 23 – Assessee is entitled to claim benefit u/s. 23(1)(c) if assessee intended to let out property and took efforts in letting out of property and the property remained vacant despite such efforts made by the assessee.

33. 
[2019] 101 taxmann.com 45 (Delhi-Trib.) Priyankanki Singh Sood vs. ACIT ITA No.: 6698/Del./2015 A.Y.: 2012-13 Dated: 13th December, 2018

 

Section 23 – Assessee is entitled to claim
benefit u/s. 23(1)(c) if assessee intended to let out property and took efforts
in letting out of property and the property remained vacant despite such
efforts made by the assessee.

 

FACTS


In the course
of assessment proceedings, the Assessing Officer (AO) observed that the assessee
owned a property at Madras and that the assesse had not offered any income
under the head `Income from House Property’ in respect of the said house
property at Madras. The AO considered the annual value of the property to be
the sum for which the property might reasonably be expected to be let out and
after allowing standard deduction of 30% as per provisions of section 24(a) of
the Act, he made an addition of Rs. 49,849 under the head income from house
property.

 

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
noted that the assessee purchased the said property in 1980 and the same was
continuously let out upto assessment year 2001-02 and thereafter from
assessment year 2002-03, suitable tenant could not be found and hence the
property remained vacant. The Tribunal observed that section 23(1)(c) was
attracted only upon fulfilment of the three conditions cumulatively. Upon cumulative
satisfaction of the three conditions the amount received or receivable shall be
deemed to be the annual value. The three conditions, according to the Tribunal,
are-

–  the property or part thereof must be let; and

–  it should have been vacant during the whole
or any part of the previous year; and

– owing to such
vacancy the actual rent received or receivable by the owner in respect thereof
should be less than the sum referred to in the clause

 

Further, the Tribunal also observed that
clause (c) would not apply in situations where the property was not let out at
all during the previous years or even if let out was not vacant during whole or
any part of the previous year.

 

The Tribunal observed that the property at
Madras which was in dispute remained vacant after assessment year 2002-03 till
date. The Tribunal noted that since the property could not be let out due to
inherent defects and the property remained vacant, the assessee had rightly
applied section 23(1)(c) of the Act. The said property after being vacant also
was not under self-occupation of the assessee. Further, it was not the case of
the revenue that the property was not let out prior to assessment year 2002-03.
Under the circumstances, the Tribunal, following the decision of the co-ordinate
bench in Premsudha Exports (P.) Ltd. vs. ACIT [2008] 110 ITD 158 (Mum.)
held that the assessee was entitled to benefit u/s. 23(1)(c) of the Act. The
appeal filed by the assessee was allowed.

CBDT Circulars – CBDT Circular No. 3 of 2018 dated 11th July, 2018 which specifies the revised monetary limits for filing appeal by the department before Income-tax Appellate Tribunal, High Courts and SLPs/appeals before the Supreme Court is applicable even in respect of the appeals filed prior to the date of circular

32. 
[2019] 101 taxmann.com 248 (Ahmedabad-Trib.) DCIT vs. Shashiben Rajendra Makhijani ITA No.: 254 and 255/Ahd./2016 A.Y.: 2009-10 and 2010-11 Dated: 17th December, 2018

 

CBDT Circulars – CBDT Circular No. 3 of
2018 dated 11th July, 2018 which specifies the revised monetary
limits for filing appeal by the department before Income-tax Appellate
Tribunal, High Courts and SLPs/appeals before the Supreme Court is applicable
even in respect of the appeals filed prior to the date of circular

 

FACTS


During the course of appellate proceedings,
the assessee submitted that the appeals filed by the revenue were to be
dismissed on account of low tax effect in view of the CBDT Circular No. 3 of
2018 dated 11th July, 2018.

 

HELD


The Tribunal observed that, indeed, the tax
effect in the instant appeals was less than the limit of Rs. 20 lakh prescribed
by CBDT Circular No. 3 of 2018 dated 11th July, 2018. The Tribunal
observed the assessee’s case was not covered within the exemption clause,
clause (10) of the said CBDT Circular and since tax effect was less than Rs. 20
lakh, the appeals were held to be not maintainable.

Section 56(2)(vii)(b) – Agricultural land falls within the definition of immovable property and covered within the scope of section 56(2)(vii)(b) irrespective of whether the same falls within the definition of capital asset u/s. 2(14) of the Act or otherwise.

This is the first
and oldest monthly feature of the BCAJ. Even before the BCAJ started, when
there were no means to obtain ITAT judgments – BCAS sent important judgments as
‘bulletins’. In fact, BCAJ has its origins in Tribunal Judgments. The first
BCAJ of January, 1969 contained full text of three judgments.

We are told that the first convenor of
the journal committee, B C Parikh used to collect and select the decisions to
be published for first decade or so. Ashok Dhere, under his guidance compiled
it for nearly five years till he got transferred to a new column Excise Law
Corner. Jagdish D Shah started to contribute from 1983 and it read “condensed
by Jagdish D Shah” indicating that full text was compressed. Jagdish D Shah was
joined over the years by Shailesh Kamdar (for 11 years), Pranav Sayta (for 6
years) amongst others. Jagdish T Punjabi joined in 2008-09; Bhadresh Doshi in
2009-10 till 2018. Devendra Jain and Tejaswini Ghag started to contribute from
2018. Jagdish D Shah remains a contributor for more than thirty years now.

While Part A covered Reported Decisions,
Part B carried unreported decisions that came from various sources. Dhishat
Mehta and Geeta Jani joined in 2007-08 to pen Part C containing International
tax decisions.

The decisions earlier were sourced from
counsels and CAs that required follow up and regular contact. Special bench
decisions were published in full. The compiling of this feature starts with the
process of identifying tribunal decisions from a number of sources. Selection
of cases is done on a number of grounds: relevance to readers, case not
repeating a settled ratio, and the rationale adopted by the bench members.

What keeps the contributors going for so
many years: “Contributing monthly keeps our academic journey going. It keeps
our quest for knowledge alive”; “it is a joy to work as a team and contributing
to the profession” were some of the answers. No wonder that the features
section since inception of the BCAJ starts with the Tribunal News!

31.  [2019] 101 taxmann.com 391 (Jaipur-Trib.) ITO vs.
Trilok Chand Sain ITA No.:
499/Jp./2018 A.Y.:
2014-15 Dated: 7th January, 2019

 

Section 56(2)(vii)(b) – Agricultural land
falls within the definition of immovable property and covered within the scope
of section 56(2)(vii)(b) irrespective of whether the same falls within the
definition of capital asset u/s. 2(14) of the Act or otherwise.

 

FACTS


The assessee, an individual, purchased three
plots of land and claimed that the said plots of land did not fall within the
definition of capital asset as per section 2(14) of the Income-tax Act, 1961
(“the Act”). The Assessing Officer (AO) invoked provisions of section
56(2)(vii)(b) of the Act and made addition of Rs. 1,51,06,224 being the difference
between the sale consideration as per the sale deed and the value determined by
the stamp valuation authority.

 

Aggrieved, the assessee preferred an appeal
to the CIT(A). The CIT(A) held that land in question being agricultural land is
not a capital asset and the said transaction of purchase of land did not
attract the provisions of section 56(2)(vii)(b) of the Act. He further held
that the assessee was in the business of sale/purchase of property and the land
so purchased was his stock-in-trade and since the stock-in-trade is also
excluded from the definition of capital asset, provisions of section
56(2)(vii)(b) of the Act were not applicable. He deleted the addition of Rs.
1,51,06,224 made to the total income of the assessee.

 

Aggrieved, the Revenue preferred an appeal
to the Tribunal.

 

HELD


Section 56(2)(vii)(b) refers to any
immovable property and the same is not limited to any particular nature of
immovable property. The Tribunal also held that the section refers to
`immovable property’ which by its grammatical meaning would mean all and any
property which is immovable in nature i.e. attached to or forming part of earth
surface. The issue as to whether such agricultural land falls in the definition
of capital asset u/s. 2(14) or whether such agricultural land is part of
stock-in-trade could not be read into the definition of any immovable property
used in the context of section 56(2)(vii)(b) of the Act and is therefore not
relevant.

 

The appeal filed by the Revenue was
dismissed by the Tribunal.

 

Business expenditure – Deduction u/s. 35AD – Specified business – Hotel Business – Commencement of new business not disputed by Department and income offered to tax accepted – Certification of hotel as three-star category hotel in subsequent year – Time taken by competent authority for certification beyond control of assesse – Assessee not to be denied deduction u/s. 35AD on the ground that the certification was in the later year

43.  CIT vs.
Ceebros Hotels Pvt. Ltd.; 409 ITR 423 (Mad) Date of order: 13th November, 2018 A Y. 2011-12 Section 35AD of ITA 1961

 

Business expenditure – Deduction u/s. 35AD – Specified
business – Hotel Business – Commencement of new business not disputed by
Department and income offered to tax accepted – Certification of hotel as
three-star category hotel in subsequent year – Time taken by competent authority
for certification beyond control of assesse – Assessee not to be denied
deduction u/s. 35AD on the ground that the certification was in the later year

 

The assessee was in the hotel business running a three-star hotel. The
assessee commenced the business in the A. Y. 2011-12 but the certification of
the three-star was received only in the subsequent year. For the A. Y. 2011-12,
the Assessing Officer denied the benefit of deduction u/s. 35AD(5)(aa) of the
Act on the ground that the assesse obtained classification as three-star
category hotel only during the subsequent year, i.e., A. Y. 2012-13.

 

The Tribunal allowed the assessee’s claim and held that once the
Department had accepted the income of the assessee offered to tax from the
hotel business, which was newly established and became fully operational in the
year 2010, the assessee was eligible for the investment allowance, that once
the application for star category classification was not rejected and after
inspection no discrepancy was found and the assessee was recommended for
classification under the three-star category the assessee could not be
penalised for the delay on the part of the Hotel and Restaurant Approval and
Classification Committee to inspect the Hotel before the end of the financial
year.

 

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

 

“i)   The reasons assigned by the
Tribunal for grant of deduction to the assessee u/s. 35AD(5)(aa) were just and
proper and the findings rendered by it were right.

 

ii)   The application filed by the
assesse for classification was made on 19/04/2010 and thereafter certain
procedures were to be followed and an inspection was required to be conducted
for such purpose. The manner in which the inspection was conducted and the time
frame taken by the competent authority were beyond the control of the assessee.
The Department had not disputed the operation of the new hotel from the F. Y.
2010-11 as it had accepted the income, which was offered to tax from the newly
established hotel which became fully operational in the year 2010.

iii)  Nowhere in the clause (aa) of
sub-section (5) of section 35AD was it mandated that the date of the
certificate was to be with effect from a particular date. Therefore, the
provision which was to encourage the establishment of hotels of a particular
category, should be read as a beneficial provision and therefore, the
interpretation given by the Tribunal were valid and justified. Therefore, the
Tribunal was right in concluding that the assesse is entitled to claim
deduction u/s. 35AD(5)(aa) for the A. Y. 2011-12.”

 

AMOUNTS NOT DEDUCTIBLE U/S. 40(a)(ii) AND TAX

ISSUE FOR CONSIDERATION


Section 40(a)  provides for a list of expenses that are not
deductible in computing the income chargeable under the head “Profits and gains
of business or profession”, notwithstanding the provisions of sections 30 to 38
of the Act in case of any assesse. Vide clause (ii), any sum paid on account of
any rate or tax levied on the profits or gains of any business or profession
of, or otherwise on the basis of any such profits or gains is disallowable.
Explanations 1 & 2 of the said clause, 
provide that any tax eligible for relief u/s. 90, 90A and 91 shall be deemed
to be the rate or tax. Likewise, any sum paid on account of wealth-tax is also
disallowable vide clause (iia) of section 40 (a).


The term ‘tax’ is defined by section 2(43) of the Act to mean income-tax
chargeable under the provisions of the Act. The courts often have been asked to
examine the true meaning of the term “tax” and to determine whether any of the
following are includible in the meaning of the term tax.

  • Education cess including secondary and higher
    education cess.
  • Interest on late payment of tax deducted at
    source.
  • Foreign taxes i.e. taxes on foreign
    income.                                                               


The Tribunals and the Courts  at
times have delivered  conflicting
decisions on each of the above issues. The short issue which however is sought
to be examined here is about the deductibility of the payment of the education
cess, in computing the profits and gains of business or profession.


SESA GOA LTD’S CASE


The issue arose in the case of Sesa Goa Ltd vs. JCIT, 38 taxmann.com
(Panaji), 60 SOT 121,  for assessment
year 2009-10. In that case, the assessee company had claimed a deduction of an
amount of Rs.19.72 crore towards payment of education cess, which amount was
disallowed by the AO and the disallowance was confirmed by the CIT (Appeals) by
applying provisions of section 40(a)(ii) of
the Act.


On appeal to the Tribunal, it was contended that the education cess was
paid for providing finance for quality education and therefore should be
considered to have been paid and incurred for the purposes of business. It was
further explained that cess was not listed for disallowance under the
provisions of clause (ii) of section 40 of the Act. In reply, it was contended
by the Revenue that the education cess formed an integral part of the direct
tax collection and the payment thereof was clearly covered for the disallowance
under the aforesaid clause of section 40(a) of the Act.


On hearing the rival submissions and on due consideration of the
parties, the Tribunal held that the education cess was collected as a part of
the income tax and the provisions of the respective clauses of section 40(a)
were applicable and the assessee was not entitled for the deduction of the
amount paid towards education cess.


According to the Tribunal, the payment of the education cess could not
be treated as a “fee” but should be treated as a “tax” for the reason that the
payment of fees was meant for getting certain benefits or services, while tax
was imposed by the Government and was levied without promising in return any
benefit or service to the assessee.


The Tribunal held that such payment could not be said to be an
expenditure incurred wholly and 
exclusively for the purpose of the business. An appeal filed by the
assessee against the order of the Tribunal in this case has been admitted by
the High Court and is pending for hearing.


CHAMBAL FERTILIZERS AND CHEMICALS’ CASE


The issue again came up for
consideration of the Jaipur bench of the Tribunal in the case of ACIT vs.
Chambal Fertilizers & Chemicals Ltd., for assessment year 2009-10, in
ITA No.412/JP/2013. In that case, the assessee had challenged the action of
the CIT (Appeals)  in confirming the
action of disallowance of education cess of Rs.3.05 crore, by the AO, u/s. 40
(a) (ii). The AO had also held that such cess was not an allowable expenditure
u/s. 37. The Tribunal noted that the same issue, in the assessee’s own case,
was adjudicated by a co-ordinate bench of the Tribunal vide an order dated
28.10.2016 passed in ITA No.s 459 and 558/JP/2012.


In the said appeals, it was contended by the assessee that the
legislature, where desired  had provided
that the payment of cess was not deductible, by specifically including the same
in the language of the provisions; it was explained that there was no intention
to disallow the payment of education cess in computing the income. The Tribunal
observed that the basic character of the education cess was that of a tax which
was levied on the profits or gains of the business and given that such a tax
was liable for disallowance u/s. 40(a) (ii), the payment of education cess was
not eligible for deduction. The Tribunal, in the later case under
consideration, following the above mentioned orders, decided the appeal against
the assessee by confirming the disallowance made by the AO.


On further appeal by the assessee to the high court in the case of Chambal  Fertilizers & Chemicals Ltd. vs. JCIT in
D.B ITA No. 52 of 2018 decided by an order dt. 31.07.2018, the assessee,
relying on the decision in the case of Jaipuria Samla Amalgamated Collieries  Limited vs. CIT , 82 ITR 580 (SC)
contended  that the term tax did not
include cess. Attention of the court was invited to  circular No. 91 of 1967, bearing number
91/58/64–ITJ(19) dated 18.05.1967 to contend that the CBDT vide that circular
had clarified that the cess was not specifically included in section 40(a)(ii)
for disallowance and that no disallowance of education cess was possible. 


The following submissions made before the lower authorities by the
assessee were taken note of by the court;

  • On a plain reading of the above provision of
    section 40(a) (ii), it was  evident that
    a sum paid of any rate or tax was expressly disallowed only where : (i) the
    rate was levied on the profits or gains of any business or profession, and
    (ii)  the rate or tax was assessed at a
    proportion of or otherwise on the basis of any such profits or gains. It was
    evident that nowhere in the said section, it had been mentioned that education
    cess was not allowable. Education cess was neither levied on the profits or
    gains of any business or profession nor assessed at a proportion of, or
    otherwise on the basis of, any such profits or gains.
  • In CBDT Circular No. 91/58/66 ITJ (19), dated
    May 18, 1967 it has been clarified that the effect of the omission of the word
    “cess” from section 40(a)(ii) was that only taxes paid were to be disallowed in
    the assessment for the years 1962-63 onwards. Thus, as per the said circular,
    Education cess could not be disallowed; there could not be a contradiction, as
    the circulars bind the tax authorities.
  • That education cess could not be treated at
    par with any “rate” or “tax” within the meaning of section 40(a)(ii) especially
    when the same was only a “cess” as seen from the speech of the  Finance Minister .


The Revenue  placed reliance on
the decision in the case of Smithkline & French (India)  Ltd. vs. CIT, 219 ITR 581 (SC) wherein it
was held that ‘surtax’ was levied on business profits of the company and was
therefore, disallowable u/s. 40(a)(ii) of the Act. It was also contended
relying on the decision in the case of SRD Nutrients Private Limited  vs. CCE AIR 2017 SC 5299 that ‘education
cess’ was in the nature of surcharge, which the assessee was required to pay
along with the basic excise duty. 


The following submissions made before the lower authorities by the
Revenue were taken note of by the court;

  • The purpose of introducing the cess was
    to  levy and collect, in accordance with
    the provisions of the relevant chapter, 
    as surcharge for purposes of Union, a cess to be called the Education
    Cess, to fulfill the commitment of the Government to provide and finance
    universalised quality basic education. It was clear that the said cess was
    introduced as a surcharge, which was admittedly not deductible.
  • The 
    provision was  wide enough to
    cover any sum paid on account of any rate or tax on the profits or assessed at
    a proportion of such profits. Education cess being calculated at a proportion
    (2% or 1%) to Income Tax, which in turn, was in proportion to profits of
    business, would certainly qualify as a sum assessed at a proportion to such
    profits.
  • If education cess was considered deductible,
    then by the same logic Income-Tax or any surcharge would also became
    deductible, which would be an absurd proportion.
  • If Education cess were to be deductible, then
    it would not be possible to compute it, e.g. If profit is Rs. 100, Income Tax
    was Rs. 30 and Education Cess was Rs. 0.90 and if education cess were to be
    deductible from profit, such profit (after such deduction) would become Rs.
    99.1 (100-0.9) which would again necessitate re-computation of Income-Tax. The
    vicious circle of such re-computation would continue, which was why the
    legislature, in its wisdom, had not allowed deductibility of amounts calculated
    at a proportion of profits.
  • The mechanism of recovery of unpaid Education
    cess and the penal provision for non payment being the same as that for  income tax, indicated that unpaid cess was
    treated as unpaid tax and was visited with all consequences of non-payment of
    demand. There was no separate machinery in the Act for recovery of unpaid cess
    and imposition of interest and penalty in case of default in payment of unpaid
    cess. This indicated that cess is a part of tax and all recovery mechanisms and
    consequences pertaining to recovery of tax apply to recovery of cess also
    without explicit mention of the word “cess” in the foregoing
    provisions. Hence, drawing a parallel, no explicit mention of “cess”
    was required in section 40a(ii) for making disallowance thereof.


On due consideration of the submissions by the parties, the Rajasthan
high court allowed the appeal of the assesse and ordered the deletion of the
disallowance of the education cess by holding in paragraph 5 that ;


“On the third issue in appeal no.52/2018, in view
of the circular of CBDT where word “Cess” is deleted, in our
considered opinion, the tribunal has committed an error in not accepting the
contention of the assessee. Apart from the Supreme Court decision referred that
assessment year is independent and word Cess has been rightly interpreted by
the Supreme Court that the Cess is not tax in that view of the matter, we are
of the considered opinion that the view taken by the tribunal on issue no.3 is
required to be reversed and the said issue is answered in favour of the
assessee.”


The High Court directed the AO to allow the claim of the assesse for
deduction of the cess in computing the profits and gains of business.


OBSERVATIONS


The issue, under the controversy, 
is all about deciding whether the education cess levied under the
Finance Act with effect from financial year 2004-05 is disallowable under
clause (ii) of section 40(a) of the Income tax Act.


The Education Cess, secondary and higher,  has been levied since financial year 2004-05
by the respective Finance Acts. The Finance Minister, while presenting the
Finance (No.2) Bill, 2004, 268 ITR (st.) 1, had explained the objective and the
purpose behind the levy of cess in the following words. “Education 22.
In my scheme of things, no issue enjoys a higher priority than providing basic
education to all children. I propose to levy a cess of 2 per cent. The new cess
will yield about Rs. 4000- 5000 crores in a full year. The whole of the amount
collected as cess will be earmarked for education, which will naturally include
providing a nutritious cooked midday meal. If primary education and the
nutritious cooked meals scheme can work hand-in-hand, I believe there will be a
new dawn for the poor children of India.”


The cess  is levied and collected
at a specified percentage of the Income tax i.e. otherwise payable on the total
income, including the profits or gains of any business or any profession. It is
deposited in a separate account to be known as ‘Prarambhik Shiksha Kosh’ which
deposits are used for this specific purpose of meeting the educational needs of
the citizens of India. The power to levy income tax as also cess is derived by
the parliament under Article 270 of the Constitution of India. The term ‘tax’
is defined by section 2 (43) of the Income tax Act and in the context, means,
the income tax chargeable under the provision of the Act. With effect from
financial year, 2018-19, this cess includes collection for health also and is
now know as the Health & Education Cess.


A provision similar to section 40(a)(ii), is not contained in section 58
for disallowance of tax payable on the income computed under the head  Income from 
Other Sources. Explanation 1 of section 115JB(2) provides that the
amount of income tax paid or payable and the provision therefore should be
added to the profit, as shown in the Statement of Profit and Loss, in computing
the book profit that is liable for the MAT. 
Explanation 2 specifically provide, vide clauses (iv) and (v), that the
income tax shall include education cess levied by the Central Acts. No such
extension of the meaning of the term ‘tax’, used in section 40(a)(ii), has been
provided for or clarified for including the education cess, in its scope for
disallowance u/s. 40(a)(ii) of the Act.


Section 10(4) of the Income tax Act, 1922 provided for a similar
disallowance in computing the income from the specified sources. The said
section in clear words provided that the income tax and “cess” were to be
disallowed in computing the income. Section 40(a)(ii) which is the successor of
section 10(4) of 1922 Act, has chosen to not include the term “cess” in its
fold specifically, there by indicating that the cess would not be subjected to
disallowance, unless the term “tax”, used therein, by itself includes a cess.


Importantly a circular issued by the CBDT, in the year 1967,
specifically clarified for the purpose of section 40(a)(ii), that the term
“tax” did not include in its scope any cess and the exclusion of ‘cess’ in
section 40(a)(ii) of the Act of 1961, in contrast to section10(4) of the Act of
1922, was for a significant reason.  In
short, the said circular bearing number 91/58/64–ITJ(19) dated 18.05.1967
clarified that a cess was not disallowable u/s. 40(a)(ii) of the Income tax Act
of 1961. The relevant part of the circular reads as;


CIRCULAR F. NO. 91/58/66-ITJ(19) DT. 18TH
MAY, 1967 Interpretation of provision of s.40(a)(ii) of IT Act,
1961-Clarification regarding 18/05/1967 . BUSINESS EXPENDITURE SECTION
40(a)(ii),


1. Recently a case has come to the notice of the
Board where the ITO has disallowed the ‘cess’ paid by the assessee on the ground
that there has been no material change in the provisions of s.10(4) of the old
Act and s.40(a)(ii) of the new Act.


2. The view of the ITO is not correct. Clause
40(a)(ii) of the IT Bill, 1961 as introduced in the Parliament stood as under:
“(ii) any sum paid on account of any cess, rate or tax levied on the profits or
gains of any business or profession or assessed at a proportion of, or
otherwise on the basis of, any such profits or gains”. When the matter came up
before the Select Committee, it was decided to omit the word ‘cess’ from the
clause. The effect of the omission of the word ‘cess’ is that only taxes paid
are to be disallowed in the assessments for the year 1962-63 and onwards.


3. The Board desire that the changed position may
please be brought to the notice of all the ITOs so that further litigation on
this account may be avoided.


Under the Constitution of India, the collected tax is to be used for the
general purpose of running and administration of the country, while the cess is
collected for a specified purpose.  In
that sense, the cess is usually held to be in the nature of a fee and not a
tax.  The education cess as noted
earlier, is levied for a specific purpose of promoting education in India;  importantly the cess is not calculated as a
tax, at the specified rate on the income of an assessee,  it is rather calculated as a percentage
of  such tax, so determined on income, by
applying the specified rate to the tax, so computed. 


The Supreme court in the case of Dewan Chand Builders &
Contractors vs. UOI [CA Nos. 1830 to 1832 of 2008, dated 18-11-2011], held
that a cess levied under the BOCW Welfare Cess Act was a fee, not a tax,
collected for a specified   purpose. It
was not a part of the consolidated fund and was to be used for the specified
purpose of promoting the security of the workers. Similarly, the Apex court in
the cases of Kesoram Industries Ltd. 262 ITR 721(SC)– held that a cess
when levied for the specific purpose was a fee and not a tax.


The Mumbai bench of the Tribunal, in an unreported decision in the case
of Kalimata Investment Co. Ltd., ITA No. 4508/N/2010 dated 19.05.2012,  held that the term ”tax” used in section
40(a)(ii) included education cess, levied w.e.f. financial year 2004-05,  and that a cess was an additional sur-charge
and was therefore disallowable in computing the income of an assessee. An
appeal filed against the decision is admitted by the High Court and is pending
for hearing.       


The related issue, of  education
cess being an expenditure incurred wholly or 
exclusively for the purpose of business or profession, was also
addressed  by the Rajasthan high court in
the case of Chambal Fertilizers & Chemicals Ltd. (supra) by holding
that the payment of education cess was for the purpose of business, by
referring to the objective behind its levy and the purpose for which it is
collected by the Government, and was allowable as a deduction u/s. 37 of the
Act.


In a different context, a cess may also be a tax and not only a
fee.  Entry 49, List 2 of the Government
of India Act which uses the expression “cesses” was examined by the  Supreme Court in the case of Kunwar Ram
Nath vs. Municipal Board AIR 1983 SC 1930 to hold that such a cess levied
under Entry 53 of List 2 of the Constitution of India was a “tax”. In the case
of Shinde Brothers vs. Deputy Commissioner, Raichur, AIR 1967 SC 1512,  it was held that a ‘cess’ meant a ‘tax’ and
was generally imposed for meeting some special administrative expenses, like
health cess, education cess, road cess, etc.


For the
reason noted above and in particular on accounts of the circular No. 91 of
1967 (supra) and the provisions of section 2(43) and section115JB, the
expenditure on education cess is not disallowable u/s. 40(a)(ii) of the Act,
unless the Government is able to establish that the education cess is also a
tax chargeable under the provisions of the Income Tax Act, 1961. Presently the
education cess is levied under sub-sections (12) & (13) of  section 2 of the Finance Act, 2018. The
decisions of the tribunal had not taken in to 
consideration circular 91 of 1967 in deciding the issue against the
assessee; had the same been brought to the attention of the Tribunal, the
decision could have been different.

 

Section 45: Capital gains-Transfer-Capital gains are levied in the year in which the possession of the asset and all other rights are transferred and not in the year in which the title of the asset gets transferred. [Section 2(47), Transfer of Property Act, 1953]

9. 
Pr.CIT-25 vs.  Talwalkars Fitness
Club [ Income tax Appeal no 589 of 2016 Dated: 29th October, 2018
(Bombay High Court)]. 

Talwalkars Fitness Club vs. ACIT-21(2);
dated 27/05/2015 ; ITA. No 7246/Mum/2014, Bench: E ;  AY 2008-09  
Mum.  ITAT ]


Section 45: Capital gains-Transfer-Capital
gains are levied in the year in which the possession of the asset and all other
rights are transferred and not in the year in which the title of the asset gets
transferred. [Section 2(47), Transfer of Property Act, 1953]


During the assessment
proceedings, the A.O noticed that the assessee had disposed of two premises
each measuring 1635 sq. ft. for a total consideration of Rs.4,40,00,000/- by
way of two separate agreements to sale. The AO observed that the assessee had not
offered capital gains arising out on such sale. On being asked to explain, the
assessee submitted that though the agreements to sale were executed during the
financial year relevant to assessment year 2011-12, however, the actual sale
took place in the subsequent year and the capital gains were accordingly
offered in subsequent assessment year 2012-13, which had been accepted by the
department also. The assessee further explained that the assessee had not
parted with the possession of the property in question during the year under
consideration.


The AO, however, did not
agree with the contentions of the assessee. He observed that the property was
transferred by way of two registered sale agreements both executed on
14.02.2011 i.e. during the year under consideration. The said agreements were
duly registered with the stamp duty authorities. The sale agreement in question
was not revokable. The handing over of the possession of the property on a
future date was a mere formality. He therefore held that the transfer of the
property took place on the date of agreement and thus the capital gains were
liable to be assessed during the year under consideration.


In appeal, the Ld. CIT(A),
while referring to the wording of the some of the clauses of the agreement dated
14.02.11, upheld the findings of the AO that the capital gains arising from the
sale of the said property would be liable to be assessed in the A.Y. 2011-12.


Aggrieved by the order of
the Ld. CIT(A), the assessee filed appeal before ITAT. The Tribunal held that
the assessee has taken us through the different clauses of the agreement dated
14.02.11. He has submitted that though, the reference to the parties in the
agreement has been given as vendors and purchasers, however, it was an
agreement to sell and not the sale deed itself. As per the separate agreements,
each of the property had been agreed to be sold for a consideration of
Rs.2,20,00,000/. Only a token amount of Rs.20,00,000/- was received as advance.
However, the balance consideration was agreed to be paid by 26.05.11. The
possession of the property was not handed over to the prospective purchasers.
The sale transaction was deferred for a future date on the payment of balance
consideration of the amount of Rs.2 crore and therafter the possession was to
be handed over to the prospective purchasers.


The assessee continued to
enjoy the possession of the property even after the execution of the agreement
and was liable to handover the possession on receipt of the balance
consideration amount. It was also 
observed that the advance received by the assessee of Rs.20 lakh was
less than the 10% of the total consideration amount settled. The assessee was
not under obligation to handover the possession of the property till the
receipt of the balance consideration of the amount. The assessee was liable to
pay the due taxes on the property and was also liable for any type of loss or
damage to the property till it was handed over to the prospective purchaser
after receipt of balance sale consideration. The sale transaction was completed
on 16.06.11 and till then the assessee continued to be the owner in possession
of the property. The assessee has already offered the due taxes in the
subsequent year relevant to the financial year in which the sale deed was completed
and the possession was handed over by the assessee to the purchasers, which has
also been accepted by the department. Hence, there was no justification on the
part of the AO to tax the assessee for short term capital gains for the year
under consideration. In the result, the appeal of the assessee is hereby
allowed.


Aggrieved
by the order of the ITAT, the Revenue filed appeal before High Court. The Court
held  that the Tribunal applied the
correct legal principles and construed the clauses in the agreement, otherwise
than as understood by the A.O and the Commissioner. Such findings of fact can
never be termed as perverse for they are in consonance with the materials
produced before the Tribunal. Accordingly Revenue appeal was dismissed.

 

Section 22: Income from house property vis a vis Income from business – Real estate developer – main object not acquiring and holding properties – Rental income is held to be assessable as Income from house property. [Section 28(i)] Section 80IB(10) : Housing projects – stilt parking is part & parcel of the housing project – Eligible to deduction

8. CIT-24 vs.  Gundecha Builders [ Income tax Appeal no 347
of 2016
Dated: 31st July, 2018
(Bombay High Court)]. 

[ACIT-24(3) vs. Gundecha Builders; dated
19/02/2014 ; ITA. No 4475/Mum/2011, Bench G, 
Mumbai.  ITAT ]


Section 22: Income from house property vis a vis
Income from business – Real estate developer – main object  not acquiring and holding properties – Rental
income is held to be assessable as Income from house property. [Section 28(i)]


Section 80IB(10) : Housing projects – stilt
parking is part & parcel of the housing project – Eligible to deduction


The assessee is engaged in
the business of developing real estate projects. During the previous year the
assessee has claimed lease income of Rs.30.18 lakh under the head income from
house property. The same was not accepted
by  the 
A.O  who  held 
it  to  be 
business  income. Consequently,
the deduction available on the account of repair and maintenance could not be
availed of by the assessee.


Being aggrieved, the
assessee filed an appeal to the CIT(A). The CIT(A) held that the rental income
received by the assessee has to be classified as income from house property.
Thus, 30% deduction on account of repairs and maintenance be allowed.


Being aggrieved with the
CIT(A) order, the Revenue filed an appeal to the Tribunal. The Tribunal holds
that the dispute stands squarely covered by the decision of the Supreme Court
in Sambhu Investment (P)Ltd. vs. CIT (2003) 263 ITR 143(SC), wherein the
Hon’ble Apex Court has held that when main intention of letting out the
property or any portion thereof is to earn rental income, the income is to be
assessed as income from house property and where the intention is to exploit
the immovable property by way of complex commercial activities, the income
should be assessee as income from business. Applying this proposition to the
facts of the instant case, it was held 
that the assessee has let out the property to earn the rental income.
Accordingly, the lease income was taxable as income from house property.


Before High Court the
Revenue points out that after the above decision the issue now stands concluded
in favour of the revenue by the decision of the Supreme Court in Chennai
Properties and Investments Limited, Chennai vs. CIT (2015) 14 SCC 793 and Rayala
Corporation Private Limited vs. ACIT (2016)15 SCC 201.


The Court observed  that the assessee is in the business of
development of real estate projects and letting of property is not the business
of the assessee. In both the decisions relied upon by Revenue Chennai Properties
(supra) and Rayala Corporation (supra), the Supreme Court on facts
found that the appellant was in the business of letting out its property on
lease and earning rent there from. Clearly it is not so in this case. Further,
the decision of this Court in CIT vs. Sane & Doshi Enterprises (2015) 377
ITR 165 wherein on identical facts this Court has taken a view that rental
income received from unsold portion of the property constructed by real estate
developer is assessable to tax as income from house property. Accordingly,
Revenue Appeal is dismissed.


As regard second issue is
concerned, the AO has disallowed assessee’s claim of deduction u/s. 80IB(10) in
regards to parking space. The CIT(A) allowed the assessee’s claim after find
that parking is part & parcel of the housing project that is the first and
foremost requirement of the residents of the residential units. Therefore, it
cannot be said that sale proceeds of stilt parking is outside the purview of
section 80IB(10) of the Act. The parking’s are in built and approved in the
residential structure of the residential building and no such separate
approvals are taken. The principle decided by the Hon’ble Spl. Bench of ITAT
(Pune) in the case of Brahma Associates vs. JCIT also supports the case
of the appellant that if some part of the flat is used for commercial purpose,
the correct character of housing project is not vitiated, AO has not brought on
record that which part of expenditure claimed to have been incurred for parking
is bogus. Hence, the A.O was directed to allow deduction to the appellant u/s.
80IB(10) on sale proceeds of stilt parking .The Tribunal upheld the finding of
the CIT(A)


Being aggrieved with the
ITAT order, the Revenue filed an appeal to the High Court. The court held that
this issue stands concluded against the Revenue and in favour of the assessee
by virtue of the orders of this Court in respect of AYs  2006-07 and 2007-08 decided in CIT vs.
Gundecha Builders (ITXA Nos.2253 of 2011 and 1513 of 2012 order dated 7th
March, 2013). Accordingly, Revenue Appeal was dismissed.


 

Section 28(iv) : Remission or cessation of trading liability – Loan waiver cannot be assessed as cessation of liability, if the assessee has not claimed any deduction and section 28(iv) does not apply if the receipts are in the nature of cash or money [ Section 41(1) ]

7. The Pr. CIT-1 vs.  M/s Graviss Hospitality Ltd [Income tax Appeal no 431 of 2016 Dated: 21st August, 2018
(Bombay High Court)]. 

[ACIT-1(1)  vs. 
Graviss Hospitality Ltd;     dated
17/06/2015 ;  ITA. No 6211/Mum/2011,
Bench: G , AY: 2008-09  Mumbai  ITAT ]


Section 28(iv) : Remission or cessation of
trading liability – Loan waiver cannot be assessed as cessation of liability,
if the assessee has not claimed any deduction and section 28(iv) does not apply
if the receipts are in the nature of cash or money [ Section 41(1) ]


The assessee company was
allowed rebate on loan liability of Rs.3,05,10,355/- from Inter Continental
Hospital  and SC Hotels & Resorts
India Pvt. Ltd. The entire rebate on loans was credited to the P& L account
under the head ‘other income’ and the same was offered for tax.


During the assessment
proceedings, the assessee furnished the details and rebate on loan to the AO
and submitted that out of total rebate allowed, an amount of Rs.2,10,73,487/-
related to principal amount of loan waived by SC Hotels & Resorts India
Pvt. Ltd. The assessee submitted before the AO that the receipt of loan from
SCH was on capital account and therefore the waiver of the principal amount was
also on capital account. The assessee submitted that the waiver of loan on
principal amount inadvertently remained to be excluded from total income and
the same was wrongly offered for tax and therefore the same was required to be
deducted from the total income.


The AO, however, did not
accept the contention of the assessee and disallowed the same observing that
the assessee was required to file a revised return of income in this respect.
He relied on the decision of the Hon’ble Supreme Court in the case of “Goetze
(India) Ltd. vs. CIT [2006] 284 ITR 323 (SC).


In appeal, the ld. CIT(A),
observed that the waiver of loan was required to be treated as capital receipt
and was not taxable income. He, while relying upon the decision of the Tribunal
in the case of “CIT vs. Chicago Pneumatics Ltd.” [2007] 15 SOT 252 (Mumbai)
held that if the assessee was entitled to a claim the same it should be allowed
to the assessee. He therefore directed the AO to treat the same as capital
receipt.


Being aggrieved with the
order of the CIT(A), the Revenue filed the Appeal before ITAT. The Tribunal
held that the waiver was not in respect of any benefit in kind or of any
perquisite. The waiver was of the principle loan amount in cash. The assessee
had not claimed any deduction in respect of loss, expenditure or trading
liability in relation to the loan amount. The waiver was of the principle
amount of loan for capital asset. He, thereafter, relying upon the decision of
the Hon’ble Jurisdictional High Court, in the case of “Mahindra &
Mahindra Ltd. vs. CIT” 261 ITR 501, held that the waiver of the loan amount
was a capital receipt not taxable as business income of the assessee. Further
relied on the Hon’ble Bombay High Court in the case of ‘Pruthvi Brokers
& Shareholders Pvt. Ltd.’ and 
held that even if a claim is not made before the AO it can be made
before the appellate authorities. The jurisdiction of the appellate authorities
to entertain such a claim is not barred.


The Hon’ble High Court
observed that the Hon’ble Supreme Court in the case of Mahindra & Mahindra
Ltd. (2018) 404 ITR 1 held that on a plain reading of section 28 (iv) of
the Act, it appears that for the applicability of the said provision, the
income which can be taxed shall arise from the business or profession. Also, in
order to invoke this provision, the benefit which is received has to be in some
other form rather than in the shape of money. If that is because of the
remission loan liability, then, this section would not be attracted.  Accordingly, Revenue appeal was dismissed.

Sections 92C and 144C – Transfer pricing – Computation of arm’s length price (Reasoned order) – Order passed by DRP u/s. 144C (5) must contain discussion of facts and independent findings on those facts by DRP – Mere extraction of rival contentions will not satisfy requirement of consideration

30. Renault Nissan Automotive India (P.)
Ltd. vs. Secretary; [2018] 99 taxmann.com 4 (Mad): Date of order: 28th
September, 2018  A. Y. 2013-14


Sections 92C and 144C – Transfer pricing –
Computation of arm’s length price (Reasoned order) – Order passed by DRP u/s.
144C (5) must contain discussion of facts and independent findings on those
facts by DRP – Mere extraction of rival contentions will not satisfy
requirement of consideration


The assessee filed return
of income by computing arm’s length price of international transactions. The
TPO rejected economic adjustments claimed by the assessee and proposed certain
transfer pricing adjustments. Based on order of the TPO, the Assessing Officer
passed draft assessment order. The assessee filed objections before the DRP
u/s. 144C objecting additions made by the TPO. The DRP passed impugned order
accepting conclusion arrived at by the TPO.


Madras High Court allowed
the writ petition filed by the assessee challenging the validity of the order
of the DRP and held as under:


“i)    Perusal of the impugned order of the first respondent would
clearly indicate that apart from extracting each objection raised by the
petitioner and the relevant portion of the order passed by the Transfer Pricing
Officer dealing with such objection, the first respondent has not further
discussed anything on the said objection in detail as to how the objections
raised by the petitioner cannot be sustained or as to how the findings rendered
by the Transfer Pricing Officer on such issue have to be accepted.


ii)    It is seen from section 144C that the assessees shall file their
objections if any, to such variation made in the draft order of assessment
within 30 days to the Dispute Resolution Panel and the Assessing Officer as
contemplated u/s. 144C(2). Sub-section (5) of section 144C contemplates that
the Dispute Resolution Panel shall issue such directions as it thinks fit for
the guidance of the Assessing Officer to enable him to complete the assessment.
But such directions referred to in sub-section (5) shall be issued by the
Dispute Resolution Panel only after considering the following as provided under
sub-section (6), viz., (a) draft order; (b) objection filed by the assessee;
(c) evidence furnished by the assessee; (d) report, if any, of the Assessing
Officer, Valuation Officer or Transfer pricing Officer or any other authority;
(e) records relating to the draft order; (f) evidence collected by or cause to
be collected by, it; and (g) result of any enquiry made by or caused to be made
by it. Sub-section (7) of section 144C further contemplates that the Dispute
Resolution Panel may make such further enquiry as it thinks fit or cause any
further enquiry to be made by any Income tax authority before issuing any
directions. Perusal of the procedure contemplated under sub-section (6) and
sub-section (7), thus, would clearly indicate that issuance of such directions
as contemplated under sub-section (5), cannot be made mechanically or as an
empty formality and on the other hand, it has to be done only after considering
the above-stated materials. Therefore, the consideration of the above materials
by the Dispute Resolution Panel must be apparent on the face of the order and
such exercise would be evident only when the order contains the discussion of
facts and independent findings on those facts, by the Dispute Resolution Panel.
Certainly mere extraction of the rival contentions will not satisfy the
requirement of consideration. In the absence of any such independent reasoning
and finding, it should be construed that the Dispute Resolution Panel has not
exercised its power and issued directions by following the mandatory
requirements contemplated u/s. 144C(6) and (7). In this case, it is found that
the Dispute Resolution Panel had failed to do such exercise. Thus, it is
evident that the first respondent has passed a cryptic order, which in other
words, can be called as an order passed with non-application of mind.


iii)    Therefore, the matter has to go back to the first respondent for
consideration of the objections raised by the assessee in detail and to pass a
fresh order on merits and in accordance with law with reasons and independent
findings.”

Section 132 – Search and seizure – Block assessment – Declaration by assessee – Effect of section 132(4) – Declaration after search has no evidentiary value – Additions cannot be made on basis of such declaration

29. CIT vs. Shankarlal Bhagwatiprasad
Jalan; 407 ITR 152 (Bom): Date of order: 18th July,
2017
B. P. 1988-89 to 1998-99


Section 132 – Search and seizure – Block
assessment – Declaration by assessee – Effect of section 132(4) – Declaration
after search has no evidentiary value – Additions cannot be made on basis of
such declaration


In the case of the
assessee, there was a search and seizure operation u/s. 132 of the Act, between
27/11/1997 and 04/12/1997. On 31/12/1997, the asessee filed a declaration under
the Voluntary Disclosure of Income Scheme, 1997 declaring undisclosed income of
Rs. 1.20 crore. However, the assessee did not deposit the tax required to be
deposited before 31/03/1998 resulting in the rejection of declaration under the
Scheme. Thereafter by a letter dated 15/01/1998, the assessee addressed a
communication to the Assistant Director (Investigation) and offered a sum of
Rs. 80 lakh as an undisclosed income to tax. But on 23/11/1998, the assessee
filed a return of income declaring undisclosed income for the block period at
Rs. 55 lakh. The Assessing Officer made an addition of Rs. 65 lakh on the basis
of the declaration under the Scheme and determined the undisclosed income for
the block period at Rs. 1.20 crore.


The Commissioner (Appeals)
deleted the addition. The Commissioner (Appeals) held that communication dated
15/01/1998 to the Assistant Director (Investigation) disclosing income of Rs.
80 lakh could not be considered to be a statement u/s. 132(4) of the Act. This
was confirmed by the Tribunal.


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


“i)    A bare reading of section 132 (4) of the Income-tax Act, 1961,
indicates that an authorised officer is entitled to examine a person on oath
during the course of search and any statement made during such examination by
such person (the person being examined on oath) would have evidentiary value
u/s. 132(4).


ii)    The Tribunal was justified in law in deciding that the letter
dated 15/01/1998 of the assessee addressed to the Assistant Director about the
disclosure of Rs. 80 lakhs as income had no evidentiary value as stated u/s.
132(4). The Tribunal was justified in law in accepting the assessee’s claim of
sale of goods on various dates while deleting the addition of Rs. 65 lakhs.


iii)    The Tribunal was correct in law in deciding that the source of
the entire purchases had been explained as out of the initial capital of Rs. 31
lakhs by cash and sale proceeds of the purchased stock of timber.”

 

Sections 160, 161, 162 and 163 – Representative assessee – Non-resident – Agent – Conditions precedent for treating person as agent of non-resident – Transfer of shares in foreign country by non-resident company – No evidence that assessee was party to transfer – Notice seeking to treat assessee as agent of non-resident – Not valid

28. WABCO India Ltd. vs. Dy. CIT
(International Taxation); 407 ITR 317 (Mad): Date of order: 1st August,
2018 A. Y. 2014-15


Sections 160, 161, 162 and 163 –
Representative assessee – Non-resident – Agent – Conditions precedent for
treating person as agent of non-resident – Transfer of shares in foreign
country by non-resident company – No evidence that assessee was party to
transfer – Notice seeking to treat assessee as agent of non-resident – Not
valid


The appellant assessee was
incorporated under the Companies Act, 1956, in the year 1962, and was engaged
in the business of designing, manufacturing and marketing conventional braking
products, advance braking systems and other related air assisted products and
systems. The company was duly listed in the stock exchange and its shares were
transferable. In 2012-13, 75% of the shares of the Appellant were held by CD
and the balance 25% were held by public. In 2013-14, there was a share transfer
agreement between CD and WABCO, Singapore, in terms whereof CD transferred its
shareholding to WABCO, Singapore. The sale consideration of 1,42,25,684 shares
amounted to Rs. 29,84,97,852 Euros equivalent to Rs. 2347,23,78,600/-, for
which capital gains in the hands of CD was Rs. 2156,98,34,163/-. CD was
assessed and a draft assessment order was served on CD on 31/12/2017 in respect
of tax liability of Rs. 4,29,39,66,823/-, subject to CD availing of the option
to challenge the draft assessment order before the Dispute Resolution panel.
The Draft assessment order was finalised and a final assessment order issued
u/s. 143(3) read with section 144C of the Act. On 09/01/2018 the Department
issued a show-cause notice u/s. 163(1)(c) of the Act, to the Appellant assesee
whereby it was alleged that the capital gains had arisen directly as a result
of consideration received by CD from the Appellant and the Appellant was
proposed to be held as agent u/s. 163(1)(c) of the Act, in the event of any
demand against CD in the assessment proceedings for the A. Y. 2014-15. A writ
petition against the notice was dismissed by the Single Judge.


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


“i)    Harmonious reading of section 160 to 163 of the Income-tax Act,
1961 would show that: (i) in order to become liable as a representative
assessee, a person must be situated such as to fall within the definition of a
representative assessee;

(ii) the income must be such as is taxable u/s. 9;


(iii) the income must be such in respect of which such a person can be treated
as a representative assesee;


(iv) the representative assessee has a statutory
right to withhold sums towards a potential tax liability;


(v) since the
liability of a representative assessee is limited to the profit, there can be
multiple representative assessees in respect of a single non-resident
assessee-each being taxed on the profits and gains relatable to such representative
assessee..


ii)    The question was whether the show-cause notice was at all without
jurisdiction, whether the respondent wrongly assumed jurisdiction by
erroneously deciding jurisdictional facts, whether in the facts and
circumstances of the case, the appellant at all had any liability in respect of
the capital gains in question, and whether the appellant could be said to be an
agent u/s. 163(1)(c). The High Court had jurisdiction to consider the question
in writ proceedings.


iii)    No case was made out by the Department that in respect of
transfer of shares to a third party, that too outside India, the Indian company
could be taxed when the Indian company had no role in the transfer. Merely
because those shares related to the Indian company, that would not make the
Indian company an agent qua deemed capital gains purportedly earned by the
foreign company.


v)    The notice was not valid. The judgment and order under appeal is
set aside and consequently, the impugned show-cause notice is also set aside.”

Section 50C – Proviso to section 50C inserted by Finance Act, 2016 w.e.f. 1.4.2017 being curative in nature is retrospective.

19.  [2018] 100 taxmann.com 334 (Delhi-Trib.) Amit Bansal vs.
ACIT ITA No.:
3974/Delhi/2018 A.Y: 2012-13 Dated: 22nd November, 2018

 

Section
50C – Proviso to section 50C inserted by Finance Act, 2016 w.e.f. 1.4.2017
being curative in nature is retrospective.

 

FACTS


For
the assessment year under consideration, the assessee, an individual filed his
return of income declaring total income of Rs.10,20,270/-. During the year
under consideration, the assessee has shown net profit from sale/purchase of
properties under the head ‘Income from other sources’ at Rs.1,33,200/-. 

 

In
the course of assessment proceedings, the Assessing Officer (AO) asked the
assessee to provide the details of sale and purchase of property as well as to
justify why the income from sale of property is not to be assessed as ‘Capital
gain’ as against the ‘Income from other sources’ treated by the assessee. He
also asked the assessee to justify the impact of section 50C on the said
transaction.

 

The assessee submitted that he has sold the property held
by him jointly with Vikas Bansal on 22nd July, 2011 with net
consideration of Rs. 42 lakh which was purchased by him on 28th
July, 2010 for the sale value of Rs.39,33,600/- and has declared one half share
of profit on sale/purchase of property at Rs1,33,200/-. The assessee further
submitted that he has entered into an agreement to sell the property on 25th
March, 2011 with buyer Phool Pati and taken a part payment of Rs.10 lakh and no
possession was taken on that date. Thereafter, the assessee entered into an
agreement dated 22nd July, 2011 with buyer Phool Pati for final sale
and gave possession of the property in continuation of earlier agreement dated
25th March, 2011 in which the terms of payment were also specified.

 

It
was submitted that there is no registered conveyance deed and the transaction
was entered into just to earn profit from this venture of sale/purchase.
Alternatively, it was argued that the same may be treated as business income as
against ‘Income from other sources’ and not the ‘Capital gains’ in the hands of
the assessee. So far as the application of provisions of section 50C is
concerned, it was submitted that since the transaction is not in the nature of
capital gains, the provisions of section 50C are not applicable.

 

The
AO held that since the agreement of purchase as well as sale of plot involved
the possession of sale of property to be taken or retained in part performance
of a contract of the nature referred to in section 53A of Transfer of Property
Act, 1982, the property was a capital asset as prescribed in section 2(47)(v).
Therefore, it had to be treated as a capital asset and the asset was a
short-term capital asset in the hands of the assessee. The Assessing Officer
further noted that the circle rate of the property as on 22-7-2011 was Rs.
16,000/- per sq. yard as against the circle rate of Rs. 11,000/- as on
25-3-2011. Applying the provisions of section 50C, he determined the full value
of consideration at Rs. 57,21,600/- as against the actual sale consideration of
Rs. 42 lakh. Accordingly, the Assessing Officer determined the short-term
capital gain and made addition.

 

Aggrieved,
the assessee preferred an appeal to the Commissioner (Appeals) who confirmed
the action of the AO including the action of taking the circle rate of Rs.
16,000/- per sq. yard as on 22-7-2011.

 

Aggrieved
the assessee preferred an appeal to the Tribunal where, on behalf of the
assessee, relying on the ratio of the following decisions

(i)  Rahul G. Patel vs. Dy. CIT [(2018) 173 ITD 1
(Ahd. – Trib.)];

(ii) Smt. Chalasani Naga Ratna Kumaris vs. ITO
[(2017) 79 taxmann.com 104 (Vishakhapatnam – Trib.)];

(iii)       Hansaben Bhaulabhai Prajapati vs. ITO,
ITA No.2412/Ahd/2016 (ITAT, Ahmedabad).

 

it
was submitted that in view of the proviso to section 50C(1), where the date of
the agreement fixing the amount of consideration and the date of registration
for the transfer of the capital asset are not the same, the value adopted or
assessed or assessable by the stamp valuation authority on the date of
agreement may be taken and, thus, it had correctly adopted the rates applicable
on the date of the agreement as against the date of actual sale.

 

HELD


The
Tribunal noted that the proviso to section 50C was inserted by the Finance Act,
2016 with effect from 1-4-2017. It observed that the question that has to be
decided is as to whether the above amendment is prospective in nature i.e.,
will be applicable from assessment year 2017-18 or is retrospective in nature being
curative in nature.

 

The
Tribunal noted that identical issue had come up before the Ahmedabad Bench of
the Tribunal in the case of Dharamshibhai Sonani [2016] 75 taxmann.com
141/161 ITD 627 (Ahd. – Trib.) where it has been held that amendment to
section 50C introduced by the Finance Act, 2016 for determining full value of
consideration in the case of involved property is curative in nature and will
apply retrospectively. It then proceeded to observe that various other
decisions relied on by the Ld. counsel for the assessee also support the case
of the assessee that where the date of the agreement fixing the amount of
consideration and the date of registration regarding the transfer of the
capital asset in question are not the same, the value adopted or assessed or
assessable by the stamp valuation authority on the date of the agreement is to
be taken for the purpose of full value of consideration.

The
Tribunal accepted the argument made on behalf of the assessee in principle and
restored the issue to the file of the AO with a direction to verify necessary
facts and decide the issue in the light of the above observations directing to
adopt the circle rate on the date of agreement to sell in order to compute the
consequential capital gain.

 

The
appeal filed by the assessee was allowed.

 

Sections 28(iv), 68 – The fact that premium is abnormally high as per test of human probabilities is not sufficient. The AO has to lift the corporate veil and determine whether any benefit is passed on to the shareholders/directors.

9. 
Bharathi Cement Corporation Pvt. Ltd. vs. ACIT (Hyderabad) Members: P. Madhavidevi, JM and S. Rifaur
Rahman, AM ITA Nos.: 696 & 697/Hyd./2014 A.Y.s: 2009-10 and 2010-11 Dated: 10th August, 2018 Counsel for assessee / revenue: Nageswar Rao
/ M. Kiranmayee

 

Sections 28(iv), 68 – The fact that premium
is abnormally high as per test of human probabilities is not sufficient.  The AO has to lift the corporate veil and
determine whether any benefit is passed on to the shareholders/directors. 

 

FACTS


During the previous
year relevant to the assessment year under consideration, the assessee company,
filed its return of income declaring total income of Rs. 2,91,01,250.  This income comprised of interest on fixed
deposits which was offered for taxation under the head `Income from Other
Sources’. The Company had not commenced its business activity of manufacture
and sale of cement at its manufacturing unit in Andhra Pradesh and did not have
any income chargeable under the head `Profits and Gains of Business or Profession’.  

 

The Assessing
Officer (AO) in the course of assessment proceedings observed that the share
capital of the assessee company was held by Y S Jagmohan Reddy (66.43%) and
Silicon Builders (P.) Ltd. (33.15%), a company was owned and controlled by Y S
Jagmohan Reddy.  The directors of the
Company were Y S Jagohan Reddy; Harish C. Kamarthy,  J Jagan Mohan Reddy, Ravinder Reddy and V. R.
Vasudevan. 

 

During the
previous year relevant to assessment year 2009-10 the assessee company issued
0% convertible preference shares with a face value of Rs. 10/- per share and a
premium of Rs. 1,440 per share on a private placement to 3 investors viz.
Dalmia Cements Ltd., India Cements Ltd., and Suguni Contructions Pvt. Ltd., a
company belonging to Sri Nimmagadda Prasad. 
The aggregate amount received by the company on account of issue of
share capital was Rs. 70.32 crore comprising of 
Rs. 48.50 lakh towards face value of shares issued and Rs. 69.84 crore
towards the amount of share premium. 

 

The AO observed
that the investments made by the investors are not technical investments but
are an arrangement between the investors and directors of the assessee company
to pass on the funds through the assessee. 
He held that this was a method adopted by the directors, who were influential
persons in the then State Govt. of A.P., to pass on contracts and other
facilities to the beneficiaries.  To
investigate the investments made by the subscribers, the AO issued summons u/s.
133(1) of the Act to the investors and senior officers attended but none of
them agreed that they had invested under any sort of influence. The AO brought
on record various incidences in which the investors (in the capital of the
company) were benefitted from the State Government policies and he treated the above
receipt of share premium by the assessee as income u/s. 28(iv) of the Act.

 

Aggrieved, the
assessee preferred an appeal to the CIT(A) who based on appraisal of evidence
on record as also further evidence held that the investments made by the
investors and the benefits and concessions received by them from Government of
A.P. were part and parcel of one integrated plan for quid pro-quo. He
also made comparison with the investments made in assessee company and shares
available in the market of same industry and not only upheld the action of the
AO but also enhanced the total income to make addition even for the face value
of the share capital issued.  However, he
held the amounts to be taxable under the head `Income from Other Sources’.

 

Aggrieved, the
assessee preferred an appeal to the Tribunal.

 

HELD


The Tribunal
observed that the assessee had allotted 0% convertible preference shares on
private placement basis to three investors. 
The investors were well known companies in the industry.  The shares were issued at a huge
premium.  While the premium was
determined without any basis, the issue and allotment was within the four
corners of law.  It noted that the AO /
CIT(A) have not brought on record any issues with the issue and allotment of
shares since the allotment was in accordance with the provisions of the
Companies Act and the Rules as they existed at the time of issue and
allotment.  It observed that while the
determination of premium may not be in accordance with the industry norms, it
was accepted by the investing parties. 

 

The Tribunal
also observed that the arrangement and the circumstances leading to the issue
and allotment of shares may draw some doubts that certain benefits may have
passed on to the directors but the question is whether the directors/shareholders
have really benefitted with this arrangement and the assessee company was used
as an arrangement to pass on the benefit. 
It held that the revenue has to prove that the investors have passed on the
benefit to the shareholders/directors through this arrangement by bringing
cogent material. The Tribunal held that since the assessee is artificial person
created by the statute, we cannot trespass the legal entity. It cannot (sic
can) be trespassed provided the authority has evidence to prove that this legal
person was used to pass on the benefit to the interested shareholders by
lifting the corporate veil. In this case, no such evidence was brought on
record rather circumstantial evidence and test of human probabilities were
applied to convert the capital transaction, as per Companies Act, into revenue
transaction under the Income-tax Act.

 

The Tribunal
held that it cannot presume or apply test of human probabilities, it observed
that it is dealing with the business transaction, it has to based on cogent
material.  Considering the whole
situation, the Tribunal observed that the AO/CIT(A) have restricted themselves
tby stopping the investigation based on circumstantial evidence and applying
test of human probabilities.  In order to
lift the corporate veil for the purpose of determining whether any benefit is
passed on to the shareholders/directors, they have to bring on record proper
evidence/cogent material. 

 

The Tribunal
directed the AO to redo the assessment keeping in mind that no doubt the
assessee has received this capital receipt and what circumstances which lead to
investment is not important but whether the assessee company was used as a
vehicle to pass on the benefit to shareholders/directors.

Section 194H –Where assessee, engaged in business of providing DTH services, sold set top Box (STB) and recharge coupon vouchers to distributors at a discounted rate, discount so offered could not be considered as commission and, hence, not liable for deduction of tax at source under provisions of section 194H.

30.  [2019] 197 TTJ 75 (Mumbai – Trib.) Tata Sky Ltd.
vs. ACIT ITA No.: 6923
to 6926/Mum/2012 A.Y: 2009-10 to
2012-13 Dated: 12th
October, 2018

           

Section 194H
–Where assessee, engaged in business of providing DTH services, sold set top
Box (STB) and recharge coupon vouchers to distributors at a discounted rate,
discount so offered could not be considered as commission and, hence, not
liable for deduction of tax at source under provisions of section 194H.

 

FACTS


The
assessee-company was engaged in business of providing Direct to Home (DTH)
services in the brand name of Tata Sky. The provision of this service required
installation of set top box and dish antenna at the customer’s premises. The
assessee had entered into agreement with distributors for sale/distribution of
settop boxes, prepaid vouchers, recharge vouchers (RCVs) etc. As per the
agreements, STBs and RCVs were sold to distributors at a discounted price. The distributors/dealers
sold these items to customers/subscribers of the assessee-company at a price
not exceeding the MRP mentioned for the product.

 

The Assessing
Officer held that the assessee was liable to deduct tax at source in respect of
payments made to the distributors as discount for sale of STBs and recharge
coupons as same was ‘commission and brokerage’ and the same was income in the
hands of distributions for service relevant of assessee. He therefore, treated
the assessee to be in default as per the provisions of section 201(1).

 

Aggrieved by
the assessment order, the assessee preferred an appeal to the CIT(A). The
CIT(A) upheld the order of the Assessing officer.

 

HELD


The Tribunal
held that the assessee entered into agreement with the distributor for sale of
Set Top Box (STB) and recharge coupon vouchers. As per agreement products are
sold to distributor at discounted price, as agreed. The distributor/dealer
sells these items to customers/subscribers at a price not exceeding MRP on the
product. As per the agreement, payment of each order for the above items was to
be made by distributor either at the time of placing the order or at the time
of delivery. Apart from the above assessee also provided festival/seasonal
discounts to the distributors. For these discounts assessee did not make any
payment rather it issued credit notes and same was subsequently adjusted from
the payment due from the distributor, so in the financial statements the
discount amount was not reflected.

 

The Tribunal followed the ratio of the Bombay High
Court decisions in the case of CIT vs. Piramal Healthcare Ltd (2015) 230
Taxman 505 and CIT vs. Qatar Airways (2011) 332 ITR 253 wherein it
was held that the assessee should not be visited with the liability to deduct
TDS for non-deduction of tax at source u/s. 194H on the difference between the
discounted price at which it is sold to the distributors and the MRP upto which
they are permitted to sell. The difference between MRP and the price at which
item is sold to the distributor cannot be held to be commission or brokerage.
The distributors are customers of the assessee to whom sales are affected. The
discounts and credit notes credited cannot be considered to be commission
payment u/s. 194H and therefore, the assessee was not liable to deduct the tax at source on the impugned amounts in this case.

Section 69 r.w.s.5 & 6 –Where additions were made to income of assessee, who was a non-resident since 25 years, since, no material was brought on record to show that funds were diverted by assessee from India to source deposits found in foreign bank account, impugned additions were unjustified.

29.  [2019] 197 TTJ 161 (Mumbai – Trib.) DCIT (IT) vs.
Hemant Mansukhlal Pandya ITA No.: 4679
& 4680/Mum/2016 A.Y: 2006-07
& 2007-08 Dated: 16th
November, 2018

                                   

Section 69
r.w.s.5 & 6 –Where additions were made to income of assessee, who was a
non-resident since 25 years, since, no material was brought on record to show
that funds were diverted by assessee from India to source deposits found in
foreign bank account, impugned additions were unjustified.

 

FACTS


The assessee
was a non-resident individual living in Japan on a business visa since 1990. He
had been a director in a company in Japan and had got permanent residency certificate
from Japan since 2001. The assessing officer had made addition towards amount
found credited in HSBC Bank account, Geneva on the ground that the assessee had
failed to explain and prove that deposit was not having any connection to
income derived in India and not sourced from India. The Assessing Officer had
made additions on the basis of a document called ‘base note’ received from
French Government, as per which the assessee was maintaining a bank account in
HSBC Bank, Geneva. Except this, the Assessing Officer had not conducted any
independent enquiry or applied his mind before coming to the conclusion that
whether the information contained in base note was verified or authenticated.


Aggrieved by
the assessment order, the assessee preferred an appeal to the CIT(A). The
CIT(A) deleted the addition of income as made by the Assessing Officer. Being
aggrieved by the CIT(A) order, the Revenue filed an appeal before the Tribunal.

 

HELD


The Tribunal
held that the Assessing Officer was not justified in placing the onus of
proving a negative that the deposits in foreign bank account were not sourced
from India on the assessee. The onus of proving that an amount falls within the
taxing ambit was on the department and it was incorrect to place the onus of proving
negative on the assessee. No material was brought on record to show that the
funds were diverted by the assessee from India to source the deposits found in
foreign bank account. Therefore, it is viewed that when the Assessing Officer
found that the assessee was a non-resident Indian, was incorrect in making
addition towards deposits found in foreign bank account maintained with HSBC
Bank, Geneva without establishing the fact that the said deposit was sourced
out of income derived in India. Hence, the findings of the CIT(A) were upheld
and the appeal filed by the revenue was dismissed.

 

Section 68 – Mere non production of Director of Shareholder Company cannot justify adverse inference u/s. 68 of the Act.

28.  (2018) 66 ITR (Trib.) 226
(Delhi) Gopal Forex Pvt. Ltd. vs. ITO ITA No.: 902/Del/2018 A.Y: 2008-09 Dated:
26th June, 2018

 

Section 68 – Mere non production of Director of Shareholder Company
cannot justify adverse inference u/s. 68 of the Act.

 

FACTS

 

The assessee company filed its return of income. Subsequent to the
processing of return of income, information was received from the investigation
wing of Income tax about a search operation carried out in the case of Jain
Brothers who were involved in providing accommodation entries and bogus share
capital. The name of the assessee company was found in a list as one of the
beneficiaries.

 

Reassessment proceedings were initiated and additions were made by the
AO only on the basis of purported documents seized from the premises of Jain
Brothers. In the assessee’s case addition was sustained merely because the
director of shareholder company did not present himself physically before the
AO.

 

Important question raised before CIT(A) was whether adverse inference
u/s. 68 could be drawn by AO once assessee placed all the relevant documents in
its possession before AO to establish its burden u/s. 68, without discharging
secondary burden lying on the AO to point out defect in the assessee’s
submission. 

 

HELD

 

Before the Hon’ble ITAT, heavy reliance was placed by the Hon’ble bench
on Moti Adhesives P. Ltd. ITA No. 3133/Del/2018 where it was held that
once assessee places all the reliable and trustworthy documentary evidences to
support the veracity of transactions u/s. 68, it is the duty of AO to
dispassionately consider the same with objective standards and to not make
additions solely on the basis of investigation wing’s report prepared at the
time of search. This discharges the assessee’s burden u/s. 68 & shifts the
secondary burden to the AO. To discharge his burden, the AO must bring credible
incriminating material on record to displace the detailed evidence filed by the
assessee. But in the present case, it was observed that AO merely reproduced
the investigation wing’s report in the reasons recorded, the show cause notice
issued & the final order passed. If reassessment & additions are based
upon the sole ground of prima facie opinions which are used to reopen
the case, this would frustrate the entire object of law. Besides, additions
made merely on basis of non-production of directors of Share Holder Company
disregarding all the other detailed evidences on record is unjustified.

 

The Hon’ble ITAT also relied on the following judgements:

i)          Softline Creations
Pvt. Ltd. (387 ITR 636) [Delhi HC]

ii)         CIT vs. Orissa
Corporation Pvt. Ltd. (Vol. 159 ITR 78) [SC]

iii)        Crystal Networks Pvt.
Ltd. vs. CIT (353 ITR 171) [Calcutta HC]

iv)        Crystal Networks Pvt.
Ltd. vs. CIT (353 ITR 171) [Calcutta HC]

v)         CIT vs. Dataware Pvt.
Ltd. (ITAT No. 263 of 2011) [Calcutta HC]

vi)        Rakam Money Matters Pvt.
Ltd. (ITA no. 778/2015) [Delhi HC]

vii)       Orchid Industries Pvt.
Ltd. (397 ITR 136) [Bombay HC]

viii)      Aksar Wire Products (P)
Ltd. (ITA no. 1167/Del/2015) [Delhi ITAT]

ix)        CIT vs. Stellar
Investment Ltd. (Civil No. 7868 of 1996) [SC]

 

Thus, relying on the views expressed in a plethora of judgements, the
Hon’ble ITAT held that mere non production of Director of share holder company
ipso facto cannot justify straight adverse inference u/s. 68 dehors detailed
documentary evidences filed.

 

Section 153A, Rule 27 – Any issues other than those relating to undisclosed income which come to the AO’s knowledge while conducting enquiries relating to Search shall not be considered by AO for making assessment u/s. 153A if normal assessment for such relevant assessment years had already been completed earlier. Rule 27 gives liberty to the respondent to raise any ground which had been decided against him by the first appellate authority.

27.  (2018) 66 ITR (Trib.) 306 (Delhi) ACIT vs.
Meroform India Pvt Ltd. ITA No.:
4494/Del/2014 A.Y: 2011-12 Dated: 31st
July, 2018

 

Section 153A,
Rule 27 – Any issues other than those relating to undisclosed income which come
to the AO’s knowledge while conducting enquiries relating to Search shall not
be considered by AO for making assessment u/s. 153A if normal assessment for
such relevant assessment years had already been completed earlier.

 

Rule 27 gives
liberty to the respondent to raise any ground which had been decided against
him by the first appellate authority.

 

FACTS


 Assessment for six years was reopened u/s.
153A. Against these, the assessee filed appeals for all the six years. Out of
these, the department preferred appeals to the Hon’ble ITAT for three
assessment years. In these three appeals, the CIT(A) had dismissed the legal
contentions of the assessee but gave relief on merits. Therefore, assessee had
not filed any cross appeal or cross objection, but it raised a legal ground by
invoking Rule 27 of ITAT Rules, challenging the validity of additions made in
the impugned assessment orders on the ground that the same were beyond the
scope of section 153A. CIT(DR) objected to the admission of the petition made
under Rule 27 and submitted that the respondent assessee cannot be permitted to
raise a ground or an issue which was decided against it which could only be
done by filing of appeal.

 

The second
issue raised in the appeal was whether issues already considered in the
assessments completed earlier, which had attained finality, can be re-examined
u/s. 153A by the assessing officer?

 

HELD


The tribunal
allowed the ground raised under Rule 27 of the Income Tax Appellate Tribunal
rules, 1963 and held
as under:


Rule 27 gives
the liberty to the respondent to support the first appellate order on any of
the ground decided against him. The issue of scope of addition in assessment
completed u/s. 153A had been decided against the assessee and therefore, as a
respondent it can very well raise the defence in the appeal filed by the
revenue. The only limitation which can be inferred is that the respondent
cannot claim any fresh relief which had been denied to him by the first
appellate authority and also which is not part of the grounds so raised by the
revenue. In the given case, it was not a claim of any fresh relief denied to
the assessee and also it was a part of the ground raised by the revenue. The
respondent assessee got the favourable judgment on merits but there was an
adverse finding on the issue of scope of addition u/s. 153A; and therefore, the
assessee can very well raise such an issue under Rule 27.

 

In the second
issue, the ITAT held that in the case of assessments which have attained
finality and are non-abated assessments, no additions can be made over and
above the original assessed income unless some incriminating material has been
found during the course of search. This proposition had been well discussed in
the judgment of CIT vs. Kabul Chawla (2016) 380 ITR 573 (Delhi HC).
Further, section 153A does not say that additions should be strictly made on
the basis of evidence found in the course of the search. But this does not mean
that the assessment can be arbitrary or without any relevance or nexus with the
seized material. Thus, an assessment has to be made under this Section only on
the basis of seized material as laid down in Pr.CIT vs. Meeta Gutgutia 395
ITR 526 (Delhi HC).

 

Thus, in the
opinion of the ITAT all the additions made by the AO in the said three
assessment years were beyond the scope of assessment u/s. 153A, because
assessments for these assessments years had attained finality before the date
of search and no incriminating material was found relating to such additions.

 

PROSECUTION AND COMPOUNDING

PROSECUTION – The word Prosecution makes every person’s blood run cold. The
menace of black money, i.e., unaccounted money, and tax evasion have assumed
gigantic proportions. The need to control the menace resulted in taking of
drastic remedial measures by the Government. Prosecution and the resultant
terror of imprisonment serve as a powerful deterrent. Under the Income Tax
Act, 1961 there are various sections for Penalties and Provisions to
ensure/enforce tax compliance, but the best and most effective measure is
Prosecution. Assessment proceedings are civil proceedings while penalty
proceedings are quasi-criminal and prosecution proceedings are criminal in
nature. Prosecutions for offences committed by an assessee are tried by the
Magistrates in the Criminal Courts of the country and the procedure thereof is
governed by the provisions of the Indian Penal Code where attracted, as well as
the rules in the Code of Criminal Procedure and the Indian Evidence Act. In
simple words, we can say that the Income Tax Department has three ways to
punish the assessee, i.e. Levy Interest, Levy Penalties and Prosecution if he
does not follow provisions as prescribed by the Act. Monetary Punishment does
not have that impact on the assessee that Prosecution proceedings have.

 

The roots of
such harsh/rigorous provisions of Prosecution were found in the Wanchoo
Committee Report. The final report by the said Committee states as follows:

 

NEED FOR VIGOROUS PROSECUTION POLICY


In the
fight against tax evasion, monetary penalties are not enough. Many a
calculating tax dodger finds it a profitable proposition to carry on evading
taxes over the years if the only risk to which he is exposed is a monetary
penalty in the year in which he happens to be caught. The public in general
also tends to lose faith and confidence in tax administration once it knows
that even when a tax evader is caught, the administration lets him get away
lightly after paying only a monetary penalty, when money is no longer a major
consideration with him if it serves his business interests….


The Supreme
Court in Gujarat Travancore Agency vs. CIT (1989) 77 CTR (SC) 174: (1989)
177 ITR 455 (SC) observed that the creation of an offence by the statute
proceeds on the assumption that society suffers injury by the act of omission
of the defaulter and that a deterrent must be imposed to discourage the
repetition of the offence.

 

OFFENCES AND PROSECUTION UNDER INCOME TAX ACT, 1961


The term
“offence” is not defined under the Income Tax Act. Even the
Constitution does not define the term “offence” for the purpose of
Article 20. Section 3(37) of the General Clauses Act defines
“offence” to mean any act or omission made punishable by any law for
the time being in force. This definition would apply to ascertain whether or
not an offence had been committed and only if there is an offence committed the
offender would be prosecuted and would attract liability for punishment in
accordance with the law in force at the relevant time of the commission of the
offence. The term Prosecution is also not defined under the Income Tax Act;
however, Webster’s dictionary defines Prosecution as “The institution and
carrying on of a suit in a court of law or equity, to obtain some right, or to
redress and punish some wrong; the carrying on of a judicial proceeding on
behalf of a complaining party, as distinguished from the defence.”

 

CBDT recently
tabled its report[1]
on Performance Audit on Administration of Penalty and Prosecution before
Parliament wherein they pointed out various gaps in Administration of
Prosecution by the Department. They made some important recommendations; (a)
more robust mechanism to be employed for identifying cases for prosecution
which takes into account timelines, quantum of tax evasion and contemporary
impact, (b) posting of designated and experienced Nodal officer to handle
prosecution, (c) to identify the stage of pendency of all cases in the various
courts and follow it actively for resolution, (d) CBDT to consider compounding
offences before launching Prosecution so that revenues are collected, (e) CBDT
to deploy prosecution machinery for high-impact cases and avoid focusing on
low-impact cases.

 

Recently, it
has become a trend and it has been observed that notices for launching of
Prosecution are being issued in large numbers. The department went into
overdrive and issued show-cause notices en masse after CBDT released
Standard Operating Procedure to be followed for Prosecution in cases of the
TDS/TCS with a strict time frame to complete the entire process from
identification to passing order u/s. 279(1)/279(2) of the Act. Even for the
technical lapse, the department launched Prosecution or forced the assessee to go
for compounding. During FY 2017-18 (up to the end of November, 2017), the
Department filed Prosecution complaints about various offences in 2225 cases
compared to 784 for the corresponding period in the immediately preceding year,
marking an increase of 184%. Therefore, it has become very important to be
aware of the laws relating to Prosecutions under direct taxes.

 

KINDS OF OFFENCES


Income Tax
Act contains a Chapter XXII dealing with ‘offences and prosecution,’ i.e.
section 275A to section 280D of the Act, refer Appendix. Provisions of the
Criminal Procedure Code, 1973 are to be followed relating to all offences under
the Income Tax Act since the said Chapter XXII of the Act does not inter se
deal with the procedures regulating the prosecution. However, if the provisions
of the Code are contrary to what is specially provided for by the Act, then the
Act will prevail.

 

Recently,
Prosecutions have been initiated for various offences including wilful attempt
to evade tax or payment of any tax; wilful failure in filing returns of income;
false statement in verification; and failure to deposit the tax
deducted/collected at source or inordinate delay in doing so, among other
defaults.

 

For this
Article, sections 276B, 276C, 276CC and 277 of the Act are dealt hereunder
since most of the prosecution has been launched on the commission of offence
contained in these sections.

 

SECTION 276B – OFFENCE RELATED TO TAX DEDUCTION


Failure to
deduct tax is not an offence but having deducted but not paid to the Central
Government is an offence. If the accused wants to prove that he was prevented
by reasonable causes, the burden to prove is on the accused. The courts have
taken contrary positions with respect to Prosecution in the event the penalty
proceedings have been dropped. The Punjab and Haryana High Court held in Jag
Mohan Singh vs. ITO (1992) 196 ITR 473 (P&H) that the offence is
complete on the due date on which the amount should have been deposited but not
deposited and a late deposit will not absolve the accused; the fact that the
income-tax authorities charged interest on such deposit and did not impose
penalty will not absolve the accused from liability to Prosecution. However, in
Banwarilal Satyanarayan & Ors. vs. State of Bihar & Anr. (1989) 80 CTR
(Pat) 31: (1989) 179 ITR 387 (Pat), it has been held that when the
authority under the IT Act has dropped the penalty proceedings on finding that
assessee had furnished good and sufficient reasons for failure to deduct and/or
pay the tax, within time, the Prosecution for the same default is liable to be
discontinued.

 

SECTION 276C – WILFUL ATTEMPT TO EVADE TAX, ETC.


Section 276C
provides that if a person wilfully attempts to evade any tax, penalty or
interest chargeable or imposable under the Act, then without prejudice to any
penalty that may be imposable on him under any provisions of the Act, he will
be liable for prosecution. The Explanation inserted gives very wide coverage to
what constitutes ‘wilful attempt’. The Andhra Pradesh High Court in ITO vs.
Abdul Razaq (1990) 181 ITR 414 (AP) held that to spell out a wilful attempt
there must be an assessment on the return filed. The Rajasthan High Court in Gopal
Lal Dhamani vs. ITO (1988) 67 CTR (Raj) 175: (1988)172 ITR 456 (Raj) held
that what is contemplated is evasion before charging or imposing penalty or
interest; it may include wilful suppression in the returns before assessment
and completion; it is not necessary that an assessment must have been made
prior thereto and it is for the prosecution to prove the ingredients of the
offence before the
Criminal Court.

 

SECTION 276CC – FAILURE TO FURNISH A RETURN OF INCOME


With the
online return filings and various data at the disposal of the assessing
officer, it has become very easy to identify the assessees who despite having
taxable income have failed to file their tax return. This section opens with
the words “wilfully fails to furnish…return”. The word `wilful’
implies the existence of a particular guilty state of mind and it imports the
concept of mens rea. The Supreme Court (SC), in a recent ruling in the
case of Sasi Enterprises vs. ACIT [TS-43-SC-2014] has held that
prosecution proceedings u/s. 276CC of the Income Tax Act, 1961 (the Act) for
failure to file a return of income (ROI) could be initiated even while appellate
proceedings were pending. In deciding this case, the SC has placed reliance on
its earlier judgement in the case of Prakash Nath Khanna (Prakash Nath
Khanna vs. CIT [2004] 266 ITR 1 (SC)).

 

SECTION 277 – FALSE STATEMENT IN VERIFICATION, ETC.


This section punishes a person for providing the
Assessing Officer with information which he knows to be false or does not
believe to be true and thus induces him to make a wrong assessment resulting in
the levy of lower income-tax than is proper and due from the assessee. The
expression `person’ in this section is very wide and need not be restricted to
an assessee only. The Madras High Court in N.K. Mohnot vs. Chief CIT (1992)
195 ITR 72 (Mad) held Prosecution to be valid against the accused who in a
conspiracy with the other accused and certain employees in the race club
applied for duplicate tax deduction certificates in the names of winners,
forged the signatures of the original winners, made false documents and filed
returns containing false declarations and forged signatures and obtained tax
refund orders which were encashed by them.

 

 SECTION 278E – ‘PRESUMPTION AS TO CULPABLE MENTAL STATE’


The burden of
proving the absence of mens rea is on the accused and provides that the
absence needs to be proved not only beyond ‘preponderance of probability’ but
also ‘beyond reasonable doubt[2]’.
He has to prove that he has no ‘culpable mental state’ which includes
intention, motive or knowledge of a fact or belief in, or reason to believe, a
fact. The Delhi High Court in V.P. Punj vs. Assistant Commissioner of Income
Tax & anr. (2002) 253 ITR 0369 held that in view of section 278E, the
absence of culpable mental state has to be proved by the accused in defence
beyond reasonable doubt — Otherwise the Court has to presume the existence of mens
rea.

 

SECTION 278B – OFFENCES BY COMPANIES / FIRMS/ ASSOCIATION OF PERSONS (AOP)


In case the
default is committed by a company/firm or AOP, the provisions of section 278B
of the IT Act prescribe that every person who was in charge of the company/firm
or AOP at the time of the commission of the offence will also be deemed to be
guilty and liable for Prosecution. Courts have held that a person in charge for
the purposes of section 278B means a person who is in overall control of the
day-to-day business of the company/firm/AOP.

 

Such person
will not be liable for prosecution if he proves the offence was committed
without his knowledge or that he exercised due diligence to prevent the
commission of such an offence. In case it comes to light that an offence has
been committed with the consent or connivance of or such offence is
attributable to some neglect on the part of a director, manager, secretary or
other officer of an entity, then such person will also be liable for
Prosecution.

 

SECTION 280 – ACCOUNTABILITY OF THE PUBLIC SERVANT


If a public
servant furnishes any information or produces any document in contravention of
the provisions of sub-section (2) of section 138, he would be punishable.
However, such Prosecution can be instituted only with the previous sanction of
the Central Government.

 

THE PROCEDURE FOLLOWED BY THE DEPARTMENT


The Income
Tax Act does not prescribe any specific procedure to be followed. However, the
Department follows its own Manual on Prosecution which lays down the various
rules and regulations for the launch of Prosecution and proceedings thereafter.
The Assessing Officer initiates the process and refers the matter to his
Commissioner with a report on the offence committed. The Commissioner, if
satisfied, will issue a notice to the assessee. If the assessee can prove
‘beyond doubt’ of no culpable mental state, then the Commissioner may direct
the AO not to file a complaint before the Court. It may be noted that if the
accused is aged 70 years or above, no prosecution is to be initiated in view of
instructions of the Board and judgment of Allahabad High Court in Kishan Lal
vs. Union of India (1989) 179 ITR 206 (All).

 

THE PROCEDURE FOLLOWED BY THE COURT


Once the
complaint is received, the Court summons the accused by sending the copy of the
complaint, and if the accused is not present on the day of summoning, then the
Court can issue a warrant against the accused, wherein he may be arrested and
produced before the Court.

 

After giving
the opportunity of hearing to the accused if the Court feels that there is no
apparent case, then the court will dismiss the complaint, whereas if there is
any primary evidence available, then the Court will frame a charge and the
Prosecution proceedings will be continued under Criminal Procedure Code. If the
trial results in a conviction, the appeal to the court will lie under the CPC
to be filed within 30 days of the date of order. Sanction for each of the
offence under which the accused is prosecuted is mandatory, otherwise the
entire proceedings will be void ab initio.

 

In the case
of Champalal Girdharlal vs. Emperior (1933) 1 ITR 384 (Nag) (HC), where
sanction was issued for an offence u/s. 277, however, the accused was found
guilty u/s. 277C, Therefore, it was held that the conviction was illegal.

 

When the
magistrate issues bailable or non-bailable warrant, necessary application for
seeking bail has to be made. If the bail application is rejected, an appeal
lies before the Session Judge and thereafter an application lies u/s. 482 of
the Criminal Procedure Code before the Hon’ble High Court.

 

PROOF OF ENTRIES IN RECORDS OR DOCUMENTS


By insertion
of section 279B of the Act by the Amending Act, 1989, the requirement to produce
a number of original records, documents, seized books of accounts, etc., before
the Courts for establishing the case have been dispensed with. It is now
possible for the Court to admit as evidence the entries on the records or other
documents in the custody of an income-tax authority and all such entries may be
proved either by the production of such records or other documents or by the
production of a copy of the entries certified by the income-tax authorities.

The question
is whether there is any mode of conciliation to avoid the rigours of
Prosecution; and the answer is compounding of offence.

 

COMPOUNDING OF OFFENCES


Section
279(2) of the Act provides that any offence under Chapter XXII of the Act may,
either before or after the institution of proceedings, be compounded by the
Chief Commissioner of Income Tax/Principal Chief Commissioner of Income Tax.
The CBDT has instructed that efforts should be made to convince the assessee to
go for compounding rather than face Prosecution. The Board has also instructed
that a prosecution should not ordinarily be compounded if prospects of success
are good. The number of complaints compounded by the Department during the
current FY (upto the end of November, 2017) stands at 1,052 as against 575 in
the corresponding period of the immediately preceding year, registering a rise
of 83%.

 

THE GENERAL MEANING OF COMPUNDING OF OFFENCES


Compoundable
offences are those which can be conciliated by the parties under dispute. The
permission of the Court is not required in such cases. When an offence is
compounded, the party, which has been distressed by the offence, is compensated
for his grievance.

 

A new set of
compounding guidelines are issued by the Income-tax Department vide
Notification F No. 185/35/2013 IT (Inv.V)/108 dated 23rd December,
2014 (2015) 371 ITR 7 (St) w.e.f 1st January, 2015.

 

The offences
under Chapter – XXII of the Act are classified into two parts (Category ‘A’ and
Category ‘B’) for the limited purpose of compounding of the offences, refer
Appendix. In case of an offence categorised in Category A, which are ‘less
grave’ offences, compounding is allowed only up to three occasions. Those
offences in Category B, or more serious offences, can be compounded only once.
The guidelines list down various other categories of persons who are not
eligible for compounding, for example: Offences committed by a person who was
convicted by a Court of law for an offence under any law, other than the Direct
Taxes laws, for which the prescribed punishment was imprisonment for two years
or more, with or without fine, and which has a bearing on the offence sought to
be compounded.

 

Notwithstanding
anything contained in the guidelines, the Finance Minister may relax
restrictions for compounding of an offence in a deserving case on consideration
of a report from the board on the petition of an appellant.

 

  •   Procedure for
    compounding

1.  Compounding of an offence may be considered
only in those cases in which the assessee comes forward with a written request
for compounding of offence;

2.  The amount of undisputed tax, interest and
penalties relating to the default should have been paid;

3.  The assessee should express his willingness to
pay both the prescribed compounding fees as well as establishment expenses;

4.  The assessee undertakes to
withdraw any appeal filed by him, if any, in case the same has a bearing on the
offence sought to be compounded. In case such appeal has mixed grounds, some of
which may not be related to the offence under consideration, the undertaking
may be taken for appropriate modification on grounds of such appeal;

5.  On receipt of the application for compounding,
the same shall be processed by the Assessing Officer/Assistant or Deputy
Director concerned and submitted promptly alongwith a duly filled in
check-list, to the authority competent to compound, through the proper channel;

6.  The competent authority shall duly consider
and dispose of every application for compounding through a speaking order in
the prescribed format within the time limit prescribed by the board from time
to time. In the absence of such a prescription, the application should be
disposed off within 180 days of its receipt. However, while passing orders on
the compounding applications, the period of time allowed to the assessee for
paying compounding charges shall be excluded from the limitation specified
above;

7.  Where compounding application is found to be
acceptable, the competent authority shall intimate the amount of compounding
charges to the applicant requiring him to pay the same within 60 days of
receipt of such intimation. Under exceptional circumstances and on receipt of a
written request for further extension of time, the competent authority may
extend this period up to further period of 120 days. Extension beyond this
period shall not be permissible except with the previous approval of the Member
(Inv), CBDT on a proposal of the competent authority concerned;

8.  However, wherever the compounding charges are
paid beyond 60 days as extended by the competent authority, the applicant shall
have to pay the additional compounding charge at the rate of 2% per month or
part of the month of the unpaid amount of compounding charges;

9.  The competent authority shall pass the compounding
order within 30 days of payment of compounding charges. Where compounding
charge is not deposited within the time allowed, the compounding application
may be rejected after giving the applicant an opportunity of being heard. The
order of rejection shall be brought to the notice of the Court immediately
through prosecution counsel in the cases where the prosecution had been
instituted. The Division Bench of the Hon’ble High Court of Delhi in response
to the writ petition titled Vikram Singh vs. UOI (W.P.(C) 6825/2016)
held that the CBDT cannot insist on a “pre-deposit” of the compounding fee even
without considering the application for compounding. The CBDT instructions to
that extent is undoubtedly ultra vires section 279 of the Act.

 

CONCLUSION


Prosecution
is a serious offence. It is high time that the assessee realise the seriousness
with which the Department has started pursuing prosecution. It is in the
interest of the assessee to comply with the law; at the same time, it is the
responsibility of the CA fraternity to guide and advise their clients in not
violating any of the provisions of the Act. The Department should also take a
holistic view before launching Prosecution and be guided by the conduct of the
taxpayer and the gravity of the situation.  

 

APPENDIX
– SUMMARY OF PROVISIONS UNDER THE INCOME TAX ACT, 1961

 

Sr. No.

Act or omission which constitutes an offence

Section under I.T. Act, 1961

Maximum Punishment (Rigorous imprisonment)

Minimum Punishment (Rigorous imprisonment)

Classification for Compounding Category

1

2

3

4

5

6

1

Contravention
of an order u/s. 132(3)

275A

Up
to two years and fine

As
decided by the Court

B

2

Failure
to comply with provisions of S.132(1)(iib)

275B

Up
to two years and fine

As
decided by the Court

B

3

Removal,
concealment, transfer or delivery of property to thwart tax recovery (w.e.f.
1-4-1989)

276

Up
to two years and fine

As
decided by the Court

A

4

Liquidator 



(a)
Fails to give notice u/s. 178(1)

 

 

276A (i)

Up
to two years

Not less than six months unless special and
adequate reason given

B

(b)
Fails to set aside the amount u/s. 178(3)

276A (ii)

 

(c)
Parts with assets of company

276A (iii)

 

5

Failure
to comply with the provisions of section 269UC about the transfer of property
without entering into an agreement as specified; failure to surrender or
deliver/possession of the property vested in the Central Government on the
presumptive purchase or contravening the provisions putting a restriction on
registration of documents.

276AB

Up
to two years

Not less than six months unless special and
adequate reason given

B

6

Failure
to pay the tax deducted at source within the specified period.

276B

Up
to seven years and fine

Three months and fine

A

7

Failure
to pay tax collected at source

276BB

Up
to seven years and fine

Three months and fine

A

8

a)
Wilful attempt to evade tax, penalty, interest, etc., chargeable or imposable
under the Act.

276C(1)

If
tax evaded is over Rs. 2,50,000/ – Seven years and fine

 

In
any other case two years and fine

Six months and fine

 

 

Three months and fine

B

 

 b) Wilful attempt to evade payment of tax,
penalty or interest

 276C(2)

Two
years and fine

 Three months and fine

 

 9

Wilful
failure to file a return of income u/s. 139(1) or return of fringe benefit
u/s. 115WD(1) or in response to notice u/s. 115WD(2), 115WH, 142(1), 148 or
153A of the Act

276CC

If
the amount of tax evaded is over Rs. 2,50,000/-, up to seven years and fine

Six
months and fine

B

In
any other case, Simple imprisonment for a term of two years and fine

Three
months and fine

10

Wilful
failure to furnish in due time return in response to notice u/s. 158BC.

276CCC

Simple
imprisonment for a term of three years and fine

Three
months and fine

B

11

Wilful
failure to produce accounts and documents or non-compliance with an order
u/s. 142(2A) to get accounts audited etc.

276D

Up
to one year with fine

 

B

12

Whenever
verification is required under Law, making a false verification or delivery
of a false account or statement.

277

If
the amount of tax evaded is more than Rs. 2,50,000/- –Up to 7 years and fine

Six
months and fine





 Three months and fine

B

In
other cases, two years and fine

13

Falsification
of books of account or document, etc.

277A

Up
to two years and fine

Three
months and fine

B

14

Abetting
or inducing another person to make, deliver a false account, statement or
declaration relating to chargeable income, or to commit an offence u/s.
276C(1)

278

Amount
of tax, penalty or interest evaded more than Rs. 2,50,000/- – up to seven
years and fine

Six
months and fine

A
– Abetment of false return etc. with reference to Category ‘A’ Offences

Any
other case two years and fine

 Three months and fine

Abetment
of false return  etc. with
reference  to Category ‘B’ offences

15

A
person once convicted, under any of the sections 276B, 276(1), 276CC, 276DD,
276E, 277 or 278 is again convicted of an offence under any of the aforesaid sections.

278A

Up
to 7 years and fine

Six
Months and fine

 

16

A
public servant furnishing any information or producing any document in
contravention of s. 138

280

Up
to six months and fine

As
decided by the Court

 

 


[1] Union Government
Department of Revenue – Direct Taxes Report No. 28 of 2013

[2] Circular No. 469
dt. 23-9-1986 (1986) 162 ITR 21(St) (39)

Gift From ‘HUF’ and Section 56(2)

Issue for
Consideration

Under the provisions of section 56(2)(x) of
the Income-tax Act, 1961, receipt of any sum of money or any property  without consideration or for inadequate
consideration (in excess of the specified limit of Rs. 50,000) by the assessee
is chargeable to income-tax under the head “Income from other
sources”. The term ‘property’ is defined for this purpose as immovable
property, shares, securities, jewellery, bullion and artistic works like
drawings, paintings etc. The Finance Act, 2017 while inserting this new provision
has widened the scope of the old 
provision by making the new 
provision applicable to all types of assessees, as against the erstwhile
provision of section 56(2)(vii), which was applicable only to an individual or
an HUF.

 

The taxability as provided in section
56(2)(x) is subjected  to several
exceptions. One of the important exceptions from taxability is when any such
sum of money or property is received by the assessee from his relative. The
Explanation to clause (x) of section 56(2) provides that the expression
‘relative’ shall have the same meaning as is assigned to it in the Explanation
to clause (vii). The said Explanation to clause (vii) defines ‘relative’
separately for individual and HUF in an exhaustive manner. In case of an
individual, ‘relative’ means –

 

(a).  spouse of the individual;

(b).  brother or sister of the individual;

(c).  brother or sister of the spouse of the
individual;

(d).  brother or sister of either of the parents of
the individual;

(e).  any lineal ascendant or descendant of the
individual;

(f).   any lineal ascendant or descendant of the
spouse of the individual;

(g).  spouse of the person referred to in items (B)
to (F).

 

In case of an HUF, ‘relative’ means any
member of such HUF. Till 1st October 2009, there was no definition
of relative qua an HUF. The definition of “relative” qua an HUF
was inserted by the Finance Act 2012, with retrospective effect from 1.10.2009.

 

The definition of ‘relative’ for  an individual does not include his HUF. In
other words, the definition of the term ‘relative’, qua an individual,
does not specifically exclude the receipt of a gift by an individual from an
HUF from the scope of taxation u/s. 56(2) (x). Therefore, the issue has arisen,
in the context of a receipt by an individual from his HUF,  as to whether an HUF can be regarded as the
relative of the individual, if all the members of that HUF are otherwise his
relatives as per the above definition. While the Rajkot bench of the Tribunal
has taken the view that gift received from an HUF, whose members comprised of
the  relatives of the recipient, is not
taxable, the Ahmedabad bench of the Tribunal has taken the view that HUF does
not fall in the definition of relative, so as to qualify for the exemption from
taxability. The view of the Rajkot bench has been confirmed by the decisions of
the Mumbai and Hyderabad benches.

 

Vineetkumar Raghavjibhai Bhalodia’s case:

The issue first came up before the Rajkot
bench of the Tribunal in the case of Vineetkumar Raghavjibhai Bhalodia vs.
ITO 46 SOT 97.

 

In this case, relating to assessment year
2005-06, the assessee i.e. Vineetkumar Raghavjibhai Bhalodia received a gift of
Rs. 60 lakh from Shri Raghavjibhai Bhanjibhai Patel (Bhalodia) HUF in which he
was a member. The assessing officer held that the HUF was not a  ‘relative’ of the recipient and  the gift of Rs. 60 lakh received from the HUF
was  taxable.

 

The CIT(A) confirmed the view of the
assessing officer. He observed that if the legislature wanted that money  received by a member of the HUF from the HUF
should also not be chargeable to tax, it would have specifically mentioned so
in the definition of ‘relative’. The CIT(A) also rejected the alternative
submissions of the assessee that the said gift was exempt u/s. 10(2), on the
ground that the sum was not received on total or partial partition of the HUF.
He held that the exemption u/s. 10(2) was available only in respect of that
amount which could be apportioned to the member’s share in the income of his
HUF. Since the assessee failed to establish whether the amount received was
equal to or less than the income which could be apportioned to his share, the
exemption was denied.

 

Before the Tribunal, on behalf of the
assessee, it was argued that HUF was a ‘relative’, in as much as the HUF was a
collective name given to a group consisting of individuals, all of whom were
relatives as per the definition. The HUF was a conglomeration of relatives as
defined under section 56(2)(v)[1].
Section 56(2)(v) should be interpreted in such a way that  avoided absurdity. Alternatively, it was also
contended that the receipt was exempt u/s. 10(2). Section 10(2) used the
language “paid out of the income of the family” and not “paid
out of the income of the previous year of the family” as was interpreted
by the assessing officer. Finally, it was submitted that if two views were
possible, the one beneficial to the assessee had to be adopted.

 

On behalf of the revenue, it was pointed out
that ‘person’ had been defined u/s. 2(31) of the Act and HUF was a separate
person thereunder. The revenue also relied upon the definition of ‘relative’
given in section 2(41), wherein also HUF was not included. Regarding
applicability of section 10(2), it was submitted that its object was to provide
exemption only in respect of partition, and not in case of gift.

 

The Tribunal held that the expression
“Hindu Undivided Family” must be construed in the sense in which it
was understood under Hindu Law. HUF constituted all persons lineally descended
from a common ancestor and included their mothers, wives or widows and
daughters. All those persons fell in the definition of “relative” as
provided in Explanation to clause (v) of section 56(2). The gift received from
“relative”, irrespective of whether it was from an individual
relative or from a group of relatives, was exempt from tax. Though it was not
expressly defined in the Explanation that the word “relative”
represented a single person. It was not always necessary that singular remained
a singular. Sometimes a singular could 
mean more than one, as was in the present case of the gift from  an HUF.

 

Regarding exemption u/s. 10(2), the Tribunal
disagreed with the view of the CIT (A) that only the amount received on partial
partition or on partition was exempt, as well as only up to the extent of share
of assessed income of HUF for the year. According to the Tribunal, for getting
exemption u/s. 10(2), two conditions were to be satisfied. Firstly, he must be
a member of the HUF, and secondly he received the sum out of the income of such
HUF, may be of an earlier year. Since there was no material on record to hold
that the gift amount was part of any assets of the HUF, it was out of the
income of the family to a member of the HUF. According to the Tribunal,
therefore, the same was exempt u/s. 10(2).

 

A similar view has
been taken by the Hyderabad and Mumbai benches of the Tribunal in the following
cases –

(i).   Hemal D. Shah vs. DCIT [IT Appeal No.
2627 (Mum.) of 2015, dated 8-3-2017]

(ii).  Dy. CIT vs. Ateev V. Gala [IT Appeal
No. 1906 (Mum.) of 2014, dated 19-4-2017]

(iii). ITO vs. Dr. M. Shobha Raghuveera [IT
Appeal No. 47 (Hyd.) of 2013, dated 3-3-2014]

(iv). Biravelli Bhaskar vs. ITO [IT Appeal No.
398 (Hyd.) of 2015, dated 17-6-2015]

 

Gyanchand M. Bardia’s case

The issue again came up before the Ahmedabad
bench of the Tribunal in the case of Gyanchand M. Bardia vs. ITO 93
taxmann.com 144.

 

In this case, relating to assessment year
2012-13, the assessee received a gift of Rs.1,02,00,000 from an HUF, which
consisted of the assessee, being Karta, his wife and son. This gift was claimed
to be exempt by the recipient. The assessing officer rejected the claim of the
assessee on the ground that the definition of ‘relative’ of an individual
recipient did not include HUF as a donor. He made the addition of the impugned
amount u/s. 68.

 

The CIT (A) confirmed the addition made by
the assessing officer. In doing so, he 
observed that the relevant provision had been amended to exempt the gift
received by the HUF from its members. Though the Hon’ble Parliament brought
amendment to the statute declaring gift from member to HUF as tax free, it did
not consider it proper to make a gift from the HUF to a member as tax free. The
reason might  be that if such provision
was made, the Karta of an HUF might 
misuse the provisions and gift the corpus of the HUF to himself, as
other members of the HUF had no control over managing affairs of the HUF.
Further, the CIT (A) also noticed that the assessee could not produce the gift
deed in respect of the said gift received by him.

 

Before the Tribunal, on behalf of the
assessee, it was emphasised that besides him, the other two members of the HUF
i.e. assessee’s wife and son were also 
covered in definition of “relative”. Accordingly, it was
claimed that the said gift received was not taxable, by placing reliance on the
decision in the case of Vineetkumar Raghavjibhai Bhalodia (supra). Apart
from this contention, the assessee also claimed exemption u/s. 10(2), which had
not been decided by the lower authorities, though it was claimed before them on
an alternative basis.

 

The Tribunal held that the ratio of the
decision in the case of Vineetkumar Raghavjibhai Bhalodia (supra) was no
more applicable in view of the subsequent legislative developments vide Finance
Act, 2012 w.r.e.f. 01.10.2009. The legislature substituted clause (e) to
Explanation in section 56(2)(vii) defining the term  “relative” to be applicable in case
of an individual assessee as well as HUF; with retrospective effect from
01.10.2009. The legislature had incorporated clause (ii) therein to deal only
with an instance of an HUF donee receiving gifts from its members. Therefore,
by implication, the legislative intent was very clear that a receipt from an
HUF was not to be taken as one from a relative 
in the hands  of an individual
recipient. Accordingly, the assessee’s plea of receipt of valid gift from his
HUF being exempt, was declined.

 

Regarding the claim of exemption u/s. 10(2),
it was held that a sum which was not eligible for exemption under the relevant
specific clause could not be considered to be an exempt income u/s. 10(2).

 

Observations

An HUF is a separate assessable unit for the
purpose of the Income-tax Act. Under the general law, it is  the members who constitute and represent it.
It being so, the gift received from the HUF may also be viewed as a gift
received from all the members of the said HUF and if that be so, such receipt
should be treated as the one from a relative of the donee and not  liable 
to tax.

 

The Ahmedabad bench of the Tribunal in the
case of Gyanchand M. Bardia (supra) did not follow the decision of the
Rajkot bench for the  reason that  the amendment made by the Finance Act, 2012  altered 
the definition of the term ‘relative’ 
to specifically provide for relationship 
vis-à-vis an HUF recipient and the amendment did not do so for an
individual in receipt of a gift from an HUF. The bench observed that a  gift from an HUF, post amendment, will not be
exempt from tax for the reason that the 
legislative intent  was  clear from the amendment that post amendment  only a 
receipt of gift by an HUF from its members is exempt from tax.  Since this amendment is effective from
1-10-2009, receipts during the pre-amendment 
period was not taxable as per the Rajkot bench. No other reason was
provided by the bench for upholding the taxability in the hands of the
individual. One fails to appreciate  how
an amendment providing for an exemption for a particular situation changes  the understanding derived for taxation or
otherwise in an altogether  different and
converse situation. The kind of deductive interpretation applied by the bench
is  not comprehensible. In our considered
view, the  bench was bound to follow the
decision of the Rajkot bench and was required to refer the matter to a special
bench, if it disagreed with the said decision. 

 

A useful reference may be made to the
memorandum explaining the insertion of the new definition of the term
‘relative’.  A bare reading of the same
clarifies that there is nothing therein that conveys that the legislature
intended that it wanted to disturb the understanding supplied by the Rajkot
bench. The better way of appreciating the amendment is to accept that the
legislative intent was contrary to what was held by the Ahmedabad bench. The
legislature clearly intended not to provide that a gift from an HUF will not be
treated as  from  a 
relative and will be taxable,  in
view of its  awareness  of the 
five decisions in favour of the interpretation exempting the gift
received  by an individual from an
HUF.  Not having  so provided, the intention should be held to
be favouring the exemption, and not otherwise.

 

The issue can be looked at from another angle
also. A coparcener can make a gift of his undivided interest in the coparcenary
property to another coparcener[2]
or to a stranger with the prior consent of all other coparceners. Such a gift
would be quite legal and valid. Therefore, when the karta of the HUF gifts
coparcenary property after obtaining the consent of all the coparceners, it may
be regarded as the gift of undivided interests in that property by all the
coparceners individually. Accordingly, the gift of property received from the
HUF may also be viewed as the gift of undivided interests in that property by
all the coparceners of that HUF. In such a case, if all the coparceners are
relatives of the recipient assessee, then the said gift cannot be taxed under
the provisions of section 56(2)(x). Alternatively, the receipt can  be considered as the one for the body of
individuals where all the individuals are related to the recipient and the
receipt therefore is made eligible to exemption from tax. 

 

Another important aspect is the intention behind
the provisions under consideration. In Circular No. 1/2011 dated 6-4-2011, it
has been mentioned that the provisions of section 56(2)(vii) were introduced as
a counter evasion mechanism to prevent laundering of unaccounted income. The
gifts received from relatives have been kept out of the purview of this
provision obviously because the possibility of such laundering of unaccounted
income does not exist or is very less. Therefore, taxing such gifts received
from the HUF, consisting of members who all are relatives, would not be in
consonance with the object of the provision.

 

Looking at the intention of the relevant
provision and the legal understanding of the concept of HUF, the view taken by
the Rajkot, Mumbai and Hyderabad  benches
of the Tribunal seems to be the more appropriate view. 

 

There is even otherwise a flaw in the view
that views the relationship in one direction only. This view holds that A is
the relative of B but B is not a relative of A. Such an absurdity in
interpreting the law should be avoided in preference to the harmonious reading
of the provisions under which the relationship is a two way affair whereby A is
a relative of B and B is therefore a relative of A and A and B are relative of
each other. Needless to say that the view beneficial to the tax payer should be
adopted in a case where two views are possible.   

 

In the end, it may be useful to examine the
competence of the Karta or an HUF to deal with and dispose of the property of
the HUF by way of gifts. A gift may be rendered invalid where it is held to be
not permissible under the general law  as
the one made beyond the competence of the person making it. One also needs to
examine whether such gifts when made, though not permissible in law, are void ab
initio or are voidable at the option of the parties to the gift. The issue
regarding validity of such gift given by the HUF needs to be examined. The
Supreme Court, in the case of R. Kuppayee & Anr. vs. Raja Gounder (2004)
265 ITR 551, has dealt with this issue and held as under:

 

“Combined reading of these paragraphs shows
that the position in Hindu law is that whereas the father has the power to gift
ancestral movables within reasonable limits, he has no such power with regard
to the ancestral immovable property or coparcenary property. He can, however,
make a gift within reasonable limits of ancestral immovable property for
“pious purposes”. However, the alienation must be by an act inter
vivos, and not by will. This Court has extended the rule in para. 226 and
held that the father was competent to make a gift of immovable property to a
daughter, if the gift is of reasonable extent having regard to the properties
held by the family.”

 

Thus, HUF’s property can be gifted by its
manager or karta only to a reasonable extent, and of immovable property only
for pious purposes. The Courts have given extended meaning to the ‘pious
purposes’ and validated the gift of ancestral property made by the father to
the daughter within reasonable limits. However, such extended meaning given to the
words ‘pious purposes’ enabling the father to make a gift of ancestral
immovable property within reasonable limits to a daughter has not been extended
to the gifts made in favour of other female members of the family. Rather it
has been held that husband could not make any such gift of ancestral property
to his wife out of affection on the principle of ‘pious purposes’.

 

However, gift of HUF’s property in excess of
reasonable limit or not for pious purposes is not void but voidable  and that too at the instance of other members
of the family and not strangers. In Pollock on Contracts, page 6 (twelfth
edition), this distinction between the terms ‘void’ and ‘voidable’ has been
explained as follows:

 

“The distinction between void and
voidable transactions is a fundamental one, though it is often obscured by
carelessness of language. An agreement or other act which is void has from the
beginning no legal effect at all, save in so far as any party to it incurs
penal consequences, as may happen where a special prohibitive law both makes
the act void and imposes a penalty. Otherwise no person’s rights, whether he be
a party or a stranger, are affected. A voidable act, on the contrary, takes its
full and proper legal effect unless and until it is disputed and set aside by
some person entitled so to do.”

 

In the case of R.C. Malpani vs.
CIT  215 ITR 241, the Gauhati High
Court held that the income derived from the property which is alienated by the
Karta without any legal necessity is not assessable in the hands of the HUF, as
it is only voidable and not void. Similarly, any gift received from the HUF may
be required to be considered (whether income or not) under the provisions of
section 56(2)(x), even if it is impermissible and voidable, unless the Court
has declared it to be void.

 


[1] In this case, the
Tribunal was dealing with the assessment year 2005-06 and the relevant clause
applicable in that assessment year was clause (v) of Section 56(2) which had
similar provisions

[2] Thamma Venkata
Subbamma (By Legal Representative) vs. Thamma Rattamma [1987] 168 ITR 760 (SC).

Section 254 – The ITAT is an adjudicator and not an investigator. It has to rely upon the investigation / enquiry conducted by the AO. The Department cannot fault the ITAT’s order and seek a recall on the ground that an order of SEBI, though available, was not produced before the ITAT at the hearing. The negligence or laches lies with the Department and for such negligence or laches, the order of the ITAT cannot be termed as erroneous u/s. 254(2). Section 254(2) of the Act is very limited in its scope and ambit and only applies to rectification of mistake apparent on the face of record, review of earlier decision of the Tribunal is not permissible under the provisions of section 254(2) of the Act

4.  ITO vs. Iraisaa Hotels Pvt. Ltd.

Members
: Saktijit Dey, JM and Rajesh Kumar, AM

MA No.
29/Mum/2017 arising out of ITA No.: 6165/Mum/2014

A. Y.:
2007-08  
Dated: 10th September, 2018.

Counsel
for revenue / assessee: Ram Tiwari / Pradeep Kapasi

 

Section 254 – The ITAT is an adjudicator and not an investigator.
It has to rely upon the investigation / enquiry conducted by the AO. The
Department cannot fault the ITAT’s order and seek a recall on the ground that
an order of SEBI, though available, was not produced before the ITAT at the
hearing. The negligence or laches lies with the Department and for such
negligence or laches, the order of the ITAT cannot be termed as erroneous u/s.
254(2). Section 254(2) of the Act is very limited in its scope and ambit and
only applies to rectification of mistake apparent on the face of record, review
of earlier decision of the Tribunal is not permissible under the provisions of
section 254(2) of the Act

 

FACTS

The Revenue filed an application
seeking recall of the order dated 29th April, 2016 passed in ITA No.
6165/Mum/2014.  It was contended that at
the time of disposal of the appeal by the Tribunal, though the final order
dated 31.3.2015, passed by SEBI was available it was not brought to the notice
of the Tribunal while deciding the issue relating to additions made u/s. 68 of
the Act by the Assessing Officer (AO) in respect of unsecured loan and share
capital amounting to Rs. 1,69,94,882.  It
was contended that had the observations of the SEBI in the final order been
considered, the issue relating to the disputed additions made by the AO could
have been decided in a different manner i.e., in favor of the Department.  It was submitted that the appeal order be
recalled and the appeal be heard and decided afresh after considering the final
report of the SEBI.

 

HELD

From the narration of facts in the
authorisation memo of the learned PCIT, the Tribunal noticed that he admits
that proper enquiry was not done by the learned CIT(A) and by the AO at the
stage of remand which resulted in not bringing certain facts to the notice of
the Tribunal.  It observed that it is
crystal clear that the Tribunal has proceeded on the basis of facts and
material on record and as were placed before it at the time of hearing by the
learned Counsels appearing for the parties. 
It observed that the role of the Tribunal as a second appellate
authority is of an adjudicator and not an investigator. 



The Tribunal under the provisions
of the Act has to decide the grounds raised in an appeal filed either by the
assessee or by the Department on the basis of the facts and materials available
on record or brought to its notice at the time of hearing of appeal.

 

The Tribunal observed that it is
after passing of the order of the Tribunal the Department has come forward with
the final order of the SEBI by stating that, though, it was available at the
time of hearing of appeal but it could not be brought to the notice of the
Tribunal.  It held that the negligence or
laches for not bringing the final order of SEBI to the notice of the Tribunal
lies with the Department and for such negligence or laches of the Department,
the appeal order passed by the Tribunal cannot be termed as erroneous to bring
it within the ambit of section 254(2) of the Act. 

 

After disposal of appeal by the
Tribunal, if the Department comes with fresh evidence certainly it cannot be
entertained, much less, by taking recourse to section 254(2) of the Act. 

 

The Tribunal observed that by
filing this application the Department wants a review of the earlier decision
of the Tribunal which is not permissible under provisions of section 254(2) of
the Act which is very limited in its scope and ambit and only applies to
rectification of mistake apparent on the face of record. 

 

The Tribunal held the application
filed by the Department to be not maintainable. 

Sections 143(2), 147 – A notice u/s. 143(2) issued by the AO before the assessee files a return of income has no meaning. If no fresh notice is issued after the assessee files a return, the AO has no jurisdiction to pass the reassessment order and the same has to be quashed

3.  Sudhir Menon vs. ACIT

Members
: Mahavir Singh, JM and N K
Pradhan, AM

ITA
No.: 1744/Mum/2016

A. Y.:
2010-11  
Dated: 3rd October, 2018.

Counsel for assessee / revenue: S E Dastur / R. Manjunatha Swamy

 

Sections 143(2), 147 – A notice u/s. 143(2)
issued by the AO before the assessee files a return of income has no meaning.
If no fresh notice is issued after the assessee files a return, the AO has no
jurisdiction to pass the reassessment order and the same has to be quashed

 

FACTS

The assessee filed his return of
income on 30.7.2010 declaring total income of Rs. 46,76,95,780 which return of
income was processed u/s. 143(1) of the Act on 21.3.2012.  Thereafter, the case was reopened by issuing
notice u/s. 148 of the Act dated 1.4.2013 which was served on the assessee on
8.4.2013. The ACIT, Central Circle – 45, Mumbai (AO) issued notice u/s. 143(2)
of the Act dated 3.5.2013 requiring assessee to attend his office on
13.5.2013.  The assessee in response to
notice issued u/s. 148 of the Act, filed a letter dated 23.5.2013 stating that
the return originally filed be treated as a return filed in response to notice
u/s. 148 of the Act.

 

Since no notice u/s. 143(2) was
issued after filing of return by the assessee, it was contended that the
assessment framed is invalid and bad in law. For this proposition, reliance was
placed on the following decisions –

 

i)    ACIT
vs. Geno Pharmaceuticals [(2013) 32 taxmann.com 162 (Bom.)]

ii)    CIT
vs. Ms. Malvika Arun Somaiya [(2010) 2 taxmann.com 144 (Bom)]

iii)   DIT vs. Society for Worldwide Inter Bank Financial,
Telecommunications [(2010) 323 ITR 249 (Delhi)]

iv)   Decision
of Delhi Tribunal in ITA Nos. 5163 & 5164/Del/2010, 5554/Del/2012 for AY
2004-05 and 2005-06 vide order dated 2.7.2018

 

HELD

The Tribunal noted the factual
position and observed that the question is can the AO issue notice u/s. 143(2)
of the Act in the absence of pending return of income.  It held that the provisions of section 143(2)
of the Act is clear that notice can be issued only when a valid return is
pending assessment.  It held that the
notice issued before 23.5.2013 had no meaning as the assessee filed return of
income u/s. 148 vide letter dated 23.5.2013 stating that the original return of
income can be treated as return filed in response to notice u/s. 148 of the
Act.  It observed that it means return
was filed only on 23.5.2013. 

 

The issue as to whether assessment
can be framed without issuing a notice u/s. 143(2) of the Act when the return
was filed by the assessee in response to notice u/s. 148 of the Act has been
considered by the Bombay High Court in the case of Geno Pharmaceuticals Ltd.
(supra).   Having noted the
observations of the Bombay High Court in the case of Geno Pharmaceuticals
Ltd. (supra), the Tribunal observed that similar is the position in the
case of Malvika Arun Somaiya (supra). 
The Tribunal also noted the observations of the Delhi High Court in the
case of Society for Worldwide Inter Bank Financial, Telecommunications
(supra) and held that in view of the consistent view of jurisdictional High
Court and Delhi High Court, in the absence of a pending return of income, the
provisions of section 143(2) of the Act is clear that notice can be issued only
when a valid return is pending for assessment. Accordingly, the notice issued
on 3.5.2013 has not meaning.  Since no
notice was issued by the Department after 23.5.2013 (date of filing of return
of income by the assessee) the Tribunal held that the assessment framed without
issuing a notice u/s. 143(2) of the Act when the return was filed by the
assessee in response to notice u/s. 148 of the Act is bad in law. The Tribunal
quashed the assessment framed by the AO.

 

The issue raised by the assessee by
way of additional ground was allowed. 
The appeal filed by the assessee was allowed.

Section 140A(3) and 221 – AO was not justified in levying penalty u/s. 140A(3) r.w.s. 221(1) for failure to pay self-assessment tax as per the provisions of section 140A(3) as amended w.e.f. 1st April, 1989 as the amended section 140A(3) does not envisage any penalty for non-payment of self-assessment tax

10.  [2018] 195 TTJ 536
(Mumbai – Trib.)

Heddle Knowledge P (Ltd) vs. ITO

ITA No.: 7509/Mum/2011

A. Y.: 2009-10.                                   

Dated: 19th January, 2018.

 

Section 140A(3) and 221 – AO was not justified in levying penalty
u/s. 140A(3) r.w.s. 221(1) for failure to pay self-assessment tax as per the
provisions of section 140A(3) as amended w.e.f. 1st April, 1989 as
the amended section 140A(3) does not envisage any penalty for non-payment of
self-assessment tax 

 

FACTS

The assessee filed its return for the relevant year which was not
accompanied by proof of payment of self-assessment tax. In response to
show-cause notice issued by AO, assessee raised a plea of financial stringency.
The AO did not find the reason advanced by the assessee to be satisfactory to
mitigate the levy of penalty.

He took a view that the assessee had defaulted in payment of self-assessment
tax within the stipulated period and was thus liable to be treated as
‘assessee-in-default’ as per the provisions of section 140A(3) r.w.s. 221(1) of
the Act. Accordingly, penalty order was passed for delayed payment of
self-assessment tax.

 

Aggrieved by the assessment order,
the assessee preferred an appeal to the CIT(A). The CIT(A) confirmed the
penalty order.

 

HELD

The Tribunal held that in terms of
the provisions of section 140A(3) as existing till 31-3-1989, the Assessing
Officer was empowered to levy penalty in cases where assessee had failed to pay
the self-assessment tax. The section was then amended by inserting Explanation
to it with effect from 1-4-1989. The amended section along with the explanatory
notes to the amendment conjointly made it clear that the earlier provision
prescribing for levy of penalty for default outlined in sub-section (1) of
section 140A(3) had yielded place to mandatory charging of interest for such
default. The aforesaid legislative intent also got strength by the fact that
simultaneously the legislature prescribed for mandatory charging of interest
u/s. 234B of the Act for default in payment of self-assessment tax with effect
from 01-04-1989 onwards.

 

However, a contrary position was
taken by the revenue to the effect that for having defaulted in payment of
self-assessment tax within the stipulated period, assessee qualified to be an
“assessee-in-default” as prescribed in the amended section 140A(3).
Section 221(1) of the Act prescribed for penalty when assessee was in default
in making the payment of tax. Once section 140A(3) had been amended with effect
from 01-04-1989, there was no amendment of section 221 and it continued to
remain the same. Furthermore, the intention of the legislature at the time of
insertion of the amended section 140A(3) made it clear that the old provisions
of section 140A(3) prescribing for levy of penalty for non-payment of
self-assessment tax was no longer found necessary because the said default
would henceforth invite mandatory charging of interest. Ostensibly, the
legislature did not envisage that consequent to the amendment, the default in
payment of self-assessment tax would hitherto be covered by the scope of
section 221(1).

 

The consequence of the aforesaid
two expressions contained in section 140A(3) were also not of the type sought
to be understood by the revenue, and rather the assessee was to be treated as
an “assessee-in-default” for the limited purpose of enabling the AO
to make recovery of the amount of tax and interest due and not for levy of
penalty, an aspect which had been specifically done away in the new provision.
Therefore, the Tribunal concluded that the fact that the amended section
140A(3) with effect from 01-04-1989 did not envisage any penalty for
non-payment of self-assessment tax, the AO was not justified in levying the
penalty by making recourse to section 221(1) of the Act. It may again be
emphasised that section 221 remained unchanged, both during the pre and post
amended section 140A(3) of the Act and even in the pre-amended situation,
penalty u/s. 221 of the Act was not attracted for default in payment of
self-assessment tax, which was expressly covered in pre 01-04-1989 prevailing
section 140A(3). In the result, the Tribunal directed the AO to delete the
penalty.

Section 54F – AO having accepted the returned income despite the fact that the assessee neither admitted capital gains on sale of property nor claimed exemption under any of the provisions and the CIT having given direction to the AO in his revisional order to verify the facts and to redo the assessment as per law, the claim for exemption u/s. 54F could not be denied in the fresh assessment

9.  [2018] 195 TTJ 630 (Hyd
– Trib.)

Manohar Reddy Basani vs. ITO

ITA No.: 1307/Hyd/2017

A. Y.: 2010-11.                                   

Dated: 30th May, 2018.

           

Section 54F – AO having accepted the returned
income despite the fact that the assessee neither admitted capital gains on
sale of property nor claimed exemption under any of the provisions and the CIT
having given direction to the AO in his revisional order to verify the facts
and to redo the assessment as per law, the claim for exemption u/s. 54F could
not be denied in the fresh assessment 

 

FACTS

The assessee filed its return
declaring certain taxable income. In course of scrutiny assessment, the AO
noticed that the assessee made transaction of sale of property. The assessee
had neither admitted capital gains on sale of property nor claimed exemption
under any of the provisions of the Act. In response to show-cause notice, the
assessee furnished the information called for and stated that he was entitled
to exemption u/s. 54F on the capital gains since his share of sale
consideration of the property was utilised for construction of a residential
property. Having considered the stand of the assessee, AO accepted the returned
income.

 

The Commissioner, however, opined
that in the absence of disclosure of capital gains in the return of income, the
assessee was not entitled to get any deduction u/s. 54F for investment in new
residential house. He thus passed a revisional order setting aside the
assessment.

 

Consequent to the directions of the
Revisional Authority, the AO passed an order u/s. 143(3) r.w.s. 263 holding
that the assessee neither declared the transaction of sale of property nor made
any claim of deduction u/s. 54F of the Act in the return of income and, in the
absence of any claim the assessee was not entitled to get any deduction u/s.
54F of the Act.

 

HELD

The Tribunal held that even if it
was assumed that the assesse could not make any new claim at later stage but
the fact remained that the assessee had not even disclosed capital gains and in
the absence of offering the capital gains to tax, the AO should have strictly
confined to the return filed and would not have made any addition and if once
he took the issue of capital gains for the first time, the claim of the
assessee regarding deduction u/s. 54F of the Act should also be considered and
in fact, the AO had fairly considered the same in the original assessment and
completed the assessment without making any addition. Presumably, because of
this the Revisional Authority did not give much stress to this aspect but
limited his direction by stating that the AO should reconsider the matter in
accordance with law. Thus, there was a categorical direction of the
Commissioner, to verify the facts and to redo the assessment as per law, and in
such an event it was a duty of the AO to consider the issue afresh. As the
assessee neither disclosed the capital gains in the return of income nor
claimed any deduction u/s. 54F, the assessee was not entitled to get any
deduction u/s. 54F, in the same way the AO should not have added the capital
gains to the income of the assessee since there was no disclosure of the same
in the return of income.

 

The first appellate authority ought
to have considered the issue on merits since the decision of the Supreme Court
in the case of Goetze (India) Ltd., would not debar the first appellate
authority to consider the fresh claim, if any, so as to arrive at the correct
taxable income. The High Court, in the case of CIT vs. Indian Express
(Madurai) (P.) Ltd. [1983] 13 Taxman 441/140 ITR 705, observed that unlike
a law suit in civil appeals, in tax litigation, it could not be treated as a
“lis”
between two rival parties but the job of the AO was to arrive at the correct
taxable income.

 

Therefore, merely on account of
fact that the assessee had not claimed exemption in return of income, the same
could not have been denied. In the result, the Tribunal directed AO to allow
the claim of deduction u/s. 54F of the Act.

Section 23 – Annual value of property of the assessee which property had remained let out for 36 months and thereafter could not be let out and had remained vacant during whole of the year under consideration, but had never remained under self-occupation of the assessee, has to be rightly computed at `nil’ by taking recourse to section 23(1)(c) of the Act

8.  [2018] 97 taxmann.com
534 (Mumbai-Trib.)

Sonu Realtors (P.) Ltd. vs. DCIT

ITA No.: 2892/Mum/2016 & 66(MUM) OF 2017

A. Y.: 2011-12 and 2012-13.

Dated: 19th September, 2018.

 

Section 23 – Annual value of property of the
assessee which property had remained let out for 36 months and thereafter could
not be let out and had remained vacant during whole of the year under
consideration, but had never remained under self-occupation of the assessee,
has to be rightly computed at `nil’ by taking recourse to section 23(1)(c) of
the Act 

 

FACTS

The assessee, engaged in the
business of construction, filed its return of income for assessment year
2011-12, declaring therein a total income of Rs. Nil. In the course of
assessment proceedings, the Assessing Officer noted that immovable properties
were reflected in the balance sheet of the assessee but the deemed rental
income had not been offered for taxation. He called upon the assessee to show
cause why deemed rent of the properties owned by the assessee should not be
charged to tax under the head `Income from House Property’. The assessee, in
response to the show cause, submitted that the two flats owned by it were let
out to Sterling Construction P. Ltd. for a period of 36 months vide agreement
dated April 2007. Upon expiry of the license period, the licensee vacated the
flats. During the period when the properties were let out on leave and license,
the rental income was offered for taxation under the head `Income from House
Property’. Since during the entire year the property was vacant, the assessee
had considered the annual value to be nil. The assessee contended that its case
is covered by section 23(1)(c) of the Act. The AO, however, held that since the
properties under consideration were not let out at all during the previous
year, the provisions of section 23(1)(c) would not be applicable to its case.

 

Aggrieved, the assessee preferred
an appeal to the CIT(A) who upheld the order passed by the AO. Aggrieved, the
assessee preferred an appeal to the Tribunal.

 

HELD

The Tribunal noted that the
assessee had vide agreement dated April, 2007 let out the Unit No. 401 &
425 of project Balaji Bhavan to Sterling Construction Pvt. Ltd. for a period of
36 months, and had offered the rental income received therefrom as its
“Income from house property” in the preceding years, but after the
expiry of the license period of 36 months the licensee had vacated the property
and conveyed its intention of not getting the license agreement renewed any
further. It observed that it is not the case of the department that after the
property was vacated, the same thereafter had remained under the self
occupation of the assessee.

 

In light of the aforesaid factual
position the Tribunal found itself to be in agreement with the submissions of
the Ld. A.R. that the issue raised before it is squarely covered by the orders
of the coordinate benches of the Tribunal in the case of (i) Vikas Keshav
Garud vs. ITO [(2016) 71 taxmann.com 214 (Mum.); (ii). ACIT vs. Dr. Prabha
Sanghi [(2012) 27 taxmann.com 317 (Delhi)]; (iii). Premsudha Exports (P) Ltd.
vs. ACIT [(2008) 110 ITD 158 (Mum.); and (iv) Informed Technologies India Ltd.
vs. DCIT [(2016) 75 taxmann.com 128 (Mum.)].

 

The Tribunal, observed that the
co-ordinate Bench in the case of Informed Technologies India Ltd. (supra)
had while analysing the scope and gamut of section 23(1)(c) of the ‘Act’,
concluded that in light of the words ‘Property is let’ used in clause (c) of
section 23(1) of the ‘Act’, unlike the term ‘house is actually let’ as stands
gathered from a conjoint reading of sub-section (2) to (4) of section 23, it
can safely and rather inescapably be gathered that the conscious, purposive and
intentional usage of the aforesaid term ‘Property is let’ in section 23(1)(c)
of the ‘Act’, cannot be substituted by the term ‘house is actually let’ as used
by the legislature in all its wisdom in sub-section (3) of section 23.

 

The Tribunal held that it can
safely be concluded that the requirement that the ‘house is actually let’
during the year is not to be taken as a prerequisite for bringing the case of
an assessee within the sweep of section 23(1)(c) of the ‘Act’, as long as the
property is let in the earlier period and is found vacant for the whole year
under consideration, subject to the condition that such vacancy of the property
is not for self occupation of the same by the assessee who continues to hold
the same for the purpose of letting out.

 

Though the
term ‘Property is let’ used in section 23(1)(c) is solely with the intent to
avoid misuse of determination of the ‘annual value’ of self occupied properties
by the assesses by taking recourse to section 23(1)(c), however, the same
cannot be stretched beyond that and the ‘annual value’ of a property which is
let, but thereafter remains vacant for the whole year under consideration,
though subject to the condition that the same is not put under self occupation
of the assessee and is held for the purpose of letting out of the same, would
continue to be determined u/s. 23(1)(c) of the ‘Act’. The Tribunal held that
the assessee had rightly determined the ‘annual value’ of the property at Nil
by taking recourse to section 23(1)(c) of the ‘Act’.

 

It observed that the CIT(A) had
misconceived the judgment of the Hon’ble High Court of Andhra Pradesh in the
case of Vivek Jain vs. Asstt. CIT [2011] 14 taxmann.com 146/202 Taxman
499/337 ITR 74.  It observed that in
the said judgment the Hon’ble High Court in the concluding Para 14 & 15 had
observed that though the benefit of computing the ‘ALV u/s. 23(1)(c) could not
be extended to a case where the property was not let out at all, however the
same would duly encompass and take within its sweep cases where the property
had remained let out for two or more years, but had remained vacant for the
whole of the previous year.

 

The Tribunal was of the view that now
when in the case of the present case no infirmity emerges from the computation
of the ‘annual value’ of the said property u/s. 23(1)(c) of the ‘Act’ by the
assessee. The Tribunal allowed this ground of appeal filed by the assessee.

Section 271AAA – Penalty proceeding u/s. 271AAA can be initiated only if the person has been subjected to search u/s.132(1) If penalty proceedings u/s. 271AAA are initiated against a person who is not subjected to search action u/s. 132(1) of the Act, the provision itself becomes unworkable as no declaration u/s. 132(4) of the Act is possible from any person other than the person against whom search and seizure action u/s. 132(1) is carried out.

7.  [2018] 97 taxmann.com 460 (Mumbai-Trib.)

DCIT
vs. Velji Rupshi Faria

ITA
No.: 1849/Mum/2017

A. Y.:
2008-09
Dated: 31st August, 2018

 

Section 271AAA – Penalty proceeding u/s. 271AAA can be initiated
only if the person has been subjected to search u/s.132(1)

 

If penalty proceedings u/s. 271AAA are initiated against a person
who is not subjected to search action u/s. 132(1) of the Act, the provision
itself becomes unworkable as no declaration u/s. 132(4) of the Act is possible
from any person other than the person against whom search and seizure action
u/s. 132(1) is carried out.

 

FACTS

The assessee, an individual, was a
key person of certain firms and companies which were subjected to search and
seizure operation. The Assessing Officer (AO) initiated proceedings u/s. 153C
of the Act. In the course of proceedings for assessment u/s. 153C of the Act,
the AO referring to incriminating material found in the course of search and
seizure operation made a number of additions as a result of which total income
was assessed at Rs. 7,40,04,778. He also initiated proceedings for imposition
of penalty u/s. 271AAA of the Act. The AO, rejecting the explanation filed by
the assessee, levied penalty of Rs. 74,00,477 u/s. 271AAA of the Act.

 

Aggrieved, the assessee preferred
an appeal to the CIT(A) who having found that no search and seizure action was
carried out in the case of the assessee, followed the decision of the Ahmedabad
Bench of the Tribunal in the case of Dy. CIT vs. K. G. Developers, ITA No.
1139/Ahd./2012, dated 13th September, 2013, and deleted the
penalty imposed.


Aggrieved, the revenue preferred an appeal to the Tribunal.

 

HELD

At the outset, the Tribunal noted
that the Department is not disputing that the penalty has been levied u/s.
271AAA of the Act. The Tribunal held that the primary condition for initiating
penalty proceeding is, a person concerned must have been subjected to a search
and seizure operation u/s. 132(1) of the Act. Undisputedly, in the facts of the
present case, no search and seizure operation u/s.132(1) of the Act was carried
out in case of the assessee. This fact is clearly evident from the initiation
and completion of proceedings u/s. 153C of the Act.

 

Thus, the primary condition of section 271AAA of the Act remains
unsatisfied. Even otherwise also, if penalty proceedings u/s. 271AAA of the Act
is initiated against a person who is not subjected to search action u/s. 132(1)
of the Act, the provision itself becomes unworkable as no declaration u/s.
132(4) of the Act is possible from any person other than the person against
whom the search and seizure u/s. 132(1) is carried out.

Thus, in such circumstances, sub-section (2) to section 271AAA of the Act
cannot be given effect to. The Tribunal agreed with the CIT(A) that initiation
of penalty proceedings u/s. 271AAA of the Act in the instant case is invalid.
The Tribunal observed that its decision gets support from the decision relied
upon by the Authorised Representative.

 

The Tribunal upheld the order
passed by the CIT(A). The appeal filed by the revenue was dismissed.

 

Section 263: Commissioner – Revision of orders prejudicial to revenue – Scope of power – Subsequent amendement. [ Section 6(a)]

6.  CIT-26 vs. Mihir Doshi [ Income tax Appeal no
196 of 2016, Dated: 23rd August, 2018 (Bombay High Court)]. 

 

[Mihir Doshi vs. DCIT; dated
30/08/2013 ; ITA. No 4403/Mum/2010, Mum. 
ITAT Mum.  ITAT ]

 

Section 263: Commissioner – Revision of orders prejudicial to
revenue – Scope of power – Subsequent amendement. [ Section 6(a)]

 

The assessee has been serving in
‘Morgan Stanley International (Inc)’ of the USA. He was on deputation to India.
He filed return of income for Assessment Year 2003- 2004 on 19th
October, 2004, claiming the status of a ‘Resident’, but ‘not ordinarily
resident’ within the meaning of section 6 sub-section 6 clause (a) of the I.T
Act. He offered the salary earned in India to the extent of Rs.3,23,23,506/- to
tax. He offered further income under the head ‘Short Term Capital Gain’ and
‘Bank Interest’ on his own, which the A.O brought to tax by his Assessment
Order of 24th January, 2006. The said proceedings resulted from the
refund sought by this assessee and the A.O modified his order by invoking
section 154 of the Act. Admittedly the A.O was possessed of this power and he
modified or corrected his order to the extent of the amount of income which
could be brought to tax.

 

The Commissioner was of the view
that the A.O did not examine the legal status of the assessee in the course of
the assessment proceedings and, hence, initiated action u/s. 263 of the Act.
That is on the footing, namely, the unamended section 6 sub-section 6 clause
(a) of the Act. It is said that the A.O gave effect
to the order of the Commissioner, but when the assessee asked for rectification
of that order to exclude double addition, the A.O surprisingly passed another
order dated 24th February, 2009 deleting the entire amount. It is in
these circumstances that the records were again summoned by the Commissioner of
Income Tax and he returned the finding that the order of the A.O is erroneous
in so far as it is prejudicial to the interest of Revenue. Not only the salary,
but his perquisites also should be brought to tax was the view of the
Commissioner.

 

The aggrieved assessee approached
the Tribunal and the Tribunal considered both issues in the backdrop of the
peculiar facts and came to the conclusion that there could not be prejudice
caused to the Revenue as the A.O not only brought to tax the Indian component,
but the global component of the salary. That was a mistake and he, therefore,
made this correction so as to pass an Assessment Order in tune with the law. It
does not mean that the Commissioner was authorised by the same legal provision,
namely, section 263 of the Act to raise the issue of taxability. Firstly, all
proceeds of the entire tax deducted at source and secondly, that part of the
refund which was granted to the assessee on the basis that the sum refunded,
does not belong to the assessee, but to his employer. The main issue was
whether there was indeed any mistake in the Assessment Order and whether that
justified exercise of powers by the A.O conferred vide section 154 of the Act.
The Tribunal considered the factual and legal position and a judgment of the
Hon’ble Supreme Court in the case of Pradip J. Mehta vs. Commissioner of
Income Tax (300 ITR 231) and arrived at the conclusion that the amendment
to section 6 sub-section 6 clause(a) has been brought into effect from 1st
April, 2004. That was not applicable to the Assessment Year under
consideration. The existing law was considered by the Hon’ble Supreme Court in
the aforesaid judgment and the Hon’ble Supreme Court’s judgment would bind the
A.O. That part of the income earned outside India would have to be excluded and
the assessee would have to be taxed to the extent of the income earned in
India. That has admittedly been done.

 

Being aggrieved with the order of the ITAT, the Revenue filed the
Appeal before High Court. The Court find that, in such circumstances, there was
no prejudice caused and this was not a fit case, therefore, to exercise the
powers u/s. 263 of the Act. Such a conclusion is imminently possible in the
peculiar facts of this case. The assessee’s status, the nature of his income
and the legal provision then prevailing having been correctly applied, the
order under Appeal does not suffer from perversity or any error of law apparent
on the face of the record. Accordingly, 
dept appeal was dismissed.

Section 153A: Assessment – Search or requisition-No addition can be made in respect of an unabated assessment which has become final if no incriminating material is found during the search. [Section 132, 143(3)]

5.  The Pr. CIT-4 vs. Jignesh P. Shah [Income tax
Appeal no 555 of 2016, Dated: 26th September, 2018 (Bombay High
Court)]. 

 

[Jignesh P. Shah vs. DCIT;
dated 13/02/2015 ; ITA. No 1553 & 3173/Mum/2010, Mum.  ITAT ]

 

Section 153A: Assessment – Search or requisition-No addition can
be made in respect of an unabated assessment which has become final if no
incriminating material is found during the search. [Section 132, 143(3)]

 

The assessee is an individual being
the member of Financial Technologies India Ltd., was covered under search and
seizure action. In pursuance of search action u/s. 132(1), notices u/s. 153A
was issued to the assessee on 25.10.2007 for the six assessment years
immediately preceding the assessment year of the year of the search, which
included the aforesaid assessment years. In response to the said notices the
assessee filed his return of income on 26.11.2007 on the same income which was
declared in the original return of income filed u/s. 139. In the assessment
order passed u/s. 153A, r.w.s 143(3), the addition on account of deemed
dividend of Rs.1,69,68,750/- for the A.Y. 2002-03 and Rs.4,65,76,000/- for the
A.Y. 2004-05 was made, vide separate order dated 31.03.2009.

 

The Ld. AO noted the facts about
receiving the payments by the assessee from Lotus investment, which was a
division of La-fin Financial Services Pvt. Ltd. in which the assessee held 50%
of share, from the balance sheets and records already filed along with the
return of income. However, an Assessment Order was made and this time, an
addition, on account of deemed dividend of Rs.1,69,68,750/for AY: 2002-03 and
Rs.4,65,76,000/- for AY:  2004-05, was
made. This came to be confirmed by the CIT (A).

 

The assessee submitted that during
the course of search and seizure action, no incriminating document, material or
unaccounted assets were found from the assessee. The A.O, without there being
any incriminating material found in the course of search relating to the deemed
dividend has made the addition on the basis of information already available in
the return of income. This is also evident from the copy of panchnama and
statement on oath of the assessee recorded at the time of search. The Ld. AO
has noted the facts about receiving of the payments by the assessee from Lotus
investment, which was a division of La-fin Financial Services Pvt. Ltd. in
which the assessee held 50% of share, from the balance sheets and records
already filed along with the return of income. Since the assessment for the
A.Ys. 2002-03 & 2004-05 had attained finality before the date of search and
does not get abated in view of second proviso to section 153A, therefore,
without there being any incriminating material found at the time of search, no
addition over and above the income which already stood assessed can be made.
This proposition he said, is squarely covered by the decision of All Cargo
Global Logistics Ltd. vs. DCIT reported in (2012) 137 ITD 287 (SB) (Mum).

 

Even the Hon’ble jurisdictional
(Bombay) High Court in the case of CIT vs. Murli Agro Products Ltd. ITA No.
36 of 2009 order dated 29.10.2010, has clearly held that, once the
assessment has attained finality before the date of search and no material is found
in the course of proceedings u/s. 132(1), then no addition can be made in the
proceedings u/s. 153A. This proposition has been reiterated by Hon’ble
Rajasthan High Court in the case of Jai Steel (India) vs. ACIT reported in
(2013) 259 CTR (Raj) 281. Thus, the addition of deemed dividend made by the
assessing officer is beyond the scope of assessment u/s 153A for the impugned
assessment years.

 

The Tribunal held that the
principle which was enunciated by the judgment of this Court rendered in the
case of Commissioner of Income Tax vs. M/S Murli Agro Products Ltd. (Income
Tax Appeal No.36 of 2009 decided on 29th October 2010) was
applied. That judgment held that, once the assessment has attained finality
before the date of search and no material is found in the course of proceedings
u/s. 132(1), then, no addition can be made in the proceedings u/s. 153A. After
setting out this principle in great details, the Tribunal rendered their
opinion that factually there was no incriminating material found during the
course of search relating to the addition made on account of deemed dividend.
The very fact that section 132 was resorted requiring the Assessing Officer to
record the necessary satisfaction, was lacking in this case. The assessment,
which had gained finality, in the absence of any material termed as
incriminating having thus been subjected to assessment/reassessment, the Tribunal
held in favour of the assessee.

 

Being aggrieved with the order of
the ITAT, the Revenue filed the Appeal before High Court. The Court upheld  the order of the Tribunal. Accordingly,
dismissed the departments appeal .

Sections 133A, 119(2)(a), 234A, 234B and 234C – Waiver of interest u/s. 234A, 234B and 234C – Delay in furnishing return and in paying advance tax – Discretion of Chief Commissioner to waive interest – Return submitted voluntarily – Assessee genuinely believing that he had no taxable income – Interest to be waived

20. R. Mani vs. CCIT; 406 ITR
450 (Mad):

Date of order: 4th
December, 2017

A. Ys. 1997-98 and 1998-99


Sections 133A, 119(2)(a), 234A, 234B and 234C – Waiver of interest u/s. 234A,
234B and 234C – Delay in furnishing return and in paying advance tax –
Discretion of Chief Commissioner to waive interest – Return submitted
voluntarily – Assessee genuinely believing that he had no taxable income –
Interest to be waived

 

The assessee’s income was mainly
from property, sago commission income and income from a trust. For the A.Ys. 1997-98 and 1998-99, the assessee filed his returns of income on
20/12/2000 which was processed and the assessee was assessed to tax and
interest was levied u/s. 234A, 234B and 234C of the Act. The assessee
approached the Chief Commissioner u/s. 119(2)(a) of the Act for waiver of
interest u/ss. 234A, 234B and 234C so levied. The Chief Commissioner rejected
the application on the ground that the assessee failed to voluntarily file his
returns and that the returns were filed consequent upon a survey conducted on
23/01/1999 u/s. 133A and issuance of notice u/s. 148 of the Act.

 

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

 

“i)    An
income tax survey does not amount to detection of undisclosed income.

iii)    The Circular issued by the CBDT empowering the Chief Commissioner
to consider petitions for waiver of interest u/s. 234A as well as section 234B
would show that even in cases covered by section 234B, even though these
provisions are compensatory in nature, special orders for grant of relaxation
could be passed.

iv)   A
survey was conducted in the premises of the assessee on 22/01/1999. However,
the survey did not lead to any immediate issuance of notice u/s. 148. In the
interregnum, the assessee filed his return of income. Thereafter the Assessing
Officer had taken up the matter and completed the assessment u/s. 143 of the
Act and passed an order dated 30/03/2001 accepting the return filed by the
assessee with no further additions.

v)    The
assessee’s case was that he had no taxable income. This plea has not been
controverted by the Revenue and this was evident from the conduct of the
assessee in not filing returns for the earlier three years, i.e., A. Ys.
1994-95 to 1996-97. That apart, the assessee had been able to establish that
the property still remained undivided and no definite share in the property had
been allotted to any coparcener and the suit for partition was pending.

vi)   Apart
from that, the returns filed by the assessee had been accepted and assessment
had been completed with no further additions. The dispute with regard to the
division of property was a bonafide dispute which directly related to the
assessability of the assessee to tax. Therefore, if assessee were entitled to
waiver of interest u/s. 234A the question of payment of advance tax or a
portion thereof would not arise and therefore, the assessee was entitled to
waiver of interest u/s. 234B and 234C of the Act.

vii)   Accordingly, the writ petition is allowed, the impugned order is
set aside and it is held that the petitioner is entitled for waiver of interest
u/s. 234A, 234B and 234C of the Act.”

13. ITO vs. Dilip Kumar Shaw (Kolkata)(SMC) Member : P. M. Jagtap (AM) ITA No.: 1517/Kol/2016 A.Y.: 2006-07. Dated: 4th June, 2018. Counsel for revenue / assessee: Nicholas Murmu/ Tapas Mondal Section 154 – The difference between contract receipts as stated in Form 16A and as assessed while assessing total income u/s. 143(3) of the Act, cannot be brought to tax by passing an order u/s. 154 of the Act.

FACTS


For assessment year 2006-07, the
assessee, an individual, filed his return of income declaring therein a total income
of Rs. 8,85,386.  The Assessing Officer
(AO) vide order dated 18.7.2008 passed u/s. 143(3) of the Act, assessed the
total income to be Rs. 9,25,390. 
Thereafter, it was noticed by the AO that the contractual receipts
credited in the Profit & Loss Account of the assessee were to the tune of
Rs.2,91,42,128/- whereas the contract receipts of the assessee as per TDS Form
16A were Rs.2,99,89,617/-. He, therefore, held that there was a mistake in the
assessment order passed u/s. 143(3) in taking the contract receipts short by
Rs.8,47,489/- and the same was rectified by him vide an order dated 08.12.2012
passed u/s. 154, wherein an addition of Rs.8,47,489/- was made by him to the
total income of the assessee.

 

Aggrieved, the assessee preferred
an appeal to the CIT(A) who after considering the submission made by the
assessee as well as the material available on record set aside the order passed
by the Assessing Officer u/s. 154 by holding the same as not maintainable.

 

Aggrieved, the revenue preferred an
appeal to the Tribunal where on behalf of the assessee it was stated that the
said difference was due to the mistake committed by the concerned party in
deducting tax at source from the contract receipts of the earlier years, which
was corrected by them by deducting more tax from the contract receipts of the
year under consideration.

 

HELD 


The Tribunal agreed with the
observations of the CIT(A) that there could be many reasons for the difference
noted by the AO in the contract receipts credited in the Profit & Loss
Account of the assessee and the contract receipts as shown in the relevant TDS
certificates. It observed that the difference in the contract receipts as
noticed by the AO, thus, required more investigation and enquiry to find out as
to whether there was any escapement of income of the assessee and as rightly
held by the CIT(A) it was not a case of obvious and patent mistake, which could
be rectified u/s. 154. This issue involved a debatable point which required
further enquiry and investigation and the same, therefore, was beyond the scope
of rectification permissible u/s. 154 as rightly held by the ld. CIT(A). The
Tribunal set aside the order passed by the AO u/s. 154 by treating the same as
not maintainable.

 

The appeal filed by the revenue was
dismissed.

12. Jessie Juliet Pereira vs. ITO (Mumbai) Members : R. C. Sharma (AM) and Amarjit Singh (JM) ITA No.: 6914/M/2017 A.Y.: 2009-10. Dated: 4th June, 2018 Counsel for assessee / revenue: Subhash Chhajed & S. Balasubramanian / Ms. N. Hemalatha Section 54 – Claim for exemption u/s. 54 needs to be considered in a case where assessee has surrendered his flat in exchange for corpus fund/hardship allowance and a new flat in a scheme of redevelopment.

FACTS  


In the course of assessment
proceedings of MIG Group III Co-operative Housing Society Ltd. (society), it is
noticed that the society has entered into a development agreement with Suyog
Happy Homes (developer) on 30.4.2008 and the members of the society have
received payments from the said developer. 
The details revealed that the assessee has received Rs. 40,75,302 and
had not filed return of income for assessment year 2009-2010.  Accordingly, reasons were recorded and a
notice u/s. 148 of the Act was issued and served upon the assessee.  In response to the notice, the assessee filed
return of income declaring total income of Rs. 1,94,290. 

 

The society, of which the assessee
was a member, was the owner of property consisting of 9 buildings with 80
members. The society, on 30.4.2008, entered into an agreement with the
developer for development of the property in such a manner that each member of
the society shall receive a new flat in exchange of surrender of old flat
depending upon the size of the old flat along with interest in the additional
FSI allotted by MHADA. The property and the additional FSI would be with the
name of the society. All the expenses, costs and charges for the proposed
project of redevelopment of the said property including for purchase of
additional FSI from MHADA etc., were to be borne by the Developers alone and
the society and members were not liable to pay or contribute any amount towards
the same.

 

As per the agreement, the developer
was to pay the society being lawful owner of the property and the members an
aggregate monetary consideration of Rs.39.10 crore which was to be distributed
among the members of the society being shareholders depending upon the size of
their old flat.

 

During the year under
consideration, the assessee, as a shareholder of the society, received an
amount of Rs.40,75,302/- being consideration for surrender of his old flat
along with his interest in the additional FSI allotted by MHADA etc. The
developer issued the cheques in the name of the individual members which were
handed over to the society and in turn, the society diverted the same at source
to the members/shareholders. Thus, the said amount of Rs.39.10 crore never
routed through the books of accounts of the society though these cheques were
in the custody of the society before handing over to the individual members
being shareholder.

 

The said activity was treated as
commercial activity and the receipt of the amount of Rs.40,75,302/- was
considered as revenue receipt by AO and accordingly taxed as Income from Other
Sources.

 

Aggrieved by the order, the
assessee filed an appeal before the CIT(A) contending that the amount of corpus
money/hardship allowance is a capital receipt not chargeable to tax.  The CIT(A) treated the said receipt as long
term capital gain.

 

Aggrieved, the assessee preferred
an appeal to the Tribunal on the ground that the amount of corpus
money/hardship allowance received by the assessee is a capital receipt not
chargeable to tax and without prejudice contending that the CIT(A) ought to
have appreciated that the Appellant has purchased a new house at Dahisar for
Rs.21,68,180/- out of the capital gains of Rs.31,68,313/- and hence the
proportionate deduction u/s. 54 ought to have been granted by the CIT (A).

 

HELD  


At the time of argument, the
assessee did not contest that the amount of corpus money/hardship allowance
constitutes capital receipt not chargeable to tax but only argued that the
CIT(A) has treated the receipt of Rs.40,75,302/- as capital gain and the
assessee has also acquired new flat, therefore, the benefit u/s. 54 of the Act
is required to be given. The Tribunal observed that the Assessing Officer
treated the receipt as income from other sources whereas the CIT(A) has treated
the said receipt as long term capital gain. It is not in dispute that the
assessee has also acquired a new flat in lieu of his old flat. The receipt to
the tune of Rs.40,75,302/- has been treated as long term capital gain.
Undoubtedly, the claim u/s. 54 of the Act was not raised earlier before the
revenue. Anyhow, since the receipt to the tune of Rs.40,75,302/- has been
treated as long term capital gain, therefore, in the said circumstances, the
claim u/s. 54 of the Act is also liable to be considered in accordance with
law.

 

The Tribunal remanded the alternate
ground raised (viz. claim for deduction u/s. 54) before the AO for consideration
in view of the provision u/s. 54 of the Act in accordance with law after giving
an opportunity of being heard to the assessee. This ground of appeal was
allowed.

 

The appeal filed by the assessee
was allowed.

 

Contributor’s Note:  The grounds of appeal state that the claim
u/s.54 ought to have been allowed in respect of flat purchased by the assessee
in Dahisar but the operative portion of the ITAT order refers to assessee
having acquired a new flat in lieu of old flat.

11. ITO vs. Jogesh Ghosh (Kolkata) Members : J. Sudhakar Reddy (AM) and Smt. Madhumita Roy (JM) ITA No.: 1532/Kol/2016 A.Y.: 2013-14. Dated: 1st June, 2018 Counsel for revenue / assessee: Sallong Yaden / Subash Agarwal Sections 69, 69A – Source of purchase of land held to be satisfactorily explained by the assessee if he has produced receipts confirming sale of land. Production of receipts issued by buyer, though not numbered, are sufficient discharge of burden.

FACTS 


The assessee derived income by way
of interest on fixed deposits.  During
the previous year under consideration, he had sold his land and also purchased
land.  In order to explain the source of
purchase of land, the assessee contended that it had received amounts in cash
from the purchaser to whom the assessee had sold his land.  To substantiate the contention, the assessee
produced receipts issued by the purchaser of land.  The Assessing Officer (AO) disbelieved the
receipts produced on the ground that (a) there was no agreement between the
assessee and the purchaser of land; (b) the receipts were not serially
numbered; (c) the letter issued by the AO to the purchaser of land Windstar
Realtors Pvt. Ltd., calling for information was returned unserved; and (d) the
conveyance deed mentioned that the amount had been received on execution of
sale deed by mentioning the word “today”.  
The AO did not accept the contention of the assessee that there was a
mistake in the conveyance deed which was rectified by a registered
rectification deed, which was produced by the assessee.

 

The AO added a sum of Rs. 76,05,701
to the income of the assessee on the ground that money was received from
undisclosed sources as well as on the ground that there was unexplained expenditure.

 

Aggrieved, the assessee preferred
an appeal to the CIT(A) who considered the set of money receipts produced by
the assessee and also affidavit signed by Mr. Dhar, authorised person of the
purchaser company.  The CIT(A) in his
order mentioned that the authorised person of the purchaser company appeared
before him and confirmed the cash payments as well as the dates mentioned in
the money receipts.  Mr. Dhar had also
confirmed that making cash payments were necessary and a common feature for
purchases of land in rural areas from the agriculturists and the company had
made the payments by withdrawing cash from its bank accounts. The Ld. CIT(A)
deleted the addition made  by the AO.

 

Aggrieved, the revenue preferred an
appeal to the Tribunal where, on behalf of the revenue, it was contended that
the order of CIT(A) be set aside as the CIT(A) had accepted additional evidence
in the form of affidavit of Mr. Dhar as well as his explanations and that the
AO was not provided an opportunity.  It
was also contended that the CIT(A) erred in accepting the rectification deed
produced by the assessee to correct the original conveyance deed. 

 

The assessee contended before the
Tribunal that all the details were filed before the AO and that filing of
affidavit was only supplementary and supporting evidence and additional
evidence.  Reliance was placed on the
following case laws –

 

i)   Shankar
Khandasari Sugar Mill vs. CIT reported in 193 ITR 669 (Kar);

ii)   DCIT vs. New Manas Tea Estate Pvt. Ltd. (Gau) reported in 73 ITD
157 (Gau)

 

HELD 


The Tribunal held that the assessee
has discharged the onus that lay on him to prove the sources for purchase of
land. It observed that the AO has only doubted the timing of receipts of cash
by the assessee, consequent to the sale of land to Windstar Realtors Pvt. Ltd.
Any money receipts issued by an individual would have a date but not a serial
number, as in the case with a business concern. When the company has confirmed
the payments in cash on the dates mentioned in the receipts, nothing else
survives. In view of the factual findings of the Ld. CIT(A), the Tribunal
upheld the order of the Ld. CIT(A). 

 

The appeal filed by the revenue was
dismissed.

21. [2018] 194 TTJ (Mumbai) 102 Owais M Husain vs. ITO ITA No.: 4320/Mum/2016 A. Y.: 2006-07 Dated: 11th May, 2018 Section 23(1)(a)- Income from house property –– AO is directed to compute the deemed rent of the house property as per the municipal rateable value and assess the income from house property accordingly instead of estimating the letable value on the basis of the prevailing rate of rent of the building situated in the surrounding areas.

FACTS


  •   The assesse owned 3 flats
    i.e. one at Chennai which is treated as self-occupied property by the AO and
    other two properties being flat at Queens Court, Worli and Dhun apartment,
    Worli, Mumbai.

 

  •  The AO estimated the reasonable let out value of the house
    property after taking IT inspector’s report. The report was on the basis of the
    local enquiry conducted in the surrounding area of the building situated and
    the going rent per square feet of Rs.50.70 per square feet per month. Based on
    inspector’s report, the AO estimated the rent per month for each of the flats
    at Rs. 75,000 per month. Therefore, the AO worked out ALV of the flat at Dhun
    cooperative society, Worli, Mumbai, at Rs. 9 lakh and for the other flat at
    Queens Court, Worli, Mumbai at Rs. 9 lakh. 

 

  • Aggrieved by the
    assessment order, the assessee preferred an appeal to the CIT(A). The CIT(A)
    confirmed the action of the AO.

 

HELD


  •     The Tribunal while
    relying upon the judgement of the Hon’ble Bombay High Court, held that the
    municipal rateable value could be accepted as a bona fide rental value
    of the property and there could not be a blanket rejection of the same.


  •     The market rate in the
    locality was an approved method for determining the fair rental value but it
    was only when the AO was convinced that the case before him was suspicious,
    determination by the parties was doubtful that he could resort to enquire about
    the prevailing rate in the locality.

 

  •     In the result, the
    Tribunal directed the AO to compute the deemed rent as per municipal rateable
    value and assess the income accordingly.

20. [2018] 194 TTJ (Mumbai) 225 Fancy Wear vs. ITO ITA No.: 1596 & 1597/Mum/2016 A. Ys.: 2010-11 and 2011-12 Dated: 20th September, 2017 Section 69C – Assessee having not been allowed to cross-examine witnesses whose statements were recorded by AO and accounts of assessee having not been rejected, addition made u/s. 69C by AO was invalid for violation of the principles of natural justice as also on merits.

FACTS


  •     The assessee filed its
    return of income which was initially processed u/s. 143(1). Subsequently, the
    AO received information from the Sales Tax Department as well as from DGIT
    (Inv.) Mumbai that the assessee had received accommodation entries for
    purchases from suspicious parties.

 

  •     The AO initiated
    proceedings u/s. 147, after recording reasons thereof. He observed that the
    assessee had purchased goods from SE and SJE. The sales tax department had
    conducted independent enquiries in each of the hawala parties and conclusively
    proved that those parties were engaged in the business of providing
    accommodation entries only. The AO observed that the notices issued u/s. 133
    (6), had been returned with the mark ‘’not known’’ or “not claimed”.
    Accordingly, the aggregate of the purchases was treated as unexplained
    expenditure u/s. 69C and was added to the returned income of the assessee.

 

  •     The AO further observed
    that apart from the above purchases, the assessee had purchased goods from two
    more entities, namely RE and VE. The names of both the entities were appearing
    on the website of the Sales Tax Department in the list of the defaulters. Thus,
    he made a further addition to the income of the assessee invoking section 69C.

 

  •     Aggrieved by the
    assessment order, the assessee preferred an appeal to the CIT(A). The CIT(A)
    reduced the addition to 25 per cent of the purchases.

 

HELD


  •   The Tribunal noted that
    though material for reopening was available to the AO, it was never shared with
    the assessee. The assessee had made a request for cross examining the parties
    who were treated as hawala-dealers by the Sales Tax Department. The AO did not
    provide the copies of statements of suppliers and opportunity of cross
    examination to the assessee.

 

  •   In case of the other two
    entities, the Tribunal held that a default under the Sales Tax Act, in itself,
    could not be equated with non-genuineness of the transaction entered by an
    entity with other party, unless and until some positive corroborative evidence
    was brought on record. It was a fact that all the payments to the suppliers
    were made through banking channels. No evidences were brought on record proving
    that the suppliers had withdrawn cash immediately after deposit of cheques of the
    assessee.

 

  •   The assessee had
    discharged the onus of proving the genuineness of the transactions by producing
    copies of purchase bills, delivery challans, bank statements showing payments
    made by the parties, confirmation of ledger accounts of the suppliers, sales
    tax returns and sales tax challans of the suppliers, income tax returns. After
    the submissions made by the assessee along with the above documents, the ball
    was in the court of the AO to discharge his onus-especially when he wanted to
    invoke the provisions of section 69C.

 

  •  The AO had completed the assessment without marshaling the facts
    properly and only on the basis of general information provided by the Sales Tax
    Department. The non-filing of appeals against the orders of the CIT(A), wherein
    he had deleted 75 per cent of the additions made by the AO, indicated that the
    department itself was not convinced about the approach adopted by the AO in
    making additions.

 

  •     In the end, the Tribunal
    held that the orders of the AO and CIT(A) were not valid because of violation
    of principles of natural justice. Besides, the addition made u/s. 69C was also
    not maintainable.

19. [2018] 193 TTJ (Jd) 751 ITO vs. Estate of Maharaja Karni Singh of Bikaner ITA NO.: 241/Jodh/2017 A. Y.: 2011-12 : 20th February, 2018 Section 50C- Capital gains – Assessee having contested the enhanced valuation of the property made by the stamp valuation authority and the AO having denied the request of the assesse to refer the matter to the DVO u/s. 50C(2), CIT(A) was justified in deleting the addition on account of capital gain on the sale of land.

FACTS


  •     The assesse had sold two
    pieces of land for Rs.45,00,000 and Rs.30,00,000 respectively, the DLC value of
    which was Rs.1,12,04,236 and Rs.1,20,00,566 aggregating to Rs.2,32,04,802.
    After deduction of cost of acquisition of Rs.95,07,478 the resultant taxable
    long term capital gain was Rs.1,36,97,324.

 

  •     The AO stated that the
    reference to DVO could not be made in view of the provisions of section 50C(2)
    of the Income-tax Act, 1961, as the litigation for the charging of stamp duty
    was pending before KAR board, Ajmer.

 

  •     Therefore, the AO
    computed the Income of the assessee invoking of the provisions of section 50C,
    as the assessment was getting barred by limitation on 31st March,
    2014.

 

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

 

  •     The CIT(A) deleted the
    additions, holding that, before adoption of valuation of property sold by the
    valuation authority, the AO should have considered the objection raised by the
    assessee and should have referred the matter to the DVO u/s. 50C (2).

 

HELD


  •   The Tribunal held that as
    per section 50C, the value taken for stamp duty by the State registration
    authority would be considered as deemed sale consideration. There was solace
    for assessee u/s. 50C(2), which provided that if the assessee objected to the
    valuation of the property for stamp duty purposes, the AO might refer the
    valuation to the DVO.

 

  •     Thus, section 50C
    provided two remedies at the option of the assessee, in that, he could either
    file appeal against the stamp value or seek reference to the valuation cell.
    Adoption of the value by the valuation cell was again subject to regular
    appeals available against the order of the AO. 

 

  •     The Tribunal further
    stated that it was well settled that the principles of natural justice would be
    presumed to be necessary, unless there existed a statutory interdict, and also
    when substantial justice and technical consideration were pitted against each
    other, the cause of substantial justice deserved to be preferred.

 

  •     Therefore, denial of
    request or objections of the assessee against the value adopted by the stamp
    valuation authority by the AO was against the spirit of section 50C. It was not
    optional for the AO to make reference to DVO, the right of the assessee u/s.
    50C was a statutory right.

 

  •     In the result, the
    Tribunal held that there was no infirmity in the order of CIT(A) that the AO
    should have considered the objections raised by the assessee against the same
    and should have referred the matter to the DVO u/s. 50C(2).

7 Section 40A(3) – Cash payments made out of business expediency allowed as expenditure.

A. Daga Royal
Arts vs. ITO

Members:  Vijay Pal Rao (J. M.) & Vikram Singh
Yadav (A. M)

ITA No.:
1065/JP/2016

A.Y.:
2013-14.  Dated : 15th May,
2018

Counsel for
Assessee / Revenue:  Rajeev Sogani / J.
C. Kulhari



Facts

During the year
under consideration, the assessee firm, the real estate developer, had
purchased 26 pieces of plot of land from various persons for a total
consideration of Rs. 2.46 crore. Out of which, payment amounting to Rs. 1.72
crore was made in cash to various persons. 
Cash payments were justified by the assessee on the ground that the
sellers were new to the assessee and refused to accept payment by cheque. The
assessee could have lost the land deals if the assessee had insisted on cheque
payment. However, according to the AO, the case of the assessee did not fall in
any of the sub-clauses of Rule 6DD and hence, he disallowed the sum of Rs. 1.72
crore paid in cash u/s. 40A(3). On appeal, the CIT(A) confirmed the order of
the AO.

 

Before the
Tribunal, the revenue justified the orders of the lower authorities and
submitted that since the matter didn’t fall in any of the exceptions provided
in Rule 6DD, the disallowance had been rightly made u/s. 40A(3).

 

Held

The Tribunal
noted the following undisputed facts:

–   Identity of the persons from whom the
purchases had been made, genuineness of the transactions of purchase of various
plots of land and payment in cash were evidenced by the registered sale deeds
and there was no dispute raised by the Revenue either during the assessment
proceedings or before the Tribunal.

–   Only at the insistence of the specific
sellers, the assessee had made cash payment and in case of other sellers, the
payment had been made by cheque. This, according to the Tribunal, established
that the assessee had business expediency under which it had to make payment in
cash and in absence of which, the transactions could not had been completed.

–   The source of cash payments was clearly
identifiable in form of the withdrawals from the assessee’s bank accounts and
the said details were submitted before the lower authorities and have not been
disputed by them.

 

Further, the Tribunal referred to the following observations of the Apex
court in the case of Attar Singh Gurmukh Singh vs. ITO (59 taxmann.com 11):

 

“The terms of section 40A(3) are not absolute.
Consideration of business expediency and other relevant factors are not
excluded. The genuine and bona fide transactions are not taken out of the sweep
of the section. It is open to the assessee to furnish to the satisfaction of
the Assessing Officer the circumstances under which the payment in the manner
prescribed in section 40A(3) was not practicable or would have caused genuine
difficulty to the payee.”

 

Thus, according to the Tribunal, so far as consideration of business
expediency and other relevant factors were concerned, the same continue to be
relevant factors, which need to be considered and taken into account while
determining the exceptions to the disallowance as contemplated u/s. 40A(3), so
long as the intention of the legislature was not violated.

 

According to the Tribunal, the amendment to Rule 6DD(j) by notification
dated 10.10.2008, providing for an exception only in a scenario where the
payment was required to be made on a day on which banks were closed on account
of holiday or strike – also do not change the above legal proposition laid down
by the Supreme Court regarding consideration of business expediency and other
relevant factors. 

 

According to the Tribunal, the above view finds resonance in decisions
of various authorities discussed below:

 

–   In the case of Harshila Chordia vs. ITO
(298 ITR 349) the Rajasthan High Court observed that as per the Board
circular dated 31.05.1977 [108 ITR (St.) 8], rule 6DD(j) has to be liberally
construed and ordinarily where the genuineness of the transaction and the
payment and the identity of the receiver is established, the requirement of
rule 6DD(j) must be deemed to have been satisfied and the rigors of section
40A(3) cannot be invoked. 

–   In Anupam Tele Services (362 ITR 92),
the Gujarat High Court overruled the decision of the Tribunal disallowing cash
payments u/s. 40A(3) since according to it, the Tribunal erred in not
considering ‘business expediencies’ when the assessee was compelled to make
cash payments.

–   In Ajmer Food Products Pvt. Ltd. vs.JCIT
[ITA No. 625/JP/14] where the genuineness of the transaction as well as the
identity of the payee were not disputed and the assessee was able to establish
business expediency, the co-ordinate bench of the Tribunal, following the above
decisions of the Gujarat High Court and of the Rajasthan High Court deleted the
addition made by the lower authorities u/s. 40A(3).

–   In the case of Gurdas Garg vs. CIT(A) (63
taxmann.com 289) where the facts of the case were pari materia to the
assessee’s case, the Punjab and Haryana high court allowed the assessee’s
appeal.

 

Further, the decisions in the following cases were also relied on by the
Tribunal:

–  M/s. Dhuri Wine vs. DCIT (ITA No. 1155
/ Chd / 2013 & others dated 09.10.2015);

–  Rakesh Kumar vs. ACIT (ITA No. 102 /
Asr / 2014 dated 09.03.2016);

–  ACE India Abodes Limited (Appeal No. 45/2012
dated 11.09.2017);

 

Taking into
account the facts and circumstances of the case and following the legal proposition
laid down by the various Courts and Coordinate Benches discussed above, the
Tribunal held that the intent and the purpose for which section 40A(3) has been
brought on the statute books has been clearly satisfied in the instant case.
Therefore, being a case of genuine business transaction, no disallowance is
called for.

18. [2018] 193 TTJ (Jp) 898 ACIT vs. Safe Decore (P.) Ltd ITA No.: 716/Jp/2017 A. Y.: 2014-15 Dated: 12th January, 2018 Section 56(2)(viib) read with Rule 11UA – Fair market value of shares determined by assessee as per discounted cash flow method being higher than the fair market value under net asset method, CIT(A) was justified in deleting addition made by AO u/s. 56(2)(viib)

FACTS

  •     During the year under
    consideration the assessee company allotted shares to ‘J’ Ltd. The assesse
    submitted valuation per equity share computed on the discounted cash flow
    method as per the certificate of Chartered Accountants wherein the value per
    shares was arrived at Rs.54.98 per share.

 

  •     The AO did not accept
    said valuation and applied Net Asset Value method as per which value of share
    came to Rs.26.69 per share. Applying the said value, the AO made addition u/s.
    56(2)(viib).

 

  •     Aggrieved by the
    assessment order, the assessee preferred an appeal to the CIT(A). In appellate
    proceedings, the assessee contended that as per Rule 11UA of the Income-tax
    Rules,1962, the Fair Market Value of unquoted equity shares would be the value
    on the allotment date of such unquoted equity shares as determined as per
    method provided or Net Asset Value, whichever was higher.

 

  •     The CIT(A) accepted the
    contention of the assessee and deleted the addition made by the AO.

 

HELD

  •     The Tribunal held that
    there was no dispute that the assessee had issued shares to ‘J’ Ltd., during
    the year under consideration. Further, the fair market value as per the
    provision of section 56(2)(viib) had to be determined in accordance with the
    method prescribed under Rule 11UA of Income-tax Rules,1962 and as per Rule
    11UA(2), discounted cash flow method was one of the prescribed methods. Therefore,
    it was the option of the assessee to adopt any of the prescribed methods under
    Rule 11UA(2).

 

  •     Section 56(2)(viib) read
    with the Explanation had specifically provided that the fair market value of
    the unquoted shares should be determined as per the prescribed methods, and
    should be taken whichever is higher fair market value, by comparing the value
    based on the assets of the company.

 

Therefore, value as per the Net
Asset Value method as well as any of the other methods prescribed under Rule
11UA of Income-tax Rules,1962, whichever was higher, should be adopted as per
the option of the assessee.

 

  •     In the case of the
    assessee, the fair market value determined as per the discounted cash flow
    method at Rs.54.98 per share which was higher than the valuation adopted by the
    AO as per the Net Asset Value at Rs.26.69 per share.

 

  •     Therefore, the Tribunal
    held that as the AO had not found any serious defect in the facts and details
    used in determining the fair market value under discounted cash flow method, there
    was no error or illegality in the order of the CIT(A). 

APPLICABILITY OF SECTION 14A – RELEVANCE OF ‘DOMINANT PURPOSE’ OF ACQUISITION OF SHARES/ SECURITIES – PART – II

Introduction


5.   As
mentioned in para 1.3 of Part-I of this write-up [January, 2019 Issue of BCAJ],
the Apex Court dealt with the main issue of applicability of section 14A in
cases where the shares were purchased by the assessee for acquiring/retaining
controlling interest or as stock-in-trade and in the process, it has dealt with
some other issues in the context of these provisions. As further mentioned in
para 3 of Part-I of this write-up, the Delhi High Court in MaxOpp Investments
Ltd’s case for the Assessment Year 2002-2003 [(2012) -347 ITR 272] took
the view that for the purpose of determining the applicability of section 14A,
it is not relevant whether the assessee has made investments for the purpose of
acquiring/retaining controlling interest as the dividend income is exempt. As
such, according to the Delhi High Court, dominant purpose for acquiring shares
is not relevant in this context. On the other hand, as mentioned in para 4 of
Part-I of this write-up, the Punjab & Haryana High Court, in State Bank of
Patiala’s case for the Assessment Year 2008-2009 [(2017) – 391 ITR 218], took
the contrary view in a case where the shares/securities were held by the assessee
as stock-in-trade. The Apex Court in batch of cases [MaxOpp Investments Ltd
vs. CIT and other cases (2018) 402 ITR 640 (SC)] has brought out the facts,
observations and findings of the Delhi High Court in MaxOpp Investments Ltd’s
case and of the Punjab & Haryana High Court in State Bank of Patiala’s case
primarily to decide the main issue [Ref paras 3.1 to 3.3 and paras 4.1 to 4.3
of Part-I of this write-up].

 

Is dominant purpose relevant ?


6.1     After
noting the divergent views emerged from the High Courts on this issue and the
reasoning given by the High Courts in support of these conflicting opinions,
the Court proceeded to consider this main issue as to whether the purpose of
making investment yielding Exempt Income is relevant for the purpose of applying
the provisions of section 14A and arguments of both the sides in that respect.

 

6.2     The
Court, to begin with, referred to statutory scheme contained in the provisions
of section 14A and Rule 8D and noted that the same should be kept in mind to
examine the divergent views expressed in the judgments of the above referred
High Courts. Further, the Court also 
referred to the views expressed by the Karnataka High Court in CCI Ltd’s
case and in both the judgments of the Calcutta High Court, in G.K.K. Capital’s
case and in Dhanuka & Sons’ case, referred to in para 4.4 of Part-I of this
write-up.

 

6.3     The
Court then briefly recapitulated the main 
arguments canvassed on behalf of the Assessees that: the holdings of
investments in group companies representing controlling interest amounts to
carrying on business as held in various cases; the character of dividend income
from such investments in shares continues to be business income though, by
virtue of the mandatory prescription in section 56 of the Act, such dividend
income is assessable under the head ‘Income from Other Sources’; interest paid
on funds borrowed for such investments is for the purpose of business and not
for earning dividend income and conversely, interest paid on such borrowed
funds does not represent expenditure incurred for earning dividend income and
was not allowable u/s. 57(iii) (prior to introduction of section 14A).

 

6.3.1  Based
on the above principles, it was, inter–alia, contended on behalf
of the assessee that when the shares were acquired, as part of promoter
holding, for the purpose of acquiring controlling interest in the
investee-company, the dominant object is to keep the controlling interest and
not to earn dividend and even when the dividend is not declared, the Assessee would
not liquidate such shares. As such, no expenditure was incurred ‘in relation
to‘ Exempt Income as contemplated in section 14A as the mandate and requirement
of section 14A requires a direct and proximate nexus between the expenditure
and the Exempt income to attract section 14A. It was further contended that
even if contextual/ purposive interpretation is to be given, that also requires
direct and proximate connection between the expenditure and the Exempt Income.
The section requires that only expenditure actually incurred ‘in relation to’
Exempt Income is to be disallowed so as to remove the double benefit to the
assessee.

 

6.3.2     On
behalf of the Revenue, it was, inter-alia, contended that the view taken
by the Delhi High Court is correct and the objective behind these provisions
manifestly pointed out that the expenditure incurred in respect of Exempt
Income earned has to be disallowed. For this, the reliance was also placed on
the Apex Court’s judgment in Walfort’s case [referred to in para 3.3 of Part-I
of this write-up]. According to the counsel for the Revenue, otherwise the
assessee will get double benefit. Firstly, 
in the form of exemption in respect of income and secondly, by getting
deduction of expenses against other taxable income as well. Therefore, the
expression ‘in relation to’ had to be given expansive meaning in order to
achieve the object of the provision. It was also pointed out that the literal
meaning of section 14A also indicates towards that and that was equally the
purpose of insertion of the provisions as brought out in Explanatory
Memorandum.

 

6.4     After
considering the contentions raised on behalf of both the sides, the Court
proceeded to consider the main issue and observed as under (pg 665):

 

“In the
first instance, it needs to be recognized that as per section 14A(1) of the
Act, deduction of that expenditure is not to be allowed which has been incurred
by the assessee “in relation to income which does not form part of the total
income under this Act”. Axiomatically, it is that expenditure alone which has
been incurred in relation to the income which is not includible in total income
that has to be disallowed. If an expenditure incurred has no causal connection
with the exempted income, then such an expenditure would obviously be treated
as not related to the income that is exempted from tax, and such expenditure
would be allowed as business expenditure. To put it differently, such
expenditure would then be considered as incurred in respect of other income
which is to be treated as part of the total income.”

 

6.4.1   After bringing out the effect of
section14A(1), the Court also stated that there is no quarrel in assigning the
above meaning to section 14A and , in fact, all the High Courts including the
Delhi High Court & Punjab & Haryana High Court have agreed on this
interpretation. Having observed this, the Court focused on the real issue with
regard to interpretation of the expression ‘in relation to’ and observed as
under (pg 665) :

            

“……The
entire dispute is as to what interpretations to be given to the words ”in
relation to” in the given scenario, viz., where the dividend income on the
shares is earned, though the dominant purpose for subscribing in those shares
of the investee-company was not to earn dividend. We have two scenarios in
these sets of appeals. In one group of cases the main purpose for investing in
shares was to gain control over the investee-company. Other cases are those
where the shares of investee-company were held by the assessees as
stock-in-trade (i.e. as a business activity) and not as investment to earn
dividends. In this context, it is to be examined as to whether the expenditure
was incurred, in respective scenarios, in relation to the dividend income or not.  ”

 

6.5     After
bringing out the real issue on hand and by drawing support from the views
expressed by the Apex Court in Walfort’s case, the Court took the view that for
this purpose the dominant purpose test is not relevant and held as under (pgs
665/666):

       

“Having
clarified the aforesaid position, the first and foremost issue that falls for
consideration is as to whether the dominant purpose test, which is pressed into
service by the assessee would apply while interpreting section 14A of the Act
or we have to go by the theory of apportionment. We are of the opinion that the
dominant purpose for which the investment into shares is made by an assessee
may not be relevant. No doubt, the assessee like MaxOpp Investments Limited may
have made the investment in order to gain control of the investee-company.
However, that does not appear to be a relevant factor in determining the issue
at hand. The fact remains that such dividend income is non-taxable. In this
scenario, if expenditure is incurred on earning the dividend income, that much
of the expenditure which is attributable to the dividend income has to be
disallowed and cannot be treated as business expenditure.  Keeping this objective behind section14A of
the Act in mind, the said provision has to be interpreted, particularly, the
words “in relation to” that does not form part of total income. Considered in
this hue, the principle of apportionment of expenses comes in to play as that
is the principle which is engrained in section 14A of
the Act…..”

                 

6.5.1   In the above context, while disagreeing with
the view expressed by the Punjab & Haryana High Court in State Bank of
Patiala’s case, the Court agreed with the view taken by the Delhi High Court in
the MaxOpp Investments Ltd’s case and held as under (pg 666):

 

“The Delhi
High Court, therefore, correctly observed that prior to introduction of section
14A of the Act, the law was that when an assessee had a composite and
indivisible business which had elements of both taxable and non-taxable income,
the entire expenditure in respect of the said business was deductible and, in
such a case, the principle of apportionment of the expenditure relating to the
non-taxable did not apply. The principle of apportionment was made available
only where the business was divisible. It is to find a cure to the aforesaid
problem that the Legislature has not only inserted section 14A by the Finance
(Amendment) Act, 2001 but also made It retrospective, i.e., 1962 when the
Income-tax Act itself came into force. The aforesaid intent was expressed
loudly and clearly in the Memorandum Explaining the Provisions of the Finance
Bill, 2001.We, thus, agree with the view taken by the Delhi High Court, and are
not inclined to accept the opinion of the Punjab and Haryana High Court which
went by dominant purpose theory. The aforesaid reasoning would be applicable in
cases where shares are held as investment in the investee-company, may be for
the purpose of having controlling interest therein. On that reasoning, appeals
of MaxOpp Investment Limited as well as similar cases where shares were
purchased by the assessees to have controlling interest in the investee-company
have to fail and are, therefore, dismissed.”

 

6.6     The
Court then dealt with another aspect of the main issue that when the shares are
held as stock-in-trade. In this context the Court noted CBDT Circular No 18 dtd
2/11/2015  [referred to in para 4.3(a) of
Part-I of this write-up] wherein the Board has clarified that income from
investments made by a banking concern is attributable to business of banking
and is taxable as business income. In this Circular, the Board has gone by the
judgment of the Apex Court in the case of Nawanshahar’s case which was dealing
with  the claim of the bank u/s. 80P
which was relied on by the  Punjab &
Haryana High Court in State Bank of Patiala’s case. In this context, the Court
observed as under (pg 667):

 

“ Form this, the Punjab and Haryana High Court pointed out that this
circular carves out a  distinction
between “stock-in-trade” and “ investment” and provides that if the motive
behind purchase and sale of shares is to earn profit, then the same would be
treated as trading profit and if the object is to derive income by way of
dividend then the profit would be said to have accrued from investment. To this
extent, the High court may be correct. At the same time, we do not agree with
the test of dominant intention applied by the Punjab and Haryana High Court,
which we have already discarded. In that event, the question is as to on what
basis those cases are to be decided where the shares of other
companies are purchased by the assessees as “ stock-in-trade” and not as
“investment”. We proceed to discuss this aspect hereinafter.”

 

6.6.1  While
finally deciding the above issue against the assessee to the effect that even
in  such cases Sec. 14A will apply as the
purpose of acquisition of shares is not relevant, the Court held as under (pgs
667/668):

 

“ In those
cases, where shares are held as stock-in-trade, the main purpose is to trade in
those shares and earn profits therefrom. However, we are not concerned with
those profits which would naturally be treated as “income” under the head
“Profits and gains from business and profession”. What happens is that, in the
process, when the shares are held as “stock-in-trade”, certain dividend is also
earned, though incidentally, which is also an income. However, by virtue of
section 10(34) of the Act, this dividend income is not to be included in the
total income and is exempt from tax. This triggers the applicability of section
14A of the Act which is based on the theory of apportionment of expenditure
between taxable and non-taxable income as held in Walfort Share and Stock
Brokers P. Ltd. case. Therefore, to that extent, depending upon the facts of
each case, the expenditure incurred in acquiring those shares will have to be
apportioned.”

 

Other
Issues


7.1     The
Court then dealt with the facts emerging from State Bank of Patiala’s case
[referred to in para 4.2 of Part-I of this write-up] wherein the AO had
restricted the disallowance to the amount of Exempt Income [Rs.12.20 Crore] by
applying formula contained in Rule 8D and the CIT (A) had enhanced the amount
of disallowance to the entire amount of allocated expenditure [Rs.40.72 Crore]
beyond Exempt Income. In this context, the Court observed as under (pg 668):

 

“ … In spite of this exercise of apportionment of expenditure carried out
by the Assessing Officer, the Commissioner of Income-tax (Appeals) disallowed
the entire deduction of expenditure. That view of the Commissioner of
Income-tax (Appeals) was clearly untenable and rightly set aside by the
Income-tax Appellant Tribunal. Therefore, on facts, the Punjab and Haryana High
Court has arrived at a correct conclusion by affirming the view of the
Income-tax Appellate Tribunal, though we are not subscribing to the theory of
dominant intention applied by the High Court…”

 

7.1.1     While
disagreeing with the views of Punjab & Haryana High Court in State Bank of
Patiala’s case on the theory of dominant purpose test, the Court further stated
as under (pg 668):

 

”… It is
to be kept in mind that in those cases where shares are held as
stock-in-trade”, it becomes a business activity of the assessee to deal in
those shares as a business proposition. Whether dividend is earned or not
becomes immaterial. In fact, it would be a quirk of fate that when the
investee-company declared dividend, those shares are held by the assessee,
though the assessee has to ultimately trade those shares by selling them to
earn profits. The situation here is, therefore, different from the case like
MaxOpp Investment Ltd. where the assessee would continue to hold those shares
as it wants to retain control over the investee-company. In that case, whenever
dividend is declared by the investee-company that would necessarily be earned
by the assessee and the assessee alone. Therefore, even at the time of
investing into those shares, the assessee knows that it may generate dividend
income as well and as and when such dividend income is generated that would be
earned by the assessee. In contrast, where the shares are held as
stock-in-trade, this may not be necessarily a situation. The main purpose is to
liquidate those shares whenever the share price goes up in order to earn
profits. In the result, the appeals filed by the Revenue challenging the
judgment of the Punjab and Haryana High Court in State Bank of Patiala also
fail, though law in this respect has been clarified hereinabove.  ”

 

7.2     The Court
then dealt with the effect of section 14A(2) and Rule 8D. In this context, it
may be noted that various the High Courts (including Delhi High Court in MaxOpp
Investments Ltd’s case) have taken a view that before applying Rule 8D to
determine the quantum of disallowance, the AO needs to record his satisfaction
with regard to incorrectness of the quantum of expenditure incurred in relation
to Exempt Income determined by the assessee. Effectively, section 14A(2)
provides that if the assessee has determined the amount of such expenditure
(which may be disallowed) then the AO cannot take resort to Rule 8D for
determination of such expenditure unless the AO, having regards to the accounts
of the assessee, is not satisfied about the quantum of disallowance determined
by the assessee and record reasons for the same. In short, the Rule 8D cannot
be regarded as mandatory for all cases attracting section 14A(1). In this
context, the following observations of the Court are relevant (pgs 668/669):

 

“…we also
make it clear that before applying the theory of apportionment, the Assessing
Officer needs to record satisfaction that having regard to the kind of the
assessee, suo motu disallowance under section 14A was not correct. It will be
in those cases where the assessee in his return has himself apportioned but the
Assessing Officer was not accepting the said apportionment. In that
eventuality, it will have to record its satisfaction to this effect. Further,
while recording such a satisfaction, the nature of the loan taken by the
assessee for purchasing the shares/making the investment in shares is to be
examined by the Assessing Officer.”

 

7.3     As
mentioned earlier, there were number of appeals before the Apex Court. One of
them was filed by Avon Cycles Ltd (Civil appeal No 1423 of 2015) in
which the issue was with regard to disallowance of interest under Rule
8D(2)(ii) in a case where mixed funds were utilised by the assessee for
investment in shares. In this context, the ITAT had held as under (pg 669):

 

“…Admittedly
the assessee had paid total interest of Rs. 2.92 crores out of which interest
paid on term loan raised for specific purpose totals of Rs. 1.70 crores and
balance interest paid by the assessee is Rs. 1.21 crores. The funds utilised by
the assessee being mixed funds and in view of the provisions of rule 8D(2)(ii)
of the Income-tax Rules the disallowance is confirmed at Rs. 10,49,851. We find
no merit in the ad hoc disallowance made by the Commissioner of Income-tax
(Appeals) at Rs. 5,00,000. Consequently, the ground of appeal raised by the
Revenue is partly allowed and the ground raised by the assessee in
cross-objection is allowed.”

 

7.3.1   The High Court had taken a view that the above
being finding other facts, no substantial question of
law arises.

 

7.3.2  This
appeal was dismissed by the Apex Court with following observations (pg 669):

 

“ After
going through the records and applying the principle of apportionment, which is
held to be applicable in such cases, we do not find any merit in Civil Appeal
No. 1423 of 2015, which is accordingly dismissed”

 

7.4     It may also be noted that in the Bombay
High Court judgment (Nagpur Bench) in the case of Jamnalal Sons Pvt. Ltd. [
(2018) 11 ITR –OL 385] , it appears that the Tribunal had deleted
disallowance of interest expenditure made u/s 14A read with Rule 8D on the
grounds that the assessee had interest free funds available which are far in
excess of the amount invested in shares on which dividend was earned [apart
from other fact that the interest income was also much more than the interest
expenditure]. For this, Tribunal had relied on the judgment of the Bombay High
Court in the case of Reliance Utilities & Power Ltd [(2009) 313 ITR 340]
wherein the Court has held that in such cases, it can be presumed that the
investments were made from the interest free funds. In this case [Jamnalal
& sons’ case], the Revenue had contended before the High Court that the
Punjab & Haryana High Court in Avon Cycles Ltd’s case [referred to in para
7.3 above] has taken a different view from the one taken in Reliance Utilities’
case and also pointed out that appeal of the assessee against this Punjab &
Haryana High Court judgment has been admitted by the Apex Court and is pending.
After considering this, the Bombay High Court has dismissed the appeal of the
Revenue and decided the issue in favour of the assessee for which it also noted
that in the case of HDFC Bank Ltd [(2014) 366 ITR 565], this Court has
reiterated the view taken in Reliance Utilities’ case. One of the appeals filed
before the Apex Court in the MaxOpp Investment Ltd’s case by the Revenue was
also against this Bombay High Court judgment in Jamnalal Sons Pvt Ltd’s case
[Civil Appeal No.2793 of 2018 – Diary No 41203 of 2017] and this appeal of the
Revenue is allowed by the Apex Court.

 

7.5     Few
appeals filed by the Revenue against the assessee involved the issue as to
retrospective applicability of Rule 8D. In this context, the Court stated that
the said Rule is prospective and will apply only from Assessment Year 2008-2009.
This has already been held by the Apex Court in the case of CIT vs. Essar
technologies Ltd. [(2018) 401 ITR 445]. This was also the view emerging
from the judgment of the Apex Court in the case of Godrej & Boyce
Manufacturing Ltd. (2017) 394 ITR 449 [Godrej’s case].

 

CONCLUSION


8.1     In
view of the above judgment of the Apex Court, now it is settled that for the
purpose of determining applicability of section 14A, the dominant purpose test
is not relevant. As such, irrespective of the purpose for which shares are
acquired [i.e. whether for acquiring controlling interest or even for business
activity(to be held as stock-in-trade), provisions of section 14A are
applicable. It is unfortunate that a very sound and rational distinction drawn
by the Punjab and Haryana High Court in the State Bank of Patiala’s case
[referred to in para 4.3 of Part-I of this write-up], in the context of shares
held as stock-in-trade, did not appeal the Apex Court in  deciding this issue.

 

8.1.1  It
appears that in a case where shares are held as stock-in-trade and during the
relevant previous year, no dividend income (Exempt Income) is earned therefrom
by the Assessee, the provisions of section 14A should not apply. In this
context, the observations of the Apex Court referred to in paras 6.6, 6.6.1,
7.1, and  7.1.1 above may be useful.

 

8.1.2  Section
14A deals with disallowance of expenditure incurred in relation to Exempt
Income. Therefore, expenditure which is admittedly incurred in relation to
taxable Income [e.g. interest on Term Loan taken and utilised for acquiring
Plant & Machinery meant for manufacturing activity yielding profit which is
not exempt] should be kept outside the purview of disallowance u/s. 14A. As
such, the same should not be considered for the quantification of the amount of
such disallowance . For this, useful reference may be made to the observations
of the Apex Court referred to in para 6.4 above.

 

8.2    Once
the provisions of section 14A(1) are applicable and the quantum of expenditure
in relation to Exempt Income is required to be determined as provided in
section 14A(2), the method prescribed in Rule 8D for determining such quantum
may become relevant. However, if the assessee has suo motu determined the
amount of disallowance u/s 14A then in such cases, the AO cannot invoke Rule 8D
for determining the quantum of such expenditure without recording the reasoned
satisfaction [as contemplated in section14A (2)] that the amount of suo motu
disallowance made by the assessee is not correct. This was the view expressed
by various High Courts including Delhi High Court in MaxOpp Investment Ltd’s
case and Bombay High Court judgment in Ultra Tech Ltd [(2018) 407 ITR 560-
Special Leave Petition [SLP] dismissed (2018) 406 ITR (St) 12]. This view
also gets support from the observations in the judgment of the Apex Court in
Godrej’s case. This position now gets settled on account of the view expressed
by the Apex Court referred to in para 7.2 above. However, from the view
expressed by the Apex Court, this position may apply only in cases where assessee
in his Return of Income has suo motu apportioned some expenditure
towards the earning of Exempt Income but the AO is not satisfied with the same.
Therefore, practically, it is advisable for the assessees to suo motu
determine the quantum of such disallowance properly so as to avoid
applicability of Rule 8D when working under Rule 8D is adverse to the Assessee.
As such, the application of the Rule 8D is strictly not mandatory.

 

8.2.1  The
above view of the Apex Court, in practice, may raise some further issues,
especially where the Assessee has taken a stand that no such expenditure is
incurred as the observations of the Apex Court are in the context of section
14A(2) and there is no reference to section 14A(3) which refers to the claim of
Nil expenditure and provide that even in such cases, section 14A(2) applies. It
seems that, in such cases, the assessee has to first demonstrate that no such
expenditure is factually incurred.

 

8.3     Considering
the facts of State Bank of Patiala’s case and on account of the view expressed
by the Apex Court referred to in para 7.1 above, in cases where the AO has
restricted the amount of disallowance u/s 14A to the amount of Exempt Income
earned during the year while applying Rule 8D, it would not be possible for the
CIT(A) to enhance the amount of such disallowance beyond the amount of Exempt
Income. In this context, it is worth noting that in the case of the same
assessee (State Bank of Patiala), the Punjab & Haryana High Court [for
Assessment Year 2010-2011 – ITA No 359/2017 dated 14/11/17] appear to have
taken similar view [in the context of order passed by the AO as a result of
order of CIT u/s. 263] by relying on decision in case of same assessee for
other years [i.e Assesstment Year 2009-2010 (2017) 393 ITR 476 and the one
referred to in para 7.1 above]. This judgment of the Punjab & Haryana High
Court dated 14/11/17 in case of the same assessee also subsequently came-up
before the Apex Court in which the SLP is dismissed by the Apex Court by an
order dated 8/10/18 stating that ‘the SLP is dismissed both on the ground of
delay as well as on merits.’ We may clarify that the mere rejection of SLP by
non-speaking order of the Apex Court against the High Court judgment does not
by itself tantamount to confirmation of the judgment of the High Court and
declaration of law by the Apex Court on the issue involved. For implications of
dismissal of SLP, reference may be made to our analysis of the Apex Court
Judgment under the title ‘Impact of rejection of SLP’ in this column in
December, 2000 issue of this Journal.

 

8.3.1  In the above context, in cases where the AO
himself has not restricted the amount of disallowance, some further issues
could arise.

 

8.3.2  Currently,
a debate continues on the issue as to applicability of section 14A in cases
where no Exempt Income is earned by the assessee during the relevant previous
year. Decisions are available on both the sides. It is for consideration
whether the position with regard to restricting the amount of disallowance to
the Exempt Income referred to in para 8.3 above could support the case of the
assessee to contend that if there is no Exempt Income, the provisions of
section 14A should not apply. In this context, it may be noted that the Amritsar
Bench of Tribunal in the case of Lally Motors India Pvt. Ltd [(2018) 170 ITD
370] has taken adverse view after considering major decisions on both the
sides and also relying on the judgment of the Apex Court [but without
specifically referring to this point arising from the view expressed by the
Apex Court referred to in para 7.1 above] in MaxOpp Investments Ltd’s case. Of
course, if the shares are held as stock-in-trade, the issue should be governed
by the position mentioned in para 8.1.1 above.

 

8.4    Another
issue which is under debate on applicability of section 14A in cases where the
assessee has larger amount of owned funds as well as other interest-free funds
available as compared to the amount invested in shares etc., yielding Exempt
Income. In such a scenario, the courts have effectively confirmed a view that
if the interest-free funds available with an assessee are more than amount
invested in such shares etc. and at the same time, if the assessee has also
borrowed funds on interest, it can be presumed that the investments were made
from the available interest-free funds [Ref HDFC Bank Ltd (2014) 366 ITR 505
(Bom), Max India Ltd. (2017) 398 ITR 209 (P & H), Microlabs Ltd (2016) 383
ITR 490 [Kar HC], Gujarat State Fertilizers & Chemicals Ltd (2018) 409 ITR
378 (GHC), etc.] In this context, recently, in another case of Gujarat
State Financial Services Ltd [ITA Nos 1252/1253/1255 of 2018], the Revenue
contended that in view of the judgment of the Apex Court in MaxOpp Investments
Ltd’s case [considered in this write-up], the legal position is that whenever
the assessee has two sources of funds, interest bearing and non-interest
bearing and also has made investments yielding Exempt Income, disallowance u/s.
14A will have to be made if the issue is to be considered after introduction of
Rule 8D. According to the Revenue, one of the issues decided in MaxOpp
Investment Ltd’s case was this one while dealing with the appeal filed by Avon
Cycle Ltd [referred to in para 7.3 above] in which the issue was with regard to
disallowance under Rule 8D in a case where mixed funds were utilised by the
assessee for such investments.

 

8.4.1   The Gujarat High Court [vide order dtd
15/10/2018], while dealing with the above issue raised by the Revenue,
explained the effect of the judgment of Apex Court in MaxOpp Ltd’s case in this
respect and took the view that this judgment of the Apex Court does not lay
down a proposition that the requirement of Rule 8D(1) of the satisfaction to be
arrived at by the AO before applying the formula given in Rule 8D(2) is done
away with. In other words, according to Gujarat High Court, this judgment of
the Apex Court does not lay down a proposition that the moment it is
demonstrated that the assessee had availed of mixed funds [i.e. interest-free
as well interest bearing funds] and utilised them for making such investments,
the applicability of section 14A read with Rule 8D(2) would be automatic. This
may be useful in cases where Tribunal has given a finding by applying the
presumption of use of interest-free funds in making such investment. In this
context, it is worth noting that the fact of allowing appeal against the Bombay
High Court judgment by the Apex Court in case of Jamnalal & Sons Pvt Ltd.
[referred to in para 7.4 above] was not considered in this case.

 

8.4.2   As mentioned in para 1.1.1 of Part-I of this
write-up, the Rule 8D is amended and, under the amended Rule, the earlier
provisions contained in Rule 8D (2)(ii) providing for disallowance of
proportionate amount of interest expenditure in cases where the mixed funds are
used for making investments is deleted w. e. f 2/6/2016. Therefore, the issues
relating to applicability of that part of the Rule 8D and determining quantum
thereof under that portion of the Rule and large number of decisions dealing
with the same may not be relevant in the post amendment era for that purpose,
though, of course, the same should continue to be relevant for other purposes.

 

8.5        The position is now settled that Rule 8D is prospective as
mentioned in para 7.4 above. This should also apply to amendment in the Rule 8D
w. e. f 2/6/2016 referred to in para 8.4.2 above.

46. CIT vs. ITD Cem India JV.; 405 ITR 533 (Bom): Date of order: 4th September, 2017 A. Y.: 2008-09 Section 40(a)(ia) – Business expenditure – Disallowance – Payments liable to TDS – Reimbursement of administrative expenses to joint venture partner – Genuineness of transaction established on verification – Finding of fact – Disallowance rightly deleted by Tribunal

For the A. Y. 2008-09, the
Assessing Officer found that the assessee did not deduct tax at source from the
payments made on account of administrative expenses which was paid by the joint
venture to the Indian company. According to the Assessing Officer section
40(a)(ia) of the Income-tax Act, 1961 (hereinafter for the sake of brevity
referred to as the “Act”) was applicable and he disallowed the
expenditure.

 

The Tribunal held that it did not
find any reason to sustain the disallowance u/s. 40(a)(ia) as the payments made
by the assessee to the co-venturer were only on account of salary and related
expenses.

 

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

 

“Once the Assessing Officer had
checked the debit notes raised by the co-venturer and they were test checked
and the amount of expenditure claimed by the assessee was verified and its
genuineness had been proved, there was no reason to interfere with the findings
of fact recorded by the Tribunal in its order.”

Section 56(2)(vii) – Provisions do not apply to rights shares offered on a proportionate basis even if the offer price is less than the FMV of the shares.


This is the first
and oldest monthly feature of the BCAJ. Even before the BCAJ started, when
there were no means to obtain ITAT judgments – BCAS sent important judgments as
‘bulletins’. In fact, BCAJ has its origins in Tribunal Judgments. The first
BCAJ of January, 1969 contained full text of three judgments.

We are told that the first convenor of
the journal committee, B C Parikh used to collect and select the decisions to
be published for first decade or so. Ashok Dhere, under his guidance compiled
it for nearly five years till he got transferred to a new column Excise Law
Corner. Jagdish D Shah started to contribute from 1983 and it read “condensed
by Jagdish D Shah” indicating that full text was compressed. Jagdish D Shah was
joined over the years by Shailesh Kamdar (for 11 years), Pranav Sayta (for 6
years) amongst others. Jagdish T Punjabi joined in 2008-09; Bhadresh Doshi in
2009-10 till 2018. Devendra Jain and Tejaswini Ghag started to contribute from
2018. Jagdish D Shah remains a contributor for more than thirty years now.

While Part A covered Reported Decisions,
Part B carried unreported decisions that came from various sources. Dhishat
Mehta and Geeta Jani joined in 2007-08 to pen Part C containing International
tax decisions.

The decisions earlier were sourced from
counsels and CAs that required follow up and regular contact. Special bench
decisions were published in full. The compiling of this feature starts with the
process of identifying tribunal decisions from a number of sources. Selection
of cases is done on a number of grounds: relevance to readers, case not
repeating a settled ratio, and the rationale adopted by the bench members.

What keeps the contributors going for so
many years: “Contributing monthly keeps our academic journey going. It keeps
our quest for knowledge alive”; “it is a joy to work as a team and contributing
to the profession” were some of the answers. No wonder that the features
section since inception of the BCAJ starts with the Tribunal News!


10. 
Asst. CIT vs. Subhodh Menon (Mumbai) Members:  R. C. Sharma (A. M.) and Ram Lal Negi (J. M.)
ITA No.: 676/Mum/2015 A. Y.: 2010-11. Dated: 7th Decmber, 2018
Counsel for Revenue / Assessee:  Tejveer
Singh and Abhijeet Deshmukh / S.E. Dastur

 

Section 56(2)(vii) –
Provisions do not apply to rights shares offered on a proportionate basis even
if the offer price is less than the FMV of the shares.

 

FACTS


The assessee was an executive director of
Dorf Ketal Chemicals India Pvt. Ltd. (“Dorf Ketal”). He filed his return of
income showing total income of Rs. 25.04 crore (revised).  On 28.01.2010 the assessee acquired 20,94,032
shares in Dorf Ketal @ Rs.100/- per share i.e. @ face value for a consideration
of Rs.20.94 crore. According to the A.O., under Rule 11UA(c), the fair market
value of the share of Dorf Ketal was Rs.1,438.64. Therefore, the difference in
share value was brought to tax u/s. 56(2)(vii)(c) and the total income was
assessed at Rs. 326.32 crore. According to the AO, the assessee being a
salaried employee, the shares allotted to him could also be treated as
perquisite or profit in lieu of salary u/s. 17. Reliance was placed on the
ratio laid down by the Bombay High Court in the case of CIT vs D. R. Pathak (99
ITR 14).  The CIT(A) on appeal, relying
on the decision of the Mumbai tribunal in the case of Sudhir Menon HUF vs.
Asst. CIT (I.T.A. No. 4887/Mum/2013 dated 12.03.2014) held in favour of the
assessee.  Being aggrieved, the revenue
appealed before the Tribunal.

 

Before the Tribunal, the revenue justified
the order of the AO and contended that:

 

  •  The assessee has not disputed the valuation of
    the shares at Rs.1,538.64 per share as on 31,03.2009, which was in accordance
    with the Rules. As regards argument of the assessee that after the date of the
    issue of fresh shares, the valuation of the shares has been drastically reduced
    with inclusion of the new contribution of share capital,  according to the revenue, the share value of
    the company has to be valued as on date of issue or prior to the issue date to
    determine the fair market value;
  •  The assessee was offered 21,78,204 shares at
    face value of Rs. 100. However, he accepted only 20,94,032 shares. Thus,
    according to the revenue, there has been disproportionate allotment in the case
    of the assessee and thus the decision of the Mumbai Tribunal in the case of
    Sudhir Menon HUF, relied on by the CIT(A), was distinguishable;
  •  The provisions of section 56(2)(vii) are in the
    nature of anti-abuse provisions and therefore should be interpreted strictly.
    For the purpose, it relied on the Circular No. 1/2011 dated 6th
    April, 2011 and the decisions of the Hyderabad Tribunal in case of Rain Cement
    Limited vs. DC IT (2017 1 NYPTTJ 362) and Kolkata Tribunal in the case of
    Instrumentarium Corporation Ltd. (2016 (7) TMI 760 – ITAT Kolkata);

 

HELD


According to the Tribunal, the issue under
consideration was squarely covered by the order of the Mumbai Tribunal in the
case of Sudhir Menon HUF.  As held under
the said decision, the Tribunal held that the provisions of section
56(2)(vii)(c) is not applicable to the facts and circumstances of the
appellant’s case.

 

As regards contention of
“disproportionate allotment” raised by the revenue, according to the
Tribunal, it is only when a higher than the proportionate allotment is received
by a shareholder, the provisions of section 56(2)(vii) get attracted. In the
instant case, the assessee applied for and was allotted a lesser than the
proportionate shares offered to him and his shareholding reduced from 34.57% to
33.30%.

 

The Tribunal further noted that the
transaction of issue of shares was carried out to comply with a covenant in the
loan agreement with the bank to fund the acquisition of the business by the subsidiary
in USA. Thus, the shares were issued by Dorf Ketal for a bonafide reason and as
a matter of business exigency. As per Circular No.1/2011 explaining the
provision of section 56(2)(vii) and relied on by the revenue, “the
intention was not to tax transactions carried out in the normal course of
business or trade, the profit of which are taxable under the specific
head of income”. Thus, the Circular supports the assessee’s case.

 

As regards the
alternated contention of the AO that the same should be considered for
taxability as perquisite u/s. 17, the tribunal held that the provisions of
section 17 do not apply to the shares allotted by Dorf Ketal to the assessee,
as the shares were not allotted to the assessee in his capacity of being an
employee of the company. The shares were offered and allotted to the assessee
by virtue of the assessee being a shareholder of the company. Therefore the
provisions of section 17 were not applicable. For the purpose, the Tribunal
referred to the Board Circular No. 710 dated 24th July, 1995 which
provides that where shares are offered by a company to a shareholder, who
happens to be an employee of the company, at the same price as have been
offered to other shareholders or the general public, there will be no perquisite
in the shareholder’s hands. In the instant case, the Tribunal noted that the
shares were offered to the assessee and other shareholders at a uniform rate of
Rs. 100 and therefore, the difference between the fair market value and issue
price cannot be brought to tax as a perquisite u/s. 17. 

 

In the result, the appeal filed by the
revenue was dismissed.

 

 

6 Section 28 – Two properties sold by a builder within a short span of time in an industrial park developed by it at different rates cannot be a ground for presuming that the assessee has received ‘on money’.

Shah Realtors
vs. ACIT

Members: B. R.
Baskaran (A M) and Pawan Singh (J M)

ITA No.:
2656/Mum/2016

A.Y.:
2012-13.  Dated: 25th May,
2018

Counsel for
Assessee / Revenue: Dr. K. Sivaram and Sashank Dandu / Suman Kumar

Facts

The assessee is
a partnership firm, carrying on business as 
builder and developer.  During the
previous year relevant to the assessment year, the assessee sold various
buildings/ galas in the industrial park developed by it.  The AO observed variations in the selling
rates of two buildings viz., Rs. 1,948 in building No. 10 and Rs. 5,025 in
building No.3. He concluded that the assesse had taken ‘on money’. Accordingly,
he made addition of Rs.2.52 crore. On appeal, the CIT(A) confirmed the order of
the AO. 

 

Before the
Tribunal, the revenue justified the orders of the lower authorities and
submitted that there was about 75% difference in the rates of building No. 3
and 10 and the assessee failed to substantiate the reason when both the
buildings were sold within a short span of time.  It also relied on the decision of CIT vs.
Diamond Investments & Properties in ITA No.5537/M/2009 dated 29.07.2010
and the decision of the Supreme Court in Diamond Investment & Properties
vs. ITO [2017] 81 Taxmann.com 40.

 

Held

The Tribunal
noted that building No. 3, which according to the AO was sold at a higher rate,
was already in possession of the buyer (on leave and licence basis) and plant
and machinery were already fastened to earth. Besides the assessee also handed
over possession of approximately 12,000 sq. ft. of adjoining  plot for exclusive use by the said buyer.
Therefore, taking the advantage of situation, the said building was sold to
buyer at a lump-sum price of Rs. 4.25 crore. 

 

The Tribunal
further noted that the assessee had sold the Building No.3 & 10 at a rate
higher than the stamp value rate.  The AO
on his suspicion about the “on money” made the addition on the basis of
variation of rates between two buyers. According to the Tribunal, the onus was
upon the AO to prove that the assessee had received “on money” on sale of
building. He made the addition without any evidence in his possession.  No enquiry was made of the purchaser of
building no. 10 which was sold at a lower rate, which according to the Tribunal,
was necessary. 

 

The tribunal further
observed that, when the AO had required the assessee to show-cause as to why
there was a difference between two transactions and when the assessee had
offered an explanation, no addition could be made simply discarding his
explanation. There must be evidence to show that the explanation given by the
assessee was not correct. It is settled law that no addition can be made on
hypothetical basis or presuming a higher sale price by simply rejecting the
contention without cogent reason. 
According to it, the case law relied by AO in ITO vs. Diamond
Investment and Properties was not applicable, since in that case the flats
were sold to the related parties at lower price than the price charged to the
other parties.  The Tribunal also
referred to a decision of the coordinate bench of Tribunal in Neelkamal
Realtor & Erectors India Pvt. Ltd. 38 taxmann.com 195 where where the
assessee had offered an explanation for charging lower price in respect of some
of the flats sold by it and AO without controverting such explanation had made
addition to income of assessee by applying the rate at which another flat was
sold by it.  It was held that the AO was
not justified in his action.  The Tribunal
also referred to a decision of the Supreme Court in the case of K.P. Varghese
vs. ITO [1981] 131 ITR 597 where it was emphasised that the burden of
proving an understatement or concealment was on the Revenue.  In the result, the appeal of the assessee was
allowed.

 

14 Section 56(2)(vii)(b) – The provisions of section 56(2)(vii)(b) are applicable to only those transactions which are entered into on or after 1.10.2009.

[2018] 94 taxmann.com 39 (Nagpur-Trib.)

Shailendra Kamalkishore Jaiswal vs. ACIT

ITA No.: 18/Nag/2015

A.Y.: 2010-11.                                                    

Dated: 11th May, 2018.


FACTS

For assessment year
2010-11, the assessee, engaged in business of trading in country liquor, filed
his return of income on 31.3.2011 declaring therein a total income of Rs.
32,70,730.  The assessee is also a
director of M/s Infratech Real Estate Pvt. Ltd. 
The Assessing Officer (AO) obtained information that the assessee has
purchased an immovable property for a consideration of Rs.48,57,000. 

 

The AO asked the
assessee to furnish details in respect of this transaction and also made
inquiry with the office of the Sub-Registrar. 
From the submissions and the inquiry, the AO observed that on 6th
June, 2009, the assessee has purchased a plot of land from Infratech Real
Estate Pvt. Ltd. for a consideration of Rs. 48,57,000. The registered sale deed
stated that the consideration was paid vide cheque no. 573883 drawn on Canara
Bank, Badkas Chowk, Nagpur. However, the transaction was not recorded either in
the books of the assessee nor in the books of Infratech Real Estate Pvt. Ltd.

 

In the course of
assessment proceedings, the assessee submitted that Infratech Real Estate Pvt.
Ltd. needed finance and on approaching the finance company, Infratech Real
Estate Pvt. Ltd. was informed that the finance company would not be able to
sanction more than Rs. 1 crore in single name and therefore, Infratech Real
Estate Pvt. Ltd. had transferred the plot of land in the name of the assessee
for Rs. 48,57,000.  Loan obtained by the
assessee from the finance company was transferred to Infratech Real Estate Pvt.
Ltd.  The cheque issued to them was not
encashed by them.  It was contended that
the property is not received without consideration. Not satisfied with the
explanations furnished by the assessee, the AO made an addition of Rs.
48,57,000 by invoking the provisions of section 56(2)(vii)(b) 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

At the outset, the
Tribunal noted that the addition in this case has been made u/s. 56(2)(vii)(b)
of the Act. It held that the provisions of section 56(2)(vii)(b) of the Act bring
into the ambit of income from other sources, stamp duty value of an immovable
property, to the transferee, which is received without consideration. This was
brought into statute book by Finance Act, 2010, w.e.f. 1st October
2009. Hence, prior to this date such transactions were not coming under income
u/s. 2(24) of the Act. 

 

It observed that,
it is evident that the above said provisions of the Act are applicable to
transactions which are entered into after 1st October 2009. It also
noted that Circular no.5/2010 issued by the CBDT clearly mentions that “these
amendments have been made applicable w.e.f. 1st October 2009 and
will accordingly apply for transaction undertaken on/or after such date“.
The Tribunal held that from the above provisions of law and CBDT circular, it
is clear that transfer of immovable property without consideration will be
taxable in the hands of transferee if the transaction took place after 1st
October 2009. There was no provision of law to tax such transaction prior to 1st
October 2009.

 

The impugned
transaction was entered into on 6th June 2009, as per registered
sale deed. Hence, there is no dispute that the impugned transaction is not hit
by the provisions of section 52(6)(vii)(b) of the Act. It is settled law that
CBDT circulars are binding upon Revenue authorities. It observed that no
contrary decision has been brought to its notice that the said amendment is
applicable retrospectively.

 

The Tribunal did
not adjudicate the other limbs of argument canvassed by the assessee since it
held that the assessee succeeds on this argument itself. The Tribunal set aside
the order of the CIT(A) and decided the issue in favour of the assessee.

 

The appeal filed by the assessee was
allowed.

18. Jayantilal Investments vs. ACIT [ Income tax Appeal no 519 of 2003, Dated: 4th July, 2018 (Bombay High Court)]. [Reversed ACIT vs. Jayantilal Investments. Ltd; AY 1988-89 , dated 20/07/2004 ; Mum. ITAT ] Section 36(1)(iii) prior to Amendment: Business expenditure — Capital or revenue – interest paid on the loan taken for purchase of plot of land – stock-in-trade – revenue expenditure

The assessee filed its return of
income for the subject A.Y. declaring an income of Rs.15,280/. Subsequently
revised return of income was filed by the assessee declaring a loss of Rs.2.30
lakh. In the revised return, the appellant had claimed amount of Rs.9.52 lakh
as interest expenditure allowable u/s. 36(1)(iii) of the Act. During the course
of assessment proceedings on being so called upon by the A.O, the assessee
explained that so far as interest is concerned, it capitalises interest to the
extent it is expended, till the commencement of the project, therefore the
interest is taken as revenue expenditure. However, the A.O still entertained
doubts about allowing as deduction Rs.6.98 lakh being the interest expenditure
claimed on account of its construction project ‘Lucky Shoppe’. The assessee
pointed out that the above amount of Rs.6.98 lakh was debited to profit & loss
account but was wrongly capitalised in the original return of income, as during
the previous year relevant to the subject assessment year the work in the Lucky
Shoppe project had commenced. This was not accepted on the ground that mere
placing of orders would not amount to commencing of the project. Thus, not
allowable as revenue expenditure. The alternate submission of the appellant
that open plot of land in respect of ‘Lucky Shoppe’ forms stock in trade.
Therefore, the interest paid on the loan taken to purchase open plot of land
for Lucky Shoppe project is allowable as revenue expenditure being its
stock-in-trade. This alternative submission was negatived by the A.O on the
ground that purchase of plot of land is capital in nature. Hence, interest must
also be capitalised. Thus, the A.O disallowed the deduction of Rs.6.98 lakh
being interest paid on plot of land of Lucky Shoppe project.

 

The CIT(A) found that interest paid
on land was being allowed as revenue expenditure in the earlier Assessment
Years and it was only in the subject Assessment Year that the A.O for the first
time treated the same as work in progress and capitalised the same. The CIT(A)
held that the interest paid on the loan taken for the purpose of its
stock-in-trade i.e., plot of land for the ‘Lucky Shoppe’ project has to be
allowed as expenditure to determine its income. In support reliance was placed
on the decision of this Court in S.F.Engineer & Ors. vs. CIT  57 ITR 455 (Bom). Consequently, the
CIT(A) deleted the disallowance made by the A.O in respect of interest paid on
‘Lucky Shoppe’ project.

 

The Revenue filed an appeal to the
Tribunal. The Tribunal held that the assessee has not shown any work had
commenced on ‘Lucky Shoppe’ project plot of land during the previous year
relevant to the subject Assessment Year. Thus, it concluded that the A.O was
justified in coming to conclusion that interest expenditure in respect of Lucky
Shoppe project (plot of land) could not be allowed as revenue expenditure.
Thus, the Tribunal allowed the Revenue’s appeal and disallowed deduction of
interest in respect of ‘Lucky Shoppe’ project.

 

Being
aggrieved with the order of the ITAT, the assessee filed an appeal to the High
Court. The Court found that the plot of land which was purchased out of
borrowed funds on which interest was paid, forms part of its stock-in-trade.
Therefore, interest paid on purchase of stock-in-trade is to be allowed as
revenue expenditure. This was negatived by the A.O on the ground that purchase
of plot is necessarily capital in nature and, therefore, interest thereon is
also to be capitalised. However, the fact is that the loan on which interest of
Rs.6.98 lakh is paid was taken for purchase of plot of land in the course of
its business. Therefore, the interest has been paid to acquire stock-in-trade.
In the above circumstances as held by the CIT(A), the same has to be allowed as
revenue expenditure. In view of section 36(1)(iii) of the Act as existing prior
to amendment with effect from 1.4.2004 all interest paid in respect of capital
borrowed for the purpose of business or profession has to be allowed as
deduction while computing income under had income from business. Prior to
amendment made on 1.4.2004, there was no distinction based on whether the
borrowing is for purchase of capital asset or otherwise, interest was allowable
as deduction in determining the taxable income. It was only after introduction
of proviso to section 36(1)(iii) of the Act w.e.f. 1.4.2004 that the purpose of
borrowing i.e. acquisition of assets then interest paid would be capitalised.
The Supreme Court in Dy. CIT vs. Core Healthcare Ltd. 218 ITR 194 has
held that prior to 1.4.2004 interest paid on borrowings for purchase of asset
i.e. machinery is to be allowed as a deduction u/s. 36(1)(iii) of the Act. This
even if the machinery is not received in the year of booking. It held that the
restriction introduced in the proviso to section 36(1)(iii) of the Act was
effective only from A.Y 2004-05 and not for earlier Assessment Years. In this
case, the A.Y 1988-89 i.e., prior to amendment by addition of proviso to
section 36(1)(iii) of the Act. Therefore, the interest paid on the borrowings
to purchase the ‘Lucky Shoppe’ project plot of land is allowable as a deduction
u/s. 36(1)(iii) of the Act. This is so as it was incurred for the purposes of
its business. Accordingly, Assessee appeal was allowed.

13 Section 14A – Assessee having furnished details showing that its own funds were sufficient to cover the investments in shares and securities, no disallowance u/s. 14A was called for, more so when no objective satisfaction was recorded by AO before invoking the provisions of section 14A

[2018] 192 TTJ (Mumbai) 377
Bennett Coleman & Co. Ltd. vs. ACIT
ITA NO. : 3298/MUM/2012
A. Y. : 2008-09
Dated : 8th January, 2018

FACTS

–   During the A.Y. 2008-09,
assessee earned an exempt dividend income of Rs.15.68 crore from investments in
shares and securities. The company had also made long term capital gain of
Rs.51.22 crore on sale of equity shares and equity oriented mutual funds. The
dividend income and long term capital gains had been claimed as exempt from
income tax u/s. 10(34) and 10(38) of the Act respectively.

 

–   The AO held that assessee
had incurred interest expenditure and had not given exact details of the
sources of the investments in shares and mutual funds. The AO concluded that it
could not be ruled out that part of the interest incurred had a proximate
connection with the investments in tax free securities. Therefore, the AO made
the disallowance u/s. 14A.

 

–   This disallowance was
contested in an appeal before CIT(A) who upheld the disallowance.

 

–  Before the Tribunal, it was
contended that the assessee did not have any borrowings till 31-03-2006 as per
the audited balance sheet. The assessee had surplus own fund which could be
verified from the balance sheet. The comparative chart of assessee’s own funds
vis-à-vis investments right from 31-3-2006 to 31-3-2008 showed that the
assessee had sufficient interest free own funds to make investments in tax free
income yielding securities. 

 

HELD

–  The Tribunal noted that the
assessee had produced the chart showing the summary of source and application
of funds before the Assessing Officer. The assessee had replied to show cause
notice issued by the Assessing Officer and furnished details that its own funds
over the years were sufficient to cover the investments in the shares and
securities yielding exempt income.

 

–   The borrowings of the
assessee-company were utilised for other business requirements and not for
making investments. The entire interest expenditure incurred on borrowing fund
had been offered to tax.

 

–   No objective satisfaction
had been recorded by the Assessing Officer before invoking the provisions of
section 14A. It was necessary for the Assessing Officer to give opportunity to
the assessee to show cause as to why Rule 8D should not be invoked. Assessee
had placed on record all the relevant facts and it had also given the detailed
working of the disallowance voluntarily made for earning the exempt income in
the return of income.

 

–  The assessee had claimed
that it had sufficient funds to cover investments in tax free securities, which
fact was established by the financial audited report for various assessment
years. The AO had also recorded that assessee’s own funds were far more than
the investments in shares and securities yielding tax free income.

 

–  The Tribunal directed AO to
delete the disallowance made u/s. 14A.

12 Section 45 read with section 28(i) – Where assessee sold a property devolved on him after death of his father as a consequence of automatic dissolution of partnership firm in which his father was a partner, since there was nothing to suggest that assessee had undertaken any business activity, profit arising from sale of same was not taxable as business income.

[2018] 169 ITD 693 (Mumbai – Trib.)

Balkrishna P. Wadhwan vs. DCIT

ITA NO. : 5414 (MUM.) OF 2015

A.Y. : 2010-2011

Dated: 28th February, 2018


FACTS

–   During relevant year,
assessee had shown income under the head long-term capital gain on sale of an
immovable property. The property sold had devolved upon the assessee after the
death of his father as a consequence of automatic dissolution of the
partnership firm, in which his father was a partner.

 

–    The AO took a view that
since the assessee could not furnish the purchase and sale agreements of the
property in question, he was unable to verify the long term capital gain
declared by the assessee. For this reason, the AO considered the consideration
as ‘income from other sources’ and not as a long term capital gain.

 

–    Before the CIT(A), assessee
furnished the copies of the purchase and sale agreements of the property. On
that basis, the CIT (A) concluded that the consideration was received by the
assessee on sale of an immovable property, but according to him, the same was
not a ‘capital asset’. Therefore, he disagreed with the assessee that the
profit on sale of such property was assessable under the head ‘capital gain’.
Instead, CIT (A) concluded that the profit on sale of property was assessable
as ‘business income’.

 

–    The other three plots were
sold by the assessee in A.Y. 2008-09 and the gain arising therefrom was
declared as capital gain, and the same had also been accepted by the AO.

 

HELD

–    The material on record
showed that during the year under consideration, the assessee had sold a plot
of land admeasuring 966.40 sq. mtrs. for a consideration of Rs. 3.75 crore. The
material led by the assessee also revealed that the plot of land sold during
the year was a part of the four plots, which admeasured in total 4648.70 sq.
mtrs.

 

–    The Tribunal noted that the
share of assessee’s father devolved on his wife, two sons and four daughters,
and it was only by way of deed of release, that the assessee obtained complete
ownership of the plot of land from the other co-inheritors.

 

–   It was found that neither
the assessee had declared income from any business and nor any income under the
head ‘business’ had been determined by the AO. The assessee was engaged in the
business of dealing in lands, and the sources of income detailed in the return
of income were on account of salaries, capital gain and income from other
sources.

 

–   The basis for the CIT(A) to
treat the impugned plot of land as ‘stock-in-trade’ is the fact that the
property devolved on the assessee from the erstwhile partnership firm, where
assessee’s father was a partner. The property was acquired by the partnership
firm in 1972 and assessee’s father died in February, 1987. As per the CIT(A),
the final accounts of the erstwhile partnership firm were not available for
examination, therefore, the manner in which the impugned plot of land was
accounted for i.e. whether as capital asset or not, could not be verified.

 

–  The CIT(A) proceeded to
presume that the land was held by the erstwhile partnership firm as a ‘business
asset for the purpose of its business’. Apparently, it is nobody’s case that
upon dissolution of the erstwhile partnership firm, its business devolved on to
the assesse.

 

The fact is that
only the land devolved on the assessee. So far as the assessee was concerned,
there was nothing to establish that the same had been held by him for the
purpose of his business so as to be construed as stock-in-trade. In A.Y.
2008-09, the land devolved on the assessee from his father had already been
accepted as a ‘capital asset’. Therefore, there was no justification to treat
the plot of land in question as ‘stock-in-trade’ and the assessee was justified
in treating the gain on sale of the plot to be assessable under the head
‘capital gain’.

11 Section 32 read with section 43(3) – Depreciation – Assessee being in the business of manufacture and sale of soft drinks and required to supply the product to far off places in chilled condition. Visicoolers purchased by it and installed at the site of distributors to keep the product in cold saleable condition was entitled for additional depreciation.

[2017] 192 TTJ (Kol) 361

DCIT vs. Bengal Beverages (P) Ltd.

ITA NO : 1218/Kol/2015

A.Y. : 2010-11

Dated: 6th October, 2017


FACTS

–    The assessee company was
engaged in the business of manufacture of soft drinks, generation of
electricity through wind mill and manufacture of PET bottles for packing of
beverages. The assessee had installed visicoolers at distributors premises so
as to deliver product to ultimate consumer in its consumable form, i.e.,
chilled form. The assessee claimed additional depreciation on Visicooler.

 

–    The AO disallowed the claim
of additional depreciation on the ground that these Visicoolers were kept at
distributors premises and not at the factory premises of the assessee company.
The assessee submitted before the AO that Visicoolers were required to be
installed at the delivery point to deliver the product to the ultimate consumer
in chilled form, therefore these were part of assessee’s plant. However, the AO
rejected the assessee’s contention and held that assessee was not carrying out
manufacturing activity on the product of the retailer at retailer’s premises
and merely chilling of aerated water could not be termed as manufacturing
activity and even that chilling job was the activity of the retailer and not of
the assessee.

 

–    Aggrieved by the AO’s order
the assessee preferred an appeal before CIT(A). The CIT(A) deleted the addition
made by AO. The assessee’s contention that usage of visicooler at the
distributor’s premises so as to ensure that the drink is served ‘cold’ to the
ultimate consumer tantamounts to usage in the course and for the purposes of
business, was upheld by CIT(A).

 

HELD

–     The Tribunal held that the
benefit of additional depreciation is available to an assessee engaged in the
business of manufacture of article or thing. It is therefore clear that the
additional deprecation is available only to those assessees who manufacturer,
on the cost of plant & machinery. Additional depreciation allowance is not
restricted to plant & machinery used for manufacture or which has first
degree nexus with manufacture of article or thing. The condition laid down in
section 32(1)(iia) is that if the assessee is engaged in manufacture of article
or thing then it is entitled to additional depreciation on the amount of
additions to plant & machinery provided the items of addition do not fall
under any of the exceptions provided in clauses (A) to (D) of the proviso. ln
this case, the assessee was engaged in the business of manufacture of cold
drinks. This fact had not been disputed by the AO. Therefore, the assessee was
legally entitled to avail the benefit of additional depreciation u/s. 32(1)(iia).

 

–    The “visicooler”
is a “plant & machinery”. The said item falls within the category
of “plant & machinery” as laid down in the I.T. Rules, 1962. The
“visicooler” also does not fall within the exceptions provided in
clauses (A) to (D) of the proviso to section 32(1)(iia).

 

–    In the result, the appeal
filed by the Revenue was dismissed.

 

10 Section 45 – Capital gains – Settlement of accounts of partners on their retirement, and payment of cash by firm to retiring partners after revaluation of firm’s assets did not attract section 45(4) – there could be no charge of capital gains on assessee firm in such a case.

[2018] 193 TTJ (Mumbai) 8

Mahul Construction Corporation vs. ITO

ITA NO. : 2784/MUM/2017

A. Y. : 2009-10

Dated: 24th November, 2017


FACTS

–   The assessee firm was
engaged in the business of construction and was a builder and developer. This
firm vide an agreement acquired development rights over a piece of land for a
total consideration of Rs.4.67 crore. Subsequently, this partnership deed was
modified and new partners were inducted.

 

–    Subsequently, vide deed of
retirement & reconstitution, three partners retired from the partnership
firm and took the amount credited to their accounts, including surplus on
account of revaluation of asset.

 

–   The AO held that the
assessee firm had not carried out any development work till 1.4.2008.
Therefore, land was a capital asset and not stock-in-trade, and payment of
cash/bank balance by the firm for settlement of retiring partner’s revalued
capital balances amounted to distribution of capital asset as contemplated in
section 45(4).

 

–   Aggrieved by the assessment
order, the assessee preferred an appeal to the CIT(A). The CIT(A) confirmed the
action of the AO on both the issues by holding that the land was a capital
asset and not stock-in-trade, and
also that the amount distributed was taxable u/s.  45(4).

 

HELD

–    The Retiring partners
merely retired from the partnership firm without any distribution of assets of
the firm amongst the original and new incoming partners. Since, the
reconstituted firm consisted of 3 old partners and 1 new partner, it was not a
case where firm with erstwhile partners was taken over by new partners only. It
was not a case of distributing capital assets amongst the partners at the time
of retirement and therefore provisions of section 45(4) were not applicable.

 

–   It could not be inferred
that by crediting the surplus on revaluation to Capital account of 4 Continuing
Partners and allowing the 3 Retiring Partners to take equivalent cash
subsequently, amounted to distribution of rights by the Continuing Partners to the
Retiring Partners. Till the accounts are settled and the residue/surplus is not
distributed amongst the partners, no partner can claim any share in such assets
of the partnership firm. The entitlement of right in the assets/ property of
the partnership firm arises only on dissolution. While the firm is subsisting,
there cannot be any transfer of rights in the assets of the firm by any or all
partners amongst themselves because during subsistence of partnership, the firm
and partners do not exist separately. Therefore, it was not a case of
distributing capital assets amongst the partners at the time of retirement and,
therefore, provisions of section 45(4) were not applicable.

–    The AO wanted to tax the
amount credited in capital account of retiring as well as continuing partners u/s. 45(4). So far as amount credited to capital account of retiring partners
is concerned, notwithstanding the fact that there is no distribution by firm to
retiring partners, the transferor and transferee are like two sides of the same
coin. The capital gain is chargeable only on the transferor, and not on the
transferee.


–   In this case, the
transferor is the partners who on their retirement assign their rights in the
assets of the firm, and in lieu the firm pays the retiring partners the money
lying in their capital account. Hence, it is the firm and its continuing
partners who have acquired the rights of the retiring partners in the assets of
the firm by paying them lump sum amount on their retirement. So it cannot be
said that the firm is transferring any right in capital asset to the retiring
partner, rather it is the retiring partner who is transferring the rights in
capital assets in favour of continuing partners.

 

–   Accordingly, the assessee
firm was not liable to capital gains on the above transaction.


36 Recovery of tax – Attachment of bank account and withdrawal of amount from bank during pendency of appeal – Action without due procedure – Stay of recovery proceedings granted pending appeal – Revenue directed to refund 85% of the amount recovered

Sunflower
Broking Pvt. Ltd. vs. Dy. CIT; 403 ITR 305 (Guj); Date of Order: 08th
July, 2017:

A.
Y.: 2014-15:

Sections
143(3), 156 and 221 of ITA 1961 and Art. 226 of Constitution of India



For the A. Y. 2014-15,
order of assessment was passed u/s. 143(3) of the Income-tax Act, 1961 and a
demand of Rs. 19,22,770 was raised. Against this order, the assessee filed an
appeal before the Commissioner (Appeals) which was pending. Since the assessee
did not pay the demand in response to demand notice u/s. 156, a notice u/s. 221
dated 06/02/2017 was issued for recovery of the demand. By the said notice the
assessee was required to appear before the authority latest before 15/02/2017.
The notice itself was dispatched on 16/02/2017 and was received by the assessee
on 17/02/2017. On the first working day after that, the bank account of the
assessee was attached and full recovery made.

 

The assessee filed writ
petition challenging the said action. The Gujarat High Court allowed the writ
petition and held as under:

 

“i)  When the income-tax authority had taken an
action as strong as attachment of the bank account of the assessee and withdrawing
a sizable sum of more than Rs. 19 lakh from the bank account unilaterally, the
least that was expected of him was to ascertain that the notice was duly
dispatched and received by the assessee. Thus the authority effected recovery
from the bank account of the assessee without following due process.

 

ii)   It was true that the assessee ought to have
applied to the Assessing Officer or to the appellate authority for keeping the
additional tax demand in abeyance, which the assessee did not do. Nevertheless,
this would not enable the authorities to ignore the legal requirements before
effecting the recovery. Under the circumstances, the recovery of Rs. 19,22,770
made by the authority was illegal.

 

iii)  The respondent authority had
not set up a case that the assessee was a cronic defaulter, a person who may
ultimately not be able to pay the dues if the appeal were dismissed or that
there were other assessments or appeals pending, in which sizable tax demands
were held up.

 

iv)  The assessee should get the benefit of stay
pending the appeal on depositing 15% of the disputed tax dues. The respondent
should therefore refund 85% of the sum of Rs. 19,22,770 recovered from the
assessee and retain 15% thereof by way of tax pending the outcome of the
assessee’s appeal.” 


35 Income – capital or revenue receipt – Subsidy allowed by State Government on account of power consumption which was available only to new units and units which had undergone an expansion, was to be regarded as capital subsidy not liable to tax

Principal
CIT vs. Shyam Steel Industries Ltd.; [2018] 93 taxmann.com 495 (Cal):

Date
of Order: 07th May, 2018:

Section
4 of ITA 1961


The question arose in
instant appeal was as to whether a subsidy allowed by the State Government on
account of power consumption, by its very nature, would make the subsidy a
revenue receipt and not a capital receipt, irrespective of the purpose of the
scheme under which such incentive or subsidy was made available to a business
unit.

 

The Calcutta High Court
held as under:

 

“i)  The difference may be in degrees but the words
of a scheme and the real purpose thereof have to be discerned in assessing
whether the incentive or the subsidy thereunder has to be regarded as a capital
receipt or a revenue receipt. There may be a scheme, for instance, that permits
every entity of a certain class to lower charges for consumption of power,
irrespective of the unit being a new unit or it having expanded itself. In such
a scenario, the incentive would have to be invariably regarded as a revenue
receipt. However, when the scheme itself makes the incentive applicable only to
new and expanding units, the fact that the incentive is in the form of a rebate
by way of sales tax or concessional charges on account of use of power or a
lower rate of duty being made applicable would be of little or no relevance.

 

ii)   When an entrepreneur sets up a business unit,
particularly a manufacturing unit, or embarks on an exercise for expanding an
existing unit, the entrepreneur factors in the cost of setting up the unit or
the cost of its expansion and the costs to be incurred in running the unit or
the expanded unit. It is the totality of the capital expenditure and the
expenses to run it that are taken into account by the entrepreneur. The
investment by an entrepreneur by way of capital expenditure is recovered over a
period of time and has a gestation gap. If the running expenses are made
cheaper by way of any subsidy or incentive and made applicable only to new
units or expanded units, the realisation of the capital investment is quicker
and the decision as to the quantum of capital investment is influenced thereby.
That is the exact scenario in the present case where the lower operational
costs by way of subsidy on consumption of power helps in the quicker
realisation of the capital expenditure or the servicing the debt incurred for
such purpose.

 

iii)  In view of the acceptance of the wider ambit
of the “purpose test” and the scheme in this case being available
only to new units and units which have undergone an expansion, the real purpose
of the incentive in this case has to be seen as a capital subsidy and has to be
regarded, as such, as a capital receipt and not a revenue receipt.

 

iv)  In the result, the revenue’s appeal is
dismissed.”

34 Export – Profits and gains from export oriented undertakings in special economic zones – Scope of section 10A – Meaning of “Profits and gains derived by an undertaking” – Interest on bank deposits and staff loans arise in the ordinary course of business – Entitled to exemption u/s. 10A

CIT
vs. Hewlett Packard Global Soft Ltd.; 403 ITR 453 (Karn): Date of Order: 30th
Oct., 2017:

A.
Y.: 2001-02:

Section
10A of I. T. Act, 1961



Due to conflict of opinion
of the two Division Benches, the following questions were referred to the Full
Bench of the Karnataka High Court:

 

“i)  Whether in the facts and in the circumstances
of the case, the Tribunal was justified in holding that interest from fixed
deposits, accrued interest on fixed deposits, interest received from Citibank,
Hong kong and interest of staff loans should be treated as business income of
the assessee even though the assessee is not carrying on any banking/financial
activity?

 

ii)  Whether the Assessing Officer was correct in
holding that the interest income cannot be held to be derived from eligible
business of the assessee (software development) for the purpose of claiming
deduction u/s. 10A of the Income-tax Act, 1961?”

 

The Full
Bench of the Karnataka High Court held as under:

 

“i)  Sections 10A and 10B of the Income-tax Act,
1961, are special provisions and a complete code in themselves and deal with
profits and gains derived by the assessee of a special nature and character
such as 100% export oriented units situated in special economic zones and
software technology parks of India, where the entire profits and gains of the
entire undertaking making 100% export of articles including software are given
100% deduction. The dedicated nature of the business or their special
geographical locations in software technology parks of India or special
economic zones makes them a special category of assesses entitled to the
incentive in the form of 100% deduction u/s. 10A or section 10B of the Act,
rather than it being a special character of income entitled to deduction from
gross total income under Chapter VI-A u/s. 80HH etc.

 

ii)   The computation of income entitled to
exemption u/s. 10A or section 10B of the Act is done at the prior stage of
computation of income from profits and gains of business in accordance with
sections 28 to 44 under Part D of Chapter IV before “gross total income” as
defined u/s. 80B(5) is computed and after which the consideration of various
deductions under Chapter VI-A in section 80HH etc., comes into picture.
Therefore the analogy of Chapter VI deductions cannot be telescoped or imported
in section 10A or section 10B of the Act.

 

iii)  The words “derived by the undertaking” in
section 10A or section 10B are different from “derived from” employed in
section 80HH, etc.

 

iv)  A provision intended for promoting economic
growth has to be interpreted liberally.

 

v)  The incidental activity of parking of surplus
funds with the banks or advancing of staff loans by such special category of
assesses covered u/s 10A or section 10B of the Act is an integral part of their
export business activity and a business decision taken in view of the
commercial expediency and the interest income earned incidentally cannot be
de-linked from the profits and gains derived by the undertaking engaged in the
export of articles as envisaged u/s. 10A or section 10B cannot be taxed separately
u/s. 56.

 

vi)  Gains of the undertaking including the
incidental income by way of interest on bank deposits or staff loans would be
entitled to 100% exemption or deduction u/s. 10A and section 10B. Such interest
income arises in the ordinary course of export business of the undertaking even
though not as a direct result of export but from the bank deposits, etc.,
and is therefore eligible for 100% deduction.”

33 Exemption u/s. 10(23C)(iv) – Approval by prescribed authority – Approval granted on 01/03/2016 for A.Ys. 2006-07 to 2011-12 – Approval valid for A. Y. 2012-13 and subsequent years also

CIT(Exemption)
vs. Haryana State Pollution Control Board; 403 ITR 337 (P&H);

Date
of Order: 14th July, 2017:

A.
Y.: 2012-13:

Section
10(23C)(iv) of ITA 1961


For A. Y. 2012-13, the
assessee filed return of income claiming exemption u/s. 10(23C)(iv) of the
Income-tax Act, 1961. The Assessing Officer denied exemption on the ground that
the assessee had not obtained the necessary approval from the prescribed authority
for exemption u/s. 10(23C)(iv) of the Act.

 

The Commissioner (Appeals)
allowed the exemption on the ground that the Commissioner (Exemption)’s order
dated 01/03/2016 granting exemption u/s. 10(23C)(iv) of the Act, for the A. Ys.
2006-07 to 2011-12 was also applicable for the A. Y. 2012-13. The Tribunal
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:

 

“i) Circular No. 7 of 2010,
dated 27/10/2010 clarifies that as in the case of approvals under sub-clauses
(iv) and (v) of section 10(23C) of the Income-tax Act, 1961, any approval
issued on or after 01/12/2006 under sub-clause (vi) and (via) of that
sub-section would also be a one time approval which would be valid till it is
withdrawn.

 

ii) It was recorded by the
Tribunal that the capital expenditure had not been charged to the profit and
loss account. The third proviso to section 10(23C) of the Act provides for
“applies its income or accumulates it for application, wholly or exclusively to
the objects for which it is established…..” Thus, the amount was spent by the
assessee towards the object. It was further recorded by the Tribunal, after
examining the matter that the amounts spent by the assessee were clearly the
application of the income to achieve the objects of the assessee.

 

iii) The assessee had been
granted approval u/s. 10(23C)(iv) of the Act and thus, there was no question of
disallowing any amount of this nature.

 

iv) No substantial question
of law arises and the appeal stands dismissed.”

32 Educational institution – Exemption u/s. 10(23C)(vi) – School run by assessee having only up to kindergarten class – Provision of Right to Education Act applicable to school imparting education from class 1 to class 8 – Provision not applicable to assesee – Assessee cannot be denied exemption for failure to comply with that Act

CIT(Exemption)
vs. Infant Jesus Education Society; 404 ITR 85 (P&H):

Date
of order: 14th July, 2017:

A.
Y.: 2013-14:

Section
10(23C)(vi) of I. T. Act 1961


The assesee was a society
registered under the Societies Registration Act, 1860. The Society was running
a school since the year 2006 and the school was from class play to kindergarten
class. For the A. Y. 2013-14, the assessee applied for grant of exemption u/s.
10(23C)(vi) of the Income-tax Act, 1961. The Principal Chief Commissioner
rejected the application primarily on the ground that the assessee had not been
complying with the provisions of Right of Children to Free and Compulsory
Education Act, 2009.

 

The Tribunal held that the
provisions of the 2009 Act were not applicable to school being run by the
assessee and directed the Principal Chief Commissioner to grant approval for
exemption to the assessee.

 

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

 

“i) The school was only up
to kindergarten class. No doubt was raised with regard to the genuineness of
the activities of the society. The provisions of the 2009 Act were applicable
to schools imparting education from class 1 to class 8 and hence the school of
the assessee was not to be governed by the 2009 Act.

 

ii) The Department failed
to show that the provisions of the 2009 Act were applicable to the assessee or
the findings recorded by the Tribunal were in any way illegal or perverse
warranting interference. No substantial question of law arose. The appeal
stands dismissed.”

31 Deduction u/s. 10A – Free trade zone – Effect of sales return – Sales return would result into reduction in profit qualifying for deduction u/s. 10A – AO has to allow corresponding reduction in total income also

CIT
vs. L.C.C. Infotech Ltd.; [2018] 94 taxmann.com 117 (Cal): Date of Order: 11th
May, 2018:

A.
Y.: 2001-02:

Sections
10A and 147 of ITA 1961


The assessee was a
corporate body engaged in computer training and software development. During
the relevant previous year the assessee made project exports to certain
parties. The assessee filed return of its income claiming exemption u/s. 10A of
the Income-tax Act, 1961 for profit from said project export. The said claim
was supported by Auditor’s certificate and was duly accepted as per intimation
issued u/s. 143(1). Based on statement made by the Auditor, that till date of
signing of Report certain amount against projects exports remained unrealised,
the Assessing Officer issued notice u/s. 148. During the course of proceeding
u/s. 147, the assessee filed supplementary Auditors report claiming profit from
software export at the reduced figure due to sales return against project
export. The Assessing Officer without accepting the claim of sales return took
the net profit at the original figure but reduced exemption u/s. 10A by the
amount in question.

 

The Commissioner (Appeals)
rejected the order of the Assessing Officer and directed for computation of net
profit by the Assessing Officer to be reconsidered. The Tribunal confirmed the
order of the Commissioner (Appeals).

 

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

 

“i) The higher total income
of Rs. 2.50 crore found by the Assessing Officer was assessed on the basis of
reduced profit resulting from sales return. Sales return was the cause, as per
the assessee, the effect of which was reduction in the profit figure qualifying
for deduction under the provisions of section 10A. The exercise that resulted
in the intimation, done on the basis of material and evidence then available,
cannot be said to have been done in a manner which allowed some income of the
assessee to have escaped assessment to tax. As such there is nothing wrong with
the directions given by the said appellate authority.

 

ii) In the premises no
substantial question of law is involved in the case. The appeal and application
are accordingly dismissed.”

Section 194C – Value of by-products arising during the process of milling paddy into rice, which remained with the millers, not considered as part of the consideration for the purpose of TDS

6.  ITO (TDS) vs. Punjab State
Warehousing Corporation (Chandigarh)

Members: Sanjay Garg, JM and Annapurna Gupta, AMITA Nos.: 1309 /CHD/2016 A.Y.: 2012-13 Dated: 30th October, 2018 Counsel for Revenue / Assessee: Atul Goyal, B. M. Monga, Rohit Kaura and
Vibhor Garg / Manjit Singh


Section 194C – Value of by-products arising
during the process of milling paddy into rice, which remained with the millers,
not considered as part of the consideration for the purpose of TDS


Facts


The assessee is a procurement agency of
Punjab Government which procures paddy on behalf of Food Corporation of India
(FCI), get it milled and supply rice to FCI. The paddy was given to the millers
for milling at the rates as fixed by FCI. As per the terms of the agreement,
the millers were required to supply rice in the ratio of 67% of the paddy given
to them by the assessee in return the millers would get Rs. 15 per quintal as
milling charges. As per agreement, the by-products, if any, arising from the
process would remain with the millers and the assessee had no right in respect
thereof. The assessee deducted the tax at source u/s. 194C on the milling
charges of Rs. 15 per quintal so paid to the millers.


According to the AO, since as per the
agreement, the by-products i.e. remaining 33% part, out of the milled paddy,
was retained by the millers and the same had a marketable value, it was part of
the consideration paid by the assessee to the millers, whereon the assessee was
required to deduct tax at source u/s. 194C. Since the assessee failed to do so,
he held the assessee as assessee in default u/s. 201 (1) and 201 (1A) of the
Act.

 

The assessee appealed before the CIT(A) who
relying on the decisions of the Delhi Bench of the tribunal in the case ITO
vs. Aahar Consumer Products Pvt Ltd. (ITA No. 2910-1939-1654 &
1705/Delhi/2010) and of the Amritsar Bench of the Tribunal in the case of D.M.
Punjab Civil Supply Corporation Ltd, (ITA No. 158/Asr/2016) allowed the
appeal of the assessee and quashed the demand raised by the AO on account of
short deduction of tax.

 

Being aggrieved by the order of the CIT(A),
the revenue appealed before the Tribunal and made following submissions in
support of its contention that the tax at source should have been deducted
after taking into account the value of the by-products:

  • While fixing the milling
    charges by FCI, the value of by-product in the shape of broken rice, rice kani,
    rice bran and phuk and which had a reasonable market value, was duly taken into
    consideration and thereafter net milling charges of Rs. 15 was arrived at;

  • Reliance was placed on the
    correspondence / clarification from the Secretary, Food and Civil Supplies
    Department that milling charges were fixed taking into consideration the value
    of the by-product which was a part of the consideration paid by the assessee to
    the millers for paddy milling contract;

  • As per the press release
    issued by the Ministry of Consumer Affairs, Food & Public Distribution, the
    Union Food Ministry had clarified that the milling charges for paddy paid by
    the Central Government to the State Agencies were fixed, on the basis of the
    rates recommended by the Tariff Commission, who had taken into account value of
    the by-products derived from the paddy, while suggesting net rate of the
    milling price payable to the rice millers;

  • As per the report of the
    Comptroller and Auditor General of India (C&AG) on Procurement and Milling
    of Paddy for Central Pool, the milling charges were fixed after adjusting for
    by-products cost recovery;

  • It also relied on the
    decisions of the Andhra Pradesh High Court in the case of Kanchanganga Sea
    Foods Ltd. vs. CIT (2004) 265 ITR 644    , which was confirmed by the Supreme
    Court reported in (2010) 325 ITR 549.


Held


The Tribunal noted that the milling charges
were fixed by the Government and neither the assessee nor the millers had any
say on the milling charges fixed. Even the out-turn ratio was also fixed and
the miller had to return 67% of the manufactured rice, irrespective of the fact
whether the yield of rice manufactured was low or high from the paddy entrusted
to him.


Thus, the nature of the contact, according
to the Tribunal, was not purely a work contract, but it was something more than
that. Under the contract, the miller had no choice to return rice and
by-products as per the actual outcome and claim only the milling charges.


Further, it was noted that the agreement
contained specific term that ‘the by-product is the property of the miller’,
which meant that the property in the by-product passed immediately to the
miller on the very coming of it, into existence. Thus, moment the paddy was
milled, the assessee lost its ownership and control over the paddy and the
by-product, and acquired the right only on the ‘milled rice’.


Thus, as per the agreement, the by-product
never became the property of the procurement agencies. Therefore, according to
the Tribunal, it cannot be said that the said by-product had been handed over
as consideration in kind by the assessee to the millers. When one is not the
owner of the product and the property in the product had never passed on to
other person, he, under the circumstances, cannot pass the same to the others.


The property in the by-product from the very
inception remained with the miller and, hence, the Tribunal held that the same
cannot be said to be the consideration received by the miller. According to the
Tribunal, even though the consideration was fixed taking into consideration the
likely benefit that the miller will get out of milling process in the form of
by-products, such benefits cannot be said to be consideration for the
contract. 


As
regards the reliance placed by the revenue on the decision in the case of Kanchanganga
Sea Foods Ltd., the same was distinguished by the Tribunal and held that
the same was not applicable to the assessee’s case. In the result, the Tribunal
dismissed the appeals filed by the revenue and upheld the order of the CIT(A).

 

45. CIT vs. Airlift (India) Pvt. Ltd.; 405 ITR 487 (Bom): Date of order: 8th June, 2018 Section 260A – Appeal to High Court – Limitation – Condonation of delay – Failure by Department to remove office objections despite extension of time being granted – Absence of any particular reason for delay – Reason of administrative difficulty – Delay cannot be condoned

Notice of motion was filed by the
Department in appeal for condonation of delay on the ground that the office
objections could not be removed within the stipulated time in view of the
administrative difficulty including shortage of staff.

 

Rejecting the notice of motion, the
Bombay High Court held as under:

 

“The application for condonation
for delay was not bonafide as the applicant failed to remove the office
objections though it had secured extension of time on three occasions and the
affidavit offered no explanation as to what steps were taken by the Department
after the last extension to remove the office objections. The only reason made
out in the affidavit in support was administrative difficulty including
shortage of staff which could not be the reason for condonation of delay in the
absence of the same being particularised.”

REVENUE EXPENDITURE ON TECHNICAL KNOW-HOW AND SECTION 35 AB

Issue for Consideration

Section 35 AB introduced by the Finance Act, 1985, w.e.f  1st April 1986, provides for
deduction of an amount paid towards any lump sum consideration for acquiring
know-how for the purposes of business in six equal annual instalments
commencing from the previous year in which the deductions is first allowed. The
relevant part contained in s/s. (1) reads as ; “S. 35AB. Expenditure on
know-how. (1) Subject to the provisions of sub-section (2), where the assessee
has paid in any previous year relevant to the assessment year commencing on or
before the 1st day of April, 1998 any lump sum consideration for
acquiring any know-how for use for the purposes of his business, one-sixth of
the amount so paid shall be deducted in computing the profits and gains of the
business for that previous year, and the balance amount shall be deducted in
equal instalments for each of the five immediately succeeding previous years.”

 

The term ‘know-how’ is exhaustively defined vide an
Explanation to the section to mean any industrial information or technique
likely to assist in the manufacture or processing of goods or in the working of
mine, oil, etc.

 

Prior to the insertion of section 35AB, an expenditure of
revenue nature, incurred on know-how, was allowed as deduction u/s. 37 of the
Income tax Act. A capital expenditure on know-how was not allowable as a
deduction and its treatment was governed by the other provisions of the Income
tax Act. With insertion of section 35AB, a capital expenditure became eligible
for deduction, subject to compliance of the prescribed conditions, in the
manner specified in the section.

Section 37 provides for a deduction of any expenditure laid
out or expended wholly and exclusively for the purposes of business or
profession, in full, provided it is not in the nature of a capital expenditure
or personal expenses of the assessee and further that the expenditure is not in
the nature of the one described in section 30 to section 36 of the Act. 

 

Section 35 AB while opening a door for deduction of a capital
expenditure fuelled a new controversy, perhaps unintentionally, involving the
denial of 100% deduction to a revenue expenditure on know-how which was
hitherto allowable. It is the stand of the Revenue authorities that with the
introduction of section 35AB, the deduction for an expenditure on know-how, of
any nature, would be governed strictly by the new provision and be allowed in
six instalments and would not be allowed u/s. 37 as was the case before
insertion of the specific provision. Like any provision, a new one in
particular, section 35AB became a highly debatable provision not on one count
but on various counts. The related issues that arose, besides the issue of
identification of the relevant provision of the Act under which the deduction
for the revenue expenditure is allowable, are whether it was necessary that the
assessee acquired ownership rights over the know-how and whether the condition
for ‘lump sum’ payment meant payment in one go or even in instalments.  

 

Various High Courts had occasion to examine these issues or
some of them, leading to a fierce controversy surrounding the eligibility of a
deduction, in full u/s. 37, of an expenditure on a know-how, otherwise of a
revenue nature. The Madras, MP and the Bombay High Courts decided the issue in
favour of the Revenue by denying the deduction u/s. 37 and the Gujarat,
Karnataka and Punjab & Haryana High Courts favoured the deduction u/s. 37
for such an expenditure, incurred on know-how, in favour of the assessee. On
the issue of ‘lump sum’ payment , the Bombay High Court in two cases held that
the payment in instalments would not cease to be lump sum. The High Court also
decided that for application of section 35AB , it is not necessary to be an
owner of the know-how.

  

Anil Starch Products Ltd.’s case 

The issue arose in the case of DCIT vs. Anil Starch
Products Ltd., 57 taxmann.com 173 (Guj.) for A.Y 1990-91, 1992-93 and
1993-94. While admitting one of the appeals, the following substantial
questions of law arose for the determination of the court; “Whether,
the Appellate Tribunal was justified in law and on facts in confirming the
order of the Commissioner of Income-tax (A) who held that the expenditure under
consideration was revenue in nature and allowable u/s 37 of the Act
disregarding the special provisions of sec.35AB?”

 

The Gujarat High Court at the outset noted that an identical
question had arisen before them in another appeal of the assessee for A.Y.
1989-90 numbered 326 of 2000 decided on 03.07.2012 , not otherwise reported,
and chose to reproduce the facts, pleadings, law and even the decision therein
to finally conclude, in the cases before them, that the provisions of section
35 AB were not applicable to the case of a revenue expenditure which was
allowable u/s. 37 of the Act. The facts and the sequence of events of the case
is therefore not available in the judgement and therefore the facts, pleadings
and the outcome of the case heavily relied upon by the court are placed and
considered here as had been done by the court.  

 

The assessee in that case, a company engaged in manufacturing
of starch and other similar products, during the year under consideration
relevant to assessment year 1989-90, paid 
the technical know-how and service fees, totalling to a sum of
Rs.23,23,880 and claimed deduction thereof in full as the revenue expenditure.
The assessee had contended that the provisions of section 35AB of the Act were
applicable only in respect of the capital expenditure and not in respect of the
revenue expenditure. The assessee further contended that the company while
acquiring such know-how, obtained no ownership right on such information and
know-how was furnished by the foreign company to the assessee under an
agreement. The assessee also contended that such technical know-how was for the
purpose of production of its existing items which are being manufactured by the
assessee company since many years.

 

The AO held that such expenditure fell within section 35AB of
the Act. The AO, did not accept the contentions of the assessee, though agreed
that such expenditure was revenue in nature and was covered within section 35AB of the Act and were to be amortised, as provided under the said
section, by spreading the benefit over a period of six years. Dissatisfied with
such a decision of the AO, the assessee carried the matter in appeal. Before
the CIT (Appeals), the assessee in addition to contending that a revenue
expenditure could not be brought under the ambit of section 35AB of the Act,
further contended that the provision of section 35AB of the Act was an enabling
provision, introduced to facilitate the deduction for a capital expenditure.

 

The CIT (A) rejected the assessee’s appeal as he was of the
opinion that section 37(1) of the Act, which covered expenditure not being in
the nature of the expenditure described in sections 30 to 36, would not apply
in the case by virtue of the provisions contained in section 35AB of the Act.
He held that since section 35AB of the Act made a specific provision to treat
the expenditure incurred for acquisition of technical know-how by way of lump
sum payment and that even if such a payment was revenue in nature, it would not
fall within sub-section (1) of section 37 of the Act.

 

On a further appeal by the assessee, the Tribunal reversed
the decisions of the revenue authorities. The Tribunal noted that as per the
agreement, all information and know-how furnished by the foreign company
remained the property of that company; the payment was made as a lump sum
consideration for use of the know-how, only, for the purpose of its running
business, for a limited period. The Tribunal noted that undisputedly, there was
no purchase of the know-how from the foreign company. The Tribunal held that
the case of the assessee was not covered u/s.35AB of the Act and that section
35AB had no application in the case and the assessee was entitled to deduction
u/s. 37(1) of the Act.

 

In the appeal to the High Court, by the Revenue, it was
contended that the Tribunal committed grave error in allowing the assessee’s
appeal; that section 35AB of the Act was widely worded and included any
expenditure incurred for acquisition of technical know-how and that  the concept of ownership was not material for
section 35AB; that once an expenditure, whether revenue or capital, was covered
u/s. 35AB of the Act then by virtue of the  language of sub-section
(1) of section 37 of the Act, the assessee could not claim any benefit thereof
u/s. 37 of the Act. Reliance was placed on the decision of the Madras High
Court in the case of Commissioner of Income Tax vs. Tamil Nadu Chemical
Products Ltd., reported in 259 ITR 582, wherein a division bench of the
Madras High Court had held that during the period when section 35AB of the Act
remained effective, any expenditure towards acquisition of know-how,
irrespective of whether it was a capital or a revenue expenditure, was to be
treated only in accordance with section 35AB and the deduction allowable in
respect of such know-how was 1/6th of the amount paid as lump sum consideration
for acquiring know-how. The Revenue relying on the decision of the MP High
Court in the case of Commissioner of Income Tax vs. Bright Automotives and
Plastics Ltd., reported in 273 ITR 59 further contended that in
order to attract the rigour of section 35AB of the Act, it was not necessary
for the assessee to actually become an absolute owner of the know-how and also
that the nature of expenditure whether revenue or capital, was of no
consequence.

 

The assessee in response contended that the expenditure in
question was purely revenue in nature and the same was, therefore, not covered
u/s. 35AB of the Act; that the said provision was made to encourage acquisition
of know-how to improve the quality and efficiency of Indian manufacturing; that
the assessee had acquired the know-how for a limited period and had never
enjoyed any ownership or domain right over the know-how; that the know-how was
utilised for manufacturing of its existing items and that neither any new
manufacturing unit was established nor new item of manufacturing was
introduced. It was pointed out that even the AO agreed that the expenditure in
question was a revenue expenditure; that section 35AB of the Act had no
application to such an expenditure since the provision of section 35AB was an
enabling provision that was not introduced to limit the benefits which were
already existing. Attention was also drawn to the C.B.D.T. Circular No.421
dated 12.6.1985 wherein with respect to deduction in respect of an
expenditure on know-how, it was clarified that, the provision was inserted with
a view to providing encouragement for indigenous scientific research. Heavy
reliance was placed on the decision of the Apex Court in the case of Commissioner
of Income Tax vs. Swaraj Engines Ltd., 309 ITR 443 in which the Apex Court
had an occasion to examine the decision of the Punjab & Haryana High Court
on the question of applicability of section 35AB of the Act.

 

The Gujarat High Court noted that the AO himself had accepted
that the expenditure in question was of revenue nature and that the circular
No. 421 confirmed that the provisions of section 35AB were enabling provision
and if that be so, the deduction of such expenditure could not be limited by
applying section 35AB of the Act. The Court took note of the facts in Swaraj
Engines Ltd.’s case and also of the decision therein and observed as under;
“The Apex Court decision would suggest that for determining whether certain expenditure
would fall within section 35AB or not, it would be important to examine the
nature of the expenditure. If it is found that the same is revenue in nature,
the question of applicability of section 35AB of the Act would not arise. On
the other hand, if it is found to be capital in nature, then the question of
amortisation and spreading over, as contemplated under section 35AB of the Act
would come into play.”

 

The Court held that such provision, as was clarified by the
C.B.D.T, was made with a view to providing encouragement for indigenous
scientific research; that such statutory provision was made for making
available the benefits which were hitherto not available to the manufacturers
while incurring expenditure for acquisition of technical know-how; that to the
extent such expenditure was covered u/s. 35AB, amortised deduction spread over
six years was made available; that where such expenditure was capital in
nature, prior to introduction of section 35AB of the Act, no such deduction
could be claimed; that with introduction of section 35AB, to encourage
indigenous scientific research, such deduction was made available; that such a
provision could not be seen as a limiting provision restricting the existing
benefits of the assessee. In other words the revenue expenditure in the form of
acquisition of technical know-how, which was available as deduction u/s. 37(1)
of the Act, was never meant to be disallowed or taken away or limited by
introduction of section 35AB of the Act.

 

The Gujarat High Court also cited with approval the paragraph
from the Ninth Edition, Volume-I of Kanga & Palkhivala, while
explaining the provisions of section 35AB of the Act, : “This section
allows deduction, spread over six years, of a lump sum consideration paid for
acquiring know-how for the purposes of business even if later the assessee’s
project is abandoned or if such know-how subsequently becomes useless or if the
same is returned. The section, which is an enabling section and not a disabling
one, should be confined to that consideration which would otherwise be
disallowable as being on capital account. A payment for acquiring know-how or
the use of know-how which is on revenue account is allowable under section 37,
and does not attract the application of this section at all.”

 

The High Court concluded that the provisions of section 35AB
of the Act could apply only in case of a capital expenditure and would not
apply to a revenue expenditure even if the same was incurred for acquisition of
technical know-how and the deduction thereof could not be curtailed or limited
by applying section 35AB.A revenue expenditure remained within the ambit of
section 37(1) of the Act. The Court observed that it was unable to concur with
the view of the Madras High Court in case of Commissioner of Income Tax vs.
Tamil Nadu Chemical Products Ltd. (supra), which was in any case rendered
prior to the decision of the Apex Court in the case of Commissioner of
Income Tax vs. Swaraj Engines Ltd. (supra).

 

Accordingly, the Gujarat High Court, in the case before it,
in appeal, in Anil Starch Ltd.’s case, dismissed the Revenue’s appeal
holding that the provisions of section 35AB did not apply to an expenditure
which otherwise was of a revenue nature. In deciding the case, the High Court
followed the ratio of the decisions in the cases of DCIT vs. Sayaji
Industries Ltd. 82 CCH 412 and the Karnataka High Court in the case of Diffusion
Engineers Ltd. vs. DCIT, 376 ITR 487.

 

Standard Batteries Ltd.’s case

Recently the issue came up for consideration, before the
Bombay High Court, in the case of Standard Batteries Ltd. vs. CIT, 255
Taxman 380 (Bom.). The assessee, in that case, had entered into an
agreement with ‘O’, UK, in terms of which, the assessee was to receive outside
India a license to transfer and import information, know-how, advice,
materials, documents and drawings as required for the manufacture of miners’
cap lamp batteries and stationery batteries for a lump sum consideration paid
in three equal instalments, where the permission was only to use the know-how
and information without transfer of ownership. The assessee claimed deduction
in respect of the said payment u/s. 37(1). The AO however, rejected the claim
of the assessee but allowed deduction to the extent of 1/6th of the amount
spent and claimed, and the balance amount was to be deducted in equal
instalments for each of the five immediately succeeding previous years in terms
of section 35AB.

 

The Tribunal held that the assessee had acquired the
ownership rights in the technical know-how and accordingly the assessee was
entitled to deduction u/s. 35AB, and not u/s. 37(1) as was claimed by the
assessee.

 

On appeal by the assessee to the High Court, the three
aspects before the Court were about the application of section 35 AB to the
case where; (i) a revenue expenditure was incurred (ii) payment was made in
instalments and (iii) the assessee was not an owner of the rights or asset for
an effective application of section 35AB.  

 

On behalf of the assessee, it was contended that the expenditure
for receipt of technical know-how would 
not fall u/s. 35AB of the Act but would appropriately fall u/s. 37 of
the Act for the following reasons;

 

(a)  Section 35AB of the Act
required a lump sum consideration to be paid for acquiring any technical
know-how, while in the case before the Court admittedly payment was made in 3
instalments, therefore could not be regarded as a lump sum payment and as such
was therefore, outside the scope of section 35AB of the Act;

 

(b)  There was no acquisition of a technical
know-how in the facts of the case, as the applicant merely obtained a lease /
license of the rights to use such technical know-how; not having any ownership
rights over the technical know-how, the requirement of acquiring the know-how
u/s. 35AB of the Act was not satisfied and was thus, outside the mischief of
section 35AB of the Act;

 

(c)  The technical know-how
obtained by the applicant under the agreement dated 19th June, 1984
was to be used in the regular course of its business of manufacturing batteries
and therefore, would be revenue in nature; section 35AB would apply only where
the expenditure was in the nature of a capital expenditure; the expenditure for
obtaining technical know-how being of revenue nature, would fall in the
residuary section 37 of the Act.

                       

In response, it was contended on behalf of the Revenue, that
:—

 

(a)  The payment made in three equal instalments
continued to be a lump sum payment;

 

(b) Section 35AB of the Act, did not require
obtaining ownership of the technical know-how; the license to use the know-how
by itself would be covered by the words “consideration paid for acquiring
any know-how”; there was no basis for restricting the plain meaning of the
word “acquiring” in section 35AB of the Act;

 

(c) The applicant had used the technical know-how
so obtained in its business and on plain interpretation of section 35AB of the
Act, it would apply; it did not exclude revenue expenditure from its purview,
as there was no requirement in section 35AB that the same would be available
only if the expenditure was of a capital nature and not if it was revenue in
nature: that wherever the legislature wanted to restrict the benefit in respect
of the deduction claimed of expenditure dependent upon its nature, described in
sections 30 to 36 of the Act, it specifically provided so therein as was in
sections 35A and 35ABB of the Act;

 

(d) In any event, section 37 of the Act excluded
expenditure of a nature described in sections 30 to 36 from the purview of s.
37 of the Act; section 35AB fell within sections 30 to 36 and therefore, no
occasion to apply section 37 of the Act would arise;

 

Relying on the decision of the Court in the case of CIT
vs. Raymond Ltd., 209 Taxman 154 (Bom.), the Court held that merely because
the payments were made in instalments for using the technical know-how, it
would not cease to be a lump sum payment where the amount payable was fixed and
not variable more so when the words used in section 35AB were ‘lump sum’
payment and not a one time payment. Therefore, making of lump sum payment in 3
instalments would not make the payment any less a lump sum payment.

 

On the issue of the need to be an owner of know-how, the
assessee reiterated that the word ‘acquiring’ as used in section 35AB would
necessarily mean, acquisition of ownership rights of the technical know-how;
that a mere lease / license, would not amount to acquisition of technical
know-how as per the dictionary meaning of the word “acquisition”. The
Court however held that the dictionary meaning relied upon did not exclude the
cases of obtaining any knowledge or a skill, as was in the case before them or
technical know-how for a limited use. It held that the gaining of knowledge was
complete / acquired by transfer of know-how and the limited use of it would not
detract the same from being included in the scope and meaning of the word
acquisition; that the word “acquisition” as defined in the larger
sense even in the Oxford Dictionary referred to above, would cover the use of
technical knowledge know-how by the applicant assessee which was made available
to it; thus, the restricted meaning of the word ‘acquisition’ to mean ‘only
obtaining rights on ownership’ was not the plain meaning in English language
and obtaining of technical know-how under a license would also amount to
acquiring know-how as the words ‘on ownership basis’ were completely absent in
section 35AB(1) of the Act. The Court held that accepting the contention of the
applicant, would necessarily lead to adding the words ‘by ownership’ after the
word ‘acquiring’ in section 35AB(1) of the Act, which addition was not
permitted while interpreting a fiscal statute.

 

On the main issue of allowability u/s. 37, it was reiterated
that the technical know-how which had been obtained was used in the regular
course of its business of manufacturing batteries and it would necessarily be
in the nature of revenue expenditure, allowable u/s. 37 of the Act. Reliance
was placed upon the decisions of Gujarat High Court in DCIT vs. Anil Starch
Products Ltd. 232 Taxman 129 and DCIT vs. Sayaji Industries Ltd. 82
CCH 412 and the decision of the Karnataka High Court in Diffusion Engineers
Ltd. vs. DCIT 376 ITR 487, to contend that the issue stood concluded in
favour of the company for the reason that while dealing with an identical
situation, the courts in the above referred three cases, have held that section
35AB of the Act would not be applicable where the expenses were of revenue
nature, and the expenditure was deductible u/s. 37(1) of the Act.

 

In contrast, the Revenue reiterated that section 37 of the
Act itself excluded expenditure of the nature described in sections 30 to 36
without any qualification as was held by the Madhya Pradesh High Court in CIT
vs. Bright Automotives & Plastics Ltd. 273 ITR 59 and the Madras High
Court in CIT vs. Tamil Nadu Chemical Products Ltd. 259 ITR 582. That the
courts in those cases had held that the expenditure incurred for acquiring technical
know-how would fall u/s. 35AB of the Act irrespective of the fact that the
expenditure was revenue in nature.

 

On due consideration of the submission of the parties , the
Bombay High Court held as under;

 

  •      The submission that the expenditure in
    question be allowed u/s. 37 could not be accepted for the reason that section
    35AB of the Act itself specifically provided that any expenditure incurred for
    acquiring know-how for the purposes of the assessee’s business be allowed under
    that section; that as detailed in the Explanation thereto the know-how to
    assist in the manufacturing or processing of goods would necessarily mean that
    any expenditure on know-how which was used for the purposes of carrying on
    business would stand covered by section 35AB of the Act.

 

  •      Section 37 of the Act itself excluded
    expenditure of the nature described in sections 30 to 36 of the Act without any
    qualification.

 

  •      On examination of sections 30 to 36 to find
    whether any of them restricted the benefit to
    only capital expenditure, it was found that section 35AB of the Act made no
    such exclusion / inclusion on the basis of the nature of expenditure i.e.
    capital or revenue. In fact, wherever the parliament sought to restrict the benefit
    on the basis of nature of expenditure falling u/s. 30 to 36 of the Act, it
    specifically so provided  viz. section
    35A which was introduced  along with
    section 35AB of the Act w.e.f. assessment year 1986-87. In fact, later sections
    35ABA and 35ABB have also provided for deduction thereunder only for a capital
    expenditure .

 

  •      Wherever the Parliament sought to restrict
    the expenditure falling within sections 30 to 36 only to a capital expenditure,
    the same was expressly provided for in the section concerned. To illustrate,
    section 35A and 35ABB of the Act have specifically restricted the benefits
    thereunder only to a capital expenditure.

 

  •      In the above view, submission on behalf of
    the assessee that section 35AB of the Act would apply only to the case of a
    capital expenditure and exclude the revenue expenditure, required adding words
    to s. 35AB which the legislature had specifically not put in; the court could
    not insert words while interpreting the fiscal legislation in the absence of
    any ambiguity in reading of section as it stood; thus, even if technical
    know-how was revenue in nature, yet it would be excluded from the provisions of
    section 37 of the Act.




The Court took note of the fact that Gujarat High Court in Anil
Starch Products Ltd.’s case (supra) and Sayaji Industries Ltd.’s
case (supra) did not agree with the view of the M.P. High Court in Bright
Automotives & Plastics Ltd.’s case (supra) and of the Madras
High Court in Tamil Nadu Chemical Products Ltd.’s case (supra). It also
noted that the Karnataka High Court in Diffusion Engineers Ltd.’s case
(supra) did not agree with the view of the Madras High Court in Tamil
Nadu Chemical Products Ltd.’s case (supra). Having taken note, it
observed that the basis of all the above referred three decisions was the
subsequent decision of the Apex Court in CIT vs. Swaraj Engines Ltd.  301 ITR 284. It further noted that the
above case before the Apex Court arose from the decision of the Punjab &
Haryana High Court in Swaraj Engines Ltd.’s case, wherein it was held
that payments made on account of the royalty would be deductible u/s. 37 and
not u/s 35AB of the Act; that the Apex Court had restored the issue to the
Punjab & Haryana High Court, by way of remand; that the Apex Court directed
that the High Court should first decide whether the expenditure incurred on
royalty would be capital or revenue in nature at the very threshold before
deciding the applicability of section 35AB or 37 of the Act.

 

The Court also observed that the Apex Court, while restoring
the issue, had clearly recorded that it had not expressed any opinion on the
matter and on the question whether the expenditure was revenue or capital in
nature and had instead, depending on the answer to that question, directed the
High Court to decide the applicability of section 35AB, and had kept all
contentions on both sides expressly open.

 

The entire issue, in the opinion of the Bombay High Court,
about whether section 35AB applied only in case of capital expenditure and not
in case of revenue expenditure had not been decided by the Apex Court in Swaraj
Engines Ltd.’s case (supra) and was left to be decided by the Punjab
& Haryana High Court on the basis of the fresh submissions to be made by
the respective parties. It was clear to the High Court that the Apex Court in Swaraj
Engines Ltd.’s case (supra) had not concluded the issue by holding
that section 35AB would apply only in cases where the expenditure was capital in
nature. Instead the Apex Court had expressed only a tentative view and the
issue itself was left open to be decided by the Punjab & Haryana High Court
on remand.

 

The Bombay High Court importantly held that the reliance by
the Gujarat High Court in Anil Starch Products Ltd.’s case (supra)
and Sayaji Industries Ltd.’s case (supra) and by the Karnataka
High Court in Diffusion Engineers Ltd.’s case (supra), on the
Apex Court decision in Swaraj Industries Ltd.’s case (supra), to
hold that an expenditure which was revenue in nature would not fall u/s. 35AB
and would have necessarily to fall u/s. 37 of the Act, was not warranted by the
decision of the Apex Court in Swaraj Engines Ltd.’s case (supra).
Hence, the Bombay High Court was unable to agree with the decisions of the
Gujarat High Court and the Karnataka High Court, in as much as the Apex Court
had not conclusively decided the issue and left it open for the Punjab &
Haryana High Court to adjudicate upon the said issue.

 

Observations

That the expenditure of revenue nature on acquiring know-how
is eligible for deduction u/s. 37 in full, prior to insertion of section 35AB,
was a position in law that was well settled by several decisions of the courts,
and in particular, the decisions in the cases of Ciba of India Ltd.69 ITR
692(SC), IAEC(Pumps) Ltd. 232 ITR 316(SC), Indian Oxygen Ltd. 218 ITR 337(SC)
and Alembic Works Co Ltd. 177 ITR 377(SC).In contrast, the expenditure of
capital nature on know-how was not eligible for deduction u/s. 37, prior to
insertion of section 35AB, in as much as the section itself prohibited
deduction of an expenditure of a capital nature, though in the above referred
cases, the deduction was held to be allowable even where the expenditure
resulted in some enduring benefits.

 

This settled position in law was disturbed by the
introduction of section 35AB. With its introduction, the deduction for all
expenses on know-how, capital or revenue, was governed by the provisions of
section 35AB, was the understanding of the Revenue, a stand that was not
supported by the comments of the leading jurists published in the 9th
edition of the book titled Kanga & Palkhivala’s Law and Practice of
Income tax. In contrast, tax payers hold that the insertion of section 35
AB had not changed the settled position for deduction in full u/s. 37 of the
Act for an expenditure of revenue nature.

 

Both the views, as noted, are supported by the conflicting
decisions of about six High Courts where some of the decisions are delivered in
favour of the taxpayers on the ground that the issue has already been settled
by the Apex Court in the case of Swaraj Engines Ltd.(supra) while
recently the Bombay High Court held to the contrary, leading to one more
controversy involving whether the Apex Court really adjudicated the issue for
good or it has left the issue open.

  

It is perhaps not difficult to decide whether the Supreme
court in the case of Swaraj Engines Ltd. (supra), at all concluded the
issue under consideration and if yes, was the conclusion arrived at in favour of
the proposition that the provisions of section 35AB applied only where the
expenditure in question was of capital nature. The Apex Court in Swaraj’s
case had noted, in paragraphs 4 and 5 of the decision, that there was a
considerable amount of confusion whether the AO in the case before him applied
section 35AB at all and whether the said contention regarding applicability of
section 35AB was at all raised. The court had further observed that the order
of the AO was not clear, principally, because the order was focussed only one
point namely, on the nature of expenditure. It further observed that depending
on the answer to the said question, the applicability of section 35AB needed to
be considered; the said question needed to be decided authoritatively by the
High Court as it was an important question of law, particularly, after
insertion of section 35AB. The Court therefore remitted the matter to the High
Court for a fresh consideration in accordance with law. It also clarified, in
para 7, on the second question, that “we do not wish to express any opinion.
It is for the High Court to decide, after construing the agreement between the
parties, whether the expenditure is revenue or capital in nature and, depending
on the answer to that question, the High Court will have to decide the
applicability of section 35AB of the Income-tax Act. On this aspect we keep all
contentions on both sides expressly open”. Accordingly, the impugned
judgment of the High Court was set aside and the matter was remitted for fresh
consideration in accordance with law.

 

It seems that the
confusion has arisen out of the following observations of the Apex Court in Swaraj’s
case, wherein it stated that “At the same time, it is important to note
that even for the applicability of section 35AB, the nature of expenditure is
required to be decided at the threshold because if the expenditure is found to
be revenue in nature, then section 35AB may not apply. However, if it is found
to be capital in nature, then the question of amortisation and spread over, as
contemplated by section 35AB, would certainly come into play. Therefore, in our
view, it would not be correct to say that in this case, interpretation of section
35AB was not in issue.” These observations, made mainly to emphasise that
the decision of the High Court required to be set aside for further
examination, has been construed differently by the High Courts, some to support
the proposition that section 35AB had no application to an expenditure that was
held to be of revenue nature. In fact, in the said case, when the matter had
reached the High Court, it was dismissed by the Punjab & Haryana High Court
on an altogether different aspect of section 35AB which is not under
consideration, presently. The High Court in that case had held and observed
that effort of the revenue to bring the expenditure within the domain of
section 35AB was totally misplaced, since the pre-condition for application of
section 35AB was that the payment had to be a lump sum consideration for
acquiring any know-how and such pre-condition was not satisfied. On that basis,
the High Court had dismissed the appeal. It was this decision of the High Court
which had come up for consideration of the Apex Court . We respectfully submit
that the decision of the Apex Court in Swaraj Engines Ltd.’s case, has
not concluded that a revenue expenditure was outside the scope of section 35AB
. It has instead left this aspect of the issue open for a fresh consideration,
as has been explained by the Bombay High Court in Standard Batteries Ltd.’s
case.
 

Having noted the facts, the issue requires to be analysed on
the basis of;

 

  •     implication of the decisions favouring the
    claim for deduction u/s. 37

 

  •     an understanding of the position prevailing
    prior to insertion of section 35 AB,

 

  •     legislative intent behind introduction of
    section 35AB,

 

  •     whether section 35AB is an enabler or
    disabler,

 

  •     language of section 35AB and its scope , and

 

  •     restriction in section 37 .

 

We very respectfully submit that the decisions favouring the
claim u/s. 37, based simply on the perceived findings of the Apex Court in Swaraj
Machines Ltd.‘s case, may not hold any force, in view of our considered
opinion that the Apex Court had, in that case, not adjudicated the issue but
had instead set aside the matter and restored the same to the Punjab &
Haryana High Court. If that is so, the decisions of the courts holding that the
deduction for expenses is governed by section 35AB alone become the only
available decisions of the High Courts leaving no controversy on the subject.
The best hope for the taxpayer is to await the decision of the Apex Court on
the subject. The issue till such time remains not concluded but the one on which
no other High Court has decided in favour of the tax payer after examining the
merits of the case.

 

The legal position, prevailing prior to insertion of section
35AB by the Finance Act, 1985, is cleared by the decisions of the Supreme Court
holding that an expenditure, on acquisition of know-how, of revenue nature is
eligible for deduction u/s. 37 of the Act, once it was incurred wholly and
exclusively for the purposes of the business and the expenditure in question
was not of a capital nature or for personal purposes. Ciba of India Ltd.69
ITR 692(SC), IAEC(Pumps ) Ltd. 232 ITR 316(SC), Indian Oxygen Ltd. 218 ITR
337(SC) and Alembic Works Co Ltd. 177 ITR 377(SC) to name a few
wherein the deduction u/s 37 was held to be allowable for an expenditure incurred
on technical know-how acquisition even where the expenditure resulted in some
enduring benefit to the payer.

 

The CBDT circular No. 421 dated 12.6.1985, vide paragraphs
15.1 to 15.3 explains the intention behind the insertion of the new
provision in the form of section 35AB which is for providing further
encouragement for indigenous scientific research. The memorandum explaining the
provisions of the Finance Bill, 1985 and the Notes thereon have been reiterated
by the circular. They together do not throw any light about the scope of the
new provision, nor about the intention to override the existing understanding,
nor the available decisions on the subject. If that had been the intent, the
same is not expressed by the supporting documents.

 

Ideally from the tax payers angle, the provision of section
35AB should be construed to be an enabling provision that facilitates the
deduction for a capital expenditure hitherto not available before its
introduction and its scope should be restricted to that. Its insertion should
not be taken as a disabling provision leading to a disentitlement not expressly
provided for nor intended. 

Section 35AB in its language does not limit the deduction to
the case of an expenditure that is capital in its nature. It also does not
expressly provide that a revenue expenditure on acquisition of know-how will
fall for deduction only u/s. 35AB. Neither does it provide that such an
expenditure will not qualify for deduction u/s. 35AB and thereby strengthening
the claim for deduction u/s. 37. Useful reference may be made to the provisions
of section 35A and section 35ABA and section 35ABB which specifically apply
only to the cases of capital expenditures.

 

Section 37 grants deduction for any and all types of
expenditures wholly and exclusively for business purposes, other than those
described under sections 30 to 36 of the Act. The true intent and meaning of
the words ‘not being the expenditure described in s.30 to 36’ placed in
s/s. (1) was examined in various cases by the courts over a period of time. It
has been held by the High Courts, including by the full benches of courts, that
section 37 is a residuary provision and can be activated only where it is found
not to be covered by any of the provisions of section 30 to section 36. If it
is covered by any of those provisions, then the deduction cannot be granted
under the residual section 37. It will be so even where the conditions
prescribed under sections 30 to 36 remain to be satisfied. The use of the term ‘described’
as against the terms ‘covered’ or ‘of the nature covered by or
prescribed in’ is equally intriguing.

 

If the expenditure on know-how does not satisfy the
conditions of the lump sum payment and of the acquisition, then, in that case,
provisions of section 35AB would have no application. The deduction in such
cases would possibly be governed by the provisions of section 37, subject to
the satisfaction of the conditions satisfied therein. This view however is not
free from debate in view of the discussion in the preceding paragraph.

 

Obviously, section 35 AB will have no application in cases
where the payment is not lump sum and is periodical or annual or is turnover
based, and the tax payer would be able to stake its claim u/s. 37, provided of
course that the payment is not of the capital nature. Tata Yodogawa Ltd. vs.
CIT, 335ITR 53 (Jhar.).

 

The Apex Court in the case of Drilcos (India) Pvt. Ltd.vs.
CIT, 348 ITR 382 has held that once section 35AB had come into play,
section 37 had no role to play. This decision of the court, delivered
subsequently to Swaraj Machines’ case, may play an important role in
addressing the outcome of the issue on hand. The Apex Court, in Drilcos’
case, confirmed the decision of the Madras High Court reported in 266
ITR 12, on an appeal by the company challenging the order of the High
Court. The High Court had held that the provisions of section 35AB encompassed
in its scope the case of a revenue expenditure, following the decision in the
case of Tamil Nadu Chemicals Products Ltd.(supra).

 

While the controversy continues for the past,
the position is now clear with effect from 1.10.1998. A ‘know-how’ is expressly
included in the definition of an intangible asset with effect from 1.10.1998
and is accordingly made eligible for depreciation. Obviously, no depreciation
would be claimed or allowed in respect of a revenue expenditure on know-how,
and with that, such an expenditure, on discontinuation of section 35AB w.e.f
1.04.1998, would be eligible for deduction u/s. 37 of the Act.

Section 2(47) – Conversion of compulsory convertible preference shares into equity shares does not amount to transfer

5.  Periar
Trading Company Private Limited vs. Income Tax Officer (Mumbai) Members: Mahavir Singh, JM and N.K. Pradhan, AMITA No.: 1944/Mum/2018 A.Y.: 2012-13. Dated: 9th November, 2018 Counsel for Assessee / Revenue: Percy Pardiwala
and Jeet Kandar / Somnath M. Wagale


Section 2(47) – Conversion of compulsory
convertible preference shares into equity shares does not amount to transfer


Facts


During the year
under appeal, the assessee company converted 51,634 number of cumulative and
compulsory convertible preference shares (CCPS) held by it in Trent Ltd., into
equity shares. According to AO, the conversion of CCPS into equity shares was
transfer within the meaning of the definition provided in section 2(47)(i) of
the Act. Accordingly, the sum of Rs. 2.85 crore, being difference of market
value of 51,634 number of equity shares of Trent Ltd. as on date of conversion
and the cost of the acquisition of CCPS was by him as taxable as capital gains.
On appeal, the CIT(A) confirmed the order of the AO.


Held


The Tribunal noted that the CBDT vide its
Circular F. No. 12/1/84-IT(AI) dated 12.05.1964 has clarified that where one
type of share is converted into another type of share, there is no transfer of
capital asset within the meaning of section 2(47). It also relied on the Mumbai
Tribunal’s decision in the case of ITO vs. Vijay M. Merchant, [1986] 19 ITD
510.


According to it, the decision of the Supreme
Court in the case of CIT vs. Motors & General Stores (P.) Ltd [1967] 66
ITR 692 and relied on by the CIT(A) in his order, was entirely
distinguishable on facts of the present case. It further observed that, the
contrary interpretation would lead to double taxation in as much as, having
taxed the capital gain upon such conversion, at the time of computing capital
gain upon sale of such converted shares, the assessee would still be taxed
again, as the cost of acquisition would still be adopted as the issue price of
the CCPS and not the consideration adopted while levying capital gain upon such
conversion. Accordingly, it was held that conversion of CCPS into equity shares
cannot be treated as ‘transfer’ within the meaning of section 2(47) of the Act.

 

37 Section 80-IA – Appeal to Appellate Tribunal – Limitation – Order of revision and consequential order of assessment – Appeals from both orders – Tribunal considering appeal from order of assessment – Dismissal of appeal from order of revision on ground of limitation – Not valid Industrial undertaking – Special deduction u/s. 80-IA – Undertaking engaged in distribution of electricity – Computation of profits for purposes of deduction – Penalty recovered from suppliers for delay in execution of contracts, unclaimed balances of contractors, rebate from power generators and interest on fixed deposits for opening letter of credit to power grid corporation includible in profits – Miscellaneous recovery from employees, difference between written down value and book value of released assets, commission for collection of electricity duty and rental income not part of profit

Hubli
Electricity Supply Co. vs. Dy. CIT; 404 ITR 462 (Karn); Date of order : 9th
February, 2018

A.
Ys.: 2006-07 to 2008-09

The
assessee, a wholly owned company of the Government of Karnataka was engaged in
the business of distribution of electricity. The assessee was entitled to
deduction u/s. 80-IA of the Income-tax Act, 1961 (hereinafter for the sake of
brevity referred to as the “Act”). In the A. Y. 2006-07, it treated
as “income from profits and gains of business” penalty for delay in execution
of work by contractors, rebate from power generators, interest from fixed
deposits, the difference between the written down value and the book value of
assets, commission for collection of electricity duty, rental income, and
miscellaneous recovery from employees. The claim was accepted by the Assessing
Officer. Thereafter the Commissioner invoked the provisions of section 263 of
the Act and set aside the scrutiny assessment, without directing a fresh
assessment. A belated appeal filed against the order of revision was dismissed
by the Tribunal on the ground of limitation. Subsequently, the consequential
assessment order u/s. 143(3) read with section 263 of the Act was passed by the
Assessing Officer disallowing the said claims. The Assessee’s appeal was
dismissed by the Commissioner. The assessee filed further appeal before the
Tribunal. In the mean time, assessment orders for the A. Ys. 2007-08 and
2008-09 were concluded on the same lines, disallowing the deduction u/s.
80-IA(4)(iv)(c) and treating the items of income claimed as “other income” and charging
them to tax. Against these matters, the appeals were filed before the Tribunal.
All these appeals were clubbed together, heard and disposed of by a common
order. The Tribunal accepted some of the claims by the assessee.

 

On appeal,
the Karnataka High Court held as under:

 

“i)  The dismissal of the appeal by the Tribunal on
the ground of limitation without going into the merits of the case was
unjustifiable when the issue was considered on merits while adjudicating the
consequential orders.

 

ii)   The penalty recovered from suppliers and
contractors for delay in execution of works contract, unclaimed balances
outstanding pertaining to security deposits of contractor written back in the
books of account, rebate from power generators, interest income (fixed deposit
for opening of letter of credit to Power Grid Corporation Ltd.) had to be taken
into account while computing the deduction u/s. 80-IA(4).

 

iii)  Miscellaneous recovery from employees, the
difference between the written down value and book value of released assets,
commission from collection of electricity duty and rental income could not be
taken into account while computing the deduction u/s. 80-IA(4).”

 

38 Section 2(22)(e) – Deemed dividend (Loans and advances to shareholder) – Where transactions between shareholder and company were in nature of current account, provisions of section 2(22)(e) would not be applicable

CIT vs. Gayatri Chakraborty; [2018] 94
taxmann.com 244 (Cal); Date of Order : 3rd 
May, 2018 A.
Y.: 2009-10

The
assessee was a director in a company, BAPL in which she held 25.24 per cent
equity shares. There were transactions between the assessee and BAPL of giving
money by the assessee to BAPL as well as by BAPL to the assessee. The Assessing
Officer from the ledger account of BAPL in books of the assessee, took note
only of the transactions whereby BAPL gave money to the assessee and was of the
view that the same was ‘loan or advance’ within the meaning of section 2(22)(e)
by a company (BAPL) to a person who held substantial interest in the company
(BAPL) and had to be brought to tax as deemed dividend to the extent the
company possessed accumulated profits.

 

The
Tribunal held that the said sum received by the assessee could not constitute
loan attracting the deeming provision contained in section 2(22)(e).

 

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

 

“i)  Law on this point is clear in the event
transactions between a shareholder and a company in which the public were not
substantially interested and the former had substantial stake, create mutual
benefits and obligations, then the provision of treating any sum received by
the shareholder out of accumulated profits as deemed dividend would not apply.
The company in the instant case fits the description conceived in the aforesaid
provision to come within the ambit of section 2(22)(e). The controversy which
falls for determination is whether the sum received by the assessee formed part
of running current account giving rise to mutual obligations or the payment
formed one-way traffic, assuming the character of loan or advance out of
accumulated profit.

 

ii)   The Tribunal analysed the ledger account of
the company so far as the payment made to and received from the assessee was concerned
and found that a copy of the ledger of the assessee in the books of BAPL was
placed. A copy of the statement showing the balance after every transaction in
the assessee’s ledger in the books of BAPL was placed. A perusal of the
statement of balances of transactions between the assessee and BAPL shows that
BAPL owed assessee certain sum. BAPL paid the assessee certain sum and the
assessee owed BAPL certain sum. The amounts given in the bracket in the last
column of the enclosed balances in the running current account is the amount
which BAPL owed to the assessee. Mutual transactions go on in this fashion
throughout the previous year and as on the last date of the previous year the
account is squared i.e., neither the assessee owes BAPL nor BAPL owes assessee
any sum. The assessee was beneficiary of the sums given by BAPL at some point
of time during the previous year and BAPL was the beneficiary of the sums given
by the assessee at another point of time during the previous year. It was case
of mutual running or current account which created independent obligations on
the other and not merely transactions which created obligations on other side,
those on the other being merely complete or partial discharge of such
obligations and there were reciprocal demands between the parties and the
account was mutual.

 

iii)  In this factual and legal perspective, payment
of the aforesaid sums to the assessee cannot be treated as dividend out of
profit. No perversity has been pointed out on behalf of the revenue so far as
such a concurrent finding of fact is concerned by the two statutory appellate
fora. One is not inclined to disturb such finding of fact, which the Tribunal
has backed with detailed analysis. If one embarks on a fresh factual enquiry
into the accounts of the assessee or that of the company involved, such
exercise would entail reappreciation of evidence. Such enquiry is impermissible
at this stage. The Tribunal’s order, thus, stands confirmed and the question
formulated is answered accordingly, in favour of the assessee.”

Sections 50, 54F – Deemed short term capital gains, calculated u/s. 50, arising on transfer of a depreciable asset, which asset was held for more than 36 months before the date of transfer qualify for exemption u/s. 54F, subject to satisfaction of other conditions mentioned in section 54F. Assessee having utilised the net consideration by the due date as specified u/s. 139(4), is entitled to exemption u/s. 54F though he failed to deposit the net consideration in the capital gain account scheme within the time specified u/s. 139(1).

18. [2018] 99 taxmann.com 88 (Ahmedabad-Trib.) Shrawankumar G. Jain vs. ITO ITA No. 695/Ahd./2016 A.Y.: 2011-12.Dated: 3rd  October, 2018.

 

Sections 50, 54F – Deemed short term
capital gains, calculated u/s. 50, arising on transfer of a depreciable asset,
which asset was held for more than 36 months before the date of transfer
qualify for exemption u/s. 54F, subject to satisfaction of other conditions
mentioned in section 54F. 


Assessee having utilised the net
consideration by the due date as specified u/s. 139(4), is entitled to
exemption  u/s. 54F though he failed to
deposit the net consideration in the capital gain account scheme within the
time specified u/s. 139(1).


FACTS


The assessee, an individual, carrying on his
proprietorship business under the name and style of MM sold his factory shed on
which depreciation had been claimed. Accordingly, the income earned thereon was
shown as short-term capital gain u/s. 50. However, in the return of income the
assessee had claimed exemption u/s. 54F against the short-term capital gain on
the ground that same was invested in purchase of residential property.


The Assessing Officer (AO) held that the
exemption is available u/s. 54F, only on transfer of a long-term capital asset.
The impugned factory shed was subject to depreciation u/s. 32 therefore, the
gain earned on the sale of such factory shed was liable to be taxed u/s. 50
being short-term capital gain. Once, the gain was held as short-term by virtue
of the provision of section 50, same could not be subjected to exemption under
section 54F.  The Assessing Officer also
observed that the object for enacting the provision of section 50 was to avoid
the multiple benefits claimed by the assessee. He held that the assessee was
not eligible for exemption u/s. 54F.  
Besides above, he also observed that the assessee had violated the
provision of section 54F(4) as he failed to deposit the amount of net sale
consideration in the capital gain account scheme. Therefore, the assessee could
not be allowed exemption u/s. 54F.


Aggrieved, the assessee preferred an appeal
to the CIT(A) who upheld the order passed by the AO.


Aggrieved, the assessee preferred an appeal
to the Tribunal.


HELD


The Tribunal noted that It is undisputed
fact that the period of holding of factory shed, on which depreciation was
claimed and which has been sold, was exceeding 36 months. Thus, the gain
arising on sale was held as short term by virtue of the provision of section
50.


The Tribunal on a combined reading of the
sections 50 and 54F noted that all the provisions of the two sections are
mutually exclusive to each other. There is no mention under section 50
referring to the provision of section 54F and vice versa. Therefore, the Tribunal
held that the provision of one section does not exclude the provision of other
section. It held that both the provisions should be applied independently in
the instant case. The Tribunal held that the capital gain earned by the
assessee on the sale of depreciable assets being factory shed is eligible for
exemption u/s. 54F as it is long-term capital assets as per the provision of
section 2(42A).  The Tribunal observed
that it has no hesitation in deleting the addition made by the AO by
disallowing the exemption available to the assessee.


The Tribunal also held that there is no
dispute the net consideration was utilised by the assessee before filing the
income tax return within the due date as specified u/s. 139(4). Therefore, the
assessee is eligible for exemption u/s. 54F, though he failed to deposit the
net consideration in the capital gain account scheme within the time specified
u/s. 139(1). The appeal filed by the assessee was allowed.

 

Sections 22, 24 – Income earned by assessee, society, by letting out space on terrace for installation of mobile tower / antenna is taxable as “Income from House Property” and consequently, deduction u/s. 24(a) is allowable in respect of such income.

17. [2018] 98 taxmann.com 365 (Mumbai-Trib.) Kohinoor Industrial Premises Co-op Society
Ltd. vs. ITO ITA No. 670/Mum/2018 A.Y.: 2013-14.              
Dated: 5th  October, 2018.


Sections 22,
24 – Income earned by assessee, society, by letting out space on terrace for
installation of mobile tower / antenna is taxable as “Income from House
Property” and consequently, deduction u/s. 24(a) is allowable in respect of
such income.


FACTS


The assessee, a co-operative society,
derived income by letting out space on terrace for installation of mobile
tower/antenna.  This income was declared
in the return of income, filed by the society, under the head `Income from
House Property’ and deduction u/s. 24(a) was claimed.


The Assessing Officer (AO) observed that the
terrace cannot be regarded as house property as it was a common amenity for
members.  He also observed that since the
conveyance was not executed, the society is not the owner of the premises.  The AO taxed the income under the head
“Income from Other Sources”.


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


Aggrieved, the assessee preferred an appeal
to the Tribunal.



HELD


The Tribunal observed that the issue before
it is, what is the nature of income received by the assessee for letting out
such space to the cellular operator/mobile company for installing and operating
mobile towers/antenna? It held that the terrace of the building cannot be
considered as distinct and separate but certainly is 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 amounts to letting-out a part of the house property itself. It held
that the observation of the AO that the terrace cannot be considered as house
property is unacceptable.


As regards the
observation of the Commissioner (Appeals) that the rental income received by
the assessee is in the nature of compensation for providing services and
facility to cellular operators, the Tribunal observed that the revenue has
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 has provided any other service or facilities to the cellular operators.


The Tribunal
directed the AO to treat the rental income received by the assessee from
cellular operator as income from house property and allow deduction u/s. 24(a).


Appeal filed by the assessee was allowed.

Section 145(3) – Books of Accounts cannot be rejected u/s. 145(3) merely because Gross profit from a particular segment was lower and assessee was not in possession of proper documentary evidences in respect of expenses where the genuineness of expenses was not doubted.

16.
(2018) 65 ITR (Trib.) 532 (Jaipur)

Dreamax
Infrastructure Developers vs. ITO ITA No. :
364/JP/2017 A.Y.:
2012-13Dated: 25th May, 2018

 

Section 145(3) – Books of Accounts cannot
be rejected u/s. 145(3) merely because Gross profit from a particular segment
was lower and assessee was not in possession of proper documentary evidences in
respect of expenses where the genuineness of expenses was not doubted.


FACTS


The appellant, a partnership firm, engaged
in the business of Infrastructure and industrial project of Construction of
Road, Industrial Township, Security Barracks etc., was awarded two different
projects. One of road work and industrial township (Chittorgarh project) and
another of a highway road project (Pune Project). Appellant had maintained
single set of books for whole of its business covering both the projects. No
work was carried in respect of Pune project and no revenue was generated,
whereas, there was contractual revenue from the Chittorgarh project.  Appellant was asked to submit separate
trading account for each project by the Assessing Officer (AO). Appellant had
not maintained separate books for each project, however books were audited and
the same were produced along with other required details. AO further pointed
out that assessee had not supported the expenditure with proper vouchers. AO
also noted that appellant had shown very less Gross Profit (GP) for the
relevant Assessment year from the work executed. Accordingly, the AO doubted
the correctness of the books of accounts of the assessee and rejected the same
by invoking the provisions of section 145(3) of the Income Tax Act and adopted
8% Net Profit rate on Contract receipts. The rejection of Books was challenged
before the Hon’ble ITAT.


HELD


When AO does
not dispute the fact that appellant maintains Books, which are also audited,
then he is not justified in segregating the activities in different category
and then observing that appellant had reported low GP in some category ,
whereas overall 7.44% GP rate was declared which was not objected by the
revenue. Further, AO had only pointed out that expenses were not supported with
proper evidences and he had not doubted the genuineness of expenditure. When
appellant had produced relevant documentary evidences, insignificant defects in
supporting evidence cannot be a reason for rejection of books of account. It
was further held that if the expenditure claimed by the appellant was not found
to be bogus/ excessive then the low profit cannot be reason for rejection of
Books. As the work was carried under a composite work contract and appellant
was working as one enterprise there was no need for production of separate
books for each activity. Further, Hon’ble ITAT followed the decision of the
Hon’ble jurisdictional High Court in case of Malani Ramjivan Jagannath vs.
ACIT 316 ITR 120, wherein it was held that mere deviation of GP rate cannot
be a ground for rejecting books of accounts and income cannot be determined on
the basis of estimate and guesswork. Accordingly it was held that appellant’s
case did not warrant rejection of Books of Accounts u/s. 145(3).

 

Section 10(1) – Cultivation of Mushroom, although in controlled condition using trays placed above land, is an agricultural activity and income derived there from is exempt u/s. 10(1).

15.
(2018) 65 ITR (Trib.) 625 (Hyderabad – SB)

DCIT vs.
Inventaa Industries (P.) Ltd. ITA No.:
1015 to 1018(Hyd.) of 2015 C.O. No.:
53 to 56 (Hyd.) of 2015 A.Ys.:
2008-09 to 2012-13 Dated: 9th July, 2018


Section 10(1) – Cultivation of Mushroom,
although in controlled condition using trays placed above land, is an
agricultural activity and income derived there from is exempt u/s. 10(1).   


FACTS


 The assessee company was engaged in growing
Edible White Button Mushrooms and the income from the said activity was treated
as Agricultural Income claiming exemption u/s. 10(1).  Assessing Officer (AO) contended that as
Mushrooms were grown in ‘growing rooms’ under ‘controlled conditions’ in racks
placed above land and using compost manure which is not land and hence the said
activity was not an agricultural activity. CIT(A) ruled in assessee’s favor by
concluding that production of mushroom was a process of agricultural production
and income derived from such a process was agricultural income eligible for
exemption u/s. 10(1). The question before the Special Bench of the Hon’ble ITAT
(Hyderabad Bench) was, whether income from production and sale of Mushrooms can
be termed as ‘agricultural income’ under the Income Tax Act, 1961?


HELD


The Special Bench of the Hon’ble ITAT
supported the view of assessee that ‘soil’ is a part of the land, which is part
of earth. Mushrooms are grown on ‘soil’. Certain basic operations are performed
on it, which require ‘expenditure of human skill and labour’ resulting in
raising the mushrooms. When soil is placed on trays, it does not cease to be
land and when operations are carried



out on soil, it would be agricultural activity carried upon land itself.


In order to
claim exemption u/s. 10(1), use of land and performing activity on it, so as to
raise a natural product, is sufficient. If the strict interpretation is adopted
for the word ‘Land’ appearing in definition of “agricultural Income” u/s. 2(1A)
of the Act, then, when ‘soil’ attached to earth is cultivated, it would be
agricultural activity and when ‘soil’ is cultivated after detaching the same
from earth, it would not be agricultural activity. Such an interpretation is
unintended and unfair. It was concluded that ‘soil’, even when separated from
land and placed in trays, pots, containers, terraces, compound walls etc.,
continues to be a specie of land.


Further, on the question whether mushroom is
‘plant’ or a ‘fungus’ it was observed that one cannot restrict the word
‘product’ to ‘plants’, ‘fruits’, ‘vegetables’ or such botanical life only. The
only condition was that the “product” in question should be raised on
the land by performing some basic operations. Mushrooms produced by the
assessee are a product.


This product is raised on land/soil, by
performing certain basic operations. The product draws nourishment from the
soil and is naturally grown, by such operation on soil which require expenditure
of ‘human skill and labour’. The product so raised has utility for consumption,
trade and commerce and hence would qualify as an ‘agricultural product’ the
sale of which gives rise to agricultural income which is exempt u/s. 10(1) of
the Act.

Just because mushrooms are grown in
controlled conditions it does not negate the claim of the assessee that the
income arising from the sale of such mushrooms is agricultural income.
Accordingly, exemption u/s. 10(1)was allowed to the assessee.

Section 68 – No addition u/s. 68 can be made when assessee is not liable to maintain books of accounts, further bank passbook cannot be regarded as books maintained by assessee.

14.  (2018) 65 ITR (Trib.) 500 (Delhi)

Babbal
Bhatia vs. ITO ITA Nos.
5430 & 5432/DEL/2011 A.Ys.:  2010-11 to 2012-13 Dated: 8th June, 2018




Section 68 – No addition u/s. 68 can be made when assessee is not liable to
maintain books of accounts, further bank passbook cannot be regarded as books
maintained by assessee.


FACTS


Assessment was reopened u/s. 147 based on
information that Assessee had earned Rental income and had made huge cash
deposit in her bank account. In response to notice u/s. 148, she filed her
Return of Income (ROI) wherein she clearly stated that she did not maintain
books of accounts. Further, assessee had declared her income under the
presumptive taxation provisions of section44AF, however as per the contentions
of revenue, the turnover and profit shown by assessee did not entitle assessee
to be governed by section 44AF. During the assessment proceeding, she submitted
Cash Flow Statement and stated that cash deposited was received from cash sales
and withdrawals from other banks. However, the Assessing Officer (AO) rejected
the explanation and made addition of cash deposit u/s. 68.


CIT(A) upheld the order of AO and assessee
filed appeal before the Hon’ble ITAT.


HELD


The Tribunal allowed the assessee’s appeal
and held as under:


1.  If returned income did not match the
presumptive tax rates u/s. 44AF revenue authorities should have treated the ROI
as invalid. Further in such circumstances, AO cannot proceed by making addition
u/s. 68 in respect of cash deposited in Bank account knowing fully that
assessee was not maintaining books of accounts.


2.  The Hon’ble ITAT relied on the following
decisions:


(a) ITO vs. Om Prakash Sharma (ITA
2556/Del/2009) wherein it was accepted that bank passbook does not
constitute Books of Accounts, further when no Books are maintained by assessee
addition u/s. 68 cannot be made. Reliance was placed on CIT vs. Bhaichand H.
Gandhi [141 ITR 67 (Bom.)], Sampat Automobile vs. ITO [96 TTJ(D)368], Mayawati
vs. DCIT [113 TTJ 178(Del.)], Sheraton Apparels vs. ACIT [256 I.T.R. 20 (Bom.)].


(b) Baladin Ram v. CIT [1969] 7 ITR 427[SC]
wherein the apex court held that passbook could not be regarded as books of
account of assessee as relationship between banker and customer is that of
debtor-creditor and not of trustee-beneficiary.


(c) CIT vs. Ms. Mayawati [338 ITR 563 (Del
HC)] wherein it was held that Bank neither act as agent of customer nor
maintains pass book under the instructions of customer (assessee). Thus, cash
credit in the Pass Book of the assessee does not attract provisions of section
68.


(d) Anandram Ratiani vs. CIT [1997] 223 ITR
544 (Gauhati) wherein it was observed that perusal of section 68 of the
Act, shows that in relation to the expression “books”, the emphasis
is on the word “assessee” meaning thereby that such books have to be
the books of the assessee himself and not of any other person.


3.  The very sine qua non for making
addition u/s. 68 presupposes a credit of the amount in the Books of the
assessee. A credit in the Bank account of assessee cannot be construed as
credit in the books of the assessee.


4.  The Hon’ble ITAT stated that it is settled
position that statutory provision has to be given plain literal interpretation
no word howsoever meaningful it may appear can be allowed to be read into a
statutory provision in garb of giving effect to the underlying intent of
legislature. Thus, credit in bank of assessee cannot be construed as credit in
Books of assessee. Accordingly no addition u/s. 68 can be made in the given
case.

 

Section 54 r.w. section139 and 143 – There is no bar/restriction in provisions of section 139(5) that assessee cannot file a revised return after issuance of notice u/s. 143(2). The AO could not reject assessee’s claim for deduction u/s. 54 raised in revised return on ground that said return was filed after issuance of notice u/s. 143(2)

13. [2018] 195 TTJ 1068 (Mumbai – Trib.)

Mahesh H. Hinduja vs. ITO ITA No. 
176/Mum/2017 A.Y.: 
2011-12. Dated: 20th June, 2018.

 

Section 54
r.w. section139 and 143 – There is no bar/restriction in provisions of section
139(5) that assessee cannot file a revised return after issuance of notice u/s.
143(2). The AO could not reject assessee’s claim for deduction u/s. 54 raised
in revised return on ground that said return was filed after issuance of notice
u/s. 143(2)


FACTS


The assessee filed his return declaring
certain taxable income. Subsequently, the assessee filed a revised return of
income in which while offering long-term capital gain, he claimed deduction of
the said amount u/s. 54 towards investment of an amount in a new residential
house. The AO taking a view that revised return of income was filed after
issuance of notice u/s. 143(2), held that the said revised return being
invalid, assessee’s claim for deduction u/s. 54 could not be allowed. Aggrieved
by the assessment order, the assessee preferred an appeal to the CIT(A). The
CIT(A) confirmed the said disallowance.


HELD


The Tribunal held that in the original
return of income the assessee had neither declared the long-term capital gain
nor has claimed deduction u/s. 54. Therefore, the assessee filed a revised
return of income within the time prescribed u/s. 139(5) declaring net long-term
capital gain of Rs.49,96,681, though, it was claimed as deduction u/s. 54
towards investment in a new residential house.


A careful
reading of the provisions contained u/s. 139(5) would make it clear that if an
assessee discovered any omission or wrong statement in the original return of
income, he could file a revised return of income within the time limit as per
section 139(5). There was no bar/restriction in the provisions of section
139(5) that the assessee could not file a revised return of income after
issuance of notice u/s. 143(2) of the Act. The assessee could file a revised
return of income even in course of the assessment proceedings, provided, the
time limit prescribed u/s. 139(5) was available. That being the case, the
revised return of income filed by the assessee u/s. 139(5) could not be held as
invalid.


When the
assessee had made a claim of deduction u/s. 54 of the Act, it was incumbent on
the part of the Departmental Authorities to examine whether assessee was
eligible to avail the deduction claimed under the said provision. The
Departmental Authorities were not expected to deny assessee’s legitimate claim
by raising technical objection. In view of the aforesaid, the impugned order of
the CIT(A) was set aside and the issue was restored to the file of the AO for
examining and allowing assessee’s claim of deduction u/s. 54 subject to
fulfilment of conditions of section 54.

 

Section 2(24) r.w. section 12AA – Corpus specific voluntary contributions being in nature of ‘capital receipt’, are outside scope of income u/s. 2(24)(iia) and, thus, same cannot be brought to tax even in case of trust not registered u/s.12A/12AA

12. [2018] 195 TTJ 820 (Pune – Trib.)

TO(E) vs. Serum Institute of India Research
Foundation ITA No. 
621/Pune/2016 A.Y.: 
2005-06.       Dated: 29th January, 2018.


Section 2(24) r.w. section 12AA – Corpus
specific voluntary contributions being in nature of ‘capital receipt’, are
outside scope of income u/s. 2(24)(iia) and, thus, same cannot be brought to
tax even in case of trust not registered u/s.12A/12AA


FACTS


The assessee was registered trust under the
Bombay Public Trust Act, 1950, however, it was unapproved by the CBDT as
required u/s. 35(1)(ii) of the Act. Further, it was also not registered u/s.
12A/12AA. This is the second round of the proceedings before Tribunal. During
the relevant year, the AO brought to tax the corpus donation of Rs. 3 crore on
the ground that approval u/s.35(1)(ii) had not been granted to the assessee and
the assessee had also not been registered u/s. 12A. During the first round of
the proceedings, the assessee submitted before Tribunal that even if approval
u/s. 35(1)(ii) was not granted then also the amount could not be brought to tax
since it was in nature of a gift and said aspect had not been considered by the
lower authorities. The Tribunal restored the issue to the file of the AO with a
direction to examine the contention of the assessee that the amount of Rs.3
crore received as corpus donation was in the nature of gift and, therefore, same
was not taxable.


In remand
proceedings, the AO held that “corpus donation” did not tantamount to
exempt income as laid down u/s. 2(24)(iia) of the Act. The AO referred the  provisions of section 12A/11(1)(d) and
reasoned that the voluntary contribution to the corpus of the trust were
taxable as the income of the trust but for the provisions of clause (d) of
section 11(1) of the Act. In the absence of any such specific exclusions
provided in the provisions of section 10(21), the said donation became taxable
in the hands of the assessee.


Aggrieved by
the assessment order, the assessee preferred an appeal to the CIT(A). The
CIT(A) held that section 2(24)(iia) was required to be read in the context of
introduction of the section 12 considering the simultaneous amendments to both
the provisions with effect from 01-04-1973 and that the said amount of corpus
donation was not taxable under the Act being in the nature of capital receipt.


 HELD


The Tribunal held that it was necessary to
examine the non-taxability of the corpus donations in assessee’s case despite
inapplicability of the provisions of section 12(1)/11(1)(d)/section 35/10(21).
On the face of it, the provisions of section 2(24)(iia) applied to the case of
the assessee. It had been held in various cases decided earlier that the corpus
donation received by the trust, which was not registered u/s. 12A/12AA, was not
taxable as it assumed the nature of ‘capital receipt’ the moment the donation
was given to the “Corpus of the Trust”. The provisions of sections
2(24)(iia)/12(1)/11(1)(d)/35/56(2) were relevant for deciding the current
issue. It was a settled legal proposition that in case of a registered trust,
the corpus specific voluntary contributions were outside the scope of income as
defined in section 2(24)(iia) due to their “capital nature”. But
assessee was an un-registered trust. Despite the detailed deliberations made by
revenue, the principles relating to judicial discipline assume significance and
the priority. It was also well settled that there was need for upholding the
favourable view if there existed divergent views on the issue. As mentioned
above, there were multiple decisions in favour of the assessee. Accordingly,
the corpus-specific-voluntary contributions were outside the taxations in case
of an unregistered trust u/s. 12/12A/12AAA too.


Section 40A(2) – Where AO made disallowance u/s. 40A(2)(a) without placing on record any material which could prove that payments made by assessee were excessive or unreasonable, having regard to fair market value of services for which same were made or keeping in view legitimate needs of business of assesee or benefit derived by or accruing to assessee therefrom, said disallowance could not be sustained.

11. [2018] 195 TTJ 796 (Mumbai – Trib.) Nat Steel Equipment (P.) Ltd. v. DCIT ITA Nos.: 4011 & 5070/Mum/2013 A.Y.s: 2009-10 & 2010-11        
Dated: 13th June, 2018.          


Section 40A(2) – Where AO made disallowance
u/s. 40A(2)(a) without placing on record any material which could prove that
payments made by assessee were excessive or unreasonable, having regard to fair
market value of services for which same were made or keeping in view legitimate
needs of business of assesee or benefit derived by or accruing to assessee
therefrom, said disallowance could not be sustained.   


FACTS 


The assessee
had made an aggregate payment to its related parties by way of commission/legal
and professional charges. However, the assessee had failed to place on record
any documentary evidence in support thereof. The AO was of the view that the
assessee had paid commission to its related parties at an exorbitant rate of 10
per cent of the sale value. It was further observed by the AO that not only the
payments made by the assessee to its related parties appeared to be
unreasonable, but rather 90 per cent of the total payments were found to have
been made to such related parties. After characterising the payments made by
the assessee to its related parties as unreasonable and excessive, the AO had
disallowed 30 per cent of such payments and made a consequential addition in
its hands.


Aggrieved, the assessee preferred an appeal
to the CIT(A). The CIT(A) confirmed the disallowance of 30 per cent of total
commission.


HELD


The Tribunal held that once the AO formed an
opinion that the expenditure incurred by the assessee in respect of the goods,
services or facilities for which the payment was made or was to be made to the
related party was found to be excessive or unreasonable, then the onus was cast
upon the assessee to rebut the same and prove the reasonableness of such
related party expenses. However, the Legislature had in all its wisdom in order
to avoid any arbitrary exercise of powers by the AO in the garb of the
aforesaid statutory provision, specifically provided that such formation of
opinion on the part of the AO had to be arrived at having regard to the fair
market value of the goods, services or facilities for which the payment was
made by the assessee.


In the case of the assessee, the CIT(A)  had upheld the ad hoc disallowance of 30 per
cent of the payments made by the assessee to its related parties, without
uttering a word as to on what basis the respective expenditure incurred by the
assessee in context of the related party services was found to be excessive or
unreasonable, having regard to either the fair market value of the services for
which the payment was made by the assessee or the legitimate needs of its
business or the benefit derived by or accruing to the assessee therefrom. The
lower authorities had carried out the disallowance u/s. 40A(2)(a) on an ad hoc
basis viz. 30 per cent of the payments made to the related parties and made a
disallowance without placing on record any material which could prove to the
hilt that the payments were excessive or unreasonable, having regard to the
fair market value of the services for which the same were made or keeping in
view the legitimate needs of the business of the assessee or the benefit
derived by or accruing to the assessee therefrom.


In the absence
of satisfaction of the basic condition for invoking of section 40A(2)(a), the
Tribunal held that the disallowance of 30 per cent of the related party
expenses i.e.Rs.38,87,705 made u/s. 40A(2)(a) could not be sustained.

2 Sections 2(47) and 54 – Condition regarding purchase of new property within one year of transfer of old property – Date of agreement to sale was considered as the date of transfer and not the date of conveyance deed.

Gautam Jhunjhunwala
vs. Income-tax Officer (Kolkata)

Members:  A. T. Varkey, (J. M.) and Dr A. L. Saini (A.
M.)

ITA No.:
1356/Kol/2017

A. Y: 
2012-13  Dated: 7th
September, 2018

Counsel for Assessee / Revenue:  P. R. Kothari / Rabin Choudhury

 


Sections 2(47) and 54 – Condition regarding
purchase of new property within one year of transfer of old property – Date of
agreement to sale  was considered as the
date of transfer and not the date of conveyance deed.

 

Facts

The assessee is an individual, who had sold
a flat vide deed of conveyance dated 26/27.12.2011. The sale deed was executed
in pursuance of an agreement to sale which was executed on 16.09.2011. The deed
of conveyance was registered while the agreement to sale was not
registered. 

 

The assessee had purchased a new residential
flat on 04.10.2010.  The AO took the date
of registration of the property sold as the date of transfer i.e. 26/27.12.2011
and since the new property was purchased on 04.10.2010, which, according to the
AO, was not within the period of one year from the date of transfer of the old
asset, he denied the benefit of section 54. 
On appeal, the CIT(A) confirmed the AO’s order.

 

Held

Relying on the Supreme Court decision in Sanjeev
Lal vs. CIT (Civil Appeal No. 5899-5900 of 2014 dated 01.07.2014)), the
Tribunal observed that by entering into an agreement to sale, some right which
the assessee had in respect of the capital asset in question had been
extinguished, because after execution of the agreement to sale, it would not be
open to the assessee to sell the property to others in accordance with the law.

 

The vendee gets a right to get the property
transferred in his favour by filing a suit under Specific Performance Act.
Thus, according to the Tribunal, a right in respect of the capital asset (old
residential property in question) had been transferred by the assessee in
favour of the vendee/transferee on 16.09.2011. 
And since purchase of the new property was on 04.10.2010, it was held
that the purchase of the property was well within one year from the date of
transfer as per section 2(47) of the Act.

 

As regards a question as to the
admissibility or otherwise of the agreement to sell as an evidence in a suit
for specific performance, relying on the decision of the Supreme Court in the
case of S. Kaladevi vs. V. R. Somasundaram & others (Civil Appeal No.
3192 of 2010 dated 12.04.2010), the Tribunal noted that  the agreement to sell can be a basis for a
suit for specific performance in view of section 49 of the Registration
Act.  Thus, though the agreement to sell
was not registered, the vendee can seek decree of specific performance on the
basis of unregistered agreement to sell.

 

Return of income – Delay of 1232 days in filing return – Condonation of delay – Assessee – NRI filed an application for condonation of delay of 1232 days in filing return on ground she was not in a position to file her returns on time due to severe financial crisis in United States of America and injuries sustained by her in an accident, enclosing a medical report in support of claim – Said application was rejected by CBDT on ground that medical certificate did not support case of assessee and that assessee had professional advisor available to her and, thus, required returns ought to have been filed within stipulated period – Though there was some lapse on part of assessee, that by itself would not be a factor to turn out plea for filing of return, when explanation offered was acceptable and genuine hardship was established – Delay to be condoned

26.  Smt. Dr. Sudha Krishnaswamy vs. CCIT; [2018]
92 taxmann.com 306 (Karn):

Date of order: 27th
March, 2018

A. Ys.: 2010-11 to 2012-13

Sections 119 and 139 of I. T.
Act 1961

 

Return of income – Delay of
1232 days in filing return – Condonation of delay – Assessee – NRI filed an
application for condonation of delay of 1232 days in filing return on ground
she was not in a position to file her returns on time due to severe financial
crisis in United States of America and injuries sustained by her in an
accident, enclosing a medical report in support of claim – Said application was
rejected by CBDT on ground that medical certificate did not support case of
assessee and that assessee had professional advisor available to her and, thus,
required returns ought to have been filed within stipulated period – Though there
was some lapse on part of assessee, that by itself would not be a factor to
turn out plea for filing of return, when explanation offered was acceptable and
genuine hardship was established – Delay to be condoned

 

The assessee, a non-resident,
had filed a petition for condonation of delay u/s. 119(2)(b) of the Income-tax
Act, 1961 before Commissioner of Income Tax. She contended that she sold one
vacant site and being non-resident, purchaser of property had deducted income
tax as per provisions of section 195, which had resulted in a refund for A. Y.
2012-13. As regards A. Ys. 2010-11 and 2011-12, it was submitted that she had
no taxable income and claimed that entire refund was relating to TDS from
interest and bank deposits. Accordingly, she requested to condone delay on
ground that she was not in a position to file her returns on time due to severe
financial crisis in United States of America and injuries sustained by her in
an accident, enclosing a medical report in support of the claim and direct
Assessing Officer to accept returns for aforesaid 3 years and process return of
income on merits and issue refund orders. Said application was rejected on
ground that assessee had professional advisor available to her and required returns
ought to have been filed within a stipulated period and, accordingly, rejected
the application relating to the three assessment years in question. The
assessee filed writ petitions challenging the orders of the Commissioner.

The Karnataka High Court allowed
the writ petitions and held as under:

 

“i)  It is not the case of the assessee that she is avoiding any
scrutiny of the returns. On the other hand, it is the case of the assessee that
she is entitled for refund, being a non-resident owing to the recession at U.S.
and the accidental injuries suffered, no returns were filed within the period
prescribed. In the circumstances, it cannot be held that the
assessee-petitioner has obtained any undue advantage of the delay in filing the
income tax returns.

 

ii)   It is trite law that rendering substantial justice shall be
paramount consideration of the Courts as well as the Authorities rather than
rejecting on hyper-technicalities. It may be true that there was some lapse on
the part of assessee, that itself would not be a factor to turn out the plea
for filing of the return, when the explanation offered was acceptable and
genuine hardship was established. Sufficient cause shown by the petitioner for
condoning the delay is acceptable and the same cannot be rejected out-rightly
on technicalities.

 

iii)  Considering the overall circumstances, the delay of 1232 days in
filing the returns for the relevant assessment years in question is condoned
subject to denial of interest for the delayed period if found to be entitled
for refund.”

Recovery of tax – Provisional attachment – Certain transactions to be void – Powers of TRO – Petitioner purchased a property belonging to a deceased person through his legal representative – Same was declared void as it was under attachment proceedings for recovery of tax dues of said deceased person – Petitioner contended that he was a bona fide purchaser of property for adequate consideration and was not aware of attachment of property for recovery of tax of its owner – TRO could not declare a transaction of transfer as null and void u/s. 281 and if department wanted to have transactions of transfer nullified u/s. 281, it must go to civil court under rule 11(6) of Second Schedule to have transfer declared void u/s. 281

25.  Agasthiya Holdings (P.) Ltd. vs. CIT; [2018]
93 taxmann.com 81 (Mad):

Date of Order: 13th April,
2018

Section 281 r.w.s. 222 and
rule 11 of second schedule of I. T. Act 1961

 

Recovery of tax – Provisional
attachment – Certain transactions to be void – Powers of TRO – Petitioner
purchased a property belonging to a deceased person through his legal
representative – Same was declared void as it was under attachment proceedings
for recovery of tax dues of said deceased person – Petitioner contended that he
was a bona fide purchaser of property for adequate consideration and was
not aware of attachment of property for recovery of tax of its owner – TRO
could not declare a transaction of transfer as null and void u/s. 281 and if
department wanted to have transactions of transfer nullified u/s. 281, it must
go to civil court under rule 11(6) of Second Schedule to have transfer declared
void u/s. 281

 

The appellant/writ petitioner
company, engaged in real estate business, purchased a property through the
legal representatives of one deceased ‘PJ’. Before purchasing property the
petitioner got legal opinion from its Advocate and also by verifying the
encumbrances through encumbrance certificate which showed no encumbrance. After
a search of original assessee’s house after two years, four months and two
days, the Revenue found about the sale of the said property in favour of the
petitioner and registration on the file of the Joint Sub-Registrar, Tuticorin.
The Tax Recovery Officer, Tuticorin held that the legal representatives of the
original assessee had illegally transferred the attached property in favour of
the appellant.

 

On appeal before the
Commissioner (Appeal), the assessee contended that the Tax Recovery Officer had
acted outside his jurisdiction Madurai. The Commissioner (Appeals), noted that
on a perusal of the Assessing Officer’s and the Tax Recovery Officer’s report
and other evidence, the attachment of the said property was made on 18/12/1987
and it was duly intimated to the Sub-Registrar’s Office by the Tax Recovery
Officer on 28/09/2007 and it was served on 03/10/2007 and only after the said
information, the transfer of property had taken place and in the light of the
rule 16(1)(2) of the Second Schedule, the defaulter or his legal representative
not competent to alienate any property except with the permission of the Tax
Recovery Officer and since the Tax Recovery Officer had acted within his
jurisdiction in the light of the said rule, the representation/petition
submitted by them was to be rejected and accordingly, the same was rejected on
the ground of no merits. On appeal, the Tribunal also upheld the order of the
Commissioner (Appeals).

 

The petitioner filed appeal as
well as writ petition challenging the order. The petitioner contended that it
was for the department to move the civil court to declare the transaction in
the form of sale in their favour u/s. 281 as null and void. It further claimed
that assessee was the bona fide purchasers for value and consideration without
any notice of pre-encumbrance and therefore, the property was liable to be
released from attachment.

 

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

 

“i)  The Tax Recovery Officer, Tuticorin, had sent a communication to
the legal representatives of the original assessee by pointing out that they
had illegally transferred the attached property, which was, as per proceedings
dated 18/12/1987, attached on 06/01/1988 in favour of the appellant in writ
appeal in W.A. (MD) No. 1186 of 2017/writ petitioner and they are calling upon
to show cause as to why the illegal transaction made by them should not be
declared as null and void as per rule 16(1) of the Second Schedule.



ii)   The appellant/writ petitioner submitted a representation to the
Commissioner, Madurai, narrating the events that had happened and claimed that
they are innocent and bona fide purchasers for valid and consideration
without any notice of prior encumbrance and therefore, prayed for appropriate
direction to direct the Assessing Officer to drop any further proceedings
pertaining to the said property and raise the attachment and also enclosed the
supporting documents.

 

iii)  The Commissioner, Madurai, has taken into consideration the said
representation and noted that on a perusal of the Assessing Officer’s and the
Tax Recovery Officer’s report and other evidence, the attachment of the said
property was made on 18/12/1987 and it was duly intimated to the
Sub-Registrar’s Office by the Tax Recovery Officer on 28/09/2007 and it was
served on 03/10/2007 and only after the said information, the transfer of
property had taken place and in the light of the rule 16(1)(2) of the Second Schedule,
the defaulter or his legal representative is not competent to alienate any
property except with the permission of the Tax Recovery Officer and since the
Tax Recovery Officer has acted within his jurisdiction in the light of the said
rule, the representation/petition submitted by them is to be rejected and
accordingly, the same is rejected on the ground of no merits.

 

iv)  As already pointed out, the Tax Recovery Officer has noted that the
property has been illegally transferred by way of a registered sale deed dated
18/06/2008 and since it has been sold after service of the demand notice, it
has to be declared as null and void as per the provisions of the Income-tax
Act.

 

v)   The facts projected would also lead to the incidental question as
to whether the sale by the legal representatives of the deceased in favour of
the appellant/writ petitioner was done with a view to defraud the revenue. It
is the categorical case of the appellant/writ petitioner that before purchasing
the property, they got the legal opinion and also obtained encumbrance
certificates and any entries therein have not declared any succeeding
encumbrance including the attachment of the said property by the Income Tax
Department.

 

vi)  Now, coming to the facts of the case, the order of attachment was
made on 18/12/1987 and as per the additional affidavit of the second appellant,
dated 12/12/2011, filed in writ petition, the intimation was sent to the Joint
Sub-Registrar, Tuticorin, on 28/09/2007 and it was acknowledged by him on
03/10/2007 and notice for settling a sale proclamation u/s. 53 of the Second
Schedule of the Income-tax Act was served on the legal heirs of the original
assessee as such the sale of the property to the writ petitioner was to be held
as null and void on 09/08/2011 which was the subject matter of challenge in the
writ petition.

 

vii) In the light of the ratio laid down by the Supreme Court of India in
TRO vs. Gangadhar Vishwanath Ranade [1998] 100 Taxman 236, it is not
open to the Tax Recovery Officer to declare the said sale as null and void. The
above said decision also held that ‘the Tax Recovery Officer is required to
examine whether the possession of the third party is of a claimant in his own
right or in trust for the assessee or on account of the assessee. If he comes
to a conclusion that the transferee is in possession in his or her own right,
he will have to raise the attachment. If the department desires to have the
transaction of transfer declared void u/s. 281, the department being in the
position of a creditor, will have to file a suit for a declaration that the
transaction of transfer is void u/s. 281.’

 

viii)      In the light of the ratio laid down in the
above cited decision, it is not open to the Tax Recovery Officer to declare the
said transfer/alienation as null and void as per the provisions of the
Income-tax Act. It is also brought to the knowledge of this Court by the
appellant/writ petitioner that he also sought information under the Right to
Information Act, from the Public Information Officer – the Joint Sub-Registrar,
Tuticorin, as to the order of attachment by the Income Tax Officer in respect
of the property concerned. The said official informed that no such document is
available on file. Therefore, this Court is of the considered view that it is for
the Income Tax Department, to file a suit to hold the transaction declared as
null and void as per the ratio laid down by the Supreme Court of India
Gangadhar Vishwanath Ranade case (supra).

 

ix)  The writ petition is partly allowed and the order of the Judge in
granting liberty to the writ petitioner to move the Tax Recovery Officer under
rule 11 of the Second Schedule seeking adjudication of his claim is set aside
and the revenue is granted liberty to file a civil suit to declare the sale
transaction/sale deed in favour of the writ petitioner as null and void.”

Offences and prosecution – Principal Officer – Assessee was a Non-Executive Chairman of Board of Directors of company based in Delhi/NCR region – AO passed an order u/s. 2(35) with respect to TDS default of company treating assessee as Principal Officer of company and launched prosecution proceedings against the assessee u/s. 276B – Where there was no material to establish that assessee was in-charge of day-to-day affairs, management, and administration of his company, AO could not have named him as Principal Officer and accordingly he could not have been prosecuted u/s. 276B for TDS default committed by his company

24.  Kalanithi Maran vs.
UOI; [2018] 92 taxmann.com 308 (Mad): Date of Order:
28th March, 2018: F. Ys. 
2013-14 and 2014-15

Sections 2(35) and 276B of I.
T. Act, 1961

 

Offences and prosecution –
Principal Officer – Assessee was a Non-Executive Chairman of Board of Directors
of company based in Delhi/NCR region – AO passed an order u/s. 2(35) with
respect to TDS default of company treating assessee as Principal Officer of
company and launched prosecution proceedings against the assessee u/s. 276B –
Where there was no material to establish that assessee was in-charge of
day-to-day affairs, management, and administration of his company, AO could not
have named him as Principal Officer and accordingly he could not have been
prosecuted u/s. 276B for TDS default committed by his company

 

The assessee was a
Non-Executive Chairman of the Board of Directors of company Spice Jet Limited
based in Delhi /NCR region. The company was engaged in the business of
operation of scheduled low cost air transport services under the brand name
‘Spice Jet’. The assessee was residing and carrying on business at Chennai and
was not receiving any remuneration whatsoever from the company. The assessee
was full time Executive Chairman of Sun TV Network Ltd., which is a public
limited company, from which he drew remuneration as per the provisions of the
Companies Act. There was failure on part of Spice Jet Limited to deposit tax
deducted at source from amounts paid/payable to third parties for F.Ys. 2013-14
to 2014-15. The Assessing Officer passed an order dated 03/11/2014 u/s. 2(35)
of the Income-tax Act, 1961 with respect to TDS default of Spice Jet to the
tune of Rs. 90 crore treating the assessee as the Principal Officer of the
Company within the meaning of section 2(35). By the impugned order, while
naming the assessee as the Principal officer, the Assessing Officer also held
that the assessee was liable for prosecution u/s. 276B for the Tax Deducted at
Source default committed by the company. The assesse filed writ petition
chalanging the said order of the Assessing Officer.

 

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

 

“i)  The assessee was a Non-Executive Chairman of the Board of Directors
of the Company. Admittedly, the corporate office of the company is at Delhi. It
is not in dispute that the assessee is residing at Chennai and the impugned order
dated 03/11/2014 naming the assessee as the Principal Officer was served on the
assessee at Chennai at his residential address. It is also pertinent to note
that the show-cause notice dated 01/9/2014 was served on the assessee at his
residential address at Chennai. When the assessee had taken a stand that he is
not involved in the day-to-day affairs of the company and was also not drawing
any salary from the company, it cannot be stated that the assessee cannot file
the writ petition at the place where he received the show-cause notice as well
as the impugned order.

 

ii)   In the instant case, admittedly the assessee is challenging the
order treating him as the Principal Officer, which was received by him at
Chennai and was brought to his knowledge only at Chennai. Though the authority
is at Delhi, it is clear that part of cause of action had arisen at Chennai. As
per article 226(2) of the Constitution of India, the writ petition is
maintainable before a High Court within which the cause of action wholly or in
part, arises for the exercise of such power, notwithstanding that the seat of
such Government or authority or the residence of such person is not within
those territories. That apart, though the company’s registered corporate office
is at Delhi and the TAN number is at Delhi assessment, the assessee in this
writ petition has not challenged the assessment order, but, has challenged only
the impugned order naming him as the Principal Officer. In these circumstances,
this Court has jurisdiction to entertain the writ petition.

 

iii)  U/s. 2(35)(b), the Assessing Officer can serve notice only to
persons who are connected with the management or administration of the company
to treat them as Principal Officer. Section 278B clearly states that it shall
not render any such person liable to any punishment, if he proves that offence
was committed without his knowledge.

 

iv)  In the instant case, the assessee has stated that he was not
involved in the day-to-day affairs of the company and that he is only a
Non-Executive Chairman and not involved in the management and administration of
the company. Whereas, the Managing Director, himself has specifically stated
that he is the person in-charge of the day-to-day affairs of the company.

 

v)   The Assessing Officer, while passing the impugned order naming the
assessee as the Principal Officer, has not given any reason for rejecting the
contention of the Managing Director. When the Managing Director himself has
stated that he is the person who is in-charge of the day-to-day affairs of the
management and administration of the company and that the petitioner is not so,
the Assessing Officer without any reason has named the assessee as the
Principal Officer. Merely because the assessee is the Non-Executive Chairman,
it cannot be stated that he is in-charge of the day-to-day affairs, management
and administration of the company. The Assessing Officer should have given the
reasons for not accepting the case of the Managing Director as well as the
assessee in their respective reply. The conclusion of the Assessing Officer
that the assessee being a Chairman and major decisions are taken in the company
under his administration is not supported by any material evidence or any
legally sustainable reasons.

 

vi)  It is clear that the assessee was not involved in the management,
administration and the day-to-day affairs of the company, therefore, the
assessee cannot be treated as Principal Officer. In these circumstances, the
impugned order dated 03/11/2014 is liable to be set aside. Accordingly, the
same is set aside. The writ petition is allowed.”

Export oriented undertaking (Manufacture) – Exemption u/s. 10B – Assessee firm was engaged in mining and export of iron ore – It outsourced work of processing of iron ore to another company which operated plant and machinery outside custom bonded area – Assessee’s claim for exemption u/s. 10B was rejected by AO – Tribunal took a view that mere processing of iron ore in a plant and machinery located outside customs bonded area would not disentitle assessee from claiming exemption u/s. 10B where iron ore was excavated from mining area belonging to an export oriented unit – Accordingly, Tribunal allowed assessee’s claim – No substantial question of law arose

23.  Pr. CIT vs.
Lakshminarayana Mining Co.;
[2018] 93 taxmann.com 142 (Karn):

Date of Order: 6th
April, 2018

A. Ys.: 2009-10 to 2011-12

Section 10B of I. T. Act, 1961

 

Export oriented undertaking
(Manufacture) – Exemption u/s. 10B – Assessee firm was engaged in mining and
export of iron ore – It outsourced work of processing of iron ore to another
company which operated plant and machinery outside custom bonded area –
Assessee’s claim for exemption u/s. 10B was rejected by AO – Tribunal took a
view that mere processing of iron ore in a plant and machinery located outside
customs bonded area would not disentitle assessee from claiming exemption u/s.
10B where iron ore was excavated from mining area belonging to an export
oriented unit – Accordingly, Tribunal allowed assessee’s claim – No substantial
question of law arose

 

The assessee was a firm in the
business of mining and export of iron ore. It had entered into an operation and
maintenance agreement with NAPC Ltd., which operated the plants and machineries
installed in the Export Oriented Unit (hereinafter referred to as ‘EOU’) and
non-EOU both belonging to the assessee-firm. The EOU had started production on
23/09/2006 and accordingly deduction u/s. 10B of the Income-tax Act, 1961 on
the profits derived from the production of iron ore from the EOU was claimed.
The Assessing Officer disallowed the claim for deduction u/s. 10B with respect
to production of iron ore said to have been outsourced by the EOU to the
non-EOU and restricted the claim to the profits derived by the EOU from its
production.

 

The Commissioner (Appeals)
confirmed the order of the Assessing Authority holding that the claim for
deduction u/s.10B was not allowable in respect of production of non-EOU. The
Tribunal held that customs bonding was not a condition precedent for granting
exemption u/s. 10B. It was thus concluded that mere processing of the iron ore
in a plant and machinery located outside customs bonded area  would 
not  disentitle  the 
assessee  from  deduction u/s.10B where the iron ore was
excavated from the mining area belonging to an export oriented unit. The
Tribunal allowed the assesee’s claim.

 

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

 

“i)  In the instant appeal, primary contention advanced by the revenue
is to the effect that profits that have been derived by the assessee must be
pursuant to excavation and processing activity of the assessee in a customs
bonded area. It is further contended that as the ‘production’ has not been
carried out in the EOU and, contribution to the finished product by the
assessee being almost absent, deduction u/s. 10B cannot be permitted.

 

ii)   Insofar as factual aspects are concerned, the authorities have
clearly held that there has been outsourcing of processing of iron ore to
evidence which the profit and loss account and the ledger account for the
relevant year have been relied upon. The assertions to the contrary by the
revenue warrants no acceptance.

 

iii)  As regards the contention that the processing by ‘SESA plant’ which
is a plant situated outside the customs bonded area and disentitles the
assessee from claiming deduction u/s. 10B is concerned, the same can be
answered as follows:

 

(a) The processing of the iron ore in a plant belonging to the assessee
being in the nature of job work is not prohibited and forms an integral part of
the activity of the EOU;

 

(b) The mere fact that the ‘SESA Plant’ is situated outside the bonded
area is of no legal significance as the benefit of customs bonding is only for
the limited purpose of granting benefit as regards customs and excise duty. The
entitlement of deduction under the Act is to be looked into independently and
said benefit would stand or fall on the applicability of section 10B.

 

iv)  The judgement in the case of CIT vs. Caritor (India) (P.) Ltd.
[2015] 55 taxmann.com 473/230 Taxman 411/[2014] 369 ITR 463 though arises in
the context of deduction u/s. 10A which is different from deduction u/s. 10B
insofar as section 10A provides for the location of the unit in the ‘Special
Economic Zone’ such locational restriction is absent in case of section 10B,
however, the principle that benefit of customs and excise duty is independent
of the entitlement of deduction under the Act is applicable in the instant case
also. From the discussion above, it is held that no substantial question of law
arises for consideration.”

Educational institution – Exemption u/s. 10(23C)(vi) – Where assessee society was set up with object of imparting education and it had entered into franchise agreements with satellite schools and also used gains arising out of these agreements in form of franchisee fees for furtherance of educational purposes, it fulfilled requirements to qualify for exemption u/s. 10(23C)(vi)

22.  DIT (Exemption) vs. Delhi Public School
Society; 403 ITR 49 (Del); [2018] 92 taxmann.com 132 (Del): Date of Order: 3th
April, 2018

A. Y.: 2008-09

Sections 2(15), 10(23C) and 11
of I. T. Act, 1961

 

Educational institution –
Exemption u/s. 10(23C)(vi) – Where assessee society was set up with object of
imparting education and it had entered into franchise agreements with satellite
schools and also used gains arising out of these agreements in form of franchisee
fees for furtherance of educational purposes, it fulfilled requirements to
qualify for exemption u/s. 10(23C)(vi)

 

The assessee a society
registered with the Registrar of Societies, Delhi had established 11 schools
and had also permitted societies/organisations/trusts with similar objects to
open schools under the name of ‘Delhi Public School’, in and outside India. As
on date, 120 schools were functioning under that name in and outside India. The
main objective of assessee society was to establish progressive schools or
other educational institutions in Delhi or outside Delhi, open to all without
any distinction of race or creed or caste or special status with a view to
impart sound and liberal education to boys and girls during their impressionable
years. The assessee had been enjoying exemption, in respect of its income u/s.
10(22) of the Income-tax Act, 1961 since A. Y. 1977-78 till A. Y. 2007-08. In
view of the change in law, section 10(22) was substituted by section 10(23C)(vi)
with effect from 01/04/1999, the assessee applied in (Form 56D) requesting for
approval of exemption, u/s. 10(23C)(vi) on 16/04/2007 for A. Y. 2008-09
onwards. The Additional Director of Income Tax, by order dated 30/04/2008,
rejected the assessee’s application u/s. 10(23C)(vi) seeking exemption,
on the grounds that, inter alia, the franchisee fee received by it from
the satellite schools in lieu of its name, logo and motto amounts to a
‘business activity’ with a profit motive and no separate books of account were
maintained by assessee for business activity as required u/s. 11(4A). The
assessee filed writ petition challenging the order.

 

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

 

“i)  There is a multitude of authorities that have surveyed and analysed
the exemption permitted u/s. 10(23C)(vi), which broadly conclude that if the
educational institution merely acquires a profit surplus from running its
institution, that alone would not belie its larger education purpose. For
instance, in Queen’s Educational Society vs. CIT [2015] 372 ITR 699/231
Taxman 286/55 taxmann.com 255 (SC), the Supreme Court focused on the
requirements that were germane to qualify for exemption under the erstwhile
section 10(22) and the subsequent section 10(23C)(vi), namely that: the
activities of the educational institution should be incidental to the
attainment of its objectives and separate books of account should be maintained
by it in respect of such business; primarily to highlight that even if an
educational institution indulges in a profit making activity, that does not
necessarily subsume the larger educational/charitable purpose of the
organisation. The determining test to qualify for exemption u/s. 10(23C)(vi),
hence, lies in the final motivation on which the institution functions,
regardless of what extraneous profit it may accrue in the pursuit of the same.

 

ii)   This critical test therefore has a conspicuous qualitative value;
the objectives of the organisation are to be determined not merely by the
memorandum of objectives of the institution, but, also from the design of how
the profits are being directed and utilised and if such application of profits
uphold the ‘charitable purpose’ of the organisation (as postulated in section
2(15)) or if the objectives are marred by a profit making motive that emerges
more as a business activity rather than an educational purpose. Section
10(23C)(vi) while guiding the manner of this determination also,
provides a certain amount of discretion to the authority assessing the
compliance to these conditions for ascertaining whether the requirements of the
provision are met with. Such scrutiny is to be carried out every year,
irrespective of any preceding pattern in the assessment of the previous years.

 

iii)  As can be seen from the present income tax
appeals, the prescribed authority has examined the assessee’s application for
exemption u/s. 10(23C)(vi) in light of the recent audits of the assessee’s
accounts. Although assessee society, in the earlier years had been granted
exemption u/s. 10(23C)(vi), that itself does not cause for a res judicata
principle, as examination of the assessee’s audited accounts may be done afresh
by the prescribed authority, corresponding to the specific assessment year, as
prescribed in the second proviso to section 10(23C)(vi).

 

iv)  Despite this stipulation, the prescribed
authority will still have to apply the determinative test of assessing whether
the business is incidental to the attainment of the objectives of the entity
and whether separate books of account are being maintained in respect of such
business, even if the profits received by the assessee as such increase
exponentially, if the assessee qualifies this test, they will still be eligible
for exemption u/s. 10(23C)(vi).

 

v)   In light of the decisive test for determining eligibility for
exemption u/s. 10(23C)(vi), it is apparent that the assertion of the
DGIT that the assessee’s activities including charging a franchisee fee could
not be regarded as a charitable activity within the meaning of section 2(15),
and thus, inapplicable for exemption u/s. 10(23C)(vi), has not been
adequately substantiated, despite examination of the assessee’s audited
accounts. The DGIT asserted that the assessee is carrying out a business
activity for profit motives by entering into franchise agreements, whereby, it
has opened and is running around 120 schools, and that these charges were
received by the assessee for using the name of Delhi Public School by the
satellite schools in and outside India and no separate books of account were
maintained by the assessee for the business activity as required under section
11(4A). This is prima facie not correct, because the assessee has
maintained, accounts audited in detail for financial years 2000-2001, 2003-04,
2004-05 and 2005-06. That aspect has been found by the Tribunal for those
assessment years. Such accounts have been maintained in compliance to what is
required under the seventh proviso to section 10(23C)(vi) and section
11(4A).

 

vi)  Furthermore, the memorandum of association of assessee society, as
well as the joint venture agreements entered into by assessee society with the
satellite schools validate the motive of an educational purpose that the
assessee aims through its business activities and substantiate its contentions
in that regard. On review of the assessee’s audited accounts, it can be
observed that the surpluses accrued by assessee society are being fed back into
the maintenance and management of the assessee schools themselves. This,
reaffirms the assessee’s argument that the usage of the gains arising out of
its agreements are incidental to its educational purpose outlined by its
objective of the assessee.

 

vii) The authorities also reiterate that a mere incurrence of (surplus)
profit does not automatically presuppose a business activity that invalidates
the exemption under section 10(23C)(vi); the same has to be tested on
whether such profits are being utilised within the meaning of the larger
charitable purpose as defined in section 2(15) or not. On scrutiny, it can be
observed that the accounts
marked the heading ‘Secretary’s Account’, detail the heads of income and
expenditure that cater to the various requirements of running and maintaining
the satellite schools. Thus, arguendo if it were held that the objected
activity were indeed commercial in nature, nevertheless, the realisation of
profit by the assessee is through an activity incidental to the dominant
educational purpose that its memorandum of association sets out, and is in turn
being channelled back into the maintenance and management of the same schools,
thus, fulfilling the objectives the assessee has set out in its memorandum of
objectives.

viii)      In view of the above analysis, it is concluded that the
assessee fulfilled the requirements u/s. 10(23C)(vi) to qualify for
exemption; assessee society is maintaining its eleven schools and the 120
satellite schools in furtherance of the education joint venture agreements with
an educational purpose that also qualifies as a ‘charitable purpose’ within the
meaning of section 2(15) and is not in contravention of section 11(4A).

 

ix)  It is felt by this court that section 10(23C)(vi) ought to
be interpreted meticulously, on a case-to-case basis. This is because, the
larger objective of an educational/charitable purpose of the institution and
its manifestation can only be subjectively adjudged; for instance, in the present
situation, the balance sheets of the assessee demonstrate how the profits are
utilised for the growth and maintenance of the very schools they are accrued
from, thus, subscribing to a charitable motive. However, the educational
institutions may take more creative steps to qualify their objectives as an
‘educational purpose’ that is more universal than the individual objectives set
out in the memoranda of objectives of such institutions. For instance, a
percentage of profits earned from a business activity indulged in by such an
educational institution may be mandated towards fructifying the implementation
the provisions of the Right to Education Act, 2009, particularly, to create a
more sensitive learning environment for children with disabilities in implementation
of the provisions in the Persons with Disabilities (Equal Opportunities,
Protection of Rights and Full Participation) Act, 1995, or have a system to
analyse the ratio of inflow of money over progressive assessment years as
opposed to how much of this money is channelled back into the growth and
maintenance of such educational purpose, in order to put in place a visible
system of accountability. This is an observation, to ensure that the purpose
for which section 10(23C)(vi) was introduced, is adequately fulfilled and not
disadvantageously circumvented by vested parties.

 

x)   For the foregoing reasons, the writ petition has to succeed.
Accordingly, the assessee’s writ petition is allowed.”

Company – Recovery of tax from director – Notice to directors – Condition precedent – Furnishing of particulars to directors of steps taken to recover dues from company and failure thereof – Condition not satisfied – Order u/s. 179(1) set aside

21.  Madhavi Ketkar vs. ACIT; 403 ITR 157 (Bom);
Date of Order:  5th January,
2018

A. Ys.: 2006-07 to 2011-12

Section 179(1) of ITA 1961;
Art. 226 of Constitution of India

 

Company – Recovery of tax from
director – Notice to directors – Condition precedent – Furnishing of
particulars to directors of steps taken to recover dues from company and
failure thereof – Condition not satisfied – Order u/s. 179(1) set aside

 

The   petitioner  
was   a   director  
of   a   company.  
For A. Ys. 2006-07 to 2011-12, the
Assessing Officer of the company passed an order u/s. 179(1) of the Income-tax
Act, 1961 against the petitioner for recovery of the tax dues of the company.
The petitioner filed a writ petition in the High Court and challenged the
order. The petitioner contended that section 179(1) conferred jurisdiction on
the authority to proceed against the directors of a private limited company to
recover the tax dues from the directors only where the tax dues could not be
recovered from the company and that no effort was made by the authorities to
recover the tax dues from the defaulting company.

 

The Bombay High Court allowed
the writ petition, quashed the order passed u/s. 179(1) of the Act, and held as
under:

 

“i)  The notice issued u/s. 179(1) to the directors of a private limited
company must indicate, albeit briefly, the steps taken by the Department to
recover the tax dues from the company and failure thereof. Where the notice
does not indicate this and the directors raise objections of jurisdiction on
the above account, they must be informed of the basis of the Assessing Officer
exercising the jurisdiction and the directors response, if any, should be
considered in the order passed u/s. 179(1).

 

ii)   The Department acquired or got jurisdiction to proceed against the
directors of a private limited company, only after it had failed to recover the
dues from the company. It was a condition precedent for the Assessing Officer
to exercise jurisdiction u/s. 179(1) against the director of the company. The
jurisdictional requirement was not satisfied by a mere statement in the order
that recovery proceedings had been conducted against the defaulting company but
it had failed to recover its dues. Such a statement should be supported by
mentioning briefly the types of efforts made and the results.

 

iii)  The notice u/s. 179(1) did not indicate or give any particulars in
respect of the steps taken by the Department to recover the tax dues of the
defaulting company and failure thereof. In the letter sent in response to the
notice, questioning the jurisdiction of the Department, the petitioner had
sought details of the steps taken by the Department and had pointed out that
the defaulting company had assets of over Rs. 100 crores.

 

iv)  Admittedly, no particulars of steps taken to recover the dues from
the defaulting company were communicated to the petitioner nor indicated in the
order. At no time had the petitioner been given a chance to meet the
Department’s case that it had taken steps to recover the amount from the
defaulting company so as to meet the jurisdictional condition precedent before
passing an order u/s. 179(1).

 

v)   The order was set aside since the condition precedent was not
satisfied. However, the attachment order would be continued till the passing of
a final order by the Assessing Officer u/s. 179(1)”

                  

Co-operative society – Special deduction u/s. 80P – No deduction where banking business is carried on – No evidence of banking business – Mere inclusion of name originally and object in bye-laws of society not conclusive – Assessee entitled to special deduction u/s. 80P

20.  ELURU Co-operative House Mortgage Society
Ltd. vs. ITO; 403 ITR 172 (T&AP)

Date of Order: 13th
September, 2017

A. Ys.: 2007-08, 2008-09 and
2009-10

Section 80P of ITA 1961

 

Co-operative society – Special
deduction u/s. 80P – No deduction where banking business is carried on – No
evidence of banking business – Mere inclusion of name originally and object in
bye-laws of society not conclusive – Assessee entitled to special deduction u/s.
80P

 

The assessee was a
co-operative society, established in the year 1963. Originally, the assessee
was registered as the Eluru Co-operative House Mortgage Bank Ltd. But the
Reserve Bank of India as well as the Co-operative Department of the State
refused to accord permission to the assessee to carry on the business of
banking under that name. Therefore the word “Bank” was deleted from the name of
the assessee w.e.f. 19/02/2009. The assessee claimed that it was not a bank
within the meaning of section 80P(4) of the Income-tax Act, 1961.

 

For the A.Ys. 2007-08, 2008-09
and 2009-10, the assessee filed returns of income declaring “nil” income
claiming deduction u/s. 80P(2), on the ground that it was running on the
principle of mutuality, dealing only with its own members. The Assessing
Officer rejected the claim for deduction.

 

The Tribunal upheld the
disallowance.

 

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

 

“i)  The entitlement of an assessee to the benefit of deduction u/s.
80P(2) does not depend upon either the name of the assessee or the objects for
which the assessee was established. The entitlement to deduction under the
provision would depend upon the actual carrying on of the business activity,
viz., banking. The fact that all co-operative banks would necessarily be
co-operative societies cannot lead to the presumption that all co-operative
societies are also co-operative banks. There are different types of co-operative
societies, many of whom may not be transacting any banking business.

 

ii)   Without reference to a single transaction that the assessee had
with any non-member, the Tribunal upheld the findings of the Assessing Officer
merely on the basis of the name of the assessee and one of the objects clauses
in the bye-laws of the assessee. Therefore, the finding of the Tribunal was
obviously perverse and such a finding could not have been recorded on the basis
of the material available on record.

 

iii)  The assessee was entitled to the special deduction u/s. 80P for the
A. Ys. 2007-08, 2008-09 and 2009-10.”

 

Business – Adventure in nature of trade – Assessee holding immovable property from 1965 – Agreement for developing property in 1994, supplementary agreement in 1997 and memorandum of understanding in 2002 – Transaction not an adventure in nature of trade – Gains from sale of flats not assessable as business income

19.  Pr. CIT vs. Rungta Properties Pvt. Ltd.; 403
ITR 234 (Cal); Date of Order: 8th May, 2017

A. Ys.: 2003-04, 2004-05 and
2006-07

Section 28 of ITA 1961

 

Business – Adventure in nature
of trade – Assessee holding immovable property from 1965 – Agreement for
developing property in 1994, supplementary agreement in 1997 and memorandum of
understanding in 2002 – Transaction not an adventure in nature of trade – Gains
from sale of flats not assessable as business income

 

The
assessee was holding immovable property since the year 1965. It entered into a
development agreement dated 28/01/1994 in relation to the property with another
company TRAL. The development agreement was followed by a supplementary
agreement dated 19/02/1997 and a memorandum of understanding dated 18/09/2002.
The arrangement between the assessee and TRAL was that a new structure was to
come up in place of the existing one at the cost of the developer and the
assessee was to get 49.29% of the developed property along with an undivided
share of the land in the same proportion, the rest going to the developer. The
Assessing Officer held that the transaction was an adventure in the nature of
trade and the income arising thereon is business income as against the claim of
the assessee that it is a capital gain.

 

The Commissioner (Appeals) and
the Tribunal reversed the decision of the Assessing Officer and allowed the
claim of the assessee.

 

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

 

“i)  The assessee’s arrangement with the developer was not a joint
venture agreement and there was no profit or loss sharing arrangement. In the
absence of any evidence that the assessee undertook the business of property
development, the object clause in the memorandum could not be treated to be the
determining factor to conclude that this was a part of the assessee’s regular
business.

 

ii)   On the same reasoning, reference to property in the corporate name
of the assessee could not make the assessee a property development company.

 

iii)  The Tribunal as well as the Commissioner (Appeals) had concurrently
found that the transactions of sale of flats did not constitute an adventure in
the nature of trade. The finding was justified.”

TDS On Provision For Expenses Made At Year-End

Issue for Consideration

Many
of the provisions casting obligation to deduct tax at source (‘TDS’) under
Chapter XVII-B require tax  deduction at
the time of credit of the specified income or sum to the account of the payee
or at the time of payment, whichever is earlier.

 

Each
of the relevant provisions of TDS, by way of a deeming fiction, under an
Explanation, provide  that when the
income or sum is credited to any account by any name in the books of account of
the person liable to pay it, such crediting shall be deemed to be credit of
such income or sum to the account of the payee and the provisions of the
relevant section shall apply accordingly[1].

 

 

A
question often arises as to whether tax is required to be deducted at the time
of making provision, in the books of account, 
for several expenses at the end of the accounting year under the
mercantile system of accounting.  While
a  view has been taken in some cases that
tax is not required to be deducted at source where the payee is not
identifiable,  there has arisen one more  controversy even in respect of ad-hoc or
interim provisions made, in respect of liability payable to identified payees
in future. The issue that has arisen is, whether crediting the amount to the
provision account, in such cases,  be
deemed to be credit to the account of the concerned payee attracting the
liability to TDS. The incidental issue also arises as to whether the reversal
of such provision in the subsequent period has any bearing in determining
applicability of TDS. Conflicting decisions have been rendered by the Bangalore
bench of Tribunal on this subject.


[1] 
Refer to Explanations to Section 193, 
Section 194A, Section 194C, 
Section 194H,  Section 194-I,  Section 194J.


IBM
INDIA (P) LTD.’S CASE

The
issue first came up before the Bangalore bench of the Tribunal in the case of IBM
India (P) Ltd vs. ITO 154 ITD 497.

 

In this case, pertaining to assessment years 2005-06 to
2009-10, the assessee,  a wholly owned
subsidiary of a U.S. based company, was following the mercantile system of
accounting. As a part of the global group accounting policy, the assessee had
to quantify its expenses every quarter, within 3 days of the end of each
quarter. The assessee made a provision in the books of account for expenses, on
such quantification,  in respect of which
service/work had been provided/performed by the vendors in the relevant quarter  but for which the invoices had not been
furnished or in respect of which the payments had not fallen due, recognising
the liability incurred. On the basis of scientific methodology, the assessee
estimated such expenses and created a provision for such expenses every quarter
within 3 days of the end of the quarter. At the time of creation of provision,
in this manner, it was not possible for the assessee to identify parties, or if
parties were identified, to arrive at the exact sum on which TDS was to be
deducted.

 

The
expenses were debited to the profit and loss account and the provisions were
credited to a provision account, and not to the vendor accounts, as those had
not fallen due for payment. In the subsequent financial year, the provision
entries were reversed and on receipt of invoices in respect of the respective
expenses, the same were recorded as liabilities due to the respective parties,
at which point of time taxes were deducted 
at source. The provision so made was disallowed by the assessee itself
in terms of section 40(a)(i) and 40(a)(ia) while filing its return of income.

 

According
to the Assessing Officer, in respect of the provision so created by the
assessee in the books of account, tax was deductible at source and the assessee
by not deducting the tax has been in default and was liable to deposit the tax
and also for interest and penalty. In response to the show cause notice issued
u/s. 201(1) & 201(1A), the assessee submitted that invoices were not
received in respect of the underlying expenses, and therefore there was neither
accrual of expenditure nor was the payee identified, as the amount was not
credited to the account of the payee, but to a suspense account. There was no
accrual of expenditure in accordance with the mercantile system of accounting,
and therefore there was no obligation on its part to deduct tax at source. The
assessee took a stand that, though  the
relevant provisions of law in Chapter XVII-B, did provide for the situation
where  an amount was credited to a
“Suspense Account”, there should be a legal liability to pay, and the
payee should be known, and only then the obligation to deduct tax at source
arose. The Assessee also submitted that the provision entries were reversed in
the subsequent financial year(s) and necessary taxes were withheld at source at
the time of actual payment (when legal liability to pay arose and the identity
of the party was known).

 

The
Assessing Officer rejected the assessee’s arguments on the grounds that:

 

1.  The
assessee did not explain as to how the expenses had been quantified;

 

2.  When
no invoices were received, the booking of such expenses in the accounts and
claiming them as expenditure of the previous year was erroneous; and

 

3.  The
procedure followed by the assessee, of reversing the entries and recording the liability
in its books of account when invoices were received, was contrary to the
accounting policy, because once expenditure was booked in the profit and loss
account, it could not be reversed;

 

4.  There
was no clarification as to whether tax 
was deducted on the whole of the provisional entries, so as to allow the
amount that was disallowed  u/s.
40(a)(ia), in the year in which tax  was
deducted and paid ;

 

5.  The
procedure followed by the assessee might 
have led to the allowing of the expenditure one year prior to the
incurring of the actual expenses;

 

6.  The
details of the TDS made on such provisions made at the end of the year was also
provided by the assessee on sample basis, contending that the number of entries
were huge and hence could not be provided in full within a limited period;
giving rise to non-verification of deductions claimed.

 

The Assessing Officer treated the assessee
as an assessee in default for  the taxes
not deducted at source, in respect of provision for expenses made in the books
of account, and also levied consequential interest.

 

The orders passed u/s. 201(1) and 201(1A)
were upheld by the CIT (A) for the following reasons:

 

1.  Under
mercantile system of accounting, accrual of liability for any expenditure was
not dependent on receipt of invoice from the person to whom payment for
expenditure had to be made. The accounting practice followed by the assessee
was contrary to the mercantile system of accounting.

 

2.  The
claim of the assessee that it created provision in the books of account on an
estimated basis in some cases, on a historical basis in one set of cases  and by using some sort of arithmetical or
geometric progression in other cases, was not acceptable. The assessee had not
established its plea with concrete evidence. The assessee had full knowledge of
what was due to its vendors, sub-contractors, commission agents etc. Therefore,
there was no necessity to create provisions.

 

3.  The
argument regarding chargeability to tax in the hands of the payee or the time
at which the payee recognised income in respect of the payment received from
the assessee was irrelevant.

 

Before the Tribunal, the assessee
contended that:

 

1.  When
payee was not identified there could  be
no charge u/s. 4(1) and therefore there could 
be no obligation to deduct tax at source;

 

2.  The
returns of TDS to be filed under the Income Tax Rules, 1962 contemplated
furnishing of names of payees.



3.  Judicial
decisions recognise that there could be no TDS obligation in the absence of
payee.

 

4.  If there was no income chargeable to tax in
the hands of the payee, there could  be
no TDS obligation. TDS obligations arose only when there was
“Income”. TDS obligations did not arise on the basis of mere payment,
without there being income and corresponding liability of the person receiving
payment from the assessee to pay tax.

 

5.  The
Assessee relied on CBDT Circular No. 3/2010 dated 2.3.2010, issued in the
context of the provisions of section 194A of the Act dealing with TDS
obligation of banks at the time of provision of monthly interest liability
under the Core Banking Solution software, where the CBDT had clarified that TDS
was not applicable at the time of such monthly provisioning.

 

6.  Reliance
was also placed by the assessee on the Delhi High Court decision in the case of
UCO Bank vs. Union of India [2014] 369 ITR 335, where the Delhi High
Court had held that no tax was deductible on deposits kept by the Registrar
General of the High Court, since the ultimate payee was not known.

 

The Revenue argued that:

 

1.  The
assessee on its own had disallowed the expenditure in question u/s. 40(a)(i)
& 40(a)(ia). Such disallowance arose only when there existed a liability to
deduct tax at source in terms of Chapter-XVII-B of the Act. The assessee having
on its own disallowed expenditure u/s. 40(a)(i) & 40(a)(ia), could not
later on  turn around and say that there
was no obligation to deduct tax at source.

 

2.  The
assessee did not account for expenditure on accrual basis but on receipt of
invoice  which could not  be the point of time at which accrual of
expenditure could  be said to have
happened. The system of accounting followed by the assessee was not in tune
with the mercantile system of accounting.

 

3.  When
the assessee credited suspense account for payments due to various persons,
such credit itself was treated as credit to the account of the payee by a
deeming fiction in the various provisions of Income tax Act. The assessee could
not therefore say that the payee was not identified. Even in such a situation,
the assessee had to comply with the TDS provisions.

 

4.  The
method of accounting followed by the Assessee resulted in postponement of time
at which tax had to be remitted to the credit of the Government. It  could be seen from the fact that the
assessee, in some cases, was liable to charge of interest u/s. 201(1A) for
about 84 months. The question whether the Assessee was indulging in a
deliberate exercise in this regard was irrelevant. The fact that the revenue
was put to loss by reason of the system of accounting followed by the assessee
and the fact that otherwise the money should have reached the coffers of the
revenue much earlier, was sufficient to uphold the levy of interest u/s.
201(1A) of the Act.

 

5.  When
the Assessee argued that the payees were not identified, it was not open to the
assessee to also contend that there was no accrual of income in the hands of
the payee or that the payment was not chargeable to tax in the hands of the
payee in India.

 

6.  The
CBDT circular No. 3/2010 was in the context of banks crediting interest on
fixed deposits of customers. The decisions rendered by the judicial forums
based on those circulars were  not
relevant, as they were relevant only in the case of Banks and could not be
pressed into service in other cases, such as the case of the Assessee.

 

The Tribunal deleted the demand for
payment of taxes raised u/s. 201(1) as the tax that was deducted  subsequently when the actual liability was
booked, was paid. However, it upheld the applicability of the provisions of TDS
at the time of making provision and the obligation to deduct tax thereon and
accordingly,  levy of interest u/s.
201(1A) on account of delay  on the part
of the assessee in complying with the TDS provisions. On the facts of the case,
the Tribunal noted that the assessee was fully aware of the payee, but
postponed credit to its account for want of receipt of invoice. Proceeding on
the basis that payees were known to the assessee, regarding applicability of
TDS on provision, the Tribunal held as under:

 

1.  Once
the assessee had offered disallowance in respect of provision u/s. 40(a)(i) and
40(a)(ia), it was not possible to argue that there was no liability to deduct
tax at source on the same provision. The disability u/s. 40(a)(i) &
40(a)(ia), and the liability u/s. 201(1) could not be different and they arose
out of the same default;

 

2.  The
liability to deduct tax at source existed when the amount in question was
credited to a “Suspense Account” or any other account by whatever
name called, which would also include a “Provision” created in the
books of account;

 

3.  Since
the assessee had not established with concrete evidence that provision was made
on an estimated basis, it had full knowledge of amounts payable to vendors,
sub-contractors, commission agents, etc., and there was no necessity to
create a provision;

 

4.  The
statutory provisions clearly envisaged collection at source de hors the
charge u/s. 4(1).

 

5.  The
argument that TDS provisions operated on income and not on payment, in the
facts and circumstances of the  case, was
erroneous. Section 194C & 194J used the expression “sum” and not
“income”. Further, section 194H & 194-I did not use the expression
“chargeable to tax”.

 

6.  The
Tribunal further held the decision of the Bangalore bench in the case of DCIT
vs. Telco Construction Equipment Co. Ltd. ITA No. 478/Bang/2012 to be sub
silentio, and, therefore, not binding. The Delhi High Court decision in the
case of UCO Bank (supra)  was also
distinguished on the ground that the assessee was fully aware of the payee in
the case before the Tribunal.

 

The Tribunal therefore confirmed the levy
of interest u/s. 201(1A).

 

BOSCH
LTD.’S CASE

The issue again came up before the
Bangalore bench of the Tribunal in the case of Bosch Ltd vs. ITO
TS-116-ITAT-2016.

 

This was a case relating to assessment
year 2012-13. The facts of this case were almost identical to the facts of
IBM’s case. The assessee was a company engaged in the business of manufacture
and sale of injection equipments, auto electric items, portable electric power tools, etc.

 

In respect of expenses amounting to  Rs.1,96,84,115, a provision was created by
the company in its books and the same was disallowed under the provisions of section
40(a)(i)(ia) in computation of total income filed for the assessment year
2012-13. Out of Rs.1,96,84,115, no invoices were received for an amount of
Rs.1,79,36,713 and the said  amount was
reversed in the beginning of the next accounting year. The assessee contended
that no tax was required to be deducted in respect of such amount for which no
invoices were received.

 

The contention of the assessee was not
accepted by the Assessing Officer by holding that the system of accounting
followed by the assessee was faulty and did not enable any verification. He
held that since the assessee company was following mercantile system of
accounting, tax should have been deducted on the provisions made. Accordingly,
the Assessing  Officer held that the
assessee to be an ‘assessee in default’ u/s. 201(1) of the IT Act and demanded
tax  and interest thereon.

 

The CIT (A) confirmed the action of the
Assessing Officer by holding that suo-moto disallowance under the
provisions of section 40(a)(ia) did not absolve the assessee from its
responsibility of deducting tax at source. However, the CIT (A) directed the
Assessing  Officer to exclude those
amounts in respect of which TDS had been made on the dates on which invoices
had been raised. 

 

Before the Tribunal, the assessee
submitted that, as regards the expenses for which the service provider or
vendor had not raised any invoices nor were they acknowledged by the assessee
company, it made a provision for such expenses on a scientific basis and such
provision was debited to its P&L account, in conformity with the provisions
of Accounting Standard 29- Provisions, Contingent Liabilities and Contingent
Assets (AS 29) issued by the Institute of Chartered Accountants of India
(ICAI). Such provision, which was mandatory as per AS 29, was reversed in the
beginning of the next accounting year.

 

It was argued that:

 

a.  No
income had accrued to the payees and a mere provision was made in the books of
account at the year end. The very fact that the provision was reversed in the
beginning of the next accounting year showed that no income had accrued to the
payee and therefore, there was no liability to deduct TDS on the basis of mere
provision.



b.  The
payees as well as the exact amount payable to them were not identifiable and
therefore, there was no liability to deduct tax at source.

 

c.  The
existence/accrual of income in the hands of payee was a pre-condition to fasten
the liability of TDS in the hands of the payer;

 

d.  The
provisions of section 195 stipulated that the payer had to deduct tax at source
at an earlier point of time, either at the time of crediting to the payee’s
account or at the time of payment of income to the payee. The phrase “whichever
is earlier” would mean that both the events i.e crediting the amount to the
account of payee and payment to the assessee must necessarily occur. Therefore,
when there was no payment made the question of deducting TDS at the time of
crediting did not arise.

 

Reliance was also placed on the CBDT’s
Instruction No.1215 (F.No.385/61/78 IT(B) dated 08-11-1978.

 

On behalf of the revenue, it was argued
that on a plain reading of section 195, the liability to deduct tax at source
had arisen the moment the amount was credited in the books of account,
irrespective of fact whether the amount was paid or not. It was  further submitted that the provision of
taxing statutes should be construed strictly so that there was no place for any
inference.

 

The Tribunal took a view that the liability
to deduct tax at source arose only when there was accrual of income in the
hands of the payee. It relied upon the decision of Supreme Court in the case of
GE India Technology Centre P. Ltd. vs. CIT 327 ITR 456. According to the
Tribunal, the fact that the provisions made at the year-end were reversed in
the beginning of the next accounting year showed that there was no income
accrued. The Tribunal observed that mere entries in the books of account did
not establish the accrual of income in the hands of the payee, as held by the
Hon’ble Supreme Court in the case of CIT vs. Shoorji Vallabhdas & Co. 46
ITR 144.

 

The Tribunal
accordingly concluded that there was no liability in the hands of the assessee
company to deduct tax at source, merely on the provisions made at the year end.

 

This order of the
Tribunal has been followed by the Bangalore bench of the Tribunal in the case
of TE Connectivity India Pvt Ltd vs. ITO (ITA 3/Bang/2015 dated 25.5.2016).

 

OBSERVATIONS

The objective  of inserting the Explanation has been stated
in Circular No. 3/2010 dated 2-3-2010. The relevant portion of this circular is
reproduced below:

 

Explanation to section 194A was introduced
with effect from 1-4-1987 by the Finance Act, 1987 to plug the loophole of
avoiding deduction of tax at source by crediting interest in the books of
account under accounting heads ‘interest payable account’ or ‘suspense account’
instead of to the depositor’s/payee’s account. (emphasis added)

 

It is gathered  from the above that, the Explanation applies
where   the interest (or any other amount
to which other provisions of TDS applies) is otherwise required to be credited
to the payee’s account and in order to avoid deduction of tax at source, it has
been credited to some other account, and not to the payee’s account.

 

A provision for an expense, by its very
nature, can not, in accountancy, be credited to any particular payee’s account;
it is rather to be credited to the Provision Account. The sum which cannot be
credited to the payee’s account as per the accounting principles cannot be
brought within the purview of Explanation so as to  deem to have been credited to the payee’s
account. The possibility to have credited a sum to the payee’s account should
first exist in order to invoke the Explanation. There is a stronger case for
non application of the  Explanation  in cases where the payee is not known in
comparision to the  cases where the payee
is known. Mere non-receipt of an invoice by the assessee cannot result in
claiming that the amount has not accrued to the service provider, particularly
when the contractual terms are also known to the assessee. The TDS provisions
in the later circumstances may be construed to have been avoided or  defeated by crediting an expenditure   to a provision account, instead of to the
payee’s account.

 

One view that the Explanation is intended
to apply only when the liability to pay that amount has become due is on
account of the language of the Explanation itself. The relevant provision of
section 194C [earlier it was present in the form of an Explanation II to s/s.
(2) but re-enacted as s/s. (2) with effect from 1-10-2009] is reproduced below:

 

Where any sum referred to in sub-section
(1) is credited to any account, whether called “Suspense account” or
by any other name, in the books of account of the person liable to
pay such income,
such crediting shall be deemed to be credit of such income to the account of
the payee and the provisions of this section shall apply accordingly. (emphasis
added)

 

The words used in the Explanation are
“person liable to pay such income” in contrast to the “person responsible for
paying” as used in the main provision. Therefore, as per this view, the person
should have become liable to pay the income on which tax is required to be withheld
in order to get covered by the Explanation. 
This view perhaps has a better appeal in cases of section 195 which
bases the obligation on ‘chargeability’ in the hands of the payee.
However, this view may not hold water, when one appreciates that the term
“liable to pay such income” merely qualifies the person who is required to
deduct tax, and not the point of time of deduction of tax. 

 

As far as disallowance u/s. 40(a)(ia) is
concerned, offering disallowance u/s. 40(a)(ia) cannot absolve the assessee
from his liability u/s. 201(1). Both the provisions, one for disallowance u/s.
40(a)(i) or 40(a)(ia) and the other for treatment of  the assessee as an assessee in default can
co-exist. The Second Proviso to section 40(a)(ia) envisages such a possibility whereby
the assessee can be proceeded against under the provisions of section 201,
apart from disallowing the relevant expenditure on account of his default in
complying with the TDS provisions.

 

But then, the incidental issue would be as
to whether the provision created in the books of account, for which a view is
taken that tax is not deductible on it, can be subjected  to the disallowance provisions of section
40(a)(i) or 40(a)(ia) or not. These provisions of section 40(a) apply to any sum payable
and on which tax is deductible at source under Chapter XVII-B. It is not the
case that the tax is not deductible at all from the provisions for expenses. It
is only the point of time at which tax is required to be deducted that is in
dispute. Therefore, it would be difficult to take a view that  the claim based on such provisions cannot be
disallowed u/s. 40(a)(i) or 40(a)(ia) merely because tax is not deductible at
present but in future. Otherwise, it would result into granting of deduction in
the year of making provision and making disallowance provision otiose in the
subsequent year in the absence of any claim for its deduction. However,
difficulties would certainly arise in a case where the provision is made for
liability towards unidentified payees. In such case, neither payee is known nor
his residential status is known.

 

One may however take notice of the
decision of the Mumbai Tribunal in the case of Pranik Shipping &
Services Ltd. vs. ACIT [2012] 135 ITD 233 wherein a view was taken that the
provision of section 40(a) would not apply in cases where the expenditure in
question was claimed in the return of income but was neither credited to the
account of payee nor provided for in the books.

 

If one looks at the plain reading of the
tax deduction sections, they require tax deduction at source on payment of any
income of specified nature (except in case of section 194C, which requires
payment of any sum). The chargeability to tax of such income is not a
prerequisite, except in case of section 195, which specifically requires such
sum to be chargeable to tax. Therefore, one can distinguish the provisions of
section 195 from the other tax deduction provisions, which do not specify that
such amounts have to be chargeable to tax. The reliance by the Tribunal on GE
Technology Centre’s decision (supra) in Bosch’s case, in relation to 
section 195, may be a good law and may be debatable for provisions other
than section 195.    

 

The assessees are advised, in the interest of
mitigating litigation to deduct tax at source 
in cases where the services are rendered and the payee is known, even
while making the provisions for expenses on an estimated basis or otherwise.

1 Section 206C – Assessee defaulted in collection of tax at source for which AO took action after seven years – When no limitation is provided in the statute for initiation of action and passing the order, held that the same has to be done within a reasonable time which according to the Tribunal was four years.

Eid Mohammad Nizamuddin vs.
Income Tax Officer (Jaipur)

Members:
Vijay Pal Rao (J. M.) and
Vikram Singh Yadav (A. M.)

ITA NO.
248 and 316 /JP/2018

A. Y:
2009-10. Dated: 29th August, 2018

Counsel
for Assessee / revenue: Mahendra
Gargieya and Fazlur Rahman /  J.C.
Kulhari

 

Section 206C – Assessee defaulted in collection
of tax at source for which AO took action after seven years – When no
limitation is provided in the statute for initiation of action and passing the
order, held that the same has to be done within a reasonable time which
according to the Tribunal was four years.

 

Facts

The assessee is a partnership firm, engaged
in the business of manufacturing and trading of Bidi. During the course of
survey proceedings, it was detected that for the F.Y. 2008-09 relevant to
assessment year 2009-10, the assessee firm was liable to collect tax at source
(TCS) @ 5% on sale of tendu leaves as per provisions of section 206C(1) but it
defaulted for non-collecting of TCS. Accordingly, the Assessing Officer
proceeded to pass order u/s. 206C(6)/206C(7) on 30/03/2016 whereby the assessee
was held as “assessee in default” within the meaning of section 206C(6) read
with section 206C(7) for non-collection of tax of Rs. 98.84 lakhs, including
interest. The assessee challenged the order passed by the Assessing Officer
before the CIT(A) and also raised objection against the validity of the said
order on the ground of limitation. The CIT(A) rejected the ground of limitation
however, granted part relief to the assessee to the extent of return of income
filed by the purchaser of tendu leaves, for which they issued Form No. 27BA.
Hence, the assessee as well as the revenue, being aggrieved by the order of the
CIT(A), filed the appeal and the cross appeal. One of the grounds of appeal by
the assessee was about the validity of the order passed by the Assessing
Officer.  According to it, the order
passed by the Assessing Officer was barred by limitation. The Tribunal decided
to take the said ground first as it was the root of the matter.

 

The assessee’s contention was that the order
passed by the Assessing Officer on 30/3/2016 was barred by limitation even
though the provisions contained u/s 206C did not prescribe any time limit for
initiation of proceedings or for passing order. However, according to the
revenue, when no limitation is provided in the statute for initiation of action
and passing the order u/s. 206C, then there was no bar on the jurisdiction and
power of the Assessing Officer to pass the order.

 

Held

According to
the Tribunal, non-providing the limitation in the statute would not confer the
jurisdiction/powers to the Assessing Officer to pass order u/s. 206C at any
point of time. As otherwise, the Assessing Officer would get an unfettered
powers to take action at any point till an indefinite period which would defy
or defeat the very purpose and scheme of the statute. According to the
Tribunal, the analogy and reasoning given in the decisions of various High
Courts (listed below) in respect of the limitation for passing the order u/s.
201 was also applicable for considering the reasonable time period for passing
the order u/s. 206C. According to the Tribunal, the provisions of sections 201
and 206C have the same scheme and object, being the measures against the
avoidance of tax by the opposite parties with whom the assessee had the
transactions. Hence, applying the reasonable period of limitation as four years
within which the Assessing Officer should pass the order u/s. 206C(6)/206C(7),
the Tribunal held that the order passed by the Assessing Officer on 30/3/2016
was beyond the said reasonable period of limitation and consequently invalid,
being barred by limitation.

 

Cases relied on by the tribunal:

CIT vs. NHK Japan Broadcasting 305 ITR
137 (Delhi);

Vodafone Essar Mobile Services Ltd. vs.
Union of India & ors. (2016) 385 ITR 436 (Del);

Tata Teleservices vs. Union of India
& Anr. (2016) 385 ITR 497 (Guj);

CIT (TDS) vs. Anagram Wellington Assets
Management Co. Ltd. (2016) 389 ITR 654 (Guj);

CIT vs. U.B. Electronics Instruments Ltd.
(2015) 371 ITR 314 (AP);

CIT(TDS) & Anr. vs. Bharat Hotels
Limited (2016) 384 ITR 77 (Karn.).

6 Section 37(1) – In the absence of any evidence brought on record by the AO to substantiate that the payment of insurance premium of employees’ family members in terms of employment rules framed by the assessee company had no nexus with business of the assessee, it could hardly be said that the impugned expenditure was not incurred wholly and exclusively for the purposes of business, which is the real intent of section 37(1).

[2018] 96 taxmann.com 483
(Delhi)

Loesche
India (P.) Ltd. vs. ACIT

ITA No. :
295/Delhi/2016

A. Y:
2010-11    
Dated: 13th August, 2018


Section 37(1)
– In the absence of any evidence brought on record by the AO to substantiate
that the payment of insurance premium of employees’ family members in terms of
employment rules framed by the assessee company had no nexus with business of
the assessee, it could hardly be said that the impugned expenditure was not
incurred wholly and exclusively for the purposes of business, which is the real
intent of section 37(1).

           

FACTS

The assessee company engaged in business of
Design & Engineering, manufacturing and trading of vertical roller grinding
mill systems & components thereof for cement, steel, power plants and other
mineral based industries filed its return of income declaring total income of
Rs. 19,12,54,863.  In the course of
assessment proceedings, the Assessing Officer (AO) noticed that amount of Rs.
15,48,654 has been claimed on account of medical insurance.  He called upon the assessee to furnish
details of relations of employees in respect of whom insurance premium has been
paid and also to show cause why it should not be disallowed on the ground that
it is gratuitious and not on commercial lines since obligation of the employee
has been met by the employer.  Upon
perusal of the list of relatives who had been insured, the AO noticed that
medical insurance premium has been paid to insure health of mother-in-law of
the Managing Director apart from his independent children and also towards
married sisters of other directors of the assessee company. He held that the
assessee had adopted an inequitable and unreasonable system by bearing the
medical insurance expenses of only the relatives of key managerial persons and
their distant family members.  Relying on
the decisions of Madras High Court in the case of CIT vs. Indian Express
Newspapers (Madurai) (P.) Ltd. [1999] 104 Taxman 578 and Calcutta High
Court in M D Jindal vs. CIT [1986] 28 Taxman 509 (Delhi), he held that
he was entitled to lift the veil of corporate entity in order to ascertain the
actual intention. He distinguished the case law of Bombay High Court in the
case of Mahindra & Mahindra on which reliance was placed by the
assessee since the instant benefit was not for achieving the purpose of
corporate social responsibility but in the instant case it was to benefit a few
selected employees.  Even otherwise,
since the employees had not offered what amounted to be perquisites in their
hands u/s. 17(2)(iv), he was of the view that these were not business expenses
qualifying for deduction u/s. 37(1).

 

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

 

Aggrieved, the assessee preferred an appeal
to the Tribunal.

 

HELD

The Tribunal observed that the record
reveals that the assessee had paid the insurance premiums of the employees’
family members in terms of employment rules framed by the assessee-company
therefor.  Therefore, it can hardly be
said that the impugned expenditure were not incurred wholly and exclusively for
the purpose of business, which is the real intent of section 37(1).  The Tribunal further observed that the
authorities below have not brought any evidence on record to substantiate that
the payments so made by the assessee-company had no nexus with the business of
the assessee.  Even otherwise, it is not
necessary that all the payments/expenditure incurred by the assessee should
have a direct bearing on earning of income, but some payments are also made
under certain business expediency.  It
noted that the payments claimed to have been made for insurance premium of such
members who have attained the age of 21 years or more or who are the remote
relations of the assesse have already been offered by the assessee to tax
before the CIT(A).  It observed that the
authorities below appear to have rejected the claim of the assessee that these
payments were in the nature of perquisites to the employees as contemplated
u/s. 17(2)(iv), according to which any obligation which, but for such payment,
would have been payable by the assessee, shall be included in perquisites.
However, in view of proviso (iii) & (iv) appended to this section clearly
prohibit application of section 17(2) in certain eventualities contained in
these provisos. The Tribunal held that in view of the attending facts and
circumstances of the case and the provisions of law, noted above, there is no
justification in the findings reached by the authorities below for rejecting
the deduction of impugned expenditure claimed by the assessee. Therefore, there
is no justification to discard the impugned claim of the assessee u/s.
37(1). 

 

The Tribunal allowed the appeal filed by
the assessee.

5 Section 23 – In case of a property construction whereof is not fully in accordance with the sanctioned plan and some alteration is required to bring it under proper plan, benefit of vacancy allowance u/s. 23(1)(c) of the Act needs to be allowed in respect of the period taken for carrying out necessary alterations.

[2018] 96 taxmann.com 476
(Mumbai)

Saif Ali
Khan Pataudi vs. ACIT

ITA No.:
5811/Mum/2016

A. Y:
2012-13  
Dated: 21st August, 2018


Section 23 – In case of a property
construction whereof is not fully in accordance with the sanctioned plan and
some alteration is required to bring it under proper plan, benefit of vacancy
allowance u/s. 23(1)(c) of the Act needs to be allowed in respect of the period
taken for carrying out necessary alterations.

           

Facts

The assessee owned a residential flat in a
society. The assessee considered the annual value of this flat to be Rs.
4,00,000. The Assessing Officer (AO) while assessing the total income of the
assessee held that considering the size of the flat and its location, the
amount of rent estimated by the assessee to be its annual value was low. The AO
adopted 7% of the value of the investment in the flat to be its annual value.
Accordingly, he computed Rs. 81,08,802 to be the annual value of the flat under
consideration.

 

Aggrieved, the assessee preferred an appeal
to the CIT(A) where the assessee argued that the building in which the house
was situated has been constructed unauthorisedly as per letter dated 9.2.2012
of Executive Engineer, Building Proposal (WS), `H’ Ward, Municipal Corporation
of Central Mumbai. It contended that the annual value shown by the assessee be
accepted and addition made by the AO deleted. He noted that as per the
valuation report filed by the assessee, the annual value of the property has
been estimated to be Rs. 11,86,723. The CIT(A) held that the alteration
required to be done to remove the unauthorised construction was minor.
Referring to the rent of another flat in the same building, the CIT(A) computed
the annual value to be Rs. 50,40,000.

 

Aggrieved, the assessee preferred an appeal
to the Tribunal where on behalf of the assessee it was contended that the
assessee was not able to let out the property and hence vacancy allowance be
granted. It was also submitted that there were some inherent defects in
construction of the property. The deficiency was pointed out by the authorities
and it was necessary to remove the deficiencies in order to bring the property
in accordance with the approved plan. Since defects were subsisting there was
reasonable cause why the flat would not be let out. It was also pointed out
that subsequently substantial expenditure was incurred by the assessee in order
to bifurcate the property into 3 flats in order to rent the same. In order to
avoid litigation the assessee was agreeable to offer Rs. 11,83,723 as annual
value, as computed by the assessee’s valuer.

 

HELD

The Tribunal noted that the CIT(A) has
partly rejected the assessee’s plea that the assessee was under an obligation
to remove certain unauthorised construction / defects done by the builder in
order to bring the construction under appropriate permission and sanction.  It observed that the CIT(A) has admitted that
certain defects were there but he has found the same to be minor.  No details whatsoever has been brought by the
CIT(A) in considering the defects to be dissected between major and minor.  Once when it is accepted that the construction
was not fully in accordance with the plan and some alteration was required to
bring it under proper plan, it has to be accepted that the flat was not in a
position to be let out dehors the removal of the defects.

 

The Tribunal held that there were certain
defects in the construction of the flat under the sanctioned plan, the removal
of which was necessary. Letting out a house which is not constructed as per an
approved plan cannot be forced upon an assessee.  Furthermore, subsequently the assessee has incurred
over Rs. 50 lakh for alteration of the flat which resulted in the bifurcation
of the flat into three parts. This oxygenates the assessee’s claim that the
premises required alteration in order to be properly let out.  It held that the plea made on behalf of the
assessee cannot be said to be spurious, vexatious, mere bluster or frivolous.
It held that the assessee deserves vacancy allowance u/s. 23(1)(c). 

 

Considering the ratio of the decision of the
Mumbai Bench of ITAT in the case of Premsudha Exports (P.) Ltd. vs. ACIT
[2008] 110 ITD 158 (Mum.), the Tribunal held that the assessee should be
granted vacancy allowance.  However,
since the assessee had in its grounds of appeal agreed to offer Rs. 11,83,723
to be the annual value of the property, the proposal of the assessee was
accepted and the order of CIT(A) was held to be modified accordingly.

 

The Tribunal allowed the appeal filed by the
assessee.

4 Section 23(1)(a) – Provisions of section 23(1)(a) cannot be applied to a property constructed by the assessee, construction whereof was completed in the month of February and property remained unsold and vacant, as it is not possible to let out property just after its completion i.e. only after one month.

[2018] 97 taxmann.com 214 (Jaipur)

Raj
Landmark (P.) Ltd. v. ITO

ITA No.:
242/Jp/2018

A. Y:
2013-14
Dated: 24th August, 2018


Section 23(1)(a) – Provisions of section
23(1)(a) cannot be applied to a property constructed by the assessee,
construction whereof was completed in the month of February and property
remained unsold and vacant, as it is not possible to let out property just
after its completion i.e. only after one month.


FACTS

The assessee, a private limited company,
engaged in the business of real estate development constructed a commercial
complex, construction whereof was completed in February 2013 and which remained
unsold and vacant for one month during the previous year 2012-13. The Assessing
Officer (AO) computed the annual value of this property to be Rs. 9 lakh for
the month of March 2013. Since the construction of the property was completed
only in February 2013, the AO determined estimated rental income only for a
period of one month. 

 

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

 

Aggrieved, the assessee preferred an appeal
to the Tribunal.


HELD

The Tribunal noted that the commercial
complex under consideration was held by the assessee as its stock-in-trade. It
noted that it was not the allegation of the AO that the assessee has
deliberately not let out the property in question under consideration. The
Tribunal, observed that without going into the controversy as to applicability
of section 23 in respect of a property held as stock-in-trade, it came to the
conclusion that it is not a case of keeping the property vacant from year after
year but the project was completed in Feb 2013. It observed that reasonably
expected rent envisaged by section 23(1)(a) itself signifies the possibility of
letting out of the property and also that there is a time lag between the
completion of construction of the property and letting out the property
thereafter. It is not practically possible to let out the property on the next
day of completion of construction or acquisition of the property. It held that
in a case when there is no possibility of any deliberate or unreasonable delay
in letting out the property then it is not expected to fetch a reasonable rent
just after completion of the project in question. Moreover, the present case
was not one of letting out a small space of the house but the entire project
was completed by assessee in the month of Feb 2013 and therefore the provisions
of section 23(1)(a) itself would not be workable in such a case for want of
immediate letting out the property just after its completion.

 

The Tribunal noted that the Legislature has
also recognised this aspect while inserting section 23(5) by Finance Act, 2017
w.e.f. 1.4.2018 allowing vacancy allowance of one year from the end of the
financial year in which certificate of completion of construction of the
property is obtained from the competent authority.

 

Though s/s. (5) is not applicable for
assessment year under consideration, however, it is not a case of allowing the
vacancy allowance in respect of the property held as stock-in-trade but it is
the fundamental issue of determination of notional annual letting value just
after completion of construction of the property held as stock-in-trade. The
Tribunal noted that without allowing a reasonable period or time gap from the
completion of construction of property held as stock-in-trade to let out the
same, the property cannot reasonably be expected to be let from year to year
and fetch fair market rent just after completion of construction.

 

The Tribunal held that in the facts and
circumstances of the case, section 23(1)(a) cannot be applied to the property
in question due to the peculiar reason that the completion certificate was
obtained only in Feb 2013 and it is not expected to let out the property just
after completion of the project and, therefore reasonable expected rent to be
fetched by the property in question is not possible immediately after the
completion without allowing a reasonable period, which is also recognised by
the Legislature.

 

The Tribunal deleted the addition made by
the AO on this account.

 

The appeal filed by the assessee were
allowed.



3 Section 271(1)(c) –Where satisfaction of AO while initiating penalty proceedings u/s. 271(1)(c) is with regard to alleged concealment of income by assessee, whereas imposition of penalty is for ‘concealment/furnishing inaccurate particulars of income’, levy of penalty is not sustainable

 
[2018] 195 TTJ (Asr)(TM) 1

HPCL Mittal Energy Ltd. vs. ACIT

ITA No.: 
554 & 555/Asr/2014

A. Ys.: 
2008-09 & 2009-10  Dated: 20th
June, 2018


Section 271(1)(c) –Where satisfaction of AO
while initiating penalty proceedings u/s. 271(1)(c) is with regard to alleged
concealment of income by assessee, whereas imposition of penalty is for
‘concealment/furnishing inaccurate particulars of income’, levy of penalty is
not sustainable

 

FACTS

During the year under consideration, the AO
made disallowance of business loss; non-declaration of interest income from
deposits with banks and non-declaration of interest income on Fixed Deposit
Receipts (FDRs) as security given to the trial court. The additions were
confirmed by the CIT(A) and the Tribunal.

 

The penalty notice u/s. 274 was issued by
stating that the assessee ‘concealed the particulars of income’ with respect to
the above three disallowance/additions. However, the penalty order was passed
holding that ‘the assessee concealed the particulars of income/furnished
inaccurate particulars of such income’.

 

On appeal to CIT(A), the penalty order was
affirmed.

 

On further
appeal to the Tribunal, the assessee contended the penalty was not sustainable,
on the ground that the Assessing Officer levelled charge of ‘concealment of
income’ and also issued penalty notices on the same charge, but found the
assessee guilty in the penalty orders on a different and vague default of ‘concealment
of the particulars of income/furnishing of inaccurate particulars of income’.

 

The Judicial
Member concurred with the submissions advanced on behalf of the assessee on
this preliminary legal ground and ordered deletion of penalty in his proposed common
order. On the other hand, Accountant Member passed order sustaining the penalty
on merits. On difference of opinion, matter was referred to the Third Member.

HELD

The Third Member held that the penalty
proceedings were separate from assessment proceedings, which got started with
the issue of notice u/s. 274 and concluded in the penalty order u/s. 271(1)(c).
Many a times, penalty initiated in the assessment order on one or more counts
by means of notice u/s. 274, was not eventually imposed by the AO on getting
satisfied with the explanation tendered by the assessee in the penalty
proceedings.

 

In any case,
confronting the assessee with the charge against him is sine qua non for
any valid penalty proceedings. It is only when the assessee was made aware of
such a charge against him that he could present his side.

 

It was evident that when the AO was
satisfied at the stage of initiation of penalty proceedings of a clear-cut
charge against the assessee in any of the three situations (say, concealment of
particulars of income), but imposed penalty by holding the assessee as guilty
of the other charge (say, furnishing of inaccurate particulars of income) or an
uncertain charge (concealment of particulars of income/furnishing of inaccurate
particulars of income), the penalty could not be sustained.

 

In the present
case, the Third Member held that the penalty was wrongly imposed and confirmed
and Judicial Member was justified in striking down all the penalty orders.

 

2 Section 11 & 13(1)(d) – It is only the income from such investment or deposit which has been made in violation of section 11(5), that is liable to be taxed; violation of section 13(1)(d) does not result in the denial of exemption u/s. 11 to the total income of the assessee.

[2018] 194 TTJ (Del) 715

ITO vs. The Times Centre for Media and
Management Studies

ITA No.: 
1389/Del/2015

A. Y.: 
2010-11    Dated: 31st
May, 2018

Section 11 & 13(1)(d) – It is only the
income from such investment or deposit which has been made in violation of
section 11(5), that is liable to be taxed; violation of section 13(1)(d) does
not result in the denial of exemption u/s. 11 to the total income of the
assessee. 

 

FACTS

The assessee was a charitable institution in
terms of section 25 of the Companies Act, 1956 and also registered u/s. 12AA(1)
of the Income-tax Act, 1961. During the year under consideration the assessee
had received a donation of 50,000 shares worth Rs.2,00,000 from Angelo Rhodes
Ltd. (United Kingdom) way back in 1996 and had received dividend income of
Rs.2,36,000.



The AO proceeded to deny the exemption u/s. 11(1) of the Income-tax Act, 1961
for violation of provision of section 13(1)(d) r.w s. 11(5) of the Income-tax
Act, 1961 pertaining to mode of investment.

 

Aggrieved by the assessment order, the
assessee preferred an appeal to the CIT(A). The CIT(A) granted the assessee the
benefit of exemption on all income except the impugned amount of Rs.2,36,000.

 

HELD

The Tribunal held that it was well settled
that where investments or deposits had been made by a charitable trust which
were in violation of section 11(5), the benefit of exemption u/s. 11 would not
be denied on the entire income of the assessee and only the
investments/deposits made in violation of provisions of section 11(5) would
attract maximum marginal rate of tax.

 

The Tribunal followed the ratio of the
Hon’ble High Court decision in the case of CIT vs. Fr. Mullers Charitable
Institutions (2014) 102 DTR (Kal) 386 wherein while dealing with an
identical issue it was held that a reading of section 13(1)(d) made it clear
that it was only the income from such investment or deposit which had been made
in violation of section 11(5) that was liable to be taxed and that the
violation u/s. 13(1)(d) did not tantamount to denial of exemption u/s. 11 on
the total income of the assessee.

 

The Tribunal relying upon the judgement of
the Hon’ble High Court, held that in the present case the maximum marginal rate
of tax would apply only to the dividend income from shares held in
contravention of section 13(1)(d) and not to the entire income.  

1 Section 56(2)(viia) – Provisions of section 56(2)(viia) are attracted only in case of “shares of any other company”

[2018] 194 TTJ (Mumbai) 746

Vora Financial Services (P.) Ltd. vs. ACIT

ITA No.: 532/Mum/2018

A. Y.: 2014-15     Dated: 29th June, 2018


Section 56(2)(viia) – Provisions of section
56(2)(viia) are attracted only in case of “shares of any other company” and
could not be its own shares as own shares cannot become property of the
recipient company; buy-back of own shares by a company cannot attract the
provisions of section 56(2)(viia) as the same does not satisfy the tests of
“becoming property” and “shares of any other company”

 

FACTS

During the year under consideration the
assessee made an offer to existing shareholders for buy-back of 25% of its
existing share capital at a price of Rs.26 per share. One of the directors of
the company offered 12,19,075 shares under the buy-back scheme for a
consideration of Rs.3,16,95,950 on 24.05.2013. The AO noticed that the book
value of shares as on 31.03.2013 was Rs.32.80 per share, whereas the
assessee-company had bought back the shares at Rs.26 per share.

 

The AO observed
that consideration of Rs. 3,16,95,950 had been reinvested in the company in the
form of loan. Hence, the AO took the view that the entire exercise was carried
out to reduce the liability of the company by purchasing shares below the fair
market value. Accordingly, the AO assessed the difference between the book
value of shares and purchase price of shares amounting to Rs.82,89,710 lakhs as
income of the assessee company u/s. 56(2)(viia) of the Income-tax Act, 1961.

Aggrieved by the assessment order, the
assessee preferred an appeal to the CIT(A). The CIT(A) confirmed the action of
the AO.

 

HELD

The Tribunal held that a combined reading of
section 56(2)(viia) and the memorandum explaining the provision of it would
show that the section 56(2)(viia) would be attracted when “a firm or
company (not being a company in which public are substantially
interested)” receives a “property, being shares in a company (not
being a company in which public are substantially interested)”.

 

Therefore, the shares should become
“property” of recipient company and in that case, it should be shares
of any other company and could not be its own shares. Own shares could not
become the property of the recipient company.

 

Accordingly, section 56(2)(viia) would be
applicable only in cases where the receipt of shares became property in the
hands of recipient and the shares would become property of the recipient only
if they were “shares of any other company”.

 

In the instant case, the assessee had
purchased its own shares under buyback scheme and the same had been
extinguished by reducing the capital and hence the tests of “becoming
property” and also “shares of any other company” failed in this
case. Accordingly, the Tribunal took a view that the tax authorities were not
justified in invoking the section 56(2)(viia) for buyback of own shares.

In the result, the Tribunal set aside the
order passed by CIT(A) on this issue and directed the AO to delete the addition
made u/s. 56(2)(viia) of the Income-tax Act, 1961.

4 Section 36(1)(vii): Bad debt- Write-off of bad debts were held to be allowable – and there is no obligation on the assessee to establish that debt had became bad.

1.     Hinduja Ventures Ltd vs.
DCIT [ Income tax Appeal no 270 of 2008, Dated: 2nd August, 2018
(Bombay High Court)]. 

 

[Hinduja
Ventures Ltd vs. DCIT; dated 24/08/2006; Mum. 
ITAT ]


After
the  close of accounting year, the
assessee had received money which it had written off as bad debts in its
accounts. Thus claim for deduction u/s.36(1)(vii) of the Act was disallowed. It
is an agreed position between the parties that after the Amendment with effect
from 1.4.1981 to section 36(1)(vii) of the Act, there is no requirement in law
that the Assessee must establish that the debt infact has become irrecoverable.

 

This as
requirement of section 36(1)(vii) of the Act to claim deduction on account of
bad debts is for the Assessee to write off the debt as irrecoverable in its
account. This is as held by the Supreme Court in TRF Ltd. vs. CIT (2010)
323 ITR 397. 

 

In this
case, it is undisputed position that the assessee had written off bad debts in
its account for the previous year relevant to the subject assessment year and
claimed deduction u/s. 36(1)(vii) of the Act. Thus, the fact that the amounts
written off as bad debts were recovered subsequent to the end of the accounting
year would not justify the Revenue to disallow the deduction on the ground that
the debt written off was not infact bad debt. In a similar circumstance, this
Court in CIT vs. Star Chemicals (Bombay) P. Ltd. [2009] 313 ITR 126 (Bom)
placed reliance upon Circular No.551 dated 23.1.1990 issued by the CBDT to
conclude that once the Assessee has written off debts as bad debts then the
requirement of section 36(1)(vii) of the Act are satisfied. There is no
requirement  to establish that the debt
was infact bad.

 

The tax on
the amount written off as bad debts in the previous year subject to relevant
Assessment Year has been offered to tax in the year the amounts were recovered
i.e. in the subsequent Assessment Year. The assessee  appeal was 
allowed.  

 

3 Section 264 : Revision– fresh claim of the deduction can be entertained – delay in filing the Revision Application – for reasonable cause it should have been condoned – order rejecting the revision application was set aside.


1.    Dwarikesh Sugar Industries
Ltd vs. DCIT [ Writ Petition no 1206 of 2018, Dated: 12th July, 2018
(Bombay High Court)]. 


The
assessee is engaged in manufacture of sugar. It purchases sugarcane from
farmers through various Societies established by the State Government under the
U.P. Sugarcane (Regulation of Supply & Purchase) Rules, 1954. The assessee
is required to pay commission to the above Societies from whom sugarcane is
procured. During the year, the assessee paid the Societies, the Commission
under the Sugarcane Act upto January, 2012. However, the assessee was under a
belief that the State Government would announce waiver of commission to be paid
to the Society under the Sugarcane Act for the months of February and March,
2012. In the above view, the assessee did not claim deduction on account of the
above accrued liability in its assessment for A.Y. 2012-13. However, the waiver
as expected from the State Government did not come. On the contrary, on 19th
June, 2012 the State Government called upon the assessee to pay the Commission
of Rs.4.25 crores payable to the sugarcane Societies for having acquired
sugarcane from them during February and March, 2012. In the aforesaid
circumstances, during the previous year relevant to A.Y 2013-14, the assessee
paid the commission of Rs.4.25 crores to the Societies under the Sugarcane
Act. 

 

The
assessee claimed a deduction of Rs.4.25 crores in its return for the previous
year relevant to the A.Y. 2013-14. However, the A.O, did not accept the
assessee’s claim for deduction of Rs.4.25 crores being commission paid to the
Societies under the Sugarcane Act. This on the ground that the payment relates
to the A.Y. 2012-13 and therefore could not be allowed as a deduction in the
A.Y. 2013-14. 

 

Consequent
to the above, the assessee filed an Appeal before the CIT(A). At the same time,
the assessee also filed a Revision Application u/s. 264 of the Act before Pr.
CIT alongwith an application for condonation of delay. The Pr. CIT rejected the
Assessee’s application for condonation of delay. This on the ground that the
assessee could have made this claim in a revised return for the A.Y 2012-13,
which infact it filed on 8th June, 2013. This without claiming this
deduction. Thus, the impugned order found, there is no cause for the delay and
rejected the condonation of delay application. Further, on merits also, Pr. CIT
rejected the claim. 

 

Consequent to the above,
the assessee filed an Writ Petition before the High Court. The Assessee relied
the decisions of the Delhi High Court in Rajesh Kumar Aggarwal vs.
CIT[2017] (78) taxmann.com 265 and the decision of the Kerala High Court in
Transformers & Electricals Kerala Ltd. Vs. DCIT[2016] 75 taxmann.com 298
wherein a view has been taken that the powers of revision u/s. 264 of
the Act are very wide and is not restricted to only consideration of claims
made before the A.O. Therefore, it is submitted that it would be appropriate
that, Pr. CIT passes a fresh order after hearing the parties and considering
the above decisions relied upon by the parties .

 

The
Revenue submits that restoring the Revision Application would be a futile
exercise as the Revision Application itself is not maintainable. It is pointed
out that the claim of deduction of Rs.4.25 crores being the payment made to the
Societies was not a claim made either in the original or revised return of
income before the A. O. Thus, relying upon the decision of the Apex Court in Goetze
(India) Ltd. vs. CIT, 2006 (284) ITR 323, it is submitted that such a claim
could not be made before the CIT in Revision u/s. 264 of the Act.

 

The Hon.
Court find that the delay in filing the Revision Application u/s. 264 of the
Act is concerned, it is the assessee’s case that as payments of commission to
Societies under the Sugarcane Act was made in previous year relevant to A.Y
2013-14. This was consequent to the order dated 19th June, 2012 of
the State Government. Therefore, they took a view that, the deduction was
allowable in A.Y 2013-14. It was in the above context, that though the assessee
had filed a revised return of income, in the year 2013 for A.Y 2012-13, it did
not claim the deduction of Rs.4.25 crores being the amount paid to the
Societies. It was only after A.O, by his order dated 25th March,
2016 held that, this deduction of Rs.4.25 crores relates to A.Y 2012-13 and
therefore could not be allowed in the A.Y 2013-14 that the assessee was
compelled to file the Revision Petition so as to claim the deduction. This to
ensure that, in atleast one of the two assessment years it gets the benefit of
deduction.

 

It is to
be noted that the assessee filed its Revision Application on 22nd
April, 2016 i.e. within a month of the order of the A.O  relating to A.Y 2013-14. In the aforesaid
circumstances, the reason in filing the Revision Application is for reasonable
cause and should have been condoned by the Pr. CIT. In the above circumstances,
delay was condoned and revision application was restored to the Pr. CIT for
disposal of the application on merits. Petition was allowed.



2 Section 45 : Capital gains vis a vis Business income – sale of property held as investment – Rental income disclosed as business income – gains arising on sale of property held in investment to be treated as capital gains.

1.      
 Pr. CIT-31 vs. Shree Shreemal Builders [ Income tax Appeal no 205 of
2016, Dated: 31st July, 2018 (Bombay High Court)]. 

 

[DCIT
vs. Shree Shreemal Builders; dated 14/11/2014, Mum.  ITAT ]

The
assessee sold a building which was acquired in 1978. It offered the gain made
on the sale of the building for tax under the head “capital gains”. However,
the A.O held that as the assessee was in business of development of real estate
and the fact that rental income received from building was offered to tax as
business income in the earlier years. The profit/gain on sale of the building
was in nature of business profit/gain. Therefore, chargeable to tax under the
head profit/gain of business or purchases and not under the head “capital
gains”.

 

Being
aggrieved, the assessee filed an appeal to the CIT (A). The CIT(A) on the facts
found that the assessee had been showing the building as part of its assets in
the balance sheet and it has never been shown as stock in trade till date. The
CIT(A) further held that merely because a person is engaged in business of
development of real estate he is not barred by holding any property as and by
way of investment. It was further found that interest paid on borrowed funds
was being capitalised and not claimed as an expenditure in the regular course
of business to arrive at the taxable income. So far as classifying the rental
income under the head “business income” is concerned, it held that by itself it
alone would not change the character of an investment into stock in trade. In
these circumstances the appeal of the assessee was allowed.

 

Being aggrieved the Revenue filed an appeal to the Tribunal. The
Tribunal find that the said building had been acquired in the year 1978 and
ever since that date the property has been shown as an asset/investment and not
as stock in trade. Further, it held that profit/gain on sale of the building is
classifiable under the head capital gains. Support was also drawn from the fact
that interest paid on the funds borrowed were not debited to the Profit and
Loss Account but were capitalised. So far as classifying the rental income from
the said building as business income is concerned, the ITAT helds that, by
itself, this would not change the character of the investment in the building
into a stock in trade. The appeal of the Revenue was dismissed.

 

Being aggrieved the Revenue
filed an appeal to the High Court. The Court find that the both CIT(A) and the
Tribunal on consideration of all facts has concluded that the building which
was acquired in 1978 and sold in previous year relevant to the subject
assessment year was an investment. This finding was on the basis that the
assessee had all along shown the building as its investment and not as its
stock in trade in its Balance Sheet and Profit and Loss Account. Further, the
interest paid on the amounts borrowed for acquisition of the building has been
capitalised since beginning and no amount of interest was claimed as an
expenditure in its profit and loss account. The first objection on behalf of
Revenue is that as the assessee is in the business of real estate development
all its income relating to real estate can only be taxed as business income.
This submission on behalf of the Revenue is contrary to the directions in the CBDT
circular No.4/2007 dated 15th June, 2007 wherein in paragraph 10
thereof it is stated that it is possible for a tax payer to have two portfolios
at the same time i.e. Investment portfolio (investment) and trading portfolio
(stock in trade).



Further
this Court in Commissioner of Income Tax vs. Gopal Purohit (2010) 188 Taxman
140 has also held to the same effect. The second objection on behalf
of the Revenue is that as the assessee had classified its rental income from
the said building as business income that would by itself be evidence of it
being stock in trade. In any case in such matters the totality of the facts are
to be taken into account as done by the CIT(A) and the Tribunal. Therefore the
profit/gain on sale of the investment is taxable under the head “capital
gains”. Accordingly, Revenue appeal dismissed. 

1 Section 68: Cash credits-Share application money-Permanent account numbers, bank details of share applicants and affidavits of share applicant company was furnished – share application money cannot be considered as unexplained cash credits.

1.        Pr. CIT-4 vs. Acquatic
Remedies Pvt. Ltd [ Income tax Appeal no 83 of 2016, Dated: 30th
July, 2018 (Bombay High Court)]. 

[DCIT
vs.  Acquatic Remedies Pvt. Ltd; dated
17/04/2015, Mum.  ITAT ]


A survey
was conducted on GP  by the Investigation
Wing of the Revenue. During the course of the survey, it was found that GP  was issuing bogus accommodation bills to
various concerns including the assessee and its sister companies. Consequently,
a search operation was conducted on the premises of the assessee and its sister
companies.

 

Thereafter,
assessment orders were passed u/s. 153(3) r.w.s 153A of the Act by the A.O for
A.Ys 2005-06 to 2009-10 making additions under the following heads :-

 

(a) on account
of introduction of share capital as unexplained cash credit u/s. 68 of the Act
;

 

(b) on
account of bogus purchases;

 

(c) on
account of commission paid at 2% for accommodation bills ; and

 

(d) on
account of cash discount at 5% on cash purchases.

 

The CIT(A)
for subject AYs confirmed the addition on account of unexplained cash credit
u/s. 68 of the Act relating to introduction of share capital. However, the
CIT(A) by common order partly allowed the Appeal to the extent of deleting
commission of 2% in respect of the share capital and on account of 5% discount
on purchases in respect of share capital.

 

Being
aggrieved, both the Revenue, as well as, the assessee filed appeals to the
Tribunal. The Tribunal, allowed the Appeal of the assessee on issue of cash
credit and also in respect of commission and cash discount as held by the CIT
(A) while dismissing the Revenue’s Appeal.

 

The
Revenue  in appeal before High Court  challenges the order of the Tribunal that the
identity and creditworthiness of the shareholders is not established and the
genuineness of the transaction not being established, the Tribunal ought not to
have allowed the assessee’s appeals.

 

The Hon.
High Court finds that the persons who invested in the shares of the assessee
had PAN numbers allotted to them which was made available by the assessee to
the A.O. Besides, the shareholders had also filed Affidavits before the A.O
pointing out that they had invested in the shares of the assessee out of their
own bank accounts. Copies of acknowledgement of Return of Income of the
shareholders was also filed. The assessee also requested the A.O to summon the
shareholders. These evidences have not been shown to be incorrect. Therefore,
the objection with regard to identity of the shareholders not being established
does not survive. So far as, the creditworthiness of the investors is
concerned, these Appeals are of AYs prior to AY: 2013-14. It was only with
effect from 1st April, 2013 i.e. from the Assessment Year 2013-14
that a proviso was added to section 68 of the Act which required the person
investing in shares of any Company to satisfy, if required by the A.O, the
source of the funds which enabled the investments in shares.

 

So far as
the genuineness of the investment by the shareholders is concerned, Revenue
placed reliance upon the statement of Kamlesh Jain who was an employee, as well
as, the shareholder of the assessee and that during the course of the search,
certain blank transfer forms were found in the possession of the assessee.
Besides, it is submitted that the shares were supposed to be finally
transferred to the family members of the Directors of the assessee company at a
discounted price.

 

The
Tribunal records the fact that copies of the share application form, share
allotment Register and Bank Statements showing receipt of funds were on record.
Moreover, all the shareholders had filed Affidavits declaring the fact that
they are investing in the assessee company by issuing of cheques from their
Accounts. Infact, the statement very categorically states that, he did not
intend to purchase any shares of Aqua Formulations (P) Ltd., but no such
declaration is made in respect of the investment made by him in the assessee
Company. Thus, there is no conclusive evidence in support of the above
submission in the context of the assessee. It records, that the entire basis of
the Revenue’s case is based on surmise that the assessee was taking bogus
purchase bills and cash was introduced in the form of share capital without any
evidence in support.

 

Regarding  cash discount at 5% on cash purchases  and commission paid at 2% for obtaining
accommodation bills treating the same as unexplained expenditure. The court
held that there is no unexplained expenditure nor any bogus purchases.
Accordingly, the  Appeals were dismissed.