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Category: Direct Taxes

42 Section 4 – Income – revenue or capital receipt – Where Government gave grant-in-aid to a company wholly-owned by Government, facing acute cash crunch, to keep company floating, even though large part of funds were applied by company for salary and provident funds, grant received was capital receipt

Pr.
CIT vs. State Fisheries Development Corporation Ltd.; [2018] 94 taxmann.com 466
(Cal); Date of order : 14th May, 2018A. Y.: 2006-07:

 

The
assessee was a company wholly-owned by the State Government. The assessee was
engaged in business of pisciculture. The assessee received an amount as
grants-in-aid. Out of that, certain sum was received for payment of salary to
its employees, certain sum for payment of Provident Fund dues and certain sum
for the purpose of flood relief. The assessee claimed deduction of said sum
from its income on plea that same constituted capital receipt. The Assessing
Officer found that the fund was applied for items which were revenue in nature.
He recorded that such receipts were consistently treated in the past by the
assessee as revenue receipt. Thus, same could not be allowed for deduction as
capital receipt.

 

The
Tribunal did not solely rely on the nature of application of the funds received
through grant-in-aid. The Tribunal examined the character of the assessee as a
Government company as well as the character of grantor, being the State
Government itself, the financial status of the assessee and certain other
factors. The Tribunal accepted the assessee’s claim that grant-in-aid towards
provident fund dues constituted capital receipts.

 

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

 

“i)  The fundamental principle for distinguishing
capital receipt from revenue receipt in relation to Government grant has been
laid down by the Supreme Court in the case of Sahney Steel & Press Works
Ltd. vs. CIT [1997] 94 Taxman 368/228 ITR 253. That was a case involving
government subsidy in the form of certain time bound incentives and facilities.
These incentives and facilities included refund of sales tax on raw materials,
machineries and finished goods. The Supreme Court found that the incentives and
facilities under a subsidy scheme to enable the assessee to acquire new plant
or machinery for expansion of manufacturing capacity or set up new industrial
undertaking could constitute capital receipt. In that case, however, the scheme
contemplated for refund of sales tax on purchase of machinery and raw
materials, subsidy or power consumption and certain other exemptions on
utilities consumed. The Supreme Court rejected the plea of the assessee for
treating such facilities and incentives as capital receipt on the reasoning
that such subsidy could only be treated as assistance given for the purpose of
carrying on the business of the assessee.

 

ii)   So far as assessee’s case in this appeal is
concerned, Rs. 3.60 crores was received as grant-in-aid in the relevant
previous year towards salary and provident fund dues. On surface test, receipt
under these heads no doubt has the attributes of revenue receipt. But there are
two factors which distinguish the character of the grant-in-aid which the
assessee wants to be treated as capital receipt. Said sum was not on account of
any general subsidy scheme. Secondly, the sum was given by the State to a
wholly-owned company which was facing acute cash crunch. Financial status of
the company appears from the submission of the assessee’s representative
recorded in the order of the first Appellate Authority and there is no denial
of this fact in any of the materials placed.

 

iii)  In the case of the assessee, though it is not
a grant from a parent company to a subsidiary company, the grant is from the
State Government, which was in effect, hundred per cent shareholder of the
assessee. Rs. 3.60 crores was meant for payment of staff salaries and provident
fund dues. As already observed, these item heads may bear the label of revenue
receipt on the surface, it is apparent that the actual intention of the State
was to keep the company, facing acute cash crunch, floating and protecting
employment in a public sector organization. There is no separate business
consideration on record between the grantor, that is the State Government and
the recipient thereof being the assessee. The principle of law as laid down in
the case of Siemens Public Communication Network (P.) Ltd. vs. CIT [2017] 77
taxmann.com 22/244 Taxman 188/390 ITR 1 (SC) is that voluntary payments
made by the parent company to its loss making Indian subsidiary can also be
understood to be payments made in order to protect the capital investment of
the assessee-company. Though the grant-in-aid in this case was received from
public funds, the State Government being 100 per cent shareholder, its position
would be similar to that of, or at par with a parent company making voluntary
payments to its loss making undertaking. No other specific business
consideration on the part of the State has been demonstrated in this appeal.
The assistance extended appears to be measures to keep the assessee-company
floating, the assessee being, for all practical purposes an extended arm of the
State. Though large part of the funds were applied for salary and provident
fund dues, the object of extension of assistance, to ensure survival of the
company.

 

iv)  As regards the funds extended for flood
relief, the same cannot constitute revenue receipt. Flood relief does not
constitute part of business of the assessee.

 

v)  Accordingly, the question is answered in
favour of the assessee and confirm the finding of the Tribunal.”

41 Section 4 – Income – Capital or revenue receipt – Real estate business – Seller of land not performing commitment under agreement to sell – Purpose of ultimate use of assessee’s land when acquired rendered irrelevant – Compensation received under arbitration award considered as capital receipt

Pr.
CIT vs. Aeren R Infrastructure Ltd.; 404 ITR 318 (Del): Date of Order : 25th
April, 2018

The
assessee, engaged in the business of real estate, entered into a consortium
agreement with its associates which defined the role, rights and
responsibilities of the parties thereto. This consortium entered into an
agreement to sell with JMA, the seller, for purchase of 10 acres of land for a
consideration of Rs. 15 crores. The seller, JMA, defaulted in its commitment
within the prescribed and extended time limit. Ultimately, upon the parties
resorting to the arbitration, a settlement was arrived at and an award was made
based upon the parties eventual settlement. The amount received by the assessee
as a part of its entitlement as consortium was credited in its books of account
as a capital receipt. The Assessing Officer held that the amounts were revenue
in nature as the land would have been part of the stock-in-trade.

 

The
Tribunal held that the amount which was intended to be ultimately used as
stock-in-trade purposes was immobile and sterilized, rendered non-offerable and
therefore when received as part of the arbitration award, fell into the capital
stream. The Tribunal held that the only inference that can be drawn is that the
compensation received by way of reward due to non-supply of land by JMA under
the agreement was capital receipt.

 

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

 

“The
purpose of the ultimate use of the assessee’s land when acquired was rendered
irrelevant on account of the seller defaulting in its commitment. This rendered
the amount expended by the assessee immobile. The eventual receipt of the
amounts determined as compensation or damages, therefore, fell into the capital
stream and not revenue as was contended by the Revenue/appellant in this case.”

40 Section 43A – Foreign exchange fluctuation – Where assessee constructed a residential house and rental income earned therefrom was offered to tax as income from house property and not as business income, provisions of section 43A would not apply to apparent gain made by assessee as a consequence of foreign exchange fluctuation in respect of lift imported from abroad

CIT
vs. Bengal Intelligent Parks (P.) Ltd.; [2018] 94 taxmann.com 399 (Cal);

Date
of order: 10th May, 2018

The
assessee was engaged in construction of houses for the purpose of letting them
out. The rental income was claimed as income from house property without the
expenses for constructing the house being claimed by way of deduction or the
individual items therefore being subjected to depreciation. In respect of a
particular elevator imported by the assessee for installation at one of its
buildings, the rise of the rupee compared to the relevant foreign currency
resulted in the cost of the equipment being effectively lowered by a sum in
excess of Rs. 6 lakh. The Assessing Officer added said amount to assessee’s
income.

 

The
assessee filed appeal contending that since the elevator was not used for the
purpose of its business and no deduction or depreciation or the like had been
claimed in respect thereof, the perceived additional income on account of
foreign exchange fluctuation could not be added back as an income in the hands
of the assessee. The Tribunal having accepted assessee’s contention, deleted
the addition made by the Assessing Officer.

 

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

 

“i)  Section 43A deals with the variation of
expenses on account of the change in the rate of exchange of currency. Such
provision takes into account the additional expenses that may be incurred by an
assessee as a result of the fluctuation of foreign exchange rates or the gain
that may be made by an assessee on such account. However, such provision is
confined to assets acquired from a country outside India for the purpose of the
assessee’s business or profession. The Tribunal held in this case that since
the construction of the relevant house was not a part of the business of the
assessee, section 43A would not apply to the apparent gain made by the assessee
as a consequence of the foreign exchange fluctuation.

 

ii)   On a plain reading of section 43A and the
fact that the assessee had not claimed any deduction or depreciation on account
of the lift or other construction material, it cannot be said that the Tribunal
committed any error or that there is any significant question of law that needs
to be looked into. In the result, revenue’s appeal is dismissed.”

Section 194L and 194LA – TDS – State Metropolitan Development Authority – Acquisition of land for projects paying sums to illegal squatters for their rehabilitation – Not a case of compulsory acquisition from owners of land for which compensation paid – No liability to deduct tax at source on payments to illegal squatters

39. 
CIT vs. MMRDA; 408 ITR 111(Bom):  Date of order: 6th September,
2018 A. Ys. 2000-01 to 2009-10

 

Section 194L and  194LA – TDS – State Metropolitan Development
Authority – Acquisition of land for projects paying sums to illegal squatters
for their rehabilitation – Not a case of compulsory acquisition from owners of
land for which compensation paid – No liability to deduct tax at source on
payments to illegal squatters

 

For the purpose of
implementing the scheme of the Government relating to road widening near the
railway track, the assessee, the Mumbai Metropolitan Regional Development
Authority, evacuated illegal and unauthorised persons who were squatters and
hutment dwellers. The Assessing Officer was of the opinion that there was
acquisition of immovable property for various projects by the assessee, for
which the project affected persons were compensated under the Land Acquisition
Act, 1894, He treated the assessee as the assessee-in-default u/s. 201(1) of
the Act and liable to pay interest u/s. 201(1A) since the assessee had not
deducted tax at source u/s. 194L/194LA. Accordingly, he computed the payment of
tax u/s. 201(1) and interest u/s. 201(1A)

 

The Commissioner
(Appeals) allowed the appeal and deleted the demand. The Tribunal upheld the
order of the Commissioner (Appeals).

 

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

 

“i)    The possession of those persons was
unauthorized and illegal and they were not the owners of the land on which they
had squatted or built their illegal hutments and were trespassers. Therefore,
there was no question of the land being acquired by the assessee.


ii)    The Tribunal correctly came to the
conclusion that the land had always belonged to the State and it was encroached
upon, which encroachment was removed by the assessee and the encroaching
squatters or hutment dwellers were rehabilitated. There was no question of
there being any compulsory acquisition from them under any law either under the
1894 Act or any other enactments which permitted compulsory acquisition of
land. Hence section 194L or section 194LA had no application.”

 

Sections 115JB and 254 Rectification of mistake – Tribunal accepting that assessee’s book profits to be computed after giving effect to deduction u/s. 54EC – AO passing order giving effect to directions issued by Tribunal – Notice of rectification issued thereafter on ground that deduction u/s. 54EC wrongly allowed – Not permissible Notice quashed

38. 
Meteor Satellite Pvt. Ltd. vs. ITO; 408 ITR 99 (Guj): Date of order: 16th April, 2018 A. Y. 2010-11

 

Sections 115JB and 254 Rectification of
mistake – Tribunal accepting that assessee’s book profits to be computed after
giving effect to deduction u/s. 54EC – AO passing order giving effect to
directions issued by Tribunal – Notice of rectification issued thereafter on
ground that deduction u/s. 54EC wrongly allowed – Not permissible Notice
quashed

 

For the A. Y.
2010-11, the Tribunal accepted the assessee’s contention and held that the
assessee’s profits ought to be computed u/s. 115JB of the Act after carrying
out deduction u/s. 54EC. The Assessing Officer gave effect to the order and
recomputed the assessee’s book profits according to the directions of the
Tribunal and passed an order. Subsequently, he issued a notice u/s. 154 of the Act
to rectify the order passed by him for giving effect to the order of the
Tribunal on the ground that the book profits of the assessee had been wrongly
computed by allowing deduction u/s. 54EC in contravention of the law for
determining the book profits and that rectification of the order was to be
carried out.

 

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

 

“i)    There was no error in the Assessing
Officer’s order implementing the Tribunal’s directions. The Tribunal had
directed the Assessing Officer to compute the assessee’s book profits in a
particular manner which was correctly understood and given effect by him.


ii)    He had proposed to rectify his order giving
effect to the Tribunal’s decision on the ground that there had been  an apparent error. However, as long as the
order of the Tribunal stood, the assessment order was required to be
implemented. Further, having implemented the order, it was not open for him to
exercise power of rectification which was meant for correcting any error
apparent on record.”

 

Section 4 – Income – Chargeable as (Compensation) – Compensation awarded under Motor Vehicles Act or Employees’ Compensation Act in lieu of death of a person or bodily injury suffered in a vehicular accident, is a damage and not an income and cannot be treated as taxable income

37. 
National Insurance Company Ltd. vs. Indra Devi; [2018] 100 taxmann.com
60 (HP): Date of order: 25th October, 2018

 

Section 4 – Income – Chargeable as
(Compensation) – Compensation awarded under Motor Vehicles Act or Employees’
Compensation Act in lieu of death of a person or bodily injury suffered in a
vehicular accident, is a damage and not an income and cannot be treated as
taxable income

 

The respondent Nos.
1 and 2 had filed a claim petition being u/s. 3 of the Workmen Compensation Act
for compensation on account of death of ‘R’, who, while working as a
cleaner/conductor, died in an accident. The Commissioner allowed the petition
by awarding a sum of Rs. 3,94,135 along with 12 per cent interest. In pursuance
to the award, the petitioner-insurance company deposited a sum of Rs. 5,32,007,
in the Court of the Commissioner after deducting TDS on interest component
payable on the compensation amount, which was deducted by the
petitioner-insurance company in compliance of section 194A. The tax was
deposited with the respondent No. 3- ITO (TDS). In execution petition preferred
by the claimants/respondents for payment of balance amount of compensation, the
Commissioner, directed to attach movable property of petitioner-insurance
company herein for realisation of balance amount. The petitioner insurance
company filed a writ petition and challenged the said order. The Himachal
Pradesh High Court held as under:

 

“i)    Section 194A clearly provides
that any person, not being an individual or a Hindu Undivided Family,
responsible for paying to a ‘resident’ any income by way of interest, other
than income by way of interest on securities, shall deduct tax on such income
at the time of payment thereof in cash or by issue of cheque or by any other
mode. Compensation awarded under Motor Vehicles Act or Employees’ Compensation
Act in lieu of death of a person or bodily injury suffered in a vehicular
accident, is a damage and not an income and cannot be treated as taxable
income.


ii)    It is well settled that
interest awarded by the Motor Accident Claims Tribunal on a compensation is
also a part of compensation upon which tax is not chargeable.


iii)    Therefore, in view of abovesaid
decision, deduction of tax by petitioner/Insurance Company on the awarded
compensation and interest accrued thereon is illegal and is contrary to the law
of land.


iv)   In view of above discussion,
this petition is disposed of directing respondent No. 3 to refund the TDS to
the petitioner/Insurance Company.


v)    The amount deposited with the
department after deduction at source is Rs. 34,468, whereas the impugned order
of realization passed by the Commissioner is Rs. 66,900. Therefore, it is made
clear that for payment of balance amount claimed in the execution petition
filed by the respondents No. 1 and 2, the petitioner/Insurance Company has to
satisfy the Court of Commissioner and in case any amount beyond Rs. 34,468 is
found payable to the D.H./Claimants/respondents, the Commissioner/Executing
Court shall be entitled to pass any order in accordance with law for failure of
the petitioner company to satisfy the award.”


Section 9 of the Act w.r.t. Article 12 of DTAA between India and Austria – Income – Deemed to accrue or arise in India (Royalty/Fees for technical services) – Assessee-company entered into a technical assistance agreement with a non-resident company in Austria for design of new 75CC, 3-valve cylinder head for moped application – Assessing Officer treated payment to Austrian company as royalty – Since engine had already been developed by assessee and scope of technical services agreement was only to design a new 3-valve cylinder head with a specified combustion system for considerable improvement of fuel efficiency, performance and meeting Indian emission standards and moreover all products, design of engines and vehicles were supplied by assessee, payment did not constitute royalty

36. 
DIT vs. TVS Motors Co. Ltd.; [2018] 99 taxmann.com 40 (Mad): Date of the order: 24th October,
2018 A. Y. 2002-03

 

Section 9 of
the Act w.r.t. Article 12 of DTAA between India and Austria – Income – Deemed to accrue or
arise in India (Royalty/Fees for technical services) – Assessee-company entered
into a technical assistance agreement with a non-resident company in Austria
for design of new 75CC, 3-valve cylinder head for moped application – Assessing
Officer treated payment to Austrian company as royalty – Since engine had
already been developed by assessee and scope of technical services agreement
was only to design a new 3-valve cylinder head with a specified combustion
system for considerable improvement of fuel efficiency, performance and meeting
Indian emission standards and moreover all products, design of engines and
vehicles were supplied by assessee, payment did not constitute royalty

 

The assessee
entered into a technical assistance agreement with a non-resident company in
Austria for design of new 75CC, 3-valve Cylinder head, the project which
commenced in January 2001 and was completed in October 2001. The assessee
during the assessment proceedings contended that the fees paid by them to the
Austrian company was only for technical services, as the entire work was done
in Austria and no part of the work was done in India and the entire income was
taxable only in Austria in terms of provision of the DTAA with Austria. The
Assessing Officer, on going through the technical assistance agreement held
that the Austrian company was providing the design of newly developed engine
for being used by the assessee and thus payment was taxable as ‘royalty’.

 

The Commissioner
(Appeals) allowed the assessee’s appeal and held that the payment did not
constitute royalty. The Tribunal dismissed the appeal filed by the revenue.

 

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

 

“i)    The scope of the work was for design of a
new 3-valve cylinder head with AVL CCBR combustion system. This would have
considerable improvement of fuel efficiency, improved performance and Meeting
India 2004 Emission Limits under IDC test conditions. The agreement states that
the assessee has recently developed a new 75CC 4-stroke 2-valve air cooled
engine with single speed transmission for moped application. As the local
market, (India), is asking for better fuel economy, the Austrian company was
asked to design a new 3-valve cylinder head with a lean burn combustion system
with charge motion for rapid combustion. The whole work under the said
agreement was to be carried out in Austria. The assessee was to supply the
material with all design documentation, engines and components as required for
the project. The total price for the project work deliverables and services was
agreed at EURO 349.522.


ii)    The engine has already been developed by the
assessee and scope of the technical services agreement was only to design a new
3-valve cylinder head with a specified combustion system for considerable
improvement of fuel efficiency, performance and meeting the Indian emission
standards. All products, design of the engines and vehicles are supplied by the
assessee. On completion all the drawings are also delivered by the Austrian
company to the assessee. The entire project was carried out in Austria and no
part of the project was performed in India. Thus, the Commissioner (Appeals)
rightly held that the payment does not constitute royalty.”

Section 10B – Export oriented undertaking – 10B(9)/(9A)) – Assessee firm was engaged in production and export of iron ore – It claimed deduction u/s. 10B – Assessing officer rejected assessee’s claim on ground that assessee’s sister concern got merged with assessee – assessee’s sister concern was also an EOU – Impugned order rejecting assessee’s claim was to be set aside

35. 
CIT vs. Trident Minerals; [2018] 100 taxmann.com 161 (Karn): Date of order: 10th October, 2018 A Y. 2009-10

 

Section 10B – Export oriented undertaking –
10B(9)/(9A)) – Assessee firm was engaged in production and export of iron ore –
It claimed deduction u/s. 10B – Assessing officer rejected assessee’s claim on
ground that assessee’s sister concern got merged with assessee – assessee’s
sister concern was also an EOU – Impugned order rejecting assessee’s claim was
to be set aside

 

The assessee-firm
was engaged in business of production, manufacture and export of iron ore. On
02/05/2008 the assessee’s sister concern namely KMMI Exports merged with
assessee. On 22/09/2009, return of income was filed u/s. 139(1) of the Act and
deduction u/s. 10B was claimed in respect of export income. The Assessing
Officer held that deduction u/s. 10B was not allowable on the ground that two
partnership firms had been merged and that assets of KMMI Exports had been
taken over by assessee.

 

The Commissioner
(Appeals) allowed the claim of the assessee.

 

The Tribunal upheld
the decision of the Commissioner (Appeals).

 

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

 

“i)    The Commissioner (Appeals) recorded a
finding that the Circular of the Board issued u/s. 84 was not withdrawn and was
still in force. It is the Rule and also the practice of the Board to withdraw
the Circular once it is not relevant. Therefore, the Circular No. 15/5/63-IT(A1),
dated 13/12/1962 is in force and relevant in the present context, when the
clauses u/s. 80J and 10B are similar. It was also recorded by the appellate
authority that the observation made by the Assessing Officer, as per section
10B(7), only Indian company is eligible for amalgamation is not appropriate.


ii)    As mentioned by the assessee in the written
submission that ‘the sub-sections (9) and (9A) which were omitted with effect
from 01/04/2004 clearly suggests that the transfer by any means will not entitle
the deduction under this section only up to 31/03/2003. In other words, the
transfer by any means is allowed with effect from 01/04/2004 by implication,
moreover, the firms merged are family concerns with same partners, with the
same sharing ratio and doing the same business and two firms are having 100 per
cent EOU recognised by the SEZ Authorities. Hence, the Commissioner held that
the claim of the assessee was justifiable and the same was allowed.


iii)    On appeal filed by the revenue, Tribunal
recorded a finding that the unit of the assessee firm is a 100 per cent EOU
unit entitled for deduction u/s. 10B of the Act. It is also seen that Assessing
Officer has not disputed the EOU status of the unit KMMI Exports also. The
issue for consideration is after the merger of the firm KMMI exports with the
assessee-firm, whether the assessee-firm is entitled for deduction u/s. 10B of
the Act. Earlier, there was sub-section (9) to section 10B, which specifically
provided that the deduction cannot be allowed, if there was a transfer of
ownership or beneficial interest in the undertaking. The sub-section (9A) of
section 10B was omitted with effect from 01/04/2004. In this view of the
matter, the inevitable and appropriate conclusion is that the limitations
specified in sub-sections (9) and (9A) of section 10B Act do not exist from
01/04/2004 and, therefore, the conclusion of the Assessing Officer that
deduction u/s. 10B cannot be granted on the merger of firms is not correct.


iv)   The Tribunal after considering a finding that
in view of the CBDT Circular No. 1 of 2013, dated 17/01/2013, it is clear that
deduction is granted to the undertaking. Therefore, it follows as long as the
undertakings remain eligible for deduction u/s. 10B, the deduction cannot be
denied merely on the ground that there has been a merger of the firms which own
the undertakings. The Assessing Officer has not rendered any finding that
either on the units, belonging to the assessee and the other belonging to the
firm that got merged, i.e., KMMI Exports, is not eligible for deduction u/s.
10B of the Act. The only reason adduced is that due to the merger of the two
units, the assessee is deploying assets already put to use by the merged firm
and hence the assessee cannot claim deduction u/s. 10B of the Act.


v)    The Tribunal further recorded a finding that
both the units/undertakings of the assessee-firm and KMMI Exports are otherwise
eligible for deduction u/s. 10B and the deduction is towards undertaking as
long as undertakings are agreeable that section 10B which is not been disputed
by the Assessing Officer merger of the firm and KMMI Exports which is not
undertaking. In view of the above, the Tribunal upheld the order passed by the
Appellate Court allowing the deduction u/s. 10B.


vii)   It is undisputed fact that the claim made by
the assessee for deduction u/s. 10B for the assessment year 2009-10 after the
merger of two firms with effect from 26/12/2011. It is also undisputed that in
view of the deletion of the provision of sub-section (9) of section 10B from
the statute with effect from 01/04/2004 the impugned order passed by the
Tribunal allowing the assessee’s claim for deduction u/s. 10B was to be
upheld.”


Section 10(23C)(iiiad) – Educational institution – Exemption u/s. 10(23C)(iiiad) – Assessee-trust was established predominantly with an object of providing education to all sections of society – Mere fact that it spent a meagre amount of its total income on some allied charitable activities such as providing food and clothing to relatives of poor students, would not stand in way of AO to deny benefit to it u/s. 10(23C)(iiiad)

34. 
Sri Sai Educational Trust vs. CIT; [2018] 100 taxmann.com 50 (Mad): Date of order: 10th October, 2018 A. Y. 2014-15

 

Section 10(23C)(iiiad) – Educational
institution – Exemption u/s. 10(23C)(iiiad) – Assessee-trust was established
predominantly with an object of providing education to all sections of society
– Mere fact that it spent a meagre amount of its total income on some allied
charitable activities such as providing food and clothing to relatives of poor
students, would not stand in way of AO to deny benefit to it u/s.
10(23C)(iiiad)

 

The assessee trust
was established predominantly with an object of providing school education to
all sections of society. The only activity of the assessee-trust was running of
an educational institution. The assessee-trust was granted registration u/s.
12A on 30/05/2016. The assessee filed its return for relevant year i.e. A. Y.
2014-15 claiming exemption of income. The assessee’s claim was based on plea
that in view of the registration granted u/s. 12AA of the Act, with effect from
01/04/2015 and in view of the first proviso to section 12A(2), effect of such
registration had to be applied retrospectively in respect of the subject year
i.e. A. Y. 2014-15 also and consequently, the Assessing Officer ought not to
have assessed the income to tax. The assessee’s alternative plea was that if
the exemption was not allowed with retrospective application of the
registration as contemplated u/s. 12A(2), it should have been granted the
benefit of exemption by applying section 10(23C)(iiiad). The Assessing Officer
rejected assessee’s claim of granting benefit of section 12A with retrospective
effect. He further held that since assessee was not existing solely for
educational purpose as it was carrying on some other charitable activities
also, exemption u/s. 10(23C)(iiiad) was also not allowable.

 

The assesee filed a
writ petition and challenged the order of the Assessing Officer. The Madras
High Court upheld the order of the Assessing Officer as regards section 12A.
The High Court allowed the writ petition and held that the assessee is entitled
to exemption u/s. 10(23C)(iiiad) and held as under:

 

“i)    Perusal of the provision of section
10(23C)(iiiad) would show that any income received by any University or
educational institution existing solely for educational purposes and not for
purposes of profit, shall not be included in total income. In other words, such
income is not taxable and on the other hand, gets exempted from levy of tax. It
is the contention of the assessee that since the trust is existing solely for
educational purposes without having any purpose of profit, the respondent is
not entitled to bring the disputed income to tax.


ii)    There is no dispute to the fact that the
assessee trust is running an educational institution for providing elementary
school education without distinction of caste and creed, from 1997. Though the
Trust Deed refers few other charitable activities such as providing medical
relief to the poor, relief to orphans, etc., the predominant object of the
trust is evidently seen as administering, establishing and maintaining schools
and other educational institutions to impart education to poor students without
any restriction as to caste, community or religion. This noble object of the
assessee trust cannot be looked into with magnifying glass to find out as to
whether any meagre expenditure spent by them on any allied charitable purpose,
so as to project, as though by doing such activity, the assessee-trust is not
existing solely for educational purposes. In this case, the objection of the
revenue relates to a sum of Rs.54,300/- spent by the petitioner for providing
sarees to mothers and grandmothers of the children studying in the school. This
free distribution of clothes to the mothers and grandmothers of the children is
considered by the revenue as the one not related to educational purposes.


iii)    On the other hand, it is contended by the
assessee that such distribution was made only to encourage those mothers and
grandmothers to send their ward to the school without discontinuation. This
purpose is not doubted by the Revenue. Nor any contra material is available
before the Assessing Officer to draw adverse inference. Therefore, the main
object behind the distribution of the sarees to those persons is evidently for
ensuring the continuance of study at the petitioner School and not solely for
providing clothes to needy persons totally unconnected with the school.


iv)   At this juncture, it is better to understand
the scope of Section 10(23C)(iiiad). The term “any university or
educational institution existing solely for educational purpose” used
under the above provision is heavily relied on by the Revenue to deny the
benefit of exemption to the petitioner on the sole ground that a portion of the
income spent on other charitable purpose, viz., distribution of sarees to the
mothers and grandmothers of the children studying in the school was not for
educational purpose. There is no dispute to the fact that the sum spent on such
purpose is very minimal, compared to the total income.


v)    While the nature of existence of the
institution is to be derived only by considering the predominant activity of
the institution, the nature of spending the money so received by such
institution to its various activities, has to be ascertained and adjudged going
by the ultimate purpose for which it was spent. If the event of spending and
the purpose for which such event took place, have some nexus to achieve the
main object viz., the predominant activity of the institution, then such
spending on an allied activity cannot be looked in isolation from the main
object.


vi)   An institution solely existing for
educational purposes, if indulges in certain allied charitable activities, such
as feeding and clothing poor, giving some medical aid to those people, etc.,
certainly, such activities cannot alter the predominant object of such
institution. While ‘the imparting education’ is like the water flowing in the
main channel, certain incidental other charitable activities done by such
institution, here and there, cannot be considered as major breach of the
channel, but as the reach of the ‘over flown’ water from the main channel to
the adjacent lands. So long as the desired destination of the channel (the
institution) is evidently existing and being achieved to reach the predominant
object and not disputed, the nature or character of the institution run by the
trust cannot be doubted, as it will always fit into the above term
“institution existing solely for educational purposes” and consequently,
is entitled to protection u/s. 10(23C)(iiiad).


vii)   Further, strictly speaking, Section 10(23C)
contemplates and excludes any income “received by” and not “the
spending” of such money received u/s. 10(23C). At the same time, if the
spending is totally on a deviated object or an object, which is totally
opposite or opposed to the main object for which the trust is created,
certainly such spending cannot have any protection u/s.10(23C)(iiiad). Thus, the sole purpose of existence is to be gathered, derived
and construed based on overall predominant activity and not from certain
isolated activity, especially when such activity also happens to be charitable
in nature, more particularly, when a meagre sum is spent on such activity. At
the same time, proportionality of the money spent on such activity, other than
the predominant activity, also plays a major role in deciding the nature of
existence of the institution. If major portions of the money received by the
trust is spent on certain objects other than the predominant object, certainly
the sole purpose of the Trust for which it was created, can be doubted. On the
other hand, if such spending is meagre and does not shake the conscience of the
Assessing Officer, being the quasi judicial authority, is at liberty to bring
such expenditure also under the exemption clause.


viii)  It is not established by the revenue that the
assessee is carrying on any other activities for profit other than running the
school. Therefore, when the only predominant activity is being carried on by
the assessee-trust, viz., the running of the school mere spending a meagre
amount, out of the total income derived by the trust, towards the distribution
of sarees to mothers and grandmothers of children studying in the school, could
not stand in the way of the Assessing Officer to deny the benefit u/s.
10(23C)(iiiad). Thus the respondents are not justified in rejecting the claim
of the petitioner u/s. 10(23C)(iiiad) of the Act.


ix)   Accordingly, the writ petition is allowed and
the impugned order is set aside.”

Section 12A – Charitable or religious trust – Registration of (Cancellation of) – Where assessee educational society, set up with various aims and objects including improvement in standard of education of backward students of rural areas, was running a school and Commissioner had not doubted genuineness of aims and objects of assessee, application u/s. 12A could not be rejected merely on ground that secretary of society was getting lease rent for land given to society for running school or his wife who had requisite qualification was teaching in school and was being paid salary

33. 
CIT (Exemption) vs. Ambala Public Educational Society; [2018] 100
taxmann.com 131 (P&H): Date of order: 29th October, 2018

 

Section 12A – Charitable or religious trust
– Registration of (Cancellation of) – Where assessee educational society, set
up with various aims and objects including improvement in standard of education
of backward students of rural areas, was running a school and Commissioner had
not doubted genuineness of aims and objects of assessee, application u/s. 12A
could not be rejected merely on ground that secretary of society was getting
lease rent for land given to society for running school or his wife who had
requisite qualification was teaching in school and was being paid salary

 

The
assessee-society was a trust registered with the Registrar of Societies,
Haryana. The assessee-society was set up with various aims and objects
including improvement in the standard of education of the backward students of
rural areas. The assessee-society was running a school. It made an application
for registration u/s. 12A of the Act. During the proceedings, the Commissioner
was swayed by the fact that the secretary of the assessee-society was getting
lease rent of certain amount per annum for land given to society for running
school and wife of the secretary was teaching in school and getting salary from
the school. It was further stated that the assessee-society was not registered
under the New Haryana Registration & Regulation of Societies Registration
Act, 2012. Accordingly, the application was rejected.

 

On appeal, the
Tribunal ordered granting registration u/s. 12A to the society.

 

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

 

“i)    The contentions raised by the revenue lacks
merit. There is no requirement u/s. 12A that the assessee-society is required
to be registered under the 2012 Act. Moreover, the assessee-society explained
before Tribunal that it had applied for registration under the 2012 Act but due
to back log, grant of registration was delayed. The certificate regarding
registration under 2012 Act was produced before the Tribunal.


ii)    The application u/s. 12A cannot be rejected
merely on the ground that the secretary of the society was getting lease rent
for the land given to the society for running the school or his wife who had
requisite qualification was teaching in the school and was being paid the
salary. It is not the case set up by the revenue that the exorbitant amounts
had been paid by the assessee-society to the secretary or to his wife. No
dispute has been raised to the fact that the assessee-society is running a
school as per its aims and objects.


iii)    The Commissioner while rejecting the
application has not doubted the genuineness of aims and objectives of the
assessee-society. On the other hand the Assessing Officer while finalising the
assessment for A. Y. 2010-11 u/s. 143(3) has specifically recorded the finding
that the income earned by the society has been utilised for educational
purposes.


iv)   The order of the ITAT warrants no
interference. No error has been pointed out in the findings recorded by the
ITAT much less shown to be perverse. No substantial question of law arises. The
appeal is, accordingly, dismissed.”

Sections 40(a)(ia) and 194J – Business expenditure – Disallowance u/s. 40(a)(ia) – Payments liable to TDS – Third party administrator for insurance companies – Payments merely routed through assessee – Disallowance u/s. 40(a)(ia) not warranted

32. 
CIT vs. Dedicated Healthcare Services (TPA) India Pvt. Ltd.; 408 ITR 36
(Bom): Date of order: 17th September,
2018 A. Y. 2008-09

 

Sections
40(a)(ia) and 194J – Business expenditure – Disallowance u/s. 40(a)(ia) –
Payments liable to TDS – Third party administrator for insurance companies –
Payments merely routed through assessee – Disallowance u/s. 40(a)(ia) not
warranted




The assessee
carried on business as a third party administrator for insurance companies.
According to the Department, the insurance companies issued policies that were
serviced by the third party administrator who acted as a facilitator and
charged fees, provided services, such as hospitalisation, cashless access,
billing and call centre services, and all the claims payable by the insurance
companies for these services were routed through the third party administrator.

 

It was further
stated, that the receipts and disbursements were routed the bank account of the
assessee for which the assessee passed certain book entries, that on receipt of
the amount, the bank account was debited and the account of the insurance
company was credited and that on payment of claims to the hospital/insured, the
account of the insurance company was debited and the bank account was credited.

 

For the A. Y.
2008-09 it was found that the assessee had made payments to various hospitals
during the year without deducting the tax at source u/s. 194J of the Income-tax
Act, 1961 (hereinafter for the sake of brevity referred to as the
“Act”) which called for disallowance u/s. 40(a)(ia) of the Act.
Relying on the CBDT circular No. 8 of 2009, dated 24/11/2009, the Assessing
Officer held that the third party administrator was required to deduct tax at
source u/s. 194J from all such payments made to hospitals, etc.

 

The Commissioner
(Appeals) allowed the appeal filed by the assessee. The Tribunal upheld the
decision of the Commissioner (Appeals).

 

The Bombay High
Court upheld the decision of the Tribunal and held as under:

 

“i)    The Tribunal had found that the assessee
only facilitated the payments by the insurer to the insured for availing of the
medical facilities. The assessee did not render any professional services to
the insurer or the insured and only collected the amount from the insurer and
passed it on to various hospitals which provided medical services to the
insured. It had found that for transactions there was no claim of expenses by
the assessee which was disallowed.


ii)    The Department could not be permitted to
raise the same questions as had been earlier dealt with in the Division Bench
judgments and orders of the Court.”

Section 37 (1) – Business expenditure – Rule of consistency – Expenditure claimed and allowed against professional income in earlier years and subsequent years – Allocation of expenditure between capital gains and professional business income in year in question – Not proper

It
started in January, 1971 as “High Court News”. Dinesh Vyas, Advocate, started
it and it contained unreported decisions of Bombay High Court only. Between
January, 1976 and April, 1984, it was contributed by V H Patil, Advocate as “In
the Courts”. The baton was passed to Keshav B Bhujle in May, 1984 and he
carries it even today – and that’s 35 years of month on month contribution.
Ajay Singh joined in 2016-17 by penning Part B – Unreported Decisions.

51.  Principal CIT vs. Quest Investment Advisors
Pvt. Ltd.; 409 ITR 545 (Bom) Date of order: 28th
June, 2018 A. Y. 2008-10

 

Section
37 (1) – Business expenditure – Rule of consistency – Expenditure claimed and
allowed against professional income in earlier years and subsequent years –
Allocation of expenditure between capital gains and professional business
income in year in question – Not proper

 

For
the A. Y. 2008-09, the assesse filed return of income declaring professional
income of Rs. 1.31 crore and short term capital gains of Rs. 6 crore. As was
the practice for the earlier years and accepted by the Department, all the
expenses were set off against the professional business income. However, for
the relevant year, the Assessing Officer allocated the expenditure between
earnings of capital gains and professional income and disallowed an expenditure
of Rs. 88.05 lakh claimed by the assesse against professional income. The
Tribunal found that the authorities had consistently over the years for 10
years prior to the A. Ys. 2007-08 and 2008-09 and for the four subsequent
years, accepted the principle that all the expenses which had been incurred
were attributable entirely to earning professional income without allocation of
any amount to capital gains, and applying the principle of consistency the
Tribunal allowed the appeal filed by the assessee.

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

“i)        For the earlier 10 years and 4
subsequent years the entire expenditure had been allowed against the business
income and no expenditure was allocated to capital gains. Once the principle
was accepted and consistently applied and followed, the Department was bound by
it. The basis for the change in practice should have been mentioned by the
Department, if it had wanted to change the practice without any change in law
or facts therein, either in its order or pointed out when the Tribunal passed
the order.

ii)         Therefore, the Tribunal’s allowing the
assessee’s appeal on the principle of consistency could not be faulted as it
was in accord with the Supreme Court decision.”

 

Section 2(47) – Reduction of share capital, even where there is no change in the face value of the share or the shareholding pattern, results in extinguishment of right in the shares amounting to transfer of shares.

8.  Jupiter Capital Pvt. Ltd. vs. Assistant
Commissioner of Income Tax (Bangalore) Members:  Sunil Kumar Yadav (J. M.) and Arun Kumar
Garodia (A. M.) ITA
No.:445/Bang/2018 A.Y.: 2014-15. Dated: 29th
November, 2018 Counsel for
Assessee / Revenue:  S. Parthasarathi /
D. Sudhakara Rao

 

Section
2(47) – Reduction of share capital, even where there is no change in the face
value of the share or the shareholding pattern, 
results in extinguishment of right in the shares amounting to transfer
of shares.

 

FACTS

The
assessee had invested in 15,33,40,900 equity shares at face value of Rs. 10 on
different dates in its subsidiary company, Asianet News Network Private Limited
(‘ANNPL’). The total number of shares of ANNPL was 15,35,05,750 out of which
the assessee’s share was 99.89%. As a result of the Order of High Court of
Bombay, there was a reduction in share capital of ANNPL to 10,000 nos., and
consequently the share of the assessee was reduced proportionately to 9,988
nos. The Court also ordered for payment of Rs. 3.18 crore as a consideration
for reduction in share capital. The face value of the shares remained the same
at Rs. 10 after the reduction. 

 

The assessee claimed Rs. 164.49 crore as Long Term
Capital loss. According to the assesse, this loss had accrued on account of
reduction in share capital of ANNPL. According to the AO, the reduction in
shares of ANNPL did not result in transfer of capital asset as envisaged u/s.
2(47). The AO came to this conclusion, in light of the finding that, even though
the number of shares had reduced, the face value of Rs. 10 as well as the
percentage of assessee’s share at 99.89% remained at the same level as it was
before the reduction of share capital. He didn’t agree with the assessee that
there was real transfer of asset, as the scheme resulted in
extinguishment/relinquishment of part of the assessee’s rights in the shares of
ANNPL and therefore, the transaction fell within the purview of section
2(47).  The AO held that the decision of
the Supreme court in the case of Kartikeya V. Sarabhai vs. CIT  (228 ITR 163) relied on by the assessee
cannot be applied as the facts of the case are contrary to the case as there
was no reduction in the face value of the shares in the case of the
assessee.  On appeal, the CIT(A) agreed
with the AO and upheld her order.

 

HELD


The Tribunal noted
that in the case of the assessee, on account of reduction in number of shares
in ANNPL, the assessee extinguished its right of 15,33,40,900 shares and in
lieu thereof, it received 9,988 shares at Rs. 10/- each along with an amount of
Rs. 3.18 crore.  According to the
tribunal, the basis adopted by the CIT(A) to hold that the judgment of the
Supreme Court in the case of Kartikeya V. Sarabhai was not applicable in
the present case was not proper as the Supreme court had not made any reference
to the percentage of shareholding prior to reduction of share capital and after
reduction of share capital.  According to
the tribunal, the judgment of the Apex Court was squarely applicable to the
case of the assessee, therefore, following the same the Tribunal held that the
assessee’s claim for capital loss on account of reduction in share capital in
ANNPL was allowable.

Section 194-1A – Four persons who purchased immovable property of Rs. 1.5 crore jointly not liable to deduct tax at source since purchase consideration for each person was Rs. 37.5 lakh which was less than the threshold limit of Rs. 50 lakh prescribed in the provisions.

7.  Vinod Soni vs. ITO (Delhi) Members:  H.S. Sidhu (J. M.) Ando.P. Kant (A. M.) ITA
No. 2736/Del/2015 A.Y.:
2014-15.  Dated:
10th December, 2018 Counsel
for Assessee / Revenue:  Raj Kumar / B.S.
Rajpurohit

 

Section
194-1A – Four persons who purchased immovable property of Rs. 1.5 crore jointly
not liable to deduct tax at source since purchase consideration for each person
was Rs. 37.5 lakh which was less than the threshold limit of Rs. 50 lakh
prescribed in the provisions.

 

FACTS


The
assesse and three of his family members each purchased 1/4th
undivided equal shares in an immovable property vide single sale deed for Rs.
1.5 crore. The purchase consideration for each person was Rs. 37.5 lakh.
According to the AO, since the value of the property purchased under single
sale deed exceeded Rs. 50 lakh, as per section 194 IA(2), the assessee was
required to deduct tax at source @1%. For his failure, the AO held the assessee
as defaulter u/s. 201(1) and levied a penalty of Rs. 1.5 lakh. The levy was
confirmed by the CIT(A). 

 

HELD


The
Tribunal noted that as per the purchase deed each of the vendees had become the
absolute and undisputed owner of the said plot in equal share.  It also noted from details of party wise
payment furnished that each of the vendee had made payment from their own bank
account / loan account.  Further, the
tribunal also noted that the provisions of section 194-IA do not apply where
the consideration for transfer of immovable property was less than Rs. 50 lakh.
According to the Tribunal, since the said provisions apply to a person being a
transferee, the provision would apply only w.r.t. the amount related to each transferee
and not with reference to the amount as per a sale deed.  In the instant case, there were four separate
transferees and the sale consideration w.r.t. each transferee was Rs. 37.5
lakh, i.e. less than Rs. 50 lakh each. Each transferee was a separate income
tax entity therefore, it observed that the law has to be applied with reference
to each transferee as an individual transferee/person. Accordingly, it was held
that the provisions of section 194-IA were not applicable and allowed the
appeal of the assesse.

Sections 28, 40A(2)(b) – If the assessee derives income from developing properties and leasing them out, income is chargeable to tax as ‘business income’ following the concept of consistency. No disallowance u/s. 40A(2)(b) can be sustained if the AO fails to specifically bring the actual fair market value on record on basis of corroborative evidences.

25.  (2018) 66 ITR (Trib.) 116 (Mumbai) ACIT vs. Grew
Industries Pvt. Ltd. ITA No.:
5427/Mum/2016 A.Y.: 2011-12 Dated: 9th May, 2018

 

Sections
28, 40A(2)(b) – If the assessee derives income from developing properties and
leasing them out, income is chargeable to tax as ‘business income’ following
the concept of consistency.

 

No
disallowance u/s. 40A(2)(b) can be sustained if the AO fails to specifically
bring the actual fair market value on record on basis of corroborative
evidences.

 

FACTS


Briefly,
facts were that the assessee – a company, was engaged in the business of
development of commercial properties including I.T. Parks, offices etc., and
given them on lease. The Assessing Officer (AO) intended to treat the lease
rent as ‘Income from house property’ as against ‘Business income’ as offered by
the assessee. Upon this, the assessee explained that the I.T. Park was
developed by Salarpuria Properties Pvt Ltd (SPPL) on the land belonging to the
assessee. That the assessee developed the property to be used as I.T. Park in
Bangalore keeping the need of I.T Sector in Bangalore and office premises of
several I.T Companies were located in the I.T. Park. Also, the development and
maintenance of I.T. Park was a very complex commercial activity, which required
continuous and considerable efforts so as to provide services round the clock.
It was submitted, as per section 80 IA of the Act, development and maintenance
of I.T. Park was regarded as a business activity. It was submitted by the
assessee that in A.Y. 2006-07 to A.Y.2010-11, the income received from I.T.
Park was offered as ‘Business income’ and the department had also accepted it.
Therefore, it was submitted that the income offered by the assessee should not
be assessed as ‘Income from House Property’. Disregarding the assessee’s
submissions, the AO held the income to be ‘Income from house property’. This
was later reversed by the first appellate authority.

 

During
the course of assessment proceedings, the Assessing Officer noticed that the
assessee had claimed deduction on account of payment of salaries of Rs.
1,11,000/- and Directors remuneration of Rs. 2,20,00,000/. The AO found that no
such remuneration was paid in the earlier assessment years. He, therefore,
called upon the assessee to justify the reasonableness of payment made to them.
The assessee justified the payment made to the Directors, however, the
Assessing Officer was of the view that there was no justification of payment to
the Directors and also observed that the assessee failed to establish the
reasonableness of commission paid to the Directors. Accordingly, he disallowed
the payment made u/s. 40A(2)(b) of the Act. The CIT(A) after considering the
submissions of the assessee, allowed assessee’s claim. The CIT(A) appealed to
the ITAT.

 

HELD


The
learned DR relying on the observations of the Assessing Officer submitted that
the lease rentals were received by the assessee merely as an owner of the property.
Therefore, the income derived from lease rental had to be assessed as ‘Income
from House Property’. The learned AR submitted that the assessee had also
demonstrated with documentary evidence that it was operating and maintaining
the I.T. Park. The learned AR submitted that the assessee was in the business
of developing and leasing out commercial properties, I.T. Parks etc. Therefore,
the income derived from such activities had to be treated as ‘Business income’.

 

The
Tribunal pointed out that the Assessing Officer himself had accepted the fact
that the assessee owns number of properties and had leased them out. Though
principle of res judicata is not strictly applicable to income tax
proceedings, each assessment year being an independent unit, rule of
consistency cannot also be ignored. Considering all the facts on record, the
ITAT held that the object of the assessee was to derive income from developing
properties and leasing them out. Further following the principle of
consistency, as per earlier years the income of the concerned year should also
be considered to be ‘business income’.

 

As
regards the payment made to the Directors, the Assessing Officer had disallowed
them primarily for two reasons – firstly, the assessee had not carried out any
business activities and secondly, the payment made was unreasonable. The first
reasoning of the Assessing Officer had lost its force considering the fact that
the income derived by the assessee had been held to be business income. Even
otherwise also, besides leasing out of properties, the assessee had other
business activities also. That being the case, the disallowance of expenditure
on the ground of no business activity was totally wrong. As regards the
applicability of section 40A(2)(b) of the Act is concerned, the ITAT observed
that the Assessing Officer had not established on record what was the fair
market value of the services rendered by the assessee. The Assessing Officer
merely made a vague statement that the remuneration paid by the assessee to the
Directors was unreasonable, without bringing any corroborative evidence on
record. Neither did he establish the actual fair market value of the services
rendered. Hence, the ITAT held that the disallowance was merely on the basis of
conjectures and surmises and could not be sustained.

 

 

Section 234E – Assessing Officer cannot make any adjustment by levying fee u/s. 234E prior to 01.06.2015

24.  [2018] 66 ITR (Trib.) 69 (Chennai) A.R.R. Charitable
Trust vs. ACIT ITA No.:
1307/Chny/2017 & 238, 239, 240 & 241/Chny/2018 A.Y.s: 2013-14 to
2015-16 Dated: 24th July, 2018

 

Section
234E – Assessing Officer cannot make any adjustment by levying fee u/s. 234E
prior to 01.06.2015

 

FACTS


Prior
to 01.06.2015, there was no enabling provision in section 200A of the Act for
making adjustment in respect of the statement filed by the assessee with regard
to tax deducted at source by levying fee u/s. 234E of the Act. The Parliament
for the first time enabled the Assessing Officer to make adjustment by levying
fee u/s.234E of the Act with effect from 01.06.2015. Therefore while processing
statement u/s. 200A of the Act, the Assessing Officer cannot make any
adjustment by levying fee u/s. 234E prior to 01.06.2015.

 

Thus
the legal position prior to 01.06.2015, as per various precedents was that, the
Assessing Officer had no authority to levy fee while issuing intimation u/s.
200A of the Act. In the present case, the Ld. CIT(A) in his order, stated that
intimation u/s. 200A of the Act was issued on 31.07.2015. However the Ld. AR
pointed out referring to the intimations issued u/s. 200A of the Act, that all
the intimations u/s. 200A of the Act were issued before 01.06.2015, therefore,
the CIT(Appeals) was not justified in confirming the levy of fee.

 

HELD


The Tribunal on careful examination of facts held that the
intimations were issued for all the years before 01.06.2015. Therefore, the
CIT(Appeals) was not correct in saying that the intimations were issued on
31.07.2015. When the intimations were issued before 01.06.2015, this Tribunal
was of the considered opinion that the Assessing Officer had no jurisdiction to
levy fee u/s. 234E of the Act. The amendment to section 200(3) of the Act was
made only with effect from 01.06.2015.

 

Relying
on its own decision in Smt. G. Indhirani the Tribunal in I.T.A. Nos.238 to
241/Chny/18, held that while processing statement u/s. 200A of the Act, the
Assessing Officer cannot make any adjustment by levying fee u/s. 234E prior to
01.06.2015. Thus the fee levied u/s. 234E of the Act was deleted.

Sections 11, 12 – Tax exemption u/s. 11/12 cannot be denied merely for receiving sponsorship from a corporate business entity.

23.  (2018) 66 ITR (Trib.) 82 (Delhi) D.C.I.T. vs. India
Olympic Association ITA No.:
1130/DEL/2016 A.Y.: 2011-12 Dated: 19th July, 2018

 

Sections
11, 12 – Tax exemption u/s. 11/12 cannot be denied merely for receiving
sponsorship from a corporate business entity.

 

FACTS 


The
assessee-society was an Apex sports body for selecting athletes to represent
India at Olympic Games, Asian Games and other international athlete meets at
these events. It was registered u/s. 12A of the Act. The assessee received an
income from sponsorship amounting to Rs. 86 lakh received from Samsung India
Electronics Pvt. Ltd for 2010 Asian Games and 2010 Youth Olympic Games.
Therefore, the Assessing Officer (AO) formed an opinion that the assessee had carried
out the activities for the purposes of general public utility in the nature of
trade, commerce or business. The AO further formed a belief that this
transaction of the assessee was in the nature of rendering services in relation
to business of Samsung in lieu of consideration from Samsung India Electronics
Pvt. Ltd.  The AO was convinced that
proviso to section 2(15) of the Act squarely applies and hence the assessee
does not fall within the category of ‘charitable organisation’. Accordingly,
benefit u/s. 11/12 of the Act was denied to the assessee. Being aggrieved, the
assessee carried the matter before the first appellate authority and reiterated
that the proviso to section 2(15) of the Act does not apply in the case of the
assessee and the AO had wrongly denied claim of exemption u/s. 11/12 of the
Act.

 

HELD


The
Tribunal allowed the assessee’s appeal and held as under:

 

1.  On drawing support from the speech of the Finance Minister and
subsequent clarification issued by the CBDT within the framework of amended
provisions of section 2(15) of the Act, the Tribunal was of the view that an
object of public utility need not be an object in which the whole of the public
is interested. It is sufficient if well defined section of the public benefits
by the objects which means that the expression “object of general public
utility” is not restricted to objects beneficial to the whole mankind.


2.  Receiving sponsorship is not a part of any business carried out by
the appellant. Merely receiving sponsorship from a business entity cannot
tantamount to a conclusion that the assessee has entered into a business
activity with such sponsorer.


3.  The Hon’ble ITAT relied on the following decisions:


(a) CIT vs. Swastik Trading Co. Ltd. (113 ITR 852) wherein it was
held that establishing and maintaining Gaushalas and Panjrapole constitutes
charitable purpose.


(b) ICAI vs. Director General of Income Tax (Exem) (347 ITR 99)
where ICAI which was denied exemption u/s. 10(23C)(iv) of the Act because in
the opinion of the DGIT (Exem.) the institute was holding coaching classes and
therefore was not an educational institution. The Hon’ble Delhi High Court held
that the order denying the exemption was not valid.

 

Thus, in the Tribunal’s opinion, there was no material
which may suggest that the assessee association was conducting its affairs
solely on commercial lines with the motive to earn profit. There was also no
material which could suggest that the assessee association had deviated from
its objects which it had been pursuing since past many decades. The proviso to
section 2(15) of the Act was not applicable to the facts of the case and the
assessee-association deserved benefit u/s. 11/12 of the Act.

 

Section 234A – When the taxes have been deposited before the original due date of filing of return of income even though the return has been filed within the extended due date so notified by the CBDT, there would not be any levy of interest u/s. 234A where the returned income has been accepted or where the taxes deposited are higher than the taxes finally determined by the AO.

22.  [2018] 196 TTJ 768 (JP – Trib.) Rajasthan State
Mines & Minerals Ltd vs. ACIT ITA No.:  47/Jp/2018 
A.Y.:  2014-15.Dated: 24th October, 2018

                                  

Section
234A – When the taxes have been deposited before the original due date of
filing of return of income even though the return has been filed within the
extended due date so notified by the CBDT, there would not be any levy of
interest u/s. 234A where the returned income has been accepted or where the
taxes deposited are higher than the taxes finally determined by the AO.

 

FACTS


The
due date of filing of return of income for A.Y.2014-15 was extended by the CBDT
vide its order u/s. 119 from 30.9.2014 to 30.11.2014. The assessee filed the
return on 28.11.2014. The assessee had paid self-assessment tax well before the
original due date of filing return of income. The AO while working out the
interest u/s. 234A had not given credit of self-assessment tax paid by the assessee.
Aggrieved by the assessment order, the assessee preferred an appeal to the
CIT(A). The CIT(A) confirmed the same.

 

HELD


The
Tribunal followed the ratio of the Hon’ble Supreme Court decision in the case
of CIT vs. Pranoy Roy & Anr. (2009) 222 CTR (SC) 6 wherein it was
held that the interest u/s. 234A of the Act on default in furnishing return of
income shall be payable only on the amount of tax that has not been deposited
before the due date of filing of the IT return for the relevant assessment
year. The Tribunal relying upon the judgement of Hon’ble Supreme Court, held
that where the taxes deposited before filing the return of income were more
than the taxes finally determined on regular assessment, the interest u/s. 234A
was held not leviable.

Section 271AAA r.w.s 132 and 153C – Where no search and seizure operation u/s. 132(1) was carried out in assessee’s case, initiation of penalty proceeding u/s. 271AAA by Assessing Officer was invalid.

21.  [2018] 196 TTJ 812 (Mumbai – Trib.) DCIT vs. Velji
Rupshi Faria ITA No.:
1849/Mum/2017 A.Y.:  2008-09 Dated: 31st August, 2018

           

Section
271AAA r.w.s 132 and 153C – Where no search and seizure operation u/s. 132(1)
was carried out in assessee’s case, initiation of penalty proceeding u/s.
271AAA by Assessing Officer was invalid.

 

FACTS



The assessee was
an individual and stated to be the key person pursuant to a search and seizure
operation u/s. 132(1) of the Act in certain business concerns. The Assessing
Officer (AO) initiated proceedings u/s. 153C of the Act against the assessee.
Pursuant to the notice issued u/s. 153C of the Act, the assessee filed its
return of income. During the assessment proceedings, the AO referring to the
incriminating material found in course of search and seizure operation made a
number of additions. While completing the assessment, the AO also initiated
proceedings for imposition of penalty u/s. 271AAA of the Act. And then passed
an order on 13th March 2014.



Aggrieved
by the assessment order, the assessee preferred an appeal to the CIT(A). The
CIT(A) after considering the submissions of the assessee and having found that
search and seizure operation u/s. 132(1) of the Act was not carried out in case
of the assessee, followed the decision of the Tribunal, Ahmedabad Bench, in
case of Dy. CIT vs. K.G. Developers, ITA No.1139/Ahd./ 2012, dated 13th
September 2013, and deleted the penalty imposed.

 

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

 

HELD


The
Tribunal held that only in case of a person in whose case search and seizure
operation u/s. 132(1) of the Act was carried out on or after 1st Day
of 2007 but before the 1st Day of July 2010, penalty proceedings
u/s. 271AAA of the Act could be initiated. The primary condition for initiating
penalty proceeding was, a person concerned must have been subjected to a search
and seizure operation u/s. 132(1) of the Act. In present case, no search and
seizure operation u/s. 132(1) of the Act was carried out. Thus, the primary
condition of section 271AAA of the Act remained unsatisfied. Even otherwise
also, if penalty proceedings u/s. 271AAA of the Act was initiated against a
person who was not subjected to search action u/s. 132(1) of the Act, the
provision itself became unworkable as no declaration u/s. 132(4) of the Act was
possible from any person other than the person against whom the search and
seizure u/s. 132(1) was carried out. In the end, the Tribunal upheld CIT(A)
order.

 

NOTE:
Section 271AAA was applicable for searches u/s. 132(1) initiated prior to the 1st
day of July, 2012. For searches initiated on or after the 1st day of
July, 2012, section 271AAB shall be applicable.

Failure To Dispose Of Objections – Whether Renders Reassessment Void Or Defective And Curable?

Issue for
Consideration

Section 147 of the Income Tax Act, 1961
provides that if an Assessing Officer has reason to believe that any income
chargeable to tax has escaped assessment, he may assess or reassess such
income, subject to the provisions of sections 148 to 153 of the Act. Section
148 provides for issue of notice to an assessee, requiring him to furnish his
return of income in response to the notice, for the purposes of reassessment.
Section 148(2) requires an Assessing Officer to record his reasons for issue of
notice, before issuing any notice under this section. Courts have held that
recording of such reasons is mandatory, and issue of notice without recording
of such reasons is  invalid.

 

The Supreme Court, in the case of GKN
Driveshafts (India) Ltd. vs. ITO 259 ITR 19, held that:

 

“when a notice under section 148 is
issued, the proper course of action for the noticee is to file return and if he
so desires, to seek reasons for issuing notice. The Assessing Officer is bound
to furnish reasons within a reasonable time. On receipt of reasons, the noticee
is entitled to file objections to issuance of notice and the Assessing Officer
is bound to dispose of the same by passing a speaking order. In the instant
case, as the reasons had been disclosed in the proceedings, the Assessing
Officer had to dispose of the objections, if filed, by passing a speaking
order, before proceeding with the assessment.”

 

Following this decision of the Supreme
Court, various cases have come up before different High Courts, requiring the
courts to consider the consequences in cases where the Assessing Officer passed
the reassessment order without disposing of the objections raised by the
assessee against the issue of notice for reassessment. The courts are of the
unanimous view that the reassessment order is not sustainable on account of
such lapse. The issue however has arisen in such cases as to whether the
reassessment proceedings are null and void, or whether the defect is curable by
providing a fresh innings to the AO for curing the defect by disposal of the
objections and pass a fresh order of reassessment after following the correct
procedure. While in some cases, the Gujarat, Bombay and Delhi High Courts have
quashed or set aside the reassessment order on the ground that the necessary
procedure had not been followed, effectively nullifying the order of
reassessment, in other cases, the Gujarat, Bombay, Delhi and Madras High
Courts, while setting aside the reassessment order, have restored the matter to
the Assessing Officer for disposing of the reasons and thereafter proceeding
with the reassessment.

 

MGM Exports’ case:

 

The issue came up before the Gujarat High
Court in the case of MGM Exports vs. DCIT 323 ITR 331.

 

In this case, for assessment year 2001-02,
the assessment was completed in September 2006 u/s. 143(3) read with section
254, after the original assessment order u/s. 143(3) was remanded back to the
Assessing Officer by the Tribunal. On 3rd March 2008, the Assessing
Officer issued notice u/s. 148 proposing to reopen the completed assessment.
Vide communication dated 8th March 2008, the assessee requested the
Assessing Officer to treat the original return of income as return of income
filed in response to notice u/s. 148 of the Act and also asked for a copy of
the reasons recorded by the Assessing Officer. The Assessing Officer supplied
the copy of the reasons recorded for reopening on 21st October 2008.
On receipt of the reasons recorded, the assessee filed its objections, both on
jurisdiction and on the merits, vide communication dated 11th
December, 2008. The Assessing Officer passed the reassessment order on 16th
December, 2008.

 

The assessee filed a writ petition before
the Gujarat High Court. Before the High Court, it was argued on behalf of the
assessee that the Assessing Officer was under an obligation to first dispose of
the preliminary objections raised by the assessee, and could not have framed
the reassessment order. It was also submitted that until such speaking order
was passed, the Assessing Officer could not have undertaken reassessment.
Reliance was placed on the decisions of the Gujarat High Court in the cases of Arvind
Mills Ltd. vs. Asst. CWT (No. 1) 270 ITR 467, and Arvind Mills Ltd. vs. Asst.
CWT (No. 2) 270 ITR 469 for supporting the proposition.

 

On behalf of the Revenue, it was submitted
that the Assessing Officer had dealt with the objections in the reassessment
order itself, and hence, the same should be treated as sufficient compliance
with the directions and the procedure laid down by the Supreme Court in the
case of GKN Driveshafts (supra).

 

The Gujarat High Court considered the
decisions cited before it, and observed that the position in law was well
settled, and the Assessing Officer was accordingly required to decide the
preliminary objections and pass a speaking order disposing of the objections
raised by the assessee. Until such a speaking order was passed, the Assessing
Officer could not undertake reassessment.

 

 Applying the settled legal position to the
facts of the case, the Court noted that it was apparent that the action of the
Assessing Officer in framing the reassessment order, without first disposing of
the preliminary objections raised by the assessee, could not be sustained.
Accordingly, it quashed and set aside the reassessment order. It however
directed the Assessing Officer to dispose of the preliminary objections by
passing a speaking order, and only thereafter proceed with the reassessment
proceedings in accordance with law.

 

A similar view was taken by the High Courts
in the following cases, where the reassessment order was quashed but the
Assessing Officer was directed to dispose of the objections and then proceed
with the reassessment:

 

Garden Finance Ltd. vs. Asstt. CIT 268
ITR 48 (Guj.)(FB)

IOT Infrastructure & Energy Services
Ltd. vs. ACIT 233 CTR 175 (Bom)

Rabo India Finance Ltd. vs. DCIT 346 ITR
81 (Bom)

SAK Industries (P) Ltd. vs. DCIT 19
taxmann.com 237 (Del)

Torrent Power SEC Ltd. vs. ACIT 231
Taxman 881 (Guj)

V. M. Salgaoncar Sales International vs.
ACIT 234 Taxman 325 (Bom)

Banaskantha District Oilseeds Growers
Co-op. Union Ltd. vs. ACIT 59 taxmann.com 328 (Guj)

Pr. CIT vs. Sagar Developers 72
taxmann.com 321 (Guj)

Simaben Vinodrai Ravani vs. ITO 394 ITR
778 (Guj)

 

In Home Founders Housing Ltd. vs. ITO 93
taxmann.com 371, the Madras High Court went a step further, and held that
non-compliance of the procedure indicated in the GKN Driveshafts (India)
case (supra) would not make the order void or non est, while
remitting the matter to the Assessing Officer for passing a fresh order, after
disposing of the objections. A Special Leave Petition against the said decision
has been rejected by the Supreme court.

 

Bayer Material Science’s case

The issue again came up before the Bombay
High Court in the case of Bayer Material Science (P) Ltd v DCIT 382 ITR 333.

 

In this case, relating to assessment year
2007-08, the assessee filed its return declaring certain taxable income. The
return was accepted by issuing intimation u/s. 143(1). On 6th
February 2013, a notice u/s. 148 was issued seeking to reopen the assessment.
On 15th March, 2013, the assessee filed its  return of income, in response to the notice,
and sought a copy of the reasons recorded in support of the notice. The
Assessing Officer did not furnish the reasons recorded, in spite of the
assessee’s letters dated 15th March, 2013 and 12th
September, 2013 seeking the reasons recorded for issuing the notice. The
Assessing Officer finally furnished the copy of the reasons recorded for
issuing the notice to the assessee only on 19th March, 2015.

 

On 25th March, 2015, the assessee
filed its objections to the reasons recorded. The Assessing Officer, without
disposing of the assessee’s objections, issued a draft Assessment order,
required for a Transfer Pricing assessment, dated 30th March, 2015.

 

The Bombay High Court noted that, as the
case involved transfer pricing issues, the period of limitation to dispose of
an Assessment consequent to reopening notice as per the 4th proviso to section
153(2) was two years from the end of the financial year in which the reopening
notice was served. The reopening notice was issued on 6th February,
2013, and the reasons in support were supplied only on 19th March,
2015  in spite of the fact that the
Revenue was aware at all times that the period to pass an order of reassessment
on the impugned reopening notice dated 6th February 2013 would
expire on 31st March, 2015.

 

The Bombay High Court observed that there
was no reason forthcoming on the part of the Revenue to satisfactorily explain
the delay. The only reason made out in the affidavit filed by the Assessing
Officer was that the issue was pending before the Transfer Pricing Officer
(TPO) and it was only after the TPO had passed his order on transfer pricing,
that the reasons for reopening were provided to the assessee. The Bombay High
Court expressed its surprise as to how the TPO could at all exercise
jurisdiction and enter upon enquiry on the reopening notice, before the notice
was upheld by an order of the Assessing Officer passed on objections. Besides,
the recording of reasons for issuing the reopening notice was to be on the
basis of the Assessing Officer’s reasons. The High Court observed that the
TPO’s reasons on merits, much after the issue of the reopening notice, did not
have any bearing on serving the reasons recorded upon the party whose
assessment was being sought to be reopened.

 

The Bombay High Court further noted that, in
the affidavit filed before it by the Department, it was stated that the
Assessing Officer was under a bonafide impression that the TPO would pass an
order in favour of the assessee. The Bombay High Court expressed its surprise
as to  how the assessing officer could
then have any reason to believe that income chargeable to tax had escaped
assessment.

 

On 23rd December 2015, when the
Department again sought more time from the High Court, the High Court indicated
that in view of the gross facts of the case, the Principal Commissioner of
Income Tax would take serious note of the above, and after examining the facts,
if necessary, take appropriate remedial action to ensure that an assessee was
not made to suffer for no fault on its part particularly so as almost the
entire period of two years from the end of the financial year in which the
notice was issued was consumed by the Assessing Officer in failing to give
reasons recorded in support of the notice.

 

When the matter again came up for hearing on
27th January 2016, the High Court was informed that, on 22nd January,
2016 the Principal Commissioner of Income Tax had passed an order u/s. 264, by
which he set aside the draft Assessment order dated 30th March 2015,
and thereafter restored the matter to the Assessing Officer for passing order
after deciding the objections filed by the assessee. However, during the course
of hearing, the learned Additional Solicitor General, on instructions, stated
that the order dated 22nd January, 2016 passed by the Principal
Commissioner of Income Tax was being withdrawn.

 

The Bombay High Court noted that the draft
Assessment order was passed on 30th March, 2015 without having
disposed of the assessee’s objections to the reasons recorded in support of the
notice. The reasons were supplied to the assessee only on 19th
March, 2015 and the assessee had filed the objections to the same on 25th March,
2015. According to the Bombay High Court, thes passing of the draft Assessment
order without having disposed of the objections was in defiance of the Supreme
Court’s decision in GKN Driveshafts (India) (supra). Thus, the Bombay
High Court held that the draft Assessment order dated 30th March,
2015 was not sustainable, being without jurisdiction, and set it asideas it had
been passed without disposing of the objections filed by the assessee to the
reasons recorded in support of the notice.

 

A similar view has been taken by the Gujarat
High Court in the case of Vishwanath Engineers vs. ACIT 352 ITR 549,
where, in spite of repeated reminders by the assessee even by pointing out the
law laid down by the Supreme Court, the Assessing Officer failed to dispose of
the said objections and instead of that, straightaway passed the order of
reassessment. In that case also, the Gujarat High Court, in the context of the
issue under consideration, held that AO was bound to disclose the reasons
within a reasonable time and on receipt of the reasons, the assesseee was
entitled to raise objections and if any such objections were filed, the
objections must be disposed of by a speaking order before proceeding to
reassess in terms of the notice earlier given.. The order of reassessment was
held to be not valid.

 

Similarly, in Ferrous Infrastructure (P)
Ltd. vs. DCIT 63 taxmann.com 201, the Delhi High Court considered a case
where the objections furnished by the petitioners to the section 148 notice had
not been disposed of by a separate speaking order prior to the reassessment
order. The Delhi High Court quashed the notice under section 148, the
proceedings pursuant to the notice and the reassessment order, on two grounds –
that the reasons had been recorded by the Assessing Officer after issue of the
notice u/s. 148, and that a separate speaking order had not been passed in
response to the objections, with the objections having been dealt with, if at
all, in the reassessment order itself.

 

Observations

The rationale for remanding the matter back
to the Assessing Officer, while quashing the reassessment order, has been
explained in detail by the Gujarat High Court, in the case of Sagar
Developers (supra):

 

“the question that arises is, whether if
the Assessing Officer defaults in disposing of the objections but proceeds to
frame the assessment without so doing, should the reassessment be terminated
permanently. In other words, the question is, should the assessment be placed
back at a stage where such defect is detected or should the Assessing Officer
for all times to come be prevented from carrying out his statutory duty and
functions.

 

It is by now well settled principle of
administrative law that whenever administrative action is found to be suffering
from breach of principles of natural justice, the decision making process
should be placed at a stage where the defect is detected rather than to
permanently annul the action of the authority.

 

Further it is also well settled that
whenever an administrative action is found to be tainted with defect in the
nature of breach of natural justice or the like, the Court would set aside the
order, place back the proceedings at the stage where the defect is detected and
leave the liberty to the competent authority to proceed further from such stage
after having the defect rectified. In other words, the breach of principle of
natural justice would ordinarily not result in terminating the proceedings
permanently.

 

The requirement of supplying the reasons
recorded by the Assessing Officer issuing notice for reopening and permitting
the assessee to raise objections and to decide the same by a speaking order are
not part of the statutory provisions contained in the Act. Such requirements
have been created under a judgment of the Supreme Court in the case of GKN
Driveshafts (India) Ltd. (supra). It is true that when the Assessing Officer
proceeds to pass the final order of assessment without disposing of the
objections raised by the assessee, he effectively deprives the assessee of an
opportunity to question the notice for reopening itself. However, the assessee
is not left without the remedy when the Assessing Officer proceeds further with
the assessment without disposing of the objections. Even before the final order
of assessment is passed, it would always be open for the assessee to make a
grievance before the High Court and to prevent the Assessing Officer from
finalizing the assessment without disposing of the objections.

 

The issue can be looked from slightly
different angle. Validity of the notice for reopening would depend on the
reasons recorded by the Assessing Officer for doing so. Similarly the order of
reassessment would stand failed on the merits of the order that the Assessing
Officer has passed. Neither the action of the Assessing Officer of supplying
reasons to the assessee nor his order disposing of the objections if raised by
the assessee would per se have a direct relation to the legality of the notice
of reopening or of the order of assessment. To declare the order of assessment
illegal and to permanently prevent the Assessing Officer from passing any fresh
order of assessment, merely on the ground that the Assessing Officer did not
dispose of the objections before passing the order of assessment, would be not
the correct reading of the judgment of Supreme Court in the case of GKN
Driveshafts (India) Ltd. (supra). In such judgment, it is neither so provided
nor one think the Supreme Court envisaged such an eventuality.”

 

Similarly, in Home Finders Housing’s case
(supra), the Madras High Court explained the rationale as under:

 

“It is not in dispute that there is no
statutory requirement to pass an order taking into account the statement of
objections filed by the assessee after receiving the reasons for invoking
section 147. The Supreme Court in GKN Driveshafts (India) Ltd. (supra) has
given a procedural safeguard to the assessee to avoid unnecessary harassment by
directing the Assessing Officer to pass a speaking order taking into account
the objections for reopening the assessment under section 147.

 

The forming of opinion to proceed further
by disposal of the objections need not be a detailed consideration of all the
facts and law applicable. It must show application of mind to the objections
raised by the noticee. In case the objections are such that it would require a
detailed examination of facts and application of legal provisions, taking into
account the assessment order sought to be reopened, the string of violations,
suppression of material particulars and transactions which would require considerable
time and would be in the nature of a detailed adjudicatory process, the
Assessing Officer can dispose of the objections, by giving his tentative
reasons for overruling the objections.

 

The disposal of objections is in the
value of a procedural requirement to appraise the assessee of the actual
grounds which made the Assessing Officer to arrive at a prima facie
satisfaction that there was escape of assessment warranting reopening the
assessment proceedings. The disposal of such objection must be before the date
of hearing and passing a fresh order of assessment. In case, on a consideration
of the objections submitted by the assessee, the Assessing Officer is of the
view that there is no ground made out to proceed, he can pass an order to wind
up the proceedings. It is only when a decision was taken to overrule the
objections, and to proceed further with the reassessment process, the Assessing
Officer is obliged to give disposal to the statement of objections submitted by
the assessee.

 

The core question is as to whether
non-compliance of a procedural provision would ipso facto make the assessment
order bad in law and non est. The further question is whether it would be
permissible to comply with the procedural requirement later and pass a fresh
order on merits.

 

In case an order is passed without
following a prescribed procedure, the entire proceedings would not be vitiated.
It would still be possible for the authority to proceed further after complying
with the particular procedure.

 

The enactments like the Land Acquisition
Act, 1894, contain mandatory provisions like section 5A, the non compliance of
which would vitiate the declaration under section 6 of the Act. Even after
quashing the declaration for non compliance of section 5A, the Court would permit
the conduct of enquiry and pass a fresh declaration within the period of
limitation.

 

Therefore, that non compliance of the
procedure indicated in the GKN Driveshafts (India) Ltd. case (supra) would not
make the order void or non est and such a violation in the matter of procedure
is only an irregularity which could be cured by remitting the matter to the
authority.”

 

Therefore, the High Courts which have held
in favour of remand, have relied on three aspects – one is that the
non-consideration of objections is a breach of principles of natural justice,
which can be remedied by restoring the matter to the earlier stage, secondly,
that the requirement is merely a procedural requirement, and thirdly, that this
is not a statutory requirement, but one laid down by the Supreme Court.

 

In Garden Finance’s case (supra), the
Full Bench of the Gujarat High Court analysed the logic of the Supreme Court
decision in GKN Driveshaft’s case (supra), as under:

 

“it appears that prior to the GKN’s case
(supra), the Courts would entertain the petition challenging a notice under
section 148 and permit the assessee to satisfy the Court that there was no
failure on the part of the assessee to disclose fully and truly all material
facts for assessment. Upon reaching such satisfaction, the Court would quash
the notice for reassessment. The question is why did the Court not require the
assessee to appear before the Assessing Officer.

 

Earlier when the Court required the
assessee to appear before the Assessing Officer, the Assessing Officer would
not pass any separate order dealing with the preliminary objections and much
less any speaking order, and the Assessing Officer would deal with all the
objections at the time of re-assessment. Hence, if the assessee was not
permitted to challenge the re-assessment notice under section 148 at the
initial stage, the assessee would thereafter have to challenge the
re-assessment itself entailing the cumbersome liability of paying taxes during
pendency of the appeal before the Commissioner (Appeals), second appeal before
the Income-tax Appellate Tribunal and then reference/tax appeal before the High
Court. It was in this context that the Constitution Bench had observed in
Calcutta Discount Co. Ltd.’s case (supra) that where an action of an executive
authority, acting without jurisdiction subjected, or was likely to subject, a
person to lengthy proceedings and unnecessary harassment, the High Courts would
issue appropriate orders or directions to prevent such consequences and,
therefore, the existence of such alternative remedies as appeals and reference
to the High Court was not always a sufficient reason for refusing a party quick
relief by a writ or order prohibiting an authority acting without jurisdiction
from continuing such action and that is why in a fit case it would become the
duty of the Courts to give such relief and the Courts would be failing to
perform their duty if reliefs were refused without adequate reasons.

 

What the Supreme Court has now done in
the GKN’s case (supra) is not to whittle down the principle laid down by the
Constitution Bench of the Apex Court in Calcutta Discount Co. Ltd.’s case
(supra) but to require the assessee first to lodge preliminary objection before
the Assessing Officer who is bound to decide the preliminary objections to
issuance of the re-assessment notice by passing a speaking order and,
therefore, if such order on the preliminary objections is still against the
assessee, the assessee will get an opportunity to challenge the same by filing
a writ petition so that he does not have to wait till completion of the
re-assessment proceed- ings which would have entailed the liability to pay tax
and interest on re- assessment and also to go through the gamut of appeal,
second appeal before Income-tax Appellate Tribunal and then reference/tax
appeal to the High Court. Viewed in this light, it appears that the rigour of
availing of the alternative remedy before the Assessing Officer for objecting
to the re-assessment notice under section 148 has been considerably softened by
the Apex Court in the GKN’s case (supra) in the year 2003. Therefore, the GKN’s
case (supra) does not run counter to the Calcutta Discount Co. Ltd.’s case
(supra) but it merely provides for challenge to the re-assessment notice in two
stages, that is: (i) raising preliminary objections before the Assessing
Officer and in case of failure before the Assessing Officer, and (ii )
challenging the speaking order of the Assessing Officer under section 148 of
the Act.”

 

From the above observations of the Courts,
it is clear that the requirement of disposal of objections by a speaking order
is not just a mere procedural formality, but a procedural safeguard introduced
by the Supreme Court, just as the recording of reasons by the Assessing Officer
is a procedural safeguard built in into the statute.

 

This safeguard, as analysed by the Gujarat
High Court Full Bench in Garden Finance’s case (supra), was to prevent
unnecessary harassment – to ensure that in cases where the issue of notice was
not justified, the assessee does not have to wait till completion of the
reassessment proceedings, which would entail the liability to pay tax and
interest on reassessment and also to go through the gamut of appeal, second
appeal before Income-tax Appellate Tribunal and then reference/tax appeal to
the High Court. The Supreme Court decision in GKN Driveshaft’s case (supra)
now provides for challenge to the reassessment notice in two stages, that is:
(i) raising preliminary objections before the Assessing Officer and (ii) in
case of failure before the Assessing Officer, challenging the speaking order of
the Assessing Officer u/s. 148. The requirement of disposal of objections is
therefore an additional level of protection granted to an assessee, and not
just a mere procedural requirement. This decision is delivered by the Full
Bench of the high court and shall, in any case, have a binding force over the
decisions of the division bench.

 

While disposing of the reasons, the
Assessing Officer has to pass a speaking order dealing with the objections, as
held by the Courts, and not just dispose of it mechanically without application
of mind, or in a standard format. The requirement of disposal of objections
cannot therefore be taken lightly.

 

It is at the same time important to appreciate
that in the matters of revenue laws, an order is to be conferred with a
finality at some point of time; an assessment cannot be kept open on one count
or another and certainly not for the lapses and latches of those in governance
and vested with power. Income tax Act, like many tax laws, is enshrined with
not one but various provisions that require the authorities and the tax payers
to carry out a task within the prescribed time limit; respecting these
statutory deadlines is not only essential for administration but also for the
dispensation of timely justice. ‘Satvar Nyay’, within the prescribed
time, is one of the promised objective of the tax laws.

 

An order of reassessment is required to be
necessarily passed within the time provided by section 153 of the Act and any
license even by the court to act beyond the prescribed time limit, will amount
to doing violence to the statutory law. In our considered view, a breach or a
lapse, in administration of a civil law or a procedure, should not be equated
with a breach in revenue laws and a breach here, should as a rule, be viewed as
fatal to the dispensation of justice. Significantly, one would find, not a few,
but hundreds of cases wherein the reassessment orders are routinely passed
without paying any heed to the need to dispose of objections by a speaking
order as mandated, under the law of the land, by the Supreme court; these
orders are passed with the knowledge of the law and, in most of the cases, are
passed in spite of being informed of the law. We are unable to side with a view
that seeks  to provide a fresh innings to
an officer who consciously, knowingly has chosen to disrespect the law, even
where it is held to be administrative. 

 

The fact that this safeguard has been
introduced by the Supreme Court and not incorporated in the statute itself,
should not make any difference – after all, what the Courts are doing is
interpreting the law as enacted. In the course of such interpretation, if a
view is taken by the Courts that a particular procedural safeguard is necessary
to avoid misuse of the provisions, such procedural safeguard should be regarded
as inherently built into the provisions itself.

 

Reassessment itself is a tool of harassment
of the assessee, as noted by the Gujarat High Court, in cases where it is not
justified. It is therefore a serious imposition on the taxpayer, for which
safeguards have been built in. If these safeguards are flouted by the Assessing
Officer, should the assessing Officer be given a second chance, is the moot question
that needs to be addressed.

 

Recording of reasons is the other safeguard
that has been built in. This is also a procedural safeguard. Almost all the
courts have been unanimous in their view that in a case where reasons have not
been recorded in writing before issue of notice u/s. 148, the reassessment
proceedings are invalid, and deserve to be quashed. Why should the same logic
not apply to the procedural safeguard of disposal of reasons before completion
of assessment?

 

Emphasising the need for such an order, the
Bombay High Court, in the case of Asian Paints Ltd. vs. DCIT 296 ITR 90,
recognised the importance of the safeguard of disposal of reasons, by holding
that if the Assessing Officer does not accept the objections filed to the
notice u/s. 148, he cannot proceed further in the matter for a period of four
weeks from the date of receipt of service of the order on the assessee,
disposing of objections with a view to enable the assessee to challenge the
order disposing of the objections, before the appropriate forum to prevent the
AO to proceed further with reassessment, if desired to do so.

 

Given the importance of this safeguard, and
the harassment that a reassessment causes to an assessee, the better view
therefore seems to be that in case these safeguards are not observed, the
Assessing Officer cannot be given a second chance to rectify his blatant
disregard of the safeguards put in place by the Supreme Court. 




5 Section 133A – Returned income as against declared income during survey accepted.

5.  Amod Shivlal Shah vs. ACIT

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

ITA No.: 795/MUM/2015  

A.Y.: 2006-07                                                                                               

Dated: 23rd  February, 2018

Counsel for Assessee /
Revenue:  Dr. K. Shivaram &  Rahul Hakani / Rajesh Kumar Yadav

 

Section
133A – Returned income as against declared income during survey accepted.

 

FACTS

The
assessee was engaged in carrying out business activity as a builder and
developer. On 12.03.2007, a survey action u/s. 133A was carried out at the
business premises of the assessee. At the time of survey, it was noted that the
return of income for the assessment year under consideration as well as for
Assessment Years 2004-05 and 2005-06 were not filed. It was found that the
development work of residential building situated at Bandra, Mumbai was
complete in view of the Occupancy Certificate issued by the Municipal
Corporation on 31.10.2005. In the statement recorded, the assessee declared the
income of Rs. 1 crore based on the work-in-progress declared for Assessment
Year 2003-04 and in the answer at the time of survey, the working thereof was
also enumerated. 

 

Subsequently,
the assessee filed a return of income for assessment year 2006-07 on 29.03.2007
declaring an income of Rs.25.36 lakh, which was accompanied by the audited
Balance-sheet and the Profit & Loss Account.  The response of the assessee was that
subsequent to the survey, it compiled its accounts, which were got audited
and   it  
 showed    that   
the    estimation     made      
at  Rs.1 crore was incorrect.
During the course of assessment, assessee also furnished the reconciliation
between income declared during survey and the returned income.  In sum and substance, the stand of the
assessee was that the income declared at the time of survey was a rough
estimate, whereas the return of income was on the basis of audited accounts
compiled with reference to the corresponding evidences, material, etc.

 

The
AO did not accept the explanation furnished as according to him, the
declaration made at the time of survey was binding on the assessee and the same
could not be retracted. The CIT(A) also affirmed the addition made by the
AO. 

 

Before
the Tribunal, the revenue supported the orders of the lower authorities and
relied upon the decision of the Mumbai Tribunal in the case of Hiralal
Maganlal and Co. vs. DCIT, (2005) 97 TTJ Mum 377.  

 

HELD

The
Tribunal noted that the income declared during the survey was entirely based on
the estimation of the value of the WIP as appearing on 31.03.2003 and the
expenses estimated for Assessment Years 2004-05 to 2006-07.  Thus, the income offered at the time of
survey was on an estimate basis.  The
Tribunal also noted that the assessee had explained the basis on which the
income was drawn-up at the time of filing of return and the reasons for the
difference between the income offered at the time of survey and that declared
in the return of income. 

 

To
a question, whether the AO was justified in making the addition merely for the
reason that assessee had offered a higher amount of income at the time of
survey – the Tribunal relied to the decision of the Supreme Court in the case
of Pullangode Rubber Produce Co. Ltd. vs. State of Kerala & Anr. (91 ITR
18) where the court had observed that the admission made on an anterior
date, which was not based on correct state of facts, was not conclusive to hold
the issue against the assessee. 

 

According
to the Tribunal, the stand of the assessee was much more convincing since the
original declaration itself was not based on any books of account or supporting
documents, but was merely an estimate, whereas the return of income had been
filed on the basis of audited accounts and the principal areas of differences,
namely, the amount of sale proceeds and the expenditure were duly supported by
relevant documents.

 

As
regards reliance placed by the revenue on the decision of the Tribunal in the
case of Hiralal Maganlal and Co., the Tribunal noted that the said decision was
dealing with a statement recorded u/s. 132(4) of the Act at the time of search,
whereas the present case was dealing with a statement recorded u/s. 133A of the
Act at the time of survey.  The Tribunal
pointed out that the Supreme Court in the case of CIT vs. S. Khader Khan
Sons, 352 ITR 480 had upheld the judgment of the Madras High Court in the
case reported in 300 ITR 157, wherein the difference between sections 133A and
132(4) of the Act was noted and it was held that the statement u/s. 133A of the
Act would not have any evidentiary value. The Tribunal also referred to the
CBDT Circular no. 286/2/2003 (Inv.) II dated 10.03.2003, wherein it has been
observed that the assessments ought not to be based merely on the confession
obtained at the time of search and seizure and survey operations, but should be
based on the evidences/material gathered during the course of search/survey
operations or thereafter, while framing the relevant assessments. 

 

Accordingly,
the Tribunal set-aside the order of the CIT(A) and directed the AO to delete
the addition.

Section 115JB – For computing book profits u/s. 115JB, no adjustment can be made in respect of depreciation provided at a rate higher than that prescribed under Schedule XIV of Companies Act provided the assessee shows how and on what basis the specified period and the higher rate of depreciation was arrived at.

9. [2018] 93 taxmann.com 215
(Chennai)

Indus Finance Corporation Ltd
vs. DCIT

ITA No. : 1348/Chennai/2017

A.Y.: 2012-13  

Dated: 03rd May,
2018

 

Section 115JB – For computing book profits u/s. 115JB, no
adjustment can be made in respect of depreciation provided at a rate higher
than that prescribed under Schedule XIV of Companies Act provided the assessee
shows how and on what basis the specified period and the higher rate of
depreciation was arrived at.

           

FACTS

The
assessee, engaged in the business of providing non-banking financial services,
charged depreciation on wind mills at 80% as against 5.28% prescribed under
Schedule XIV of the Companies Act, 1956. The notes to the accounts mentioned
that depreciation on wind mill has been provided at the rates prescribed by the
Income-tax Act. For the purposes of computing book profits u/s. 115JB of the Act, the Assessing Officer (AO) sought to disallow the amount
of depreciation in excess of the amount computed by applying the rate
prescribed by Schedule XIV of the Companies Act, 1956. In the course of
assessment proceedings, it was submitted by the assessee that the rate of
depreciation given in Schedule XIV of the Companies Act was only the minimum
rate that had to be charged and the assessee was at a liberty to claim excess
depreciation when situation warranted. The AO, not being satisfied with the
contention of the assessee computed book profits by allowing depreciation on windmills
at the rate prescribed in Schedule XIV of the Companies Act, 1956.

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 where on behalf of the assessee
it was contended that the wind mills had not performed to the level expected
and therefore assessee was constrained to charge depreciation, above the rate
prescribed under Companies Act and reliance was placed on the decision of
co-ordinate bench in the case of DCIT vs. Indowind Energy Ltd, (ITA
No.1854/2015, dated 25.10.2016).

 

HELD   

The
Tribunal noted that the assessee can, at its option, choose to provide
depreciation at a rate higher than that prescribed under Schedule of the
Companies Act.  However, in doing so, the
assessee must justify that the depreciation so computed, is in accordance with
section 205(2)(b) of the Companies Act which provides that depreciation can be
provided by dividing ninety-five per cent of the original cost thereof to the
company by the specified period in respect of such asset. It observed that
except for the note in the annual accounts, nothing was brought on record to
show how and on what basis the specified period and the higher rate of
depreciation was arrived by the assessee. In absence of justification by the
assessee on the basis of depreciation arrived by it, the Tribunal held that,
for the purposes of computing book profits u/s. 115JB, lower authorities were
justified in allowing depreciation based on the rates prescribed in the
Schedule. The Tribunal distinguished the decision relied upon by the assessee
by holding that the said decision was based on realistic facts.

Section 37(1) – Premium paid on keyman insurance policy, under which in the event of death of the directors assured sum had to be received by the assessee, is allowable expenditure u/s. 37(1) of the Act.

8. [2018] 93 taxmann.com 188
(Mumbai)

Arcadia Share & Stock
Brokers (P.) Ltd. vs. ACIT

ITA Nos. : 5854 &
5855/Mum/2016

A.Ys.: 2011-12 &
2012-13 

Dated: 25th April,
2018

 

Section
37(1) – Premium paid on keyman insurance policy, under which in the event of
death of the directors assured sum had to be received by the assessee, is
allowable expenditure u/s. 37(1) of the Act.

 

FACTS

The
assessee, a private limited company, engaged in the business of share and stock
broking, claimed deduction on account of premium paid towards keyman insurance
policy taken in the name of two of its directors. In course of assessment
proceedings, the Assessing Officer (AO) called upon the assessee to furnish
necessary details. After verifying the details furnished by the assessee and
referring to the characteristic of keyman insurance, the AO called upon the
assessee to justify the deduction claimed. The assessment order stated that the
assessee submitted some literatures of keyman insurance policy, but did not
furnish any document to prove that the policies taken are keyman insurance
policy. The AO held the premium paid to be on life insurance policy and not on
keyman insurance policy. Accordingly, he held that the premium paid by the
assessee cannot be allowed as business expenditure and disallowed the amount of
premia paid. 

 

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 assessee had claimed deduction of the premium paid in
respect of such Insurance policy in assessment years 2005-06, 2006-07 and
2007-08. While completing assessments for these years
u/s. 143(3) of the Act, the AO after examining assessee’s claim, allowed
deduction in respect of premium paid. The Tribunal held that when it is a fact
on record that the Insurance policies are continuing from the year 2004 and in
the preceding assessment years assessee’s claim of deduction in respect of
premium paid have been allowed by the AO in scrutiny assessments, in the
absence of any material change in facts the deduction claimed in respect of
premium paid cannot be disallowed in the impugned assessment year, as the rule
of consistency must be applied.  

 

It
observed that except stating that in the preceding assessment years the AO has
not properly examined the issue no material change was pointed which could have
influenced the AO to take a different view in the impugned assessment year
departing from the view taken in the preceding assessment years.

 

The
Tribunal noted that the keyman insurance policies were taken in the name of
directors in pursuance to resolution dated 24th February 2004 of
board of directors and the sum assured under the insurance policy as per the
terms and conditions will come back to the assessee on the death of policy
holders. Accordingly, the Tribunal allowed assessee’s claim of deduction of
premium paid in both the assessment years.

 

The appeals filed by
the assessee were allowed.

Section 254 (2) : Appellate Tribunal – Rectification of mistakes – Issue is debatable in view of contradictory judgements–order cannot be rectified

12. Procter & Gamble Home
Products Pvt. Ltd. vs. ITAT & Others. [Writ Petition no. 2738 of 2017 dated
: 09th March, 2018 (Bombay High Court)]. 

[Procter & Gamble Home
Products Pvt. Ltd. vs. DCIT [ MA  order
dt. 28/7/2017 (reversed) ; arising out of ITA No. 3531/Mum/2014; Bench : K ;
AY:   Dated 06th June, 2016 ;
Mum.  ITAT ]]

 

Section 254 (2) : Appellate
Tribunal – Rectification of mistakes – Issue is debatable in view of
contradictory judgements–order cannot be rectified

 

The
assessee had entered into an agreement with its sister concern for sharing of
certain common facilities and not for renting of the premises in favour of the
sister concern. However, the AO treated the amount received by assessee as
income from house property. The provision in the agreement for charge at Rs.90
per sq.ft. for the built-up area occupied from time to time was, in terms of the
understanding of the party, not implemented. Instead, as intended by the
parties all along, the cost of common facilities shared by the companies was
pooled and borne by the parties in the ratio of respective net sales. In terms
of this arrangement, the assessee in fact had paid Rs.7.63 crore to the said
sister concern such amount being net of the recoveries from such sister concern
in respect of its share of common expenses, full break-up of which was
furnished by the assessee during the assessment proceedings. Therefore, there
was no scope for arriving at any other artificial rent or any other amount
received/receivable by the assessee under the agreement. The impugned amount
considered taxable in the hands of the assessee has not been considered by the A.O
as an allowable expense in the hands of the sister concern in its assessment,
thereby resulting into double taxation of the said amount.

 

The Tribunal allowed the
Revenue appeal u/s.  254(1) of the Act by
holding that the amount received by it as rent/ compensation from its sister
concern for utilisation of a part of its premises is to be classified as ‘income
from other sources‘. This was after negative the alternate contention of
the assessee that rent/ compensation should be classifiable under the head ‘business
income‘ as also Revenue’s contention that it is classifiable under the head
‘income from the house property‘. The Tribunal did by following the
order of its coordinate bench (on identical facts) in the case of M/s. Procter
& Gamble Hygiene & Healthcare Ltd., (sister concern) for the Assessment
Years 1996-97 to 2000-01. In all the aforesaid cases, on identical facts it has
been held that the rent/compensation received has to be taxed under the head ‘income
from other sources’.

 

The Revenue had filed
Miscellaneous Application, seeking to rectify the order dated 6th June,
2016. This essentially on the following grounds:(a) the order dated 6th June,
2016 was passed without considering the written submission which were filed on
behalf of the Revenue; and (b) the order dated 6th June, 2016 had
erred in relying upon   the   orders  
passed  in the sister concern case
for AY: 1996-97 to 2000-01 to allow the appeal.

 

This was in view of the fact
that all of them proceeded on a fundamentally wrong basis namely – that the
issue stands concluded by an order passed by the Tribunal for AY: 1995-96 in
respect of the sister concern. This was not so as in fact, as it did not
consider the claim of the Revenue that rent/ compensation is chargeable to tax
under the head ‘income from the house property‘ while holding it to the
taxable as ‘income from other sources‘.

 

The MA  order of the Tribunal dated 28th July,
2017 does recall its order dated 6th June, 2016 only on the second
ground that the reliance by the Tribunal on its earlier order in respect of the
sister concern was not correct. As those orders in turn it relied upon an
earlier order for A.Y 1995-96 of the Tribunal which did not have any occasion
to deal with submission regarding the classification of  the rent/compensation under the head ‘income
from house property’.

 

Being aggrieved, the assessee
filed an Writ petition to the High Court challenging the order passed in MA .
The High Court observed that the order of the Tribunal dated 6th June,
2016 while allowing Petitioner’s appeal, had relied upon the sister concern’s
order passed by the Tribunal in respect of A.Y 1996-97 to 2000-01. Admittedly,
all the orders of the Petitioner’s sister concern relied upon by the order
dated 6th June, 2016 had an issue with regard to the classification of
rent/compensation being received on letting of property under the head ‘income
from the house property’ or ‘income from other sources’. Therefore, it
followed the same. The order of the Tribunal in respect of its sister concern
for A.Y. 1995-96 was also before the Tribunal while passing the order dated 6th
June, 2016. Therefore, the rectification application of the Revenue calls
upon the Court to reappreciate its understanding of the order passed by the
Tribunal in the case of its sister concern for A.Y 1996-97 to 2000-01. This was
on the ground that the earlier orders did not correctly understand/ interpret the
order passed by the Tribunal in respect of A.Y 1995-96 in the case of
Petitioner’s sister concern. This itself would in effect amount to Review.
Therefore, outside the scope of rectification. Besides, it seeks to sit in
appeal over order passed by its Coordinate Bench for Assessment Years 1996-97
to 2000-01. This was not permissible. Moreover, the Revenue has filed appeals
in the sister concern case for the A.Y. 1996-97 to 2000-01 u/s. 260A of the Act
to this Court. The question raised therein is on the issue of appropriate
classification of the rent/ compensation under the head ‘income from the
other sources‘ or under the head ‘income from the house property‘.
The aforesaid appeals have been admitted and are awaiting consideration for
final disposal. Till such time, as the orders of the Tribunal of its Coordinate
Bench in respect of the A.Y 1996-97 to 2000-01 are set aside or are stayed
pending the final disposal, its ratio would, prima facie, continue to be
binding. Therefore, even if the Revenue seek to contend to the contrary it
would be a debatable issue. This cannot be a subject matter of rectification.
Therefore, MA order dated 28th July, 2017 of the Tribunal to the
extent it allowed the Revenue’s application for rectification of the order
dated 6th June, 2016 of the Tribunal was set aside. Accordingly, Petition was
allowed.  

Section 43A : Foreign exchange fluctuation : on loan liability being notional as no actual payment was made – section 43A of the Act as amended w.e.f. 1st April, 2003 – would not require any adjustment in the cost of the fixed assets.

11. Pr.CIT vs.  Spicer India Ltd. [ Income tax Appeal no.
1129 of 2015 dated: 18th April, 2018 (Bombay High Court)].  [Affirmed DCIT vs. Spicer India Ltd. [ITA No.
1886/PN/2013; AY: 2003-04;   Dated: 20th
October, 2014 ; Pune.  ITAT]

 

Section
43A : Foreign exchange fluctuation : on loan liability being notional as no
actual payment was made –  section 43A of
the Act as amended w.e.f. 1st April, 2003 – would not require any
adjustment in the cost of the fixed assets.

 

The assessee is engaged in
manufacturing of axles and propeller shafts and assemblies. On 31st
March, 2006, the assessment was completed u/s. 143(3) of the Act for the
A.Y.2003-04. Thereafter, the A.O reopened the assessment for the subject AY on
the ground that gain on foreign exchange conversion of loan liabilities, would
require corresponding change in the value of the fixed assets. This not having
been done, has resulted in the assessee claiming excess depreciation.

 

Consequent to the above
reopening, the A.O passed an order u/s. 
143(3) of the Act r.w.s 147 of the Act, adding the excess depreciation
which has been disallowed to the assessee’s income.

 

Being aggrieved, the assessee
filed an appeal to the CIT(A). The CIT(A) 
observed that section 43A of the Act deals with the increase or
reduction in the liability of the assessee as expressed in India currency on
account of changes in the rate of exchange of currency. Section 43A of the Act
has been amended w.e.f. 01.04.2013 i.e. from A.Y. 2003-04 to prescribe that the
adjustment of foreign currency fluctuations in respect of foreign currency
borrowings taken for acquiring fixed assets is to be made to the cost or the
WDV of fixed assets only at the time of making payment i.e. on cash basis and
not on accrual basis for the purposes of income tax. In the present case, the
impugned gain on foreign currency fluctuations is a notional gain in as much as
it has resulted on account of translation of foreign loan liability at the end
of the year on accrual basis.

 

The foreign exchange gain is
not as a result of actual payment made by the assessee. Therefore, the
aforesaid gain cannot be adjusted towards the cost of the fixed assets.
Accordingly, there is no justification for the A.O to have reduced the
depreciation allowance corresponding to the aforesaid exchange gains.

 

The Revenue being aggrieved, filed an appeal before the Tribunal.
The Tribunal by the dismissed the Revenue’s appeal by inter alia holding
on merits that in view of amended section 43A of the Act, the gain / loss in
the foreign exchange fluctuation on loan liability being notional as no actual
payment was made, section 43A of the Act as amended w.e.f. 1st
April, 2003 would not require any adjustment in the cost of the fixed assets.
This is so as no actual payment has been made by the assessee during the
previous year relevant to the subject AY. Further, places reliance upon the
decision in Commissioner of Income Tax vs. Woodward Governor India P. India,
(2009) 312 ITR 254.

 

Being aggrieved, the Revenue
filed an appeal to the High Court. The High Court observed that no payment was
made during the previous year relevant to the subject AY.  The Apex Court in Woodward Governor India
P. India, (supra) while dealing with the amended provisions of section 43A
of the Act has held that “…. with effect from 1st April, 2003 such
actual payment of the decreased/ enhanced liability is a condition precedent
for making adjustment in the carrying amount of the fixed asset.”

 

The aforesaid observation of
the Apex Court apply to the facts of the present case. Accordingly, the revenue
appeal was dismissed.

Section 147 : Reassessment – Reopening on basis of same set of facts – change of opinion – power not to correct mistakes – reassessment was held to be invalid [Section 148 ]

10.  Pr. CIT  vs. Century Textiles and Industries Ltd.

[ Income tax Appeal no 1367 of 2015 ; dated :
03rd April, 2018 (Bombay High Court)].  [Affirmed DCIT vs. Century Textiles and
Industries Ltd.   [ITA No.
2036/Mum/2013;  Dated:
22nd August, 2014 ; AY : 2007-08; 
Mum.  ITAT ]

 

Section 147 : Reassessment –
Reopening on basis of same set of facts – change of opinion – power not to
correct mistakes – reassessment was held to be invalid [Section 148 ]

 

Assessee is engaged in
manufacture of cotton piece goods, denim, yarn, caustic soda, salt, pulp and
paper, etc. The assessee had in its return of income claimed deduction
of Rs.33.67 crore u/s. 80IC of the Act in relation to its paper and pulp unit
on the basis of audit report in Form 10CCA.

 

During the scrutiny
proceedings, the A.O raised specific queries with regard to above claim u/s.
80IC of the Act which was responded. The A.O after considering the entire
material on record disallowed the assessee’s claim to the extent of Rs.11.49
crore out of total claim of Rs.33.67 crore u/s. 80IC of the Act while passing
assessment order u/s. 143(3).

 

Thereafter, a notice u/s. 148
of the Act was issued seeking to reopen assessment. Reasons in support of the
notice as communicated to the Assessee that “the income chargeable to tax to
the extent of Rs.4.99 crore has escaped assessment. Issue notice u/s. 148 for
A.Y.2007-08”

 

Assessee objected to the
reopening of the notice on the ground that the same amounts to change of
opinion and therefore without jurisdiction. However, the A.O rejected the
objection and proceeded to complete the assessment u/s. 143(3) r.w.s 147 of the
Act. The A.O disallowed the claim of deduction u/s. 80IC of the Act by further
amount of Rs.4.99 crore.

 

Being aggrieved, the assessee
carried the issue in appeal to the CIT(A). The CIT(A) rejected the assessee’s
appeal on the issue of reopening of assessment and confirmed the assessment
order.

 

Being aggrieved, the assessee
carried the issue in appeal to the ITAT. The Tribunal allowed the assessee’s
appeal, interalia holding that the assessee’s claim for deduction u/s.  80IC of the Act in respect of its paper and
pulp unit duly supported by audit report u/s. 10CCA of the Act was a subject
matter of enquiry by the A.O in the regular assessment proceedings. This is
evident from the fact that queries with regard to the claim of deduction
u/s.  80IC of the Act were specifically
raised by the A.O and the same were responded to by the assessee. Thus, the Tribunal
held that there was a view taken/opinion formed during the regular assessment
proceedings. Therefore, this is a case of change of opinion on the part of the
A.O in issuing notice and seeking to reopen assessment. The ITAT relied on the
decision of  Supreme Court in CIT vs.
Kelvinator of India Ltd. [2010] 320 ITR 561 that “reasons to believe” do
not empower the A.O to reopen an assessment when there is change in opinion.
Power to reopen assessment as observed by the Supreme Court is only a power to
reassess not to review the order already passed.

 

Being aggrieved, the revenue
carried the issue in appeal to the High Court. 
The Revenue in support of the appeal states that reopening notice was
not on account any change of opinion, as no opinion/view was taken in regular
assessment proceedings in respect of the receipts/income not derived directly
from the paper and pulp unit.

 

The Hon. High Court observed
that the reasons in support of the impugned notice is that during the regular
assessment proceedings on account of omission by the A.O the above income was
not excluded from the claim for deduction. This is different from non application
of mind to claim for deduction u/s. 80IC of the Act. As held by this Court in Hindustan
Lever vs. Wadkar (2004) 268 ITR 339, the reasons in support of the
reopening notice has to be read as it is. No additions and/or inferences are
permissible. Moreover, the power u/s. 147/148 of the Act is not to be exercised
to correct mistakes made during the regular assessment proceedings. In the
above facts, the view taken by the 
Tribunal is a view in accordance with the decision of the Apex Court in
Kelvinator India (Supra).

 

The decision of this Court in
Export Credit Guarantee Corporation of India [2013] 350 ITR  651 relied by the Dept. was distinquished. It
was also found as a fact in the above case of Export Credit Guarantee
Corporation of India (Supra) that no query was raised during the course of
the regular assessment proceedings. Thus, the occasion for the A.O to apply his
mind to the claim by the assessee in that case, did not arise.  Accordingly, the revenue Appeal was
dismissed.

Sections 226(3), 276B and 276BB – Recovery of tax – Garnishee proceedings – Assessee holding lease for settlement of sand ghats – Surrender of lease accepted by Government – Attachment of bank account of assessee thereafter for failure by Mining Office to collect tax from other settlees – No determination that settlement amount to Mines Department due against assessee – Liability was that of Mines Department – Attachment of assessee’s bank account not sustainable and revoked

18. Sainik Food Pvt. Ltd. vs.
Principal CCIT; 406 ITR 596 (Patna);

Date of order: 8th
February, 2018

 

Sections 226(3), 276B and 276BB – Recovery of tax – Garnishee
proceedings – Assessee holding lease for settlement of sand ghats – Surrender
of lease accepted by Government – Attachment of bank account of assessee
thereafter for failure by Mining Office to collect tax from other settlees – No
determination that settlement amount to Mines Department due against assessee –
Liability was that of Mines Department – Attachment of assessee’s bank account
not sustainable and revoked

 

The assessee was the highest bidder
of the tender for settlement of sand ghats located in different districts in
the State of Bihar for the period of 2015-19. According to the notice inviting
tender the assessee was required to pay settlement amount in three instalments
with simultaneous payment of the required amount of tax to the Sales Tax
Department of the State, Income Tax Department and other statutory charges. The
assessee deposited the entire settlement amount with the Department of Mines
and Geology for the years 2015 and 2016. The assessee was required to deposit
the third and the last instalment of settlement amount in the month of
September, 2017.

 

In the mean while, the assessee
received a notice of demand dated 26/07/2017, issued by the ITO in purported
exercise of power u/s. 226(3) of the Income-tax Act, 1961 calling upon the
assessee to deposit the tax liability of the District Mining Office, Bhagalpur.
The assessee requested for grant of time so that the third instalment was paid
to the Department instead of to the District Mining Officer with settlement of
sand ghat. On 19/12/2017 the amount was deducted from the bank account of the
assessee by the Department which treated it to be an assesee u/s. 226(3)(x) and
dues payable by the District Mining Officer, Bhagalpur on account of default in
deducting tax collected at source from various brick kiln owners. The assessee
surrendered the lease on 14/10/2017 and was accepted by the State Government on
20/10/2017. The ITO (TDS) passed the order of recovery u/s. 226(3)(x) on
23/10/2017.

 

The assessee filed a writ petition
contending that the assessee was not a debtor of the Mines and Geology
Department after surrender of lease and its acceptance, that the action of the
Department in releasing the bank account of the Mining Department and
thereafter attaching the bank account of the assessee and recovery of tax
liability of the Mining Department from the bank account of the assessee was
not justified, and that not taking action against the Mining Department u/s.
276B and 276BB and attaching and recovering from the bank account of the
assessee was arbitrary exercise of power. The Patna High Court allowed the writ
petition and held as under:

 

“i)    The
Department had not carried out any factual enquiry to examine whether or not
there was any liability to be paid by the assessee in connection with the
settlement of sand ghat. In the absence of factual enquiry, proceeding against
the assessee and treating it as debtor was not justified. The action of the
Department in treating the assesse as debtor and attaching its bank account and
recovering the tax liability of the Mines and the Geology Department from the
bank account of the assessee, without noticing the surrender of lease and its
acceptance by the State Government, was not proper.

ii)    For
the lapse of the Mines Department the assessee could not be fastened with any
liability if no tax was due to be payable by the assessee against any head to
the Mines Department. In the absence of exclusive determination that the
settlement amount to the Mines Department was only due against the assessee, it
could not have been declared exclusive debtor. The counter-affidavit filed by
the Mines Department acknowledged the lapse of its officers. There was no
statement that the settlement or tax liability was exclusively due against the assessee
and not other settlees which was noticed from the fact that the assessee kept
on requesting the authorities in the matter of payment of tax u/s. 226(3)(x).

iii)    The provisions of section 226(3)(x) did not confer such arbitrary
power to the Department to recover the amount from an innocent assessee after
surrender of settlement. The tax was the liability of the Mines and Geology
Department and instead of taking coercive action and adopting the means
available under the provisions of sections 276B and 276BB for recovery of the
liability from the Mines Department, attaching the bank account and directing
the tax due to be recovered from the account of the assessee was unreasonable
and unjustified. The attachment of the bank account was revoked.”

Sections 147, 148 and 151(2) – Reassessment – Notice u/s. 148 – Sanction for issuance of notice – Designated authority Additional Commissioner – Sanction by Commissioner – Notice not valid – Order of reassessment without jurisdiction and invalid

17. CIT vs. Aquatic Remedies
P. Ltd.; 406 ITR 545 (Bom):

Date of order: 25th
July, 2018

A. Y. 2004-05

 

Sections 147, 148 and 151(2) – Reassessment – Notice u/s. 148 –
Sanction for issuance of notice – Designated authority Additional Commissioner
– Sanction by Commissioner – Notice not valid – Order of reassessment without
jurisdiction and invalid

 

The assessee was in the business of
trading in pharmaceutical product. The Assessing Officer issued a notice u/s.
148 of the Income-tax Act, 1961 to reopen the assessment for the A. Y. 2004-05.
The assessee contended that the issuance of the notice for reopening of the
assessment was without jurisdiction since the sanction for issuing the notice
had to be obtained from the Additional Commissioner according to section 151(2)
but the sanction had been obtained from the Commissioner which was in breach of
the sanction and therefore without jurisdiction. The Assessing Officer rejected
the claim and passed the assessment order u/s. 147.

 

The Tribunal allowed the appeal and
quashed the reassessment order passed by the Assessing Officer.

 

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

 

“i)    U/s.
151(2) sanction to issue notice u/s. 148 has to be issued by the Additional
Commissioner. The Assessing Officer had not sought the approval of the
designated officer but the Commissioner which was evident from the form used to
obtain the sanction and the Additional Commissioner had not granted permission
to initiate reassessment proceedings against the assessee.

ii)    The
view of the Additional Commissioner was subject to the approval of his superior
– the Commissioner. Thus, there was no final sanction granted by the Additional
Commissioner for issuing the notice u/s. 148 to reopen assessment. Further, it
was the Commissioner who had directed the issuance of the notice u/s. 148 to
the Assessing Officer.

 

iii)    The order of the Tribunal in quashing the order u/s. 143(3)
r.w.s. 147 was correct. No question of law arose.”

Chapter X and Section 260A – International transactions – Determination of arm’s length price – Appeal to High Court – Power of High Court to interfere with such determination – Interference only if finding of Appellate Tribunal is perverse – Selection of comparables, short-listing them, applying of filters, fact finding exercises and final orders passed by the Tribunal binding on Department and High Court

16. Principal CIT vs.
Softbrands India P. Ltd.; 406 ITR 513 (Karn):

Date of order: 25th
June, 2018

A. Y. 2006-07

 

Chapter X and Section 260A – International transactions –
Determination of arm’s length price – Appeal to High Court – Power of High
Court to interfere with such determination – Interference only if finding of
Appellate Tribunal is perverse – Selection of comparables, short-listing them,
applying of filters, fact finding exercises and final orders passed by the
Tribunal binding on Department and High Court

 

In the appeal filed by the Revenue
before the High Court against the order of the Tribunal the following questions
were raised:

 

“i)    Whether
on the facts and in the circumstances of the case the Tribunal is right in law
in rejecting the comparables, namely, Kals Information Systems Ltd., Tata Elxsi
Ltd., M/s. Accel Information Systems Ltd., M/s. Bodhtree Consulting by
following its earlier order and without appreciating that the reasonings of the
Transfer Pricing Officer (TPO)/Assessing Officer (AO) for adopting the said
comparables which have been brought out in the TPO’s order and without
appreciating that TPO has chosen the same after application of mind and
materials on record?

ii)    Whether
the Tribunal was justified in fixing the related party transaction (RPT) at 15
percent of total revenue and deleting Geomatric Software Ltd. (Seg) and
Megasoft Ltd. as comparables without going into specific facts in the case of
taxpayer and without adducing the basis for arriving at 15 percent cut off RPT
filter, in the case of taxpayer?”

 

The Karnataka High Court dismissed
the appeal filed by the Revenue and held as under:

 

“i)    Income-tax
Act, 1961 contains special provisions relating to avoidance of tax in Chapter X
of the Act comprising sections 92 to 94B with regard to assessment to be done
for computation of income from international transactions on the principle of
“arm’s length price” and the relevant Rules for computation of such income
under the provisions of Chapter X are enacted in the form of rules 10A to 10E
in the Income-tax Rules 1962. The procedure for assessment under Chapter X
relating to international transactions is a lengthy one and involves multiple
authorities of the Department. A huge, cumbersome and tenacious exercise of
transfer pricing analysis has to be undertaken by corporate entities who have
to comply with the various provisions of the Act and Rules with huge data bank
and in the first instance they have to satisfy that the profits or the income
from transactions declared by them are at “arm’s length” which analysis is
invariably put to test and inquiry by the authorities of the Department through
the process of Transfer Pricing Officer and Dispute Resolution Penal and the
Tribunal at various stages, the assessee has a cumbersome task of compliance
and it has to satisfy the authorities that what has been declared by it is a
true and fair disclosure.

ii)    The
pick of comparables, short-listing of them, applying of filters, etc., are all
fact finding exercises and therefore the final orders passed by the Tribunal
are binding on the lower authorities of the Department as well as the High
Court.

iii)    The scheme of both section 260A in the Income-tax Act, 1961 and
section 100 read with section 103 of the Code of Civil Procedure, 1908 are in
pari materia and in the same terms. The existence of a substantial question of
law is a sine qua non for maintaining an appeal before the High Court. The High
Court may determine any issue which (a) has not been determined by the Tribunal
or (b) has been wrongly determined by the Tribunal, only if the High Court
comes to the conclusion that “by reason of the decision on substantial question
of law rendered by it”, such a determination of an issue of fact also would be
necessary and incidental to the answer given by it to the substantial question
of law arising and formulated by it.

iv)   Sub-section
(6) of section 260A does not give any extended power, beyond the parameters of
the substantial question of law to the High Court to disturb the findings of
fact given by the Tribunal below. The insertion of sub-section (7) of section
260A does not give any new or extended powers to the High Court and the
pre-existing provisions from sub-section (1) to sub-section (6) in section 260A
of the Act already had all the trappings of section 100 and 103 of the Civil
Procedure Code.

v)    The
Tribunal is expected to act fairly, reasonably and rationally and should
scrupulously avoid perversity in its orders. It should reflect due application
of mind when it assigns reasons for returning particular findings. The very
word “comparable” means that the group of entities should be in a homogeneous
group. They should not be wildly dissimilar or unlike or poles apart.

 

ii)    From the perusal of the Tribunal’s order, it
was apparent that individual cases of such comparables had been considered,
analysed and discussed by the Tribunal and while some comparables were found to
be appropriate and really comparable to the facts of the assessee, some were
not. The Tribunal had given cogent reasons and detailed findings upon
discussing each case of comparable corporate properly. Whether or not the
comparables had been rightly picked up or filters for arriving at the correct
list of comparables had been rightly applied, did not give rise to any
substantial question of law.”

Sections 9 and 195 – Non-resident – Income deemed to accrue or arise in India – TDS – Effect of sections 9 and 195 – Non-resident liable to tax only on incomes attributable to operations in India – Commission paid for procuring abroad – Non-resident not liable to tax on commission – Tax not deductible at source on commission

15. Evolv Clothing Company Pvt.
Ltd. vs. ACIT; 407 ITR 72 (Mad):

Date of order: 14th
June, 2018

A. Y. 2009-10

 

Sections 9 and 195 – Non-resident – Income deemed to accrue or
arise in India – TDS – Effect of sections 9 and 195 – Non-resident liable to
tax only on incomes attributable to operations in India – Commission paid for
procuring abroad – Non-resident not liable to tax on commission – Tax not
deductible at source on commission

 

The assessee carried on business of
export of garments and claimed to have entered into agency agreements with a
non-resident Italian agent for procuring export orders for the assessee at a
commission. In the A. Y. 2009-10, the assessee paid a sum of Rs. 3,74,09,773/-
as commission to the foreign agent. According to the assessee, since no amount
of agency commission was chargeable to tax in India, the assessee did not
deduct tax at source before payment of commission to the foreign agent.
According to the assessee, the foreign agent rendered service akin to the
service of a broker to the assessee, procuring orders upon market survey with
regard to demand for the products of the assessee in the foreign country. The
Assessing Officer passed the assessment order disallowing the entire commission
u/s. 40(a)(i), because tax had not been deducted at source. This was upheld by
the Tribunal.

 

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

 

“i)    Explanation
1 to section 9(1)(i) of the Income-tax Act, 1961, would attract liability to
Indian tax for a non-resident with business connection in India, only in
respect of income attributable to his operations in India. The amendment with
retrospective effect from June 1, 1976, by insertion of Explanation to section
9(2) can only apply to income by way of interest, royalty and fees for
technical services and not to brokerage or job-wise commission on activities
incidental to procurement of orders.

ii)    Section
195 attracts tax only on chargeable income, if any, paid to non-residents.
Where there is no liability, the question of tax deduction does not arise.
Where no part of income is chargeable in India, even clearance u/s. 195(2) or
(3) of the Act is not necessary. In Toshoku’s case (1980) 125 ITR 525, the
Supreme Court held that payments to agents for performance of services outside
India are not liable to be taxed in India.

iii)    From the service agreements with the agents abroad, it was clear
that the service rendered was essentially brokerage service. The very first
clause of the agreement stated “to procure orders”. The reference to market
research abroad or co-ordination with the supplier or to ensure timely payment
or making available its office space for visit by the suppliers, were
ordinarily things which any agent or broker undertook incidental to brokerage
service. There was no finding that any of the commission agents had any place
of business in India.

iv)   The
Assessing officer had in the assessment order, accepted that the assessee had
paid commission charges to oversees agents. It was not the case of the
Assessing Officer that any lump sum consideration had been paid for any
specific managerial, technical or consultancy services. The commission was not
taxable in India. The assessee was liable to deduct tax on such payment.

v)    The
appeal is allowed and the questions framed are answered in favour of the
assessee and against the revenue”

Section 9 of the Act and Article 5 of DTAA–Income – Deemed to accrue or arise in India (Permanent establishment) – Where there were all relevant documentary evidence available on record to render finding whether assessee, a Netherland based company, had a permanent establishment in India and the Tribunal having referred to same in its order could not have remanded back matter to Assessing Officer for consideration afresh? – The Tribunal having referred to all factual details and crystallised issues could not have remanded back matter to Assessing officer for consideration afresh

14. Co-operative Centrale
Reiffeisen Boerenleenbank B. A. vs. Dy. DIT, (International Taxation);  [2018] 97 taxmann.com 24 (Bom);

Date of order: 29th
August, 2018:

A. Ys. 2002-03, 2003-04 and
2005-06

 

Section 9 of the Act and Article 5 of DTAA–Income – Deemed to
accrue or arise in India (Permanent establishment) – Where there were all
relevant documentary evidence available on record to render finding whether
assessee, a Netherland based company, had a permanent establishment in India
and the Tribunal having referred to same in its order could not have remanded
back matter to Assessing Officer for consideration afresh? – The Tribunal
having referred to all factual details and crystallised issues could not have
remanded back matter to Assessing officer for consideration afresh

 

The assessee was a tax resident of
Netherlands and was entitled to claim the benefit of the DTAA between India and
Netherlands. In fact the assessee was part and parcel of the Rabo bank group.
An Indian company, the Rabo India Finance Private Limited (RIFPL) was
registered as a non-banking financial company with the RBI. It provided wide
range of financial services such as credit facilities, investment banking,
strategic, financial and project advisory services. This company also belonged
to the Rabo group. It was claimed that both, the assessee and the said Indian
Company were independent entities but worked together on select assignments as
and when required. In the relevant years, the assessee claimed to have provided
assistance on principle to principle basis to the Indian company on a few
transactions and received fees and guarantee commission.

 

However, the amounts received under
the aforesaid category were not offered to tax in India on the ground that the
assessee did not have a permanent establishment in India within the meaning of
Article (5) of the DTAA. The Assessing Officer passed an order holding that the
Indian Company RIFPL was a permanent establishment of the assessee within the
meaning of Article 5 (5) of the DTAA. Hence, certain percentage of the sums
referred above were taken as profits attributable to the permanent
establishment. A further percentage from that was taken as profits chargeable
to tax in India. This resulted in the return depicting total income to Rs.
31.25 lakh.

 

On appeal, the
Commissioner(Appeals) came to the conclusion that the assessee neither had a
fixed place of business nor agency or any other form of permanent establishment
in India and consequently the income of the assessee was not taxable in India.
The Tribunal restored the matter back to the file of the Assessing Officer to
determine the issue afresh.

 

Thereafter, an application was
filed seeking rectification of order initially passed by the Tribunal. However,
the Tribunal concluded that the issue was rightly remitted to the Assessing
Officer by inter alia observing that the quantum of work done, services
rendered, the contract undertaken for outsiders would have to be examined to
determine whether RIFPL was an agent having independent status or was merely
working on behalf of assessee.

 

On appeal, the Bombay High Court
held as under:

 

“i)    The
First Appellate Authority while deciding the Appeals of the assessee has passed
a fairly detailed order. The facts and the submissions have been noted in his
order. In fact, under separate heads, the details have been noted and
considered. The Appellate Authority concludes that all the agreements placed on
record would indicate that the RIFPL had procured the contract of provision of
services to the two parties.

 

However, with a view to meeting its
obligations, the RIFPL further entered into an agreement with the assessee
requiring the assessee to provide advisory services in Italy for a
consideration paid by the RIFPL. Based on these two contracts, the First
Appellate Authority concluded that it cannot be said that RIFPL is acting as an
agent of the assessee. On the contrary, the agreements point towards the said
Indian company obtaining independent contracts and subcontracting the part of
the work thereunder to the assessee. On each of the counts, namely, guarantee
commission and other services, the First Appellate Authority has held that the
Assessing Officer committed a mistake. The clear conclusion in this order is
that the business profits of the assessee are not taxable in India in absence
of any permanent establishment in India within the meaning of article 5 of the
DTAA.

ii)    These
very materials could have been examined by the Tribunal and it would have
arrived at the satisfaction whether the Assessing Officer was correct or
whether the First Appellate Authority was right in reversing the order of the
Assessing Officer and holding as above in favour of the assessee. One does not
see why, when the Tribunal refers to all the factual matters in its order and
has in earlier paragraphs crystallised the issues, then, what was the occasion
for a remand. In the order under Appeal, the Tribunal notes that the assessee
preferred an Appeal before the First Appellate Authority and argued that the
concept of fixed place, permanent establishment requires the enterprises to
have their business or a place of management/branch in India or office in India
and the assessee had neither.

iii)    The activities of the Indian company did not result in
constitution of any agency or permanent establishment of the assessee and that
the Indian company did not have any authority to conclude the contract on
behalf of the assesee, that it did not maintain any stock of any goods or
merchandise of the assessee nor did it secure any orders from the assessee that
it was economically and legally independent, that it was acting in ordinary
course of its business not dependent on the assessee. During the year under
Appeal, the Indian company had income from various sources amounting to Rs.
1386.70 Million. The assessee received professional income and guarantee
commission. There was also certain reimbursement of expenses by the Indian
company.

iv)   In
the backdrop of all this, and further facts noted, a cryptic order has been
passed by the Tribunal. In fact, in the order under challenge in reference to
the Income Tax Appeal No. 4632 of 2006 for Assessment year 2002-2003, the
Tribunal says that the Indian company had made payment to the assessee for
providing the advisory services to it and under the Head ‘Guarantee Commission’
and that the Indian company was paying the assesee more than 30 per cent of its
income. That the basic issues are, as to whether the assesee had permanent
establishment in India or not and as to whether the services rendered by the
Indian company could be treated as the activities carried out by the assessee.
Yet, it says that there is nothing on record to prove that the provisions of
article 5(1) of the Agreement are applicable. That stipulates that the
permanent establishment for the purpose of convention meant a fixed business
through which the business of the enterprise was wholly or partly carried on.
The conclusion is that the assessee was not having fixed place of business in
India. Hence, the First Appellate Authority rightly held that the provisions of
article 5 (1) were inapplicable. It is in these circumstances, it is surprising
that the Tribunal still deems it fit and proper to remand the case. If there
was indeed no material on record, then, the above conclusion was impossible to
be reached.

v)    Judicial
decisions have to be consistent and all the more there should be no confusion.
There ought to be some predictability and when given facts and circumstances
give rise to certain legal principles which parties assert are applicable,
then, as a last fact finding authority, the Tribunal could have summoned all
records and thereafter should have arrived at a categorical conclusion whether
the First Appellate Authority was right or the Assessing Officer. This having
admittedly not been done, it is opined that the Tribunal failed to act as a
last fact finding authority. It failed to discharge its duty and function
expected of it by the law.

vi)   Thus,
the order of the Tribunal is set aside and revenue’s appeal is restored to the
file of the Tribunal for a decision afresh on merits and in accordance with
law.”

Sections 45 and 54(1) – Capital gain – Exemption u/s. 54 – Construction of residential house within stipulated time – Exemption in respect of cost of new residential house – Scope of section 54 – Does not exclude cost of land from cost of residential house

13. C.
Aryama Sundaram vs. CIT; 407 ITR 1 (Mad) :

Date of order: 6th
August, 2018

A. Y. 2010-11

 

Sections 45 and 54(1) – Capital gain – Exemption u/s. 54  – 
Construction of residential house within stipulated time – Exemption in
respect of cost of new residential house – Scope of section 54 – Does not
exclude cost of land from cost of residential house

 

The assessee
had sold a residential house property on 15/01/2010 for a total consideration
of Rs. 12,50,00,000/- and the total long term capital gains was Rs.
10,47,95,925/. On 14/05/2007, the assessee had purchased a property with a
superstructure thereon for a total consideration of Rs. 15,96,46,446/- and
after demolishing the existing structure, the assessee constructed a
residential house at a cost of Rs. 18,73,85,491/-. For the A. Y. 2010-11, the
assessee had claimed the entire long term capital gains as exempt from tax u/s.
54 of Act. The Assessing Officer held that only that part of the construction
expenditure that was incurred after the sale of the original asset was eligible
for exemption u/s. 54 and based on records held that the cost of construction
incurred after the sale of the original asset was Rs. 1,14,81,067/- and
accordingly allowed exemption of the same amount.


The Commissioner (Appeals) upheld the decision of the Assessing Officer. The
Tribunal held that section 54 was a beneficial provision and had to be
construed liberally on compliance with the conditions. It held that the
assessee had complied with the conditions of section 54 and remitted the matter
to the Assessing Officer to consider the deduction u/s. 54 for the construction
cost incurred by the assessee.

 

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

 

“i)    Section
54(1) did not exclude the cost of land from the cost of the residential house.
According to the section the capital gains had to be adjusted against the cost
of the new residential house. What had to be adjusted or set off against the
capital gains was the cost of the residential house that was purchased or
constructed. Section 54(1) was specific and clear. It was the cost of the new
residential house and not just the cost of construction of the new residential
house, which was to be adjusted.

ii)    The
cost of the new residential house would necessarily include the cost of the
land, material used in the construction, labour and any other cost relatable to
the acquisition or construction of the residential house. The condition
precedent for such adjustment was that the new residential house should have
been purchased within one year before or two years after the transfer of the
residential house, which resulted in the capital gains or alternatively, a new
residential house had been constructed in India, within three years from the
date of the transfer, which resulted in the capital gains.

iii)    The new residential house had been
constructed within the time stipulated in section 54(1). It was not requisite
of section 54 that construction could not have been commenced prior to the date
of transfer of the asset that resulted in capital gains. If the amount of
capital gain is equal to or less than the cost of the new residential house,
including the land on which the residential house was constructed, the capital
gains were not to be charged u/s. 45.”

Sections 12A and 12AA(3)– Charitable purpose – Registration of trust – Cancellation of registration – Grounds for – Difference between objects of trust and management of trust – No change in objects of trust – Amendment in respect of appointment of chief trustee and manner of managing the trust – Not ground for cancelling registration of trust

12. CIT(Exemption) vs. Sadguru
Narendra Maharaj Sansthan; 407 ITR 12 (Bom):

Date of order: 28th
February, 2018

 

Sections 12A and 12AA(3)– Charitable purpose – Registration of
trust – Cancellation of registration – Grounds for – Difference between objects
of trust and management of trust – No change in objects of trust – Amendment in
respect of appointment of chief trustee and manner of managing the trust – Not
ground for cancelling registration of trust

 

The assessee-trust amended its
trust deed. The Commissioner recorded that the amendment to the trust deed
devised a system by which the chief trustee would alone define his heir for the
post of the chief trustee and “adhishtata” and that the heir could not
take part in the management of the trust during the lifetime of the chief
trustee. The Commissioner exercised his power u/s. 12AA(3) of the Income tax
Act, 1961 (hereinafter for the sake of brevity referred to as the
“Act”) and cancelled the registration of the assessee on the ground
that the amendment violated the provisions of section 13(1)(c).

 

The Tribunal held that the
Commissioner had not appreciated the difference between the objects of the
trust and the powers/management of the trust; the amendment of the trust deed
dealt with the powers of the management of the trust rather than the objects of
the trust. The Tribunal set aside the order of the Commissioner cancelling the
registration of the trust. 

 

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

 

“i)    The
cancellation of registration u/s. 12AA(3) is only in two contingencies, one the
activities of the trust not being genuine or the activities of the trust not
being carried out in accordance with its objects.

ii)    Cancellation
of the registration of the assessee-trust was not justified. The cancellation
was not on above two grounds. Section 13 applied while applying section 11. It
was in the domain of the Assessing Officer during the assessment proceedings
and not a basis for cancellation of registration.

iii)    Besides, the amendment of the trust deed not being in the spirit
of charitable trust, could not be the basis of cancellation u/s. 12AA(3). The
term “spirit of a charitable trust” was not defined in the Act nor elaborated
in the order of the Commissioner. The amendment made in the trust deed did not
suggest any change or addition to the objects of the trust. It was only in
respect of the appointment of the chief trustee and the manner of managing the
trust. The Tribunal rightly held that the Commissioner had focused on change in
the future management of the trust rather than the objects of the trust to
cancel the registration. The appeal is dismissed.”

Section 37(1) – Business expenditure – Where assessee company had furnished names and PAN numbers of all vendors to whom it had paid repair and maintenance charges for their services, the Tribunal was justified in allowing expenditure on account of such repair and maintainence charges

11. Principal CIT vs. Rambagh
Palace Hotels (P.) Ltd.; [2018] 98 taxmann.com 167 (Delhi):

Date of order: 17th
September, 2018

A. Y. 2005-06

 

Section 37(1) – Business expenditure – Where assessee company had
furnished names and PAN numbers of all vendors to whom it had paid repair and
maintenance charges for their services, the Tribunal was justified in allowing
expenditure on account of such repair and maintainence charges

 

During the year, i.e. A. Y.
2005-06, the assessee had claimed expenditure on account of repair and
maintenance charges paid by it to several parties. The Assessing Officer had
allowed repair and maintenance charges paid to four parties, who had appeared
before him and whose statements were recorded on oath. However, the balance
repair and maintenance expenditure was disallowed to the extent of 50 per cent,
on the ground of absence of supporting documents.

 

On appeal, the Commissioner
(Appeals) reduced the disallowance to 5 per cent. The Tribunal recorded that
the assessee had produced details of all vendors, including their PAN numbers,
invoices raised by them, etc., and held that the Commissioner (Appeals) was not
right in making disallowance of 5 per cent on the ground of mere suspicion and
accordingly allowed the full claim.

 

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

 

“i)    The
finding of the Tribunal deleting disallowance of 50 per cent by the Assessing Officer
is primarily factual. One has quoted the reply filed by the respondent/assessee
before the first appellate authority. These documents and papers were relied
upon by the Tribunal and the Commissioner (Appeals). However, copies of the
said documents/papers have not been filed. There is nothing to show and
establish that the findings of the Commissioner (Appeals) and the Tribunal are
perverse and factually incorrect.

ii)    Given
the aforesaid facts, there is no any substantial question of law arises for consideration.
The appeal is accordingly dismissed.”

TAXABILITY OF PROPORTIONATE DEEMED DIVIDEND IN CASE OF LOANS TO CONCERNS

Issue
for Consideration

“Dividend” is inclusively defined
u/s. 2(22) of the Income Tax Act, 1961. Clause (e) of that section provides for
taxation of of any payment by a company, not being a company in which public
are substantially interested, of any sum by way of advance or loan to a
shareholder, who is the beneficial owner of shares holding not less than 10% of
the voting power, or to any concern in which such shareholder is a member or a
partner and in which he has a substantial interest, to the extent to which the
company possesses accumulated profits. As per Explanation 3(b) of section
2(22), a person shall be deemed to have a substantial interest in a concern,
other than a company, if he is at any time during the previous year
beneficially entitled to not less than twenty per cent of the income of such
concern while in the case of a company, a person carrying not less than twenty
per cent of the voting power shall, by virtue of section 2(32) be considered to
be the person holding a substantial interest in the company.    

 

In the case of loan or advance to a
concern in which a shareholder has a substantial interest, the Supreme Court in
the case of CIT vs. Madhur Housing & Development Co Ltd Ltd. 401 ITR 152,
has  recently held  that the taxation of deemed dividend would be
in the hands of the shareholder, and not in the hands of the recipient concern.
The ratio of this decision though has been doubted by the apex court in a later
decision in the case of National Travel Services vs. CIT, 401 ITR 154
and the issue therein has been referred to the larger bench of the court.

 

Whether in bringing to tax the
deemed dividend, in the hands of the shareholders, the amount of the loan
advanced to a concern, is to be apportioned in their hands or not is an issue
that requires consideration. If yes, what shall be the basis on which the
amount is to be apportioned is another issue that is open; in cases where more
than one shareholder holds more than 10% of the voting power in the lending
company, and also has a substantial interest in the recipient concern, in what
proportion would the amount of loan be taxed as deemed dividend amongst such
shareholders – in the proportion of their shareholding in the lending company
or in the proportion of their interest in the recipient concern.

 

While the Delhi bench of the
Tribunal has held that the taxation of deemed dividend would be in the
proportion of the interest in the recipient concern, the Hyderabad bench of the
Tribunal has taken a contrary view, that such taxation would be in the
proportion of the voting power in the lending company.   

 

Puneet Bhagat’s case

The issue came up for consideration
before the Delhi SMC bench of the Tribunal in the case of Puneet Bhagat vs.
ITO 157 ITD 353.

 

The facts in this case were that
the assessee held 50% of shares in a company, in which his wife held the
remaining 50%. This company advanced a loan of Rs 10 lakh to another company,
in which the assessee held 53.85% shares, and his wife held 46.11%. At the
relevant point of time, the accumulated profits of the lending company were Rs
14.51 crore.

 

The assessing officer, following
the decision of the Delhi High Court in the case of CIT vs. Ankitech (P) Ltd
340 ITR 14, held that the deemed dividend had to be taxed in the hands of
the shareholders of the loan recipient company. Since both the assessee and his
wife were equal shareholders in the lending company, he taxed an equal amount
of Rs 5 lakh in the hands of each of the two shareholders.

 

The Commissioner (Appeals) rejected
the assessee’s appeal, confirming the addition made by the assessing officer.

 

Before the Tribunal, on behalf of
the assessee, it was argued that though, on the facts of the case, the amount
of loan liable for addition u/s. 2(22)(e) could not be apportioned amongst the
shareholders, both of whom had substantial interest in the concerns, in as much
as no mechanism had been provided in the Act for apportioning the amount of the
deemed dividend in the respective shareholders hands. The fact that there was a
different shareholding pattern of shareholdings in the two companies made the
thing all the more unworkable. Therefore, the computation provisions failed,
and, following the Supreme Court decision in the case of CIT v s. B C
Srinivasa Setty 128 ITR 294, the charging provisions would also fail.
Hence, it was argued that deemed dividend could not be taxed in the hands of
any or both the shareholders.

 

The Tribunal noted that there was
no dispute that the total amount of loan was taxable as deemed dividend in the
hands of the 2 shareholders, as the 2 shareholders held more than 20%
shareholding in both the lending company as well as the recipient company.
Referring to the argument that the charging sections would fail on account of
failure of the computation provisions, the Tribunal noted that for application
of section 2(22)(e), a loan to a ‘concern’ was also contemplated in the section
itself and therefore the charge could not have failed It also observed that it
would be too technical to hold that the legislature visualised only one
shareholder in the concern and therefore the better view would be to pin the
charge on all the qualified shareholders.

 

The Tribunal, having held so,
observed that the section clearly stated that the shareholder might be a member
of the concern or a partner thereof, which implied that the interest of the
shareholder in the concern was to be determined with reference to the
percentage of share in income or of the shareholding with the voting power in
the concern, of the qualified shareholder, that received the loan or advance.
According to the Tribunal, it was not necessary that in every case, the
detailed mechanism should be provided by the Act for computing the income. If by
reasonable construction of the section, the income could be deduced, then,
merely on the ground that a specific provision had not been provided, it could
not be held that the computation provisions failed. The Tribunal also observed
that it was well settled law that a construction which advanced the object of
legislation should be preferred to the one which defeated the same.

 

According to the Tribunal, the
percentage of shareholding in the concern to which the loan was given, was a
determining factor of the quantum of the deemed dividend to be taxed in case of
the shareholder. In the case before it, it noted that the assessee had 53.85%
shareholding with the voting power in the loan receiving company. Therefore,
according to the Tribunal, Rs. 5,38,500 should have been assessed as dividend
in his hands, and the balance Rs.4,61,100 should have been taxed as dividends
in the case of his wife. However, since in the assessee’s case, the AO had made
an addition of Rs. 5 lakh only, the Tribunal upheld the addition of Rs. 5 lakh.

 

G Indira Krishna Reddy’s case

Recently, the issue again came up
for consideration before the Hyderabad bench of the Tribunal in the cases of G
Indira Krishna Reddy vs. DyCIT (ITA Nos 1495-1497/Hyd/2014) and G V Krishna
Reddy vs. DyCIT (ITA Nos 1498-1500/Hyd/2014) dated 24th May
2017.

 

In this case, the assessee and her
husband were both shareholders of a company, Caspian Capital & Finance P.
Ltd.holding more than 10% of the share capital of the company. This company
advanced amounts of Rs. 36.10 lakh and Rs. 15 lakh ostensibly by way of share
application money to 2 companies namely, Metro Architectures & Contractors
Pvt.Ltd. and Orbit Travels & Tours Pvt. Ltd.  in which the assessee had shareholding of 20%
and 40% respectively, her husband also was holding more than 20% shareholding
in both the companies. The lending company Caspian Capital & Finance P.
Ltd. had accumulated profits exceeding the amounts of share application money
advanced at the relevant point of time.

 

The assessing officer, based on the
facts, held that such amounts advanced by Caspian Capital & Finance P. Ltd.
were unsecured loans, though termed as share application money. He therefore
added the entire share application  money
of Rs. 51.10 lakh as income of the assessee by way of deemed dividend.

 

Before the Commissioner (Appeals),
on behalf of the assessee it was argued that the entire share application money
had been taxed as deemed dividend in the hands of the assessee as well has her
husband, which had led to double taxation. It was argued that the amount of the
deemed dividend, to be taxed in the asessee’s hands, should be restricted to
the percentage of the assessee’s shareholding in the recipient companies.

 

The Commissioner (Appeals), while
upholding the taxation of deemed dividend, directed the assessing officer to
apportion the entire advanced amounts between the assessee and her spouse as
per their shareholding pattern in the lending company and not in the recipient
company as was claimed by the assessee subject to the fact that it was taxed in
both hands of the assesseee and her husband. In case there was no taxation in
both hands, the Commissioner (Appeals) held that the question of apportionment
did not arise.

 

Before the Tribunal, it was argued inter
alia, that the share application money advanced to the recipient companies
should be taxed in proportion to the shareholding of the assessee and her
husband in the recipient company.

 

The Tribunal rejected the
assessee’s main contention that since the computation mechanism failed, no
addition of deemed dividend could be made. It observed that the entire advances
or loans, given to the concerns of the shareholders having substantial interest
were required to be taxed to the extent of accumulated profits. It observed
that dividend was always distributed to the shareholders of the company, and
the entire advances or loans given to such concerns of shareholders with
substantial interest should be brought to tax to prevent unauthorised
distribution of dividend to the controlling shareholders in the guise of loans
and advances.

 

On the issue under consideration
the Tribunal observed that there was no other shareholder who had substantial
interest in both the payer company and the recipient company, other than the
assessee and her husband. Therefore, the Tribunal held that the advances given
to the recipient companies were required to be taxed in the hands of both the
assessee and her husband. It however expressed its inability to follow the
decision of the Delhi tribunal in the case of Puneet Bhagat (supra),
wherein the Delhi Tribunal had held that the dividend would be assessable in
the hands of the shareholders in the proportion of the shareholding of the
shareholders in the recipient entity. The Hyderabad Tribunal observed that
dividend was always payable to the shareholders of the payer company, and
non-shareholders had no right in the dividend. Hence, according to the
Tribunal, the question of taxing the deemed dividend as per the proportion of
shareholding in the borrowing company did not arise.

 

The Hyderabad Tribunal, in holding
as above that the proportion should be in the ratio of the holding in the payer
company, relied upon the observations in the decision of the Mumbai bench of
the Tribunal in the case of ITO vs. Sahir Sami Khatib 57 taxmann.com 13,.
The Hyderabad Tribunal therefore expressed its inability to accept the
contention that the deemed dividend should be assessed in the hands of the
assessee in proportionto the assessee’s shareholding in the recipient company.

 

Observations

If one analyses the objective
behind section 2(22)(e), as noted by the Hyderabad Tribunal, it is to tax a
shareholder who is circumventing the taxation of dividend by taking the benefit
in a disguised form as a loan to another concern. That being the purpose, it is
no doubt true that the person who has got the benefit should be taxed to the
extent of the benefit that he has derived. However, when a loan is given to a
company or other concerns, one can perhaps say that the shareholders of the
borrowing company or the members of such concerns have received an indirect
benefit in the ratio of their shareholding in the borrowing company or in the
income sharing ratio of such concerns.

 

The argument on the other hand is
that normally, if the intention of shareholders of a company is to give a loan
to another entity instead of distributing dividend, they would have factored in
the shareholding of that other entity, to ensure that the shareholders of the
lending company get the benefit of the accumulated profits indirectly in the
ratio of their entitlements to such profits in the receiving company.

 

Given the fact that this is a
taxation of dividend, unless it can be demonstrated that the benefit has
actually flowed to the shareholders in a different ratio, the more appropriate
ratio to be adopted in such cases is the ratio of the shareholding of the
assessee in the lending company. The difference of opinion between
the Delhi and the Hyderabad benches of the Tribunal is limited to the adoption
of the proportion in which such loan is to be taxed; should the proportion be
determined w.r.t the shareholding pattern of the shareholders in a lending
company or should it be w.r.t such pattern in the receiving company or concern.

 

The decision of the Mumbai bench of
the Tribunal in the case of Sahir Sami Khatib vs. ITO(supra) relied upon
by the Hyderabad Tribunal has been upheld by the Bombay High Court, on the
facts of the case, in [ITA No 722 of 2015] vide its order dated 3rd
October 2018 for reasons not relevant in deciding the issue under
consideration. The Bombay High Court observed in this case:

 

“Equally, we find that the
reasoning given by the ITAT that there cannot be any proportionate addition of
deemed dividend taking into consideration the percentage of the shareholding in
the borrowing company, does not give rise to any substantial question of law.
In the factual matrix before the ITAT, it held that Section 2(22)(e) of the I.
T. Act, 1961 does not postulate any such situation. This is especially the case
before us as there is only one shareholder that has a shareholding in the
lending company as well as in the borrowing company. This being the case and
purely factual in nature, we do not think that the ITAT was in any event
incorrect in rejecting this argument of the assessee. We may hasten to add that
different considerations may arise if two or more shareholders are shareholders
of the same lending company and the same borrowing company. In such a factual
position it could possibly be argued that the addition ought to be made on a
proportionate basis. However, we are not examining this issue in the present
case as the facts before us are completely different.

 

The last decision relied upon by Ms
Jagtiani was a decision of the Delhi ITAT wherein it appears that the Delhi
ITAT has allowed the proportionate allocation of deemed dividend on the basis
of the shareholding of the borrowing company. We find this Judgment to be
wholly inapplicable to the facts of the present case as in the facts of this
decision, both the shareholders were holding more than 10% in the lending
company and more than 46% in borrowing company. In fact, there were only two
shareholders of the lending company as well as of the borrowing company. It was
in these peculiar facts that the Delhi ITAT came to a conclusion that the
deemed dividend ought to be proportionately divided. In the facts before us,
and as mentioned earlier, the appellant – assessee is the only shareholder who
is the shareholder of the lending company as well as that of the borrowing
company. This being the case, the ratio of the Delhi ITAT is squarely not
applicable to the facts and circumstances of the present case.”

 

From these observations of the
Bombay High Court, it is clear that the decision of the Mumbai bench of the
Tribunal in Sahir Sami Khatib’s case was based on entirely
different facts, where there was only one shareholder who fulfilled the
conditions of being the beneficial owner of more than 10% of voting power in
the lending company, and more than 20% of the shareholding in the recipient
company. It was on these facts that both the Mumbai Tribunal and the Bombay
High Court held that there was no question of proportional taxation of deemed
dividend. Therefore, to that extent, the reliance of the Hyderabad bench of the
Tribunal on the decision of the Mumbai bench of the Tribunal was not justified.

 

Useful reference may be made to the
decision of the Pune bench of the Tribunal in the case of Kewalkumar Jain
vs. ACIT 144 ITD 672, though the issues in that case were slightly
different. In that case, loans were given directly to the four shareholders
holding more than 10% of the shares of the company (the total holding of such
shareholders being 100% of the company), and the aggregate value of such loans
amounting to Rs 3.81 crore exceeded the total accumulated profits of the
company, which amounted to Rs. 2 .61 crore. The assessee had a shareholding of
14%, and received a loan of 0.76 crore.

 

The assessing
officer had computed the assessee’s share of accumulated profits at 14% of 2.61
crore, amounting to Rs. 0.36 crore, added the assessee’s proportionate share of
the general reserve, and since such amount of Rs.0.42 crore was less than the
loan received by the assessee, had taxed such amount of Rs 0.42 crore as deemed
dividend in the hands of the assessee. In this case, the Commissioner exercised
his revisional powers u/s. 263, setting aside the assessment with a direction
to the assessing officer to arrive at the correct available accumulated profits
for considering the amount of deemed dividend assessable in the hands of the
assessee. According to the Commissioner, there was nothing in section 2(22)(e)
permitting or prescribing the restriction to the proportionate amount of
accumulated profits.

 

The Tribunal set aside the order of
the Commissioner u/s. 263, noting that the balance of the accumulated profits
had been taxed in the hands of the other shareholders, and hence there was no
error in taxing only the proportionate accumulated profits in the hands of the
assessee. This decision of the Pune Tribunal therefore does indicate that the
relevant ratio for the purpose of taxation of deemed dividend is the proportionate
shareholding in the lending company, where more than one shareholder is
chargeable to tax on the deemed dividend.

 

Fortunately or otherwise, with
effect from 1st April 2018, this issue would no longer be relevant,
except perhaps for the disclosure by the shareholders of exempt income in their
returns of income, since such deemed dividend would also now be subject to
payment of dividend distribution tax at the rate of 30% u/s. 115-O by the
lending company, and would be exempt in the hands of the shareholders.

Section 194IA – The limit of Rs. 50 lakh in section 194-IA(2) is qua the transferee and not qua the amount as per sale deed. Each transferee is a separate income-tax entity and the law has to be applied with reference to each transferee as an individual transferee/person.

26.  [2018] 101 taxmann.com 190 (Delhi-Trib.) Pradeep Kumar
Soni vs. ITO (TDS) (Delhi) ITA No.:
2739/Del./2015 A.Y.:
2014-15.Dated: 10th
December, 2018

 

Section 194IA
–  The limit of Rs. 50 lakh in section
194-IA(2) is qua the transferee and not qua the amount as per
sale deed.  Each transferee is a separate
income-tax entity and the law has to be applied with reference to each transferee
as an individual transferee/person.

 

FACTS


The Assessing
Officer (AO) received information from the Sub-registrar that vide an agreement
registered on 3rd July, 2013, the assessee along with 3 other
persons has purchased an immovable property for a consideration of Rs. 1.50
crore. 

 

The AO observed
that the assessee was required to deduct tax u/s. 194-IA @ 1% and deposit the
same to the credit of the Central Government. He, accordingly, called for
information u/s. 133(6) of the Act. In response, the assessee submitted that
each of the four transferees have jointly purchased the property and the share
of every co-owner is Rs. 37.50 lakh which is less than Rs. 50 lakh and
therefore, the provisions of section 194-IA are not applicable. The AO held
that since the consideration for the transfer of immovable property is Rs. 1.50
crore, i.e. more than Rs. 50 lakh, and the same is executed through a single
deed and registered the provisions of section 194-IA are applicable. He passed
an order u/s. 201(1) and 201(1A) of the Act holding the assessee and three
other transferees to be jointly and severally responsible for payment of
taxes. 

 

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 sale deed inter alia provided that “the Vendees have
become the absolute and undisputed owner of the above said plot in equal
share.” It also noted that section 194-IA(2) provides that section 194-IA(1)
will not apply where the consideration for transfer of immovable property is
less than Rs. 50 lakh. It observed that section 194-IA(1) is application to any
person being a transferee, so section 194-IA(2) is also, obviously, applicable
only with respect to the amount related to each transferee and not with
reference to the amount as per sale deed. It noted that in the instant case,
there are four separate transferees and the sale consideration w.r.t. each
transferee is Rs. 37.50 lakh, hence, less than Rs. 50 lakh each.

 

It held that
each transferee is a separate income-tax entity therefore, the law has to be
applied with reference to each transferee as an individual transferee/person.
The law cannot be interpreted and applied differently for the same transaction,
if carried out in different ways. The point to be made is that, the law cannot be
read as that in case of four separate purchase deed for four persons
separately, section 194-IA was not applicable, and in case of a single purchase
deed for four persons section 194-IA will be applicable.

 

The Tribunal
noted that AO has passed a common order for all four transferees u/s. 201(1).
The Tribunal stated that this was to justify his action since in case of
separate orders for each transferee separately, apparently, provisions of
section 194-IA could not have been made applicable since in each case purchase
consideration is only Rs. 37.50 lakh. This action of the AO shows that he was
clear in his mind that with reference to each transferee, section 194-IA was
not applicable.


The Tribunal
held that the addition made by the AO and confirmed by CIT(A) to be not
sustainable in the eyes of law and deleted the same.

 

The appeal
filed by the assessee was allowed.

Appeal to Commissioner (Appeals) – Revision – Power of Commissioner(Appeals) – Application for revision and withdrawal of appeal to Commissioner(Appeals) – Order passed in revision granting relief – Commissioner(Appeals) has no power to decide appeal

41.  Assessing
Officer vs. Dharmendra Vishnubhai Patel; 409 ITR 276 (Guj) Date of order: 5th February, 2018 Sections 246A and 264 of ITA 1961

 

Appeal to Commissioner (Appeals) – Revision – Power of
Commissioner(Appeals) – Application for revision and withdrawal of appeal to
Commissioner(Appeals) – Order passed in revision granting relief –
Commissioner(Appeals) has no power to decide appeal

 

In this case assessment was made and penalty was levied on the assesse.
On 24/09/2016, the assesse filed an appeal against the order of penalty before
the Commissioner(Appeals). On 16/02/2017, the assessee filed a revision
petition u/s. 264 of the Income-tax Act, 1961 (hereinafter
for the sake of brevity referred to as the “Act”)  against the
order of penalty before the Commissioner. On the same day he also made a
communication to the Commissioner (Appeals) before whom his appeal was pending,
in which, he conveyed his intention to withdraw the appeal. In exercise of his
revisional powers u/s. 264, the Commissioner set aside the order of penalty.
Despite this the Commissioner (Appeals) proceeded to decide the appeal on the
merits and by an order dated 25/09/2017 dismissed the appeal. The assesse filed
writ petition and challenged the validity of the order of the Commissioner
(Appeals).

 

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

 

“i)   In terms of clause (a) of
sub-section (4) of section 264, revisional powers would not be exercised, inter
alia, in a case where the period of limitation for filing appeals has not
expired and the assesse has not waived the right of appeal. This is essentially
to ensure that in the case of the same assesse a single issue does not receive
consideration at the hands of the two separate and independent authorities, one
exercising appellate jurisdiction and the other revisional jurisdiction.

ii)   The assessee had clearly made
a choice to persuade the Commissioner to exercise his revisional powers u/s.
264 and not pursue his appeal before the Appellate Commissioner. The revisional
authority therefore correctly proceeded to decide the revision petition of the
assesse and on the facts correctly allowed it. It was thereafter not open for
the Commissioner (Appeals) to still examine the merits of such an order.”

39 Section 10B – Export oriented undertaking – Exemption u/s. 10B – Export from specified area of Iron ore excavated from specified area – Processing done outside specified area – Not relevant – Assessee entitled to exemption

Pr.
CIT(Appeals) vs. Lakshminarayan Mining Company.; 404 ITR 522 (Karn);

Date
of Order : 6th April, 2018

A.
Ys.: 2009-10 to 2011-12


The
assessee was a firm in the business of mining and export of iron ore and was
granted a mining lease for an area of 105.2 hectors in Siddapura Village in
Bellary district. The assessee had entered into an operation and maintenance
agreement with NAPC, which operated the plant and machinery installed in the
export oriented unit and non-export oriented unit both belonging to the
assessee firm. The export oriented unit had started production on 23/09/2006
and accordingly the assessee claimed deduction u/s. 10B of the Act on the
profits derived from the production of iron ore from the export oriented unit
for the A. Ys. 2009-10 to 2011-12. The Assessing Officer disallowed the claim
with respect to production of iron ore said to have been outsourced by the
export oriented unit to the non-export oriented unit and restricted the claim
to the profits derived by the export oriented unit from its production.

 

The
Tribunal allowed the assessee’s claim.

 

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

 

“i)  The processing of the iron ore
in a plant belonging to the assessee being in the nature of job work was not
prohibited and formed an integral part of the activity of the export oriented
unit; the mere fact that the plant was situated outside the bonded area was 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.

 

ii)   The entitlement to deduction under the Act is
to be looked into independently and the benefit would stand or fall on the
applicability of section 10B. Hence the mere location of the plant outside the
export oriented unit and customs bonded area was not a disqualification to
claim deduction u/s. 10B. The assessee was entitled to exemption u/s. 10B.”

 

Counsel for Assessee/Revenue: Lalchand Choudhary/Vijay Kumar Soni Section 24(a) – Rental income earned by a co-operative society for letting out the building terrace is assessable under the head ‘Income from House Property’ and is entitled to deduction u/s. 24(a).


11. 
Citi Centre Premises Co-Op. Society Ltd. 
vs. Income Tax Officer (Mumbai) Member: 
A.K. Garodia (A. M.) ITA No.: 3029 and 3030 / Mum / 18 A.Y.: 
2013-14 and 2014-15 Dated: 1st February, 2019

 

Counsel for Assessee/Revenue: Lalchand
Choudhary/Vijay Kumar Soni Section 24(a) – Rental income earned by a
co-operative society for letting out the building terrace is
assessable under the head ‘Income from House Property’ and is entitled to
deduction u/s. 24(a).

 

FACTS


The contention of the assessee before the
Tribunal was that rental income earned by a co-operative society, the assessee,
for letting out the building terrace and permitting erection and installing of
cell phone towers thereon in the building owned by it was assessable under the
head ‘Income from House Property’ and not as ‘Income from other sources’ as
assessed by the AO. Therefore, the assesse claimed, it was entitled to
deduction u/s. 24(a). 

 

According to the AO, for assessing an income
earned in respect of a property as an income from house property, the property
in question should be fit for habitation. 
According to him an open plot/ terrace cannot be termed as house
property as it is the common amenity for use of members of the assessee society
and cannot be used for habitation. 

 

HELD


According to
the Tribunal, the facts in the case of the assessee were identical with the
facts in the case of Matru Ashish Co-operative Housing Society Ltd., vs. ITO
[27 taxmann.com 169] before the Mumbai Tribunal.  As held in the said case, the tribunal held
that income from letting out of the terrace was to be assessed under the head
‘income from house property’ subject to deduction u/s. 24, as against income
from other sources, as assessed by the AO.  

 

In the result the appeal filed by the assessee
was allowed.

 

Section 68 – Additions made to income of assessee, who was a non-resident since 25 years, were unjustified 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.

20.  [2018] 100 taxmann.com 280 (Mumbai-Trib) DCIT(IT) vs. Hemant
Mansukhlal Pandya ITA Nos.: 4679
& 4680 (Mum) of 2016  and C.O. 58
& 159 of 2018 A.Y.s: 2006-07
& 2007-08 Dated: 16th November, 2018

 

Section
68 – Additions made to income of assessee, who was a non-resident since 25
years, were unjustified 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.

 

FACTS


The
assessee, a non-resident since financial year 1995-96, is a director in a
company in Japan and living in Japan on business visa since 1990.  He got permanent residency certificate from
Japan in 2001.  The assessee has filed
his return of income for AY 2006-07 declaring total income of Rs.
5,51,667.  Subsequent to processing of
the return, the assessment was reopened u/s. 147 of the Act for the reasons
recorded as per which information was received by Government of India from the
French Government under DTAA that some Indian nationals and residents have
foreign bank accounts in HSBC Private Bank (Swisse SA, Geneva) which were
undisclosed to the Indian Income-tax department. This information was received
in the form of a document (hereinafter referred to as ‘base note’) was processed
with that of the assessee’s Indian income-tax return and found that the details
contained in base note were matching with the information provided by the
assessee in his income-tax return. Accordingly, the DDIT(Inv), Unit VII(4),
Mumbai sent information to the concerned AO for further action. The AO, after
recording reasons, issued notice u/s. 148 of the Act for reopening of the
assessment.

 

In
the course of assessment proceedings the AO called for various details
including details of bank accounts maintained in HSBC, Geneva in original CD
and other details. In response to notice, the assessee, stated that he is a
non-resident for more than 25 years and being a non-resident, he is not under
obligation to declare his foreign assets and foreign income to the Indian
Income-tax Authorities; hence, the question of submitting the CD of the HSBC
Bank account or the consent waiver form does not arise.  The AO, issued notice and asked the assessee
to file necessary details in support of HSBC Bank account maintained in Geneva
and also show cause as to why assessment shall not be framed u/s. 144 of the
Act, based on material available on record.

 

In
response, the assessee filed an affidavit and stated that his foreign bank
accounts and foreign assets have no connection with India or any Indian
business. No amounts from India have been transferred to any of his foreign
accounts directly or indirectly.  The assessee
challenged the authenticity and correctness of the base note and contended that
no addition can be made merely on assumptions or presumptions. The assessee
further submitted that the bank account maintained in HSBC, Geneva is having no
connection with India and accordingly question of furnishing details of bank
accounts and foreign assets does not arise. He further stated that he has filed
his income-tax return regularly in India in the status of Non-resident
declaring whatever income accrued or deemed to accrue in India and such returns
have been accepted by the department. In the absence of any provisions to
declare foreign bank accounts and assets by non-residents to Indian Income-tax
department, the question of disclosing those accounts to Indian Income-tax
department does not arise and consequently, the amount lying in HSBC Geneva
account cannot be taxed in India.

 

The
AO added the peak balance in HSBC account, amounting to Rs. 48,95,304 (Rs.
45.52 per USD) by holding that since the assessee had not produced any
evidences to prove that the money deposited in his foreign bank account does
not have any source from India.  He held
that since the assessee did not produce any documentary evidence to prove that
prior to 2001 he was permitted to have business/profession or work in Japan or
any other country the only conclusion that can be drawn is that prior to this
date, the assessee cannot be engaged in any business, profession or employment
in Japan.  He also held that there is a prima
facie presumption of amounts in the said account being undisclosed and
sourced from India. The circumstances of the case point to only one thing with
regard to source of deposits in HSBC, Geneva accounts; that the deposits were
made by the assessee in his HSBC, Geneva account from sources in India which
have not been disclosed in his return of income.

 

Aggrieved,
the assessee preferred an appeal to CIT(A) who deleted the addition made by the
AO.

 

Aggrieved,
the revenue preferred an appeal to the Tribunal. 

 

HELD


The
Tribunal noted that the assessee had only one bank account in India of which
the bank statements from 1998 to 2008 were furnished by the assessee. On
perusal of the said bank statements it could be seen that no amounts have been
transferred by the assessee from this bank account in India to any of the other
bank accounts including HSBC Geneva.  It
also noted that the balance maintained in this Indian Bank Account is so less
that it cannot fund an amount of Rs. 4.28 crore which has been added by the AO
to assessee’s income.  The Tribunal
observed that the AO sought to put the onus of proving a negative that the
deposits in foreign bank accounts are not sourced from India, on the
assessee.  It held that the AO is not
justified in placing the onus of proving a negative on the assessee.  In fact, only a positive assertion can be
proved and not a negative one.  The onus
of proving that an amount false within the taxing ambit is on the department
and it is incorrect to place the onus of proving negative on the assessee. The
Tribunal held that when the AO found that the assessee is a non-resident
Indian, he 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 is sourced out of income derived in India, when the
assessee has filed necessary evidence to prove that he is a non-resident since
25 years and his foreign bank account and assets did not have any connection
with India and that the same have been acquired/sourced out of foreign income
which has not accrued/arisen in India.

 

The Tribunal then proceeded to examine whether the government/
legislature intended to tax foreign accounts of non-residents.  Having noted the clarifications of Minister
of State for Finance on the floor of the Loksabha and also the provisions of
the Black Money Act and the FAQs issued to the Black Money Act it held that the
AO, without understanding these facts and also without answering the
jurisdictional issue of whether the non-resident assessee was liable to tax in
India in respect of deposits in his foreign bank account, when he had proved
that the source of deposit was not from India, went on to make addition on
wrong footing only on the basis of information in the form of base note which
is unverified and unauthenticated.  It
held that 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.  The suspicion, however
strong, cannot take place of proof and no addition could be made on presumption
and assumption.  The Tribunal held that
the AO had not proved that impugned addition could be made within the ambit of
section 5(2) r.w.s. 68/69 of the Act.



The
Tribunal also noted that the co-ordinate Bench of ITAT has in the case of Dy.
CIT vs. Dipendu Bapalal Shah [(2018) 171 ITD 602 (Mum.-Trib.)] decided an
identical issue in respect of foreign bank accounts and held that when the AO
failed to prove the nexus between deposits found in foreign bank accounts and
source of income derived from India, erred in making addition towards deposit
u/s. 68/69 of the Act. 

 

As
regards reliance of the revenue on the decision of the Mumbai Bench of ITAT in
the case of Rahul Rajnikant Parikh [IT Appeal No. 5889 (Mum) 2016] the
Tribunal held that the said case has no application to the facts of the case as
in the said case, the Tribunal has not laid down any ratio.  The matter was set aside to the file of the
AO.  It is settled law that a
judgment/order delivered by consent has no precedential value. 

 

The
Tribunal held that the AO erred in making addition towards deposit found in
HSBC Bank Account, Geneva u/s. 69 of the Act. 
It held that the CIT(A) has rightly deleted the addition made by the AO.
The appeal filed by the revenue was dismissed.

 

Section 68: Cash credits – Bogus loan – The proviso to section 68 inserted with effect from 01.04.2013, does not have retrospective effect – If the AO regards the loan as bogus, he has to assess the lender but cannot assess as unexplained cash credit

9.  Pr.CIT – vs.  Veedhata Tower Pvt. Ltd.

[Income tax Appeal no. 819 of 2015
dated: 17th April , 2018 (Bombay High Court)]. [Affirmed Veedhata
Tower Pvt. Ltd vs. I.T.O-9(3)(3) [ITA No.7070/Mum/2014;  Bench : H ; AY:  2010-11 ; Dated: 21st January,
2015 ; Mum.  ITAT]

 

Section 68: Cash credits –
Bogus loan – The proviso to section 68 inserted with effect from 01.04.2013,
does not have retrospective effect – If the AO regards the loan as bogus, he
has to assess the lender but cannot assess as unexplained cash credit 

 

The assessee had obtained a
loan from M/s. Lorraine Finance Pvt. Ltd (LFPL). The A.O. held that the
assessee was unable to establish the genuineness of the loan transaction
received in the name of LFPL nor able to prove the credit worthiness/the real
source of the fund. This led to the addition of the loan as unexplained cash
credit u/s. 68 of the Act.

 

In appeal, the view of the
A.O. was upheld by the CIT(A).

 

On further appeal, the
Tribunal while allowing the assessee’s appeal records on facts that, it is undisputed
that the loan was taken from LFPL. It is also undisputed that the lender had
confirmed giving of the loan through loan confirmations, personal appearance
and also attempted to explain the source of its funds. It also records the fact
that the sum of Rs.64.25 lakh had already been returned to LFPL through account
payee cheques and the balance outstanding was Rs.1 crore and 75 lakh. Besides,
it records that the source of source also stands explained by the fact that the
director of the creditor had accepted his giving a loan to the assessee’s
lender.

 

In view of the above fact, it
is the Revenue’s case that the source of source, the assessee is unable to
explain. The requirement of explaining the source of the source of receipts
came into the statute book by amendment to section 68 of the Act on 1st
April, 2013 i.e. effective from A.Y. 2013-14 onwards. Therefore, during the
subject assessment year, there was no requirement to explain the source of the
source. The Tribunal held that the assessee had discharged the onus placed upon
it u/s. 68 of the Act by filing confirmation letters, the Affidavits, the full
address and pan numbers of the creditors. Therefore, the Revenue had all the
details available with it to proceed against the persons whose source of funds
were alleged to be not genuine as held by the Apex Court in CIT vs. Lovely
Exports (P.) Ltd. [2009] 319 ITR (St.) 5 (SC).

 

Being aggrieved, the
revenue  filed an appeal to the High
Court. The grievance of the Revenue is that, even in the absence of the
amendment to section 68 of the Act, it is for the assessee to explain the
source of the source of the funds received by an assessee. It is submitted that
the assessee has not able to explain the source of the funds in the hands of
M/s. LFPL .

 

The High Court observed that
the Bombay Court in CIT vs. Gangadeep Infrastructure Pvt. Ltd, 394 ITR 680
has held that the proviso to section 68 of the Act has been introduced by the
Finance Act, 2012 w.e.f. 1st April, 2013 and therefore it would be
effective only from A.Y 2013-14 onwards and not for the earlier assessment
years. In the above decision, reliance was placed upon the decision of the Apex
Court in Lovely Exports (supra) in the context of the pre-amended
section 68 of the Act. In the above case, the Apex Court while dismissing the
Revenue’s Appeal from the Delhi High Court had observed that, where the Revenue
urges that the money has been received from bogus shareholders then it is for
the Revenue to proceed against them in accordance with law. This would not
entitle the Revenue to invoke section 68 of the Act while assessing the
assessee for not explaining the source of its source. In present case the
assessee had discharged the onus which is cast upon it in terms of the
pre-amended section 68 of the Act by filing the necessary confirmation letters
of the creditors, their Affidavits, their full address and their pan. In any
event, the question as proposed in law of the obligation to explain the source
of the source prior to 1st April, 2013, A.Y 2013-14, stands
concluded against the Revenue by the decision of this Court in Gangadeep
Infrastructure (supra). Accordingly, the 
revenue appeal is dismissed.

Section 153A: Assessment – Search- Approval to the assessment order granted by the Addl. CIT in a casual and mechanical manner and without application of mind renders the assessment order void. [Section 153D].

11.  Pr CIT
vs. Smt. Shreelekha Damani [ ITA no 668 of 2016 Dated: 27th November, 2018 (Bombay High
Court)]. 

 

[Shreelekha
Damani vs. DCIT(OSD-1)CR-7; dated 19/08/2015; ITA. No 4061/Mum/2012, AY:
2007-08 Bench: F Mum. ITAT ]

 

Section
153A: Assessment – Search- Approval to the assessment order granted by the
Addl. CIT in a casual and mechanical manner and without application of mind
renders the assessment order void. [Section 153D].

 

A search and seizure action u/s. 132 of the Act was carried out on
16.10.2008 on Simplex Group of Companies and its Associates. The
Office/residential premises of the company and its Directors/connected persons
were also covered. Simplex Group is engaged in the business of Reality, paper,
Textile and Finance. On the basis of the incriminating documents/books of
account found during the course of search and seizure operation, assessment was
made u/s. 143(3) of the Act r.w.s 153A and as per the endorsement on page-11 of
the assessment order this order is passed with the prior approval of the ACIT,
Central Range-7, Mumbai.

 

The assessee before the Tribunal raised a additional ground against
the assessment order that the A.O has not complied with the provisions of
section 153D and hence the assessment made u/s. 153A of the Act is bad in law.

 

The Revenue furnished the copy of the approval given by Addl. CIT,
Central Range-7, Mumbai which is also filed by the assessee in the paper book .
The assessee vehemently submitted that the so called approval brought on record
cannot be considered as an approval within the frame work of the provisions of
Sec. 153D of the Act. The approval granted by the Addl CIT is devoid of
application of mind and by any stretch of imagination the order made u/s.
143(3) r.w.s 153A of the Act cannot be said to be made after receiving the
approval as per the provisions of section 153D of the Act.

 

The Tribunal held that the contents of this approval are “res
ipsa Loquiter” in as much as the language is speaking for itself. The Addl
CIT says that the draft order was placed before him on 31.12.2010. He further
says that there was no much time left to analyse the issue of draft order on
merit, therefore, the said order is approved as it is.

 

The legislature wanted the assessments/reassessments of search and
seizure cases should be made with the prior approval of superior authorities
which also means that the superior authorities should apply their minds on the
materials on the basis of which the officer is making the assessment and after
due application of mind and on the basis of seized materials, the superior
authorities have to approve the assessment order.

 

The approval granted by the Addl. Commissioner is devoid of any
application of mind, is mechanical and without considering the materials on
record. In our considered opinion, the power vested in the Joint
Commissioner/Addl Commissioner to grant or not to grant approval is coupled
with a duty. The Addl Commissioner/Joint Commissioner is required to apply his
mind to the proposals put up to him for approval in the light of the material
relied upon by the AO. The said power cannot be exercised casually and in a
routine manner. The Tribunal observed that in the present case, there has been
no application of mind by the Addl. Commissioner before granting the approval.
Therefore, the assessment order made u/s. 143(3) of the Act r.w.s. 153A of the
Act is bad in law and deserves to be annulled.

 

Being aggrieved with the order of the ITAT, the Revenue filed the
Appeal before High Court. The Court observed 
that in plain terms, the Additional CIT recorded that the draft order
for approval u/s. 153D of the Act was submitted only on 31st
December, 2010. Hence, there was not enough time left to analyse the issues of
draft order on merit. Therefore, the order was approved as it was submitted.
Clearly, therefore, the Additional CIT for want of time could not examine the
issues arising out of the draft order. His action of granting the approval was
thus, a mere mechanical exercise accepting the draft order as it is without any
independent application of mind on his part. The Tribunal is, therefore,
perfectly justified in coming to the conclusion that the approval was invalid
in eye of law. We are conscious that the statute does not provide for any
format in which the approval must be granted or the approval granted must be
recorded. Nevertheless, when the Additional CIT while granting the approval
recorded that he did not have enough time to analyse the issues arising out of
the draft order, clearly this was a case in which the higher Authority had
granted the approval without consideration of relevant issues. Question of
validity of the approval goes to the root of the matter and could have been
raised at any time. In the result, no question of law arises. Accordingly, the
Reveune Appeal was dismissed.

8. ACIT vs. Jatin P. Mistry Members : C. N. Prasad, JM and Ramit Kochar, AM ITA No. 3404/Mum/2016 Assessment Year: 2008-09. Decided on: 13th April, 2018. Counsel for revenue / assessee: Abhijit Patankar / Fenil A. Bhatt

Section 40(a)(ia) – Amendment to section
40(a)(ia) made by the Finance Act, 2010 w.e.f. 1.4.2010 is retrospective in
operation  and consequently disallowance
u/s. 40(a)(ia) is not called for in a case where there is late deposit of TDS
in Government Account when such delayed deposit is within the due date of
filing return of income.

FACTS 

The Assessing Officer (AO) while passing order u/s. 143(3)
r.w.s. 263 of the Act noticed that amounts deducted by the assessee towards TDS
during the period from August 2007 to February 2008 were deposited in
Government Treasury after 30.4.2008 when these amounts should have been
deposited between 7.9.2007 to 7.3.2008. 
Accordingly, the AO disallowed the payments by invoking provisions of
section 40(a)(ia) of the Act.  He
rejected the contention of the assessee that the amounts were deposited before
due date of filing return of income and since the amendment of section
40(a)(ia) is retrospective, the disallowance should not be made.

 

Aggrieved, the assessee preferred an appeal to CIT(A) who
following the decision of the co-ordinate Bench in assessee’s own case and also
the decision of Delhi High Court in the case of CIT vs. Naresh Kumar
[262 CTR 389] and co-ordinate Bench of Mumbai Tribunal in Huda Construction
vs. ITO [ITA No. 816/Mum/2011 dated 15.4.2015] allowed the appeal.

 

Aggrieved, the revenue preferred an appeal to the Tribunal.

 

HELD:

The Tribunal noticed that the issue to be addressed is
whether there should be any disallowance u/s. 40(a)(ia) on account of late
remittance of TDS into government account when the assessee deposited such TDS
within due date for filing the return of income.  Admittedly, there was a delay in deposit of
TDS by the assessee but the deposit was made before due date of filing return
of income. 

 

The Tribunal noted that the issue is covered in favor of the
assessee, in its own case, by the decision of the co-ordinate Bench of the
Tribunal for assessment year 2009-2010. 
The Tribunal also noted that the jurisdictional High Court has in the
case of CIT-II vs. Shraddha & S. S. Kale [ITA No. 1712 of 2014 dated
27.3.2017] decided the similar issue in favor of the assessee holding that the
amendment to section 40(a)(ia) by the Finance Act, 2010 w.e.f. 1.4.2010 is
retrospective. Following the decision of the jurisdictional High Court, the
Tribunal upheld the order of CIT(A) and rejected the ground of revenue.

 

The appeal filed by the revenue was dismissed.

[2016] 73 taxmann.com 91 (Kol – Trib.) Bombay Plaza (P.) Ltd. v. ACIT ITA Nos. 1641 & 1203 (Kol) of 2014 A.Ys.: 2006-07 and 2007-08, Dated: 02.09.2016

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S. 22 r.w.s.
27(iiib)  – The provisions of section 22
read with section 27(iiib) are not attracted in the case of an assessee who is
a licensee and not a lessee.  

FACTS: 

The assessee company, formed with the
main object of acquiring on license or by purchase, etc premises in India and
also to license or sub-license or lease or sub-lease such lands, or property or
premises, had entered into an agreement 
dated 16.4.1991 with East India Hotels Ltd. under which it got on leave
and license basis 9000 sq. feet in Hotel Oberoi Towers, Bombay for the purpose
of using it as a shopping centre.  The
tenure of the leave and license was for a period of 50 years at a fixed monthly
license fee agreed between the parties. 
After acquiring the said shopping space the assessee utilized it in
granting different portions of the shopping space to various parties who were
interested in setting up shops there with the condition that shopkeepers had to
subscribe to a specific number of shares of the assessee apart from payment of
monthly charges.  The assessee also
provided various services to the licensees like air-conditioning, telephone
services, maintenance, electricity, water, sanitary, security, etc.  The assessee was basically involved in the
business of providing the said shopping space on license along with various
services.  The consideration from this
activity was shown as business income. 
The assessee claimed license fee paid to East India Hotels as a
deduction.

While assessing the total income of the
assessee under section 143(3) of the Act, the Assessing Officer (AO), in view
of the provisions of section 22 r.w.s. 27(iiib) of the Act, charged the said
income under the head `Income from House Property’.

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 noted that the license was
not only for use of the shop area but also for the use of facilities like
air-conditioners, use of elevators, etc. 
It noted various clauses of the leave and license agreement with a view
to ascertain whether the subject matter of agreement was a lease or a
license.  It noted the definition of
`lease’ under Transfer of Property Act and the definition of `license’ under
the Indian Easements Act and keeping in mind these definitions it laid down the
distinction between the lease and the license. 
Applying the tests so laid down it came to the conclusion that the
parties intended it to be a license and the agreement did not create any
interest in the property owned by the licensor and that the licensee did not
have exclusive possession of the property. 
The assessee, as a licensee, had granted sub-license to various parties
and derived income therefrom.  It held
that once it is concluded that the assessee is only a licensee, then it can
safely be said that the provisions of section 22 read with section 27(iiib) of
the Act are not attracted.  Accordingly,
it held that the income in question cannot be assessed under the head `Income
from House Property’. 

The Tribunal also observed that keeping
in mind the objects of the assessee and the facts and circumstances of the
assessee’s case, it can be safely concluded that the assessee carried on a
systematic and regular activity in the nature of business and therefore the
income from granting the premises on sub-license was to be assessed under the
head `Income from Business’.  It observed
that the latest decision of the Apex Court in the case of Chennai Properties
and Investments Ltd. (373 ITR 673)(SC) was not available to the Tribunal when
it passed the order in case of another group company based on which decision of
the Tribunal the CIT(A) confirmed the action of the AO. 

The Tribunal held that in view of the
decision of the Apex Court in the case of Chennai Properties and Investments
Ltd. (supra) the question whether the assessee is a deemed owner under section
22 r.w.s. 27(iiib) of the Act, no longer assumes importance.

The Tribunal allowed the appeal filed by
the assessee.

Mohamed Taslim Shaikh v. Addl. CIT ITAT Mumbai `B’ Bench Before Shailendra Kumar Yadav (JM) and Rajesh Kumar (AM) ITA No. 7259/Mum/2012 A.Y.: 2009-10. Dated: 04.08.2016. Counsel for assessee / revenue: Dr. K. Shivram, Ms. Nilam Jadav / Randhir Gupta

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S. 271D – Penalty under section 271D cannot be levied in a case where assessee was prevented by reasonable cause to accept money from his close relative like father for making payment for immovable property.

FACTS:  

The assessee filed his return of income declaring total income of Rs.1,87,750.  In the course of assessment proceedings it was noticed that the assessee’s father made a payment of Rs.10,69,000 on behalf of the assessee for purchase of property which amount was treated as a loan in the books of account of the assessee.  The Assessing Officer initiated proceedings for levy of penalty under section 269SS read with section 271D of the Act.  After considering the reply of the assessee, the AO levied a penalty of Rs. 10,69,000.

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, upon going through the material on record, observed that a similar addition was deleted by ITAT, Ahmedabad `A’ Bench in the case of ITO v. Dattuprasad Manharlal Dave in ITA No. 1816/Ahd/2013, wherein on a similar issue, relief was granted to the assessee.  It also observed that similar view has been taken by Allahabad High Court in the case of CIT v. Smt. Dimpal Yadav & Akhilesh Kumar Yadav (2015) 379 ITR 177 (All.)(HC) wherein the Hon’ble High Court upheld the order of the Tribunal interalia holding that loan transaction was genuine and there was reasonable cause for cash loan in similar situation.  The Tribunal directed the AO to delete the penalty levied under section 271D because assessee was prevented by reasonable cause to accept the money from his close relative like father for making payment for immovable property.

The appeal filed by the assessee was allowed.

[2016] 73 taxmann.com 36 (Mum – Trib.) Kamlesh M. Kanungo HUF v. DCIT- TDS ITA Nos.: 4045 & 4046 (Mum) of 2015 A.Ys.: 2011-12 and 2012-13, Dated: 19.09.2016

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S. 221 r.w.s.
201  – For the purposes of Explanation
below section 221(1) which prescribes that an assessee shall not cease to be
liable to penalty under sub-section (1) of section 221 merely by reason of the
fact that before levy of such penalty, he has paid tax a distinction has to be
made between  a case where the TDS is
deposited suo motu before any proceedings are initiated by the AO and a case
where the deposit of the TDS is made after initiation of proceedings by the AO
but before levy of penalty.  

FACTS:

The assessee HUF deducted income-tax
amounting to Rs. 1,71,88,352 under section 194A of the Act but did not deposit
it by due date which was 31.5.2011 but deposited it only on 30.6.2011 along
with interest. 

The Assessing Officer (AO) levied
penalty of Rs. 5,10,000 which was equivalent to 3% of the defaulted amount of
TDS. 

Aggrieved, the assessee preferred an
appeal to CIT(A) who upheld the action of the AO by noticing that non-deposit
of requisite TDS to the Government Treasury was an admitted position.

Aggrieved, the assessee preferred an
appeal to the Tribunal.

HELD: 

The Tribunal observed that the proviso
to section 221(1) clearly suggests that the levy of penalty under section
221(1) is not automatic and that the AO is empowered to use his discretion not
to levy penalty if the default is for good and sufficient reasons. It noted
that the bonafides of the assessee in complying with the requirements of
depositing the tax into the Government Treasury stood established in as much as
the tax had been deposited even before the corresponding interest amounts were
paid to the respective creditors and also before any proceedings were initiated
by the AO. 

The Tribunal held that the Explanation
below section 221(1) refers to a situation where the tax has been paid “before
the levy of such penalty”, whereas in the facts of the present case the
assessee had deposited the requisite TDS along with applicable interest into
the Government Treasury even before any proceedings under section 201(1) of the
Act were initiated by the AO. 
Considering the penal nature of section 221 it would be in the fitness
of things to make a distinction between a case where the TDS is deposited suo
motu before any proceedings are initiated by the AO and a case where the
deposit of TDS is made after initiation of proceedings by the AO but before
levy of penalty.  It held that the
Explanation will not militate against the assessee because of this
distinction.   The Tribunal held that
there existed ‘good and sufficient reasons’ to mitigate the default in
question, and thus, the proviso to section 221(1) of the Act clearly comes to
the rescue of the assessee.

The Tribunal deleted the penalty levied
under section 221(1) r.w.s. 201(1) of the Act by the AO.

The Tribunal allowed the appeal filed by
the assessee.

[2016] 72 taxmann.com 91 (Kol – Trib.) Union Bank of India v. ACIT ITA Nos. 7589 (Mum) of 2014 A.Y.: 2008-09, Dated: 11.08.2016

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S. 244A  – While granting refund in pursuance to the
appeal effect order, the amount of refund granted earlier should be adjusted
first against the interest component of the earlier refund and thereafter the
balance amount should be adjusted against the principal component of tax in the
refund order granted earlier.  

FACTS:

The Assessing Officer (AO) while
computing the amount of refund arising as a result of passing an order giving
effect to the order of CIT(A) granted interest of Rs. 64,53,58,824 as against
the amount of Rs. 65,73,42,440 claimed by the assessee.  The discrepancy, according to the assessee,
arose because the AO adjusted the refund granted to the assessee first against
principal amount of tax due instead of adjusting it first against the amount of
interest and thereafter against the principal amount of tax.

Aggrieved, the assessee filed an appeal
to the CIT(A) who distinguished the order of the Tribunal, in the assessee’s
own case, for earlier year on the ground that the said order of the Tribunal
has not considered the decision of the Apex Court in the case of Gujarat Fluoro
Ltd. (358 ITR 291).

Aggrieved, the assesse preferred an
appeal to the Tribunal.

HELD: 

The Tribunal noted that the issue under
consideration was decided by the Tribunal, for AY1998-99, 2001-02 &
2005-06, in favour of the assessee.  It
noted that the earlier orders of the Tribunal were based on decision of the
Delhi High Court in the case of India Trade Promotion Organisation wherein it was
inter alia held that in a situation where only part amount is refunded by the
Department, then payment of interest on the balance amount due from the
Department to the assessee, on a particular date, does not amount to payment of
interest on interest.  The Delhi High
Court, while arriving at this decision, had taken support from the judgment of
the Supreme Court in the case of CIT v. HEG Ltd. (2010) 324 ITR 331 (SC). 

The Tribunal observed that the facts
before it were similar to the facts of the case before the Delhi High Court in
the case of India Trade Promotion Organisation (supra) since in the present
case also only part amount was refunded in the first phase by the department
and when the balance amount was paid by the department in the second phase, the
assessee was entitled for interest on the balance amount of refund due.  It held that, in view of the observations of
the Delhi High Court, it can be said that it is not a case of payment of
interest on interest.  It also noted that
the Delhi High Court has held that the department ought to follow the same
procedure and rules while collecting tax and while issuing refunds. 

The Tribunal held that since the statute
itself has already prescribed a particular method of adjustment in Explanation
to section 140A(1), then justice, fairness, equity and good conscience demands
that same method should be followed while making adjustment for refund of
taxes, especially when no contrary provision has been provided. 

Following the order of the Tribunal of earlier
years, the Tribunal directed the AO to re-compute the amount of interest under
section 244A by first adjusting the amount of refund already granted towards
interest component and balance left, if any, shall be adjusted towards the tax
component.

The Tribunal allowed the appeal filed by
the assessee.

ACIT v. K. S. Constructions ITAT Mumbai `A’ Bench Before Shailendra Kumar Yadav (JM) and Rajesh Kumar (AM) ITA No. 7660/Mum/2014 A.Y.: 2010-11. Dated: 12.08.2016. Counsel for revenue / assessee: Vijay Kumar Bora / Ms. Aarti Vissanji

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S. 28 – Addition for suppressed sale cannot be made on the ground that the flat was sold at a rate lower than the rate at which other flats in the building were sold specially when the sale was at a price above the stamp duty value.

FACTS:  

The assessee firm carried on business as builders and developers.  During the year under consideration it had declared income from business and income under the head other sources.  In the course of assessment proceedings the Assessing Officer (AO) noticed that the assessee had offered profits in respect of 6 commercial units sold during the year.  Of the six units sold the sale deeds in respect of the 5 units were registered in the financial year 2009-10.

The relevant details in respect of units sold can be tabulated as under –

 

 

Unit

Rate /
sq. mt

Rupees

Date of
registration of sale agt

Date of

First

payment

303

33,333

3.3.2006

30.12.2005

301

34,871

18.12.2009

7.2.2006

101

2,94,485

18.12.2009

19.8.2009

302

78,327

4.10.2009

24.11.2009

4th
floor

2,38,576

18.11.2009

13.7.2009

5th
floor

2,38,576

18.11.2009

13.7.2009

The AO asked the assessee to explain the difference in rate charged for unit no. 302 as compared to that charged for unit no. 101.  The assessee explained that the unit no. 302 suffered from design disadvantages and therefore it could not get customers to purchase unit no. 302 whereas the unit no. 101 commanded a price higher than the other units because it had a locational advantage of entire floor suitable for car show room as compared to unit no. 302.

The AO considering the date of first payment as well as date by which total payment was received by the assessee in respect of unit no. 101 and 302 held that the two transactions are comparable. He observed that it is a prevalent practice in real estate dealings; underhand transactions of on money cannot be denied specially in view of the fact that the difference in rate was more than three times.  He applied the rate at which the first floor premises were sold for the purposes of determining the actual sale rate for unit no. 302.  He, accordingly, added Rs. 4,16,70,874 to the total income of the assessee as unaccounted income from sale of unit no. 302.

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

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD: 

The Tribunal observed that

(i)    apart from Unit No. 302, date of agreement of unit no. 301 and that of units on 4th & 5th floors also fell in the same financial year;
(i)    the sale price of unit no. 302 is higher than its stamp duty valuation;
(ii)    the AO had accepted the variation in rates for sale of unit nos. 301, 302 and 4th & 5th floor vis-à-vis the rates for sale of unit no. 101.
(iii)    the AO has not brought any evidence on record  to show as to how the explanation of the assessee that there are locational disadvantages in case of Unit no. 302 is not correct;
(iv)    the AO has not brought any evidence to establish that there has been on money transaction for sale of said Unit no. 302;
(v)    it is not the case of the AO that the transaction is between related parties.
In the light of the above factual position, it observed that the addition made by the AO was simply on the basis of difference in booking of unit no. 101. It noted that CIT(A) had relied on the decision of Mumbai Bench of ITAT in the case of Neelkamal Realtors & Erectors India(P.) Ltd (2013) 38 taxman.com 195 (Mum-Trib) and held that AO had not controverted the explanation furnished by the assessee during the course of assessment proceedings to explain the reasons for charging lower price in respect of unit no. 302 sold vis-à-vis rate / price for unit no. 101.

The Tribunal held that the CIT(A) had rightly deleted the addition of Rs. 4,16,70,874.

The appeal filed by the revenue was dismissed.

[2016] 73 taxmann.com 68 (Mum-Trib)(SMC) Smt. Manasi Mahendra Pitkar v. ACIT ITA No. 4223 & 4224/Mum/2015 A.Y.: 2011-12, Dated: 12.08.2016

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S. 68 – The
bank pass book or bank statement cannot be construed to be a book maintained by
the assessee for any previous year as understood for the purposes of section
68.

FACTS: 

These were two appeals preferred by
husband and wife.  In both the appeals,
the common dispute was that the cash deposits made in the joint bank account to
the extent of Rs. 27,36,500 were treated as unexplained cash credits within the
meaning of section 68 of the Act. Substantive addition was made in the case of
Mahindra Chintaman Pitkar, the husband, and protective addition was made in the
case of Manasi Mahendra Pitkar, wife. The Tribunal in its order dealt with the
appeal in the case of husband as the lead appeal.

The assessee, an individual was employed
with Municipal Corporation of Greater Mumbai. The Assessing Officer (AO)
noticed that during the year under consideration cash aggregating to Rs.
29,53,500 was deposited in the joint bank account of the assessee and his wife
with Thane Janata Sahakari Bank. 

On being asked the assessee explained
that the amounts were received from his father, father-in-law, son and various
other relatives & friends and that these amounts were used by him for
treatment of his wife who was bedridden and was suffering from the disease of
multiple sclerosis which required costly medical treatment.  It was explained that expenditure of Rs. 30
lakh a year was required to be incurred for medical treatment of his wife and
since the assessee was a salaried employee with limited resources he had
received amounts from family members, relatives and friends for the medical
treatment of his wife.

The AO added the sum of Rs. 29,53,500 to
the total income of the assessee on a substantive basis and also made similar
addition on protective basis in the case of his wife.

Aggrieved, the assessee preferred an
appeal to CIT(A) who gave relief to the extent of Rs. 2,70,000 with respect to
withdrawals found in the bank account of assessee’s father and confirmed the
addition of Rs 27,36,500 as unexplained cash credit under section 68 of the
Act.

Aggrieved, the assessee preferred an
appeal to the Tribunal.

HELD:

In the course of hearing
before the Tribunal, affidavit of the assessee narrating the factual position
about the disease of his wife and the utilization of funds for the medial
treatment was filed and the documents in support of the facts narrated in the
affidavit were also filed. The Tribunal considered the ratio of the judgment of
Bombay High Court in the case of Bhaichand N. Gandhi (1983) 141 ITR 67
(Bom).  It noted that the assessee did
not maintain any books of account and section 68 of the Act had to fail because
as per the judgment of the Hon’ Bombay High Court in the case of Shri Bhaichand
N. Gandhi (supra), the bank pass book or bank statement cannot be construed to
be a book maintained by the assessee for any previous year as understood for
the purposes of section 68 of the Act. 
It held that on this account itself the addition deserves to be deleted.

The Tribunal also observed
that the circumstances in which the cash deposits were made and the purpose for
which such monies were utilized was emerging from record and no material was
found by the AO to disprove the same.  It
noted that the assessee could not produce any formal corroborative evidence of
having received respective amounts from friends, relatives, however, it
observed that section 68 is a rule of evidence, and, the AO is expected to
consider the explanation rendered in the context of the circumstances of each
case.

The Tribunal held that the
addition is unsustainable in view of the ratio of the Bombay High Court in the
case of Shri Bhaichand N. Gandhi (supra). 

The order of CIT(A) was set
aside and the AO was directed to delete the addition of Rs. 27,36,500 made
under section 68 of the Act.

Since the substantive
addition in the case of the husband was deleted, the Tribunal held that the
protective addition in the hands of the wife was also unsustainable.

The appeals filed by the
assessee were allowed.

Lintas India Pvt. Ltd. v. ACIT(TDS) ITAT Mumbai `A’ Bench Before R. C. Sharma (AM) and Ram Lal Negi (JM) ITA No. 3504/Mum/2014 A.Y.: 2010-11. Dated: 02.08.2016. Counsel for assessee / revenue: Prakash Jotwani / Morya Pratap

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S. 194J – Internet charges for use of internet connectivity are not covered by section 194J.

S. 194J – Payment for computer software development does not qualify for deduction under section 194J.

FACTS-I:  

The assessee, during the year, paid internet charges for use of internet connectivity and deducted tax thereon under section 194C of the Act.  The Assessing Officer (AO) held that the payment so made qualifies for deduction of tax under section 194J as “fees for technical services”.  He, accordingly, held the assessee to be an assessee-in-default under section 201(1) / 201(1A) of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the action of the AO and held that as per the amendment, the domestic payments are now covered under section 194J and therefore the ratio of the decision relied on by the assessee in the case of Skycell Communications Ltd. (251 ITR 53)(Mad HC) is not applicable in the instant case.

Aggrieved, the assessee preferred an appeal to Tribunal.

HELD:  

The Tribunal held that the issue under consideration is squarely covered by various decisions of High Court and Tribunal.  It noted that –
(i)    the Delhi High Court had an occasion to examine a similar issue in the case of CIT v. Estel Communications (P.) Ltd. (217 CTR 102)(Del) wherein the Court held that mere payment by assessee for an internet bandwidth to a US company did not mean that technical services were rendered by the US company to the assessee and, therefore, provisions of section 9(1)(vii) did not apply so as to warrant any deduction of tax from payment made by the assessee to the US company;
(ii)    the Madras High Court in Skycell Communications Ltd and another v. DCIT & Others (2011) 251 ITR has considered the provisions fo section 9(1)(vii);
(iii)    Chandigarh Bench of ITAT in the case of HFCL Infotel Ltd. v. ITO (99 TTJ 440)(Chand. ITAT) referred to the decision of Madras High Court in Skycell Communications Ltd.;
(iv)    Mumbai Bench of ITAT has in the case of Pacific Internet (India) Pvt. Ltd. v ITO 318 ITR 179 (Mum)(AT) has relied upon the observations rendered in Estel Communications Pvt. Ltd. (supra) and Communications Ltd. (supra) and held that payment for use of internet is not covered by the provisions of section 194J;
(v)    Hyderabad Bench of the Tribunal has in the case of Ushodaya Enterprises P. Ltd. v. ACIT (2012) 53 SOT 193 (Hyd.) has held that payment made towards internet charges are similar in nature to bandwidth charges and are similar to the use of telephone lines, payments made for circuit charges to VSNL, bandwidth charges do not come under TDS provision and therefore no deduction is required under section 194J.
Relying on the ratio of the above, the Tribunal held that the assessee cannot be held to be in default for non-deduction of tax on internet charges under section 194J of the Act.

This ground of appeal filed by the assessee was allowed.

FACTS-II:

The AO held the assessee to be in default for not having deducted tax on payment of Rs. 14,96,240 towards purchase of computer software development. The AO was of the view that payment for purchase of software qualifies as a “technical service” and requires deduction of tax under section 194J of the Act.  He, accordingly, held the assessee to be an assessee-in-default under section 201(1) and levied interest under section 201(1A).

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD – II:

Explanation 2 of section 9(1)(vii) defines the words “Fees for technical services” as any consideration (including any lumpsum consideration) for rendering any managerial, technical or consultancy services.  It noted that the perusal of the aforesaid definition clarifies that the term FTS would include service of the following three types : Managerial, Technical and Consultancy.  Therefore, in order to decide whether the service will fall within FTS or not, it is necessary to determine the scope of these three terms.  Considering the scope of these terms as defined by the Mumbai Bench of the Tribunal in the case of TUV Bayren (India) Ltd. dated 6.7.2012 in ITA No. 4994/Mum/2002 it held that the computer software purchased would not fall within the definition of “Fees for technical services” and therefore the provisions of section 194J are not applicable.

The Tribunal held that tax is not required to be deducted at source in respect of payment made for purchase of computer software development.

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

ITO v. Uma Developers ITAT Mumbai `F’ Bench Before Jason P. Boaz (AM) and Sandeep Gosain (JM) ITA Nos.: 7718/Mum/2014 A.Y.: 2012-13. Dated: 10.08.2016. Counsel for revenue / assessee: A K Dhondial / Vijay Mehta

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Ss. 80AC, 80IB(10), 139(1), 139(4), 143(1) – In a case where the return of income is filed beyond the period stipulated under section 139(1) but within the period stipulated in section 139(4), it is beyond the scope of section 143(1) to disallow the assessee’s claim for deduction under section 80IB(10) of the Act.

FACTS:  

For assessment year 2012-13, the assessee firm filed its return of income on 31.3.2013 claiming deduction of Rs. 3,53,17,770 under section 80IB(10) of the Income-tax Act, 1961 (“the Act”). The Assessing Officer (AO) while processing the return on 10.5.2013, in view of the provisions of section 80AC of the Act disallowed the claim of deduction under section 80IB(10) for the reason that the assessee had filed its return of income beyond the time limit specified under section 139(1) of the Act.

Aggrieved with the order dated 10.5.2013, the assessee preferred a rectification appeal under section 154 of the Act contending that the disallowance of assessee’s claim for deduction under section 80IB(10) was beyond the scope of provisions of section 143(1) of the Act.  ACIT(CPC) vide order dated 16.3.2013 passed under section 154 of the Act rejected the application of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who observed that the Bombay High Court and Benches of ITAT at Mumbai, Bangalore and Ahmedabad have even in cases where return of income was filed beyond due date specified under section 139(1) of the Act, either allowed the deduction under section 80IB(10) or have set aside the issue to the file of the authorities below for consideration of the eligibility of the claim with the direction that the claim for deduction should not be denied merely on the ground that the return of income was filed beyond the time specified under section 139(1) of the Act. He also observed that the provisions of section 80AC of the Act were subject matter of discussion and interpretation in various judgments.  He, accordingly, held that the disallowance made by the AO is beyond the scope of the provisions of section 143(1) of the Act.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

HELD:  

Considering the ratio of the decisions of the Bombay High Court in the case of Trustees of Tulsidas Gopalji Charitable & Chaleshwar Temple Trust (207 ITR 368)(Bom) and of the co-ordinate Bench in the case of Yash Developers (ITA No. 809/Mum/2011) even in cases where the return of income is filed beyond the due date stipulated under section 139(1) of the Act, the deduction should not be disallowed under section 143(1) merely in view of the provisions of section 80AC of the Act.  It held that the action of the AO in disallowing the assessee’s claim for deduction under section 80IB(10) of the Act, since the return of income was filed beyond the period stipulated under section 139(1) of the Act in view of the provisions of section 80AC is beyond the scope of section 143(1) of the Act since there is neither an arithmetical error nor an incorrect claim apparent from the record.

The Tribunal upheld the order of the CIT(A) and directed the AO to delete the disallowance made under section 143(1)(a) / 143(1) of the Act.

The Tribunal dismissed the appeal filed by the Revenue.

[2016] 159 ITD 743 (Mumbai Trib.) ITO (TDS) (OSD) vs. Fino Fintech Foundation A.Y.: 2011-12 – Dated: 22.06.2016.

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Section
194J read with Section 194C of the Income-tax Act, 1961- An assessee is
required to deduct tax under section 194J if it acquires or uses technical
knowhow which is provided by a human element. Mere use of technology by
contractors who provide services to the assessee would not make those services
technical services and hence when assessee makes payments to such contractors,
tax is required to be deducted under section 194C and not under section 194J.

FACTS:

The assessee Company was
involved in providing banking services through its network of agents in
extremely rural areas by use of a device called “Point of Transaction Machine
(POT)”.

The transactions of the
beneficiary/customers were settled at the end of the day by connecting the POT
to the Bank Server and the transactions of the beneficiary got reflected in the
beneficiary’s bank account.

In the relevant
assessment year, the assessee company had deducted tax u/s 194C on the payments
made to contractor towards the major expenses incurred under the heads – enrollment
charges, AMC charges, POT usage charges and rent for POT machines.

The AO observed that the
assessee was providing services for opening bank accounts to different banking
institutions in rural areas and that for opening bank accounts it was taking
help of other service-providers who would mobilise technical manpower for
opening the bank accounts. The service providers would prepare bio-metric and
demographic particulars of the customers and put the same in bank network for
the assessee.

The AO held that the
services of capturing photos and finger-prints by web camera and scanner
required highly technical skill and specified software and that the procedure
could not be performed by non-technical person. Hence, for such services,
payments made by the assessee under the heads enrollment expenses and AMC
charges would attract tax deduction under section 194J of the Act. Hence the AO
held that the assessee was in default under section 201(1) for the shortfall of
tax deduction and under section 201A for interest on the shorfall.

Aggrieved by the order of
the AO the assessee preferred an appeal before the First Appellate Authority
(FAA). The assessee argued that it had hired services of service provider as a
contractor and that mere use of technology and/or technical equipments by
service providers while doing the said composite work for assessee would not
make it as a technical service and hence the tax was rightly deducted u/s. 194C
of the Act.

The FAA held that
provisions of 194C were applicable as there was no acquisition / use of
technical know-how by the assessee.

On revenue’s appeal –

HELD:

In case of CIT v.
Delhi Transco Ltd. [2015] 380 ITR 398 the Hon’ble Delhi High Court has defined
the word technical services while dealing with the section 194 J of the Act, in
the following manner-

Section 194J of the Income-tax Act, 1961, provides
for deduction of tax at source from fees for technical services. Technical
services consist of services of technical nature when special skills or
knowledge relating to technical field are required for their provision,
managerial services are rendered for performing management functions and
consultancy services relate to provision of advice by someone having special
qualification that allow him to do so. What constitutes technical services
cannot be understood in a rigid formulaic manner. It will vary from industry to
industry. There will have to be a specific line of enquiry for determining what
in a particular industry would constitute rendering of a technical service.

In the case under
consideration, the FAA has rightly held that the provisions of section 194J
would not be applicable based on the following observation –

The services provided to the assessee were manual in
nature and no specific skills were required to provide the said services. The
services rendered by the parties to the assessee were neither in the nature of
fee for professional services, nor in the nature of managerial, technical or
consultancy services. Mere use of technology would not make it technical
services. For provisions of section 194J to be applicable, it is necessary that
there must either be acquisition or use of technical knowhow which is provided
by a human element. There was no acquisition of technical expertise/knowhow by
the assessee and the service providers were contractors executing contracts for
projects undertaken and hence the provisions of section 194C were applicable.

In the case under
consideration there is a use of technology, but, it does not mean that it is
not a contract. There is no legal or factual infirmity in the order of the FAA
and the assessee has rightly deducted tax as per the provisions of section 194C
of the Act.

Note – Relying on
the decision in case of CIT v. Bharti Cellular Ltd. [2009] 319 ITR 139 it was
also held that, the expression “fees for technical services” in
section 194J of the Income-tax Act, 1961 has the same meaning as given to the
expression in Explanation 2 to section 9(1)(vii) of the Act. In the said explanation
the expression “fees for technical services” means any consideration
for rendering of any “managerial, technical or consultancy services”.
Applying the rule of noscitur a sociis, the word “technical” would
take colour from the words “managerial” and “consultancy”,
between which it is sandwiched. Since both the words “managerial” and
“consultancy” involve a human element, the word “technical”
would also have to be construed as involving a human element.

TDS- Technical services- S. 194J of I. T. Act, 1961- A. Ys. 2007-08 to 2010-11- Transmission of electricity- No technical services- Tax not deductible on payment for such transmission

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CIT Vs. Hubli Electricity Supply Co. Ltd.; 386 ITR 271 (Karn)

The assessee, an electricity supply company, was a state owned company engaged in the business of buying and selling electricity. Power was transmitted from the generation point to consumers through the transmission network of the Karnataka Power Transport Corporation Ltd. The Assessing Officer found that the assessee had not deducted tax at source on charges paid to Karnataka Power Transport Corporation Ltd. for transportation of electricity. He therefore treated the assessee as an assessee in default and raised demand u/s. 201(1) and (1A) of the Income-tax Act, 1961. Commissioner(Appeals) found that the assessee had successfully demonstrated that the taxes were already paid by the payee and accordingly cancelled the demand. This was upheld by the Tribunal.

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

“i)    There was neither an offer nor an acceptance of any “technical service”, inter se between the parties. Admittedly, the Karnataka Power Transport Corporation Ltd. was a State owned company and the only power transmitting agency. There was neither transfer of any technology nor any service attributable to a technical service offered by the Karnataka Power Transport Corporation Ltd and accepted by the assessee.

ii)    Therefore, section 194J was not applicable. Moreover, it was not in dispute that the payee the Karnataka Power Transport Corporation Ltd had offered the income to tax and paid it. In the circumstances, there was no loss of revenue.

iii)    In the result, the appeals fail and accordingly stand dismissed.”

TDS: Ss. 10(23C)(iv), 194A, 194H, 201(1),(1A) of I. T. Act, 1961- A. Y. 2012-13- Payment of interest to entities exempted from tax- No tax need be deducted at source

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CIT Vs. Canara Bank; 386 ITR 229 (P&H)

The assessee had paid interest without deduction of tax at source to Punjab Infrastructure Development Board whose income was exempt u/s. 10(23C)(iv) of the Income-tax Act, 1961. The Assessing Officer held that the assessee should have deducted tax at source and since tax was not deducted the assessee was treated as an assessee in default and raised demand u/ss. 201(1) and (1A) of the Act. The Commissioner(Appeals) deleted the demand and the same was upheld by the Tribunal.

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

“i)    The Commissioner(Appeals) and the Tribunal, on appreciation of material on record had concurrently recorded that if an organization was exempted from payment of tax there was no need for deduction of tax at source by the assessee.

ii)    The Department was not able to demonstrate that the approach of the Commissioner(Appeals) and the Tribunal was erroneous or perverse or that the findings of fact recorded were based on misreading or misappreciation of evidence on record. No question of law arose.”

[2016] 159 ITD 255 (Pune Trib.) S.R.Thorat Milk Products (P.) Ltd. vs. Asst. CIT A.Ys.: 2004-05, 2005-06, 2007-08 to 2009-10, Date of Order: 20.05.2016

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Section
37(1) read with Section 36(1)(iii) – The share application money
pending allotment per se cannot be characterized and equated with share capital
as the obligation to return the share application money is always implicit in
the event of non-allotment of shares and consequently if the assessee incurs
interest expense on the share application money pending allotment, the said
interest expense can be claimed as revenue expenditure by the assessee.

FACTS:

During the various years
under appeal, the assessee had claimed deduction of interest paid, at the rate
of 12% per annum, on share application money pending allotment, while computing
business income.

The AO was of the opinion
that conditions laid down under section 36(1)(iii) are not fulfilled because ingredients
of borrowing as a positive act of lending by one and expense thereof by the
other, coupled with an obligation of refund or repayment thereof are not
present when the interest is paid on receipts in the nature of share
application money. Further the AO held that expenditure on account of interest
paid on share application money is not revenue but capital expenditure in
nature and therefore is not allowable under section 37(1) of the Act. He
accordingly disallowed the interest claimed by the assessee.

The CIT-(A) concurred
with the view of the AO and disallowed the claim of the said interest expense by
stating that when the money had been received with the intention of allotment
of shares, it could not subsequently acquire the colour of borrowed funds even
though it might have been utilized for business purposes.

Aggrieved by the order of
the CIT-(A), the assessee filed appeal before the Tribunal.

HELD:

Even though the share
application money has been pending allotment for a substantial period of time,
the revenue has not disputed the contention of the assessee that the share
application money was utilized for business purposes.

In our opinion, the share
application money per se cannot be characterized and equated with share
capital. The obligation to return the money is always implicit in the event of
non-allotment of shares in lieu of the share application money received.
Allotment of shares is subject to certain regulations and restrictions as provided
under the Companies Act and receipt by way of share application money is not
receipt held towards share capital before its conversion. Therefore, payment of
interest on share application money cannot be treated differently in the
Income-tax Act.

Relevant extract of the
observation made in case of ACIT v. Rohit Exhaust Systems (P.) Ltd. in IT Appeal
No.686 / 687 of 2011-

The
Hon’ble ITAT, Pune in the case of Western India Forging Ltd. ITA No.
419/PN/2002 dated 24-07-2007 (PCAS journal February, 2008 Page No. 49 to 52)
has held that following the principle of commercial expediency, interest paid on
share application money pending allotment utilized for business purpose is an allowable
expense.

On
perusal of the said case of Western India Forging Ltd (supra), it has also been
noticed that as per provisions of section 69(5) of the Companies Act, 1956 a
company has to pay interest @6% per annum and as per provisions of section
73(2) of the Companies Act, 1956 the maximum interest rate prescribed is 15% on
return of share application money.

Accordingly, the claim of
interest expenditure on share application money pending allotment was allowed
as revenue expenditure.

Shipping Company- S. 172 of I. T. Act, 1961- DTAA between India and Singapore- Where freight receipts in question derived by assessee, a Singaporean shipping company, was taxable at Singapore on basis of accrual and not on basis of remittance, benefit of article 8 of DTAA between India and Singapore could not be denied to assessee on ground that fright receipts were remitted to London and not to Singapore

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M.T. Maersk Mikage & 4 Vs. DIT; [2016] 72 taxmann.com 359 (Guj):

The assessee, a Singapore shipping company, had through ships owned or chartered by it, undertaken voyages from various Indian ports and earned income from exporters and out of other such business. The assessee, through present petitioner, filed a return of income u/s. 172(3) of the Income-tax Act, 1961, declaring the gross profit calculations, but claiming Nil income by relying on Article 8 of DTAA between India and Singapore. The Assessing officer denied benefit under article 8 to the assessee on the ground that freight receipts were remitted to London and not to Singapore. In his opinion, as per Article 24 of DTAA, the funds have to be remitted where the residents of the country is claiming benefit of the agreement which conditions in the present case was not satisfied. Revision application u/s. 264 of the Act made by the petitioner was dismissed by the CIT.

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

“i)    The certificate dated 09.01.2013 issued by the Inland Revenue Authority of Singapore certified that the income in question derived by ST Shipping(assessee) would be considered as income accruing in or derived from the business carried on in Singapore and such income therefore, would be assessable in Singapore on accrual basis. In other words, the full income would be assessable to tax on the basis of accrual and not on the basis of remittance.

ii)    This clause1 of Article 24 does not provide that in every case of non-remittance of income to the contracting state, Article 8 would not apply irrespective of tax treatment such income is given.

iii)    When in the present case, we hold that the income in question was not taxable at Singapore on the basis of remittance but on the basis of accrual, the very basis for applying clause1of Article 24 would not survive.

iv)    In the result, petition is allowed. Impugned order dated 25.03.2014 passed by the Commissioner is set aside. Resultantly, order of assessment dated 26.12.2011 is also quashed. Petition disposed of accordingly.”

Bastimal K Jain vs. ITO ITAT “B” Bench, Mumbai Before Mahavir Singh (J. M.) and Rajesh Kumar (A. M) ITA No.: 2896/Mum/2014 A.Y.: 2010-11. Date of order: 8th June, 2016 Counsel for Assessee / Revenue: Dr. K. Shivaram / Sachidanand Dube

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Section 54 – Date of purchase of a new flat is the date of possession and not the date of agreement.

FACTS
During the year under consideration, the assessee had sold his flat for a consideration of Rs.55 lakh on 24.02.2010 resulting into long term capital gain of Rs.50.95 lakh. The assessee claimed deduction u/s. 54 contending that he had purchased a new flat in earlier year, the possession of which was received on 11.09.2009. The AO noted that the agreement for purchase of the new flat was entered into on 28.12.2007 and registered on 28.02.2008. Thus, according to him, the purchase of new flat by the assessee was made one year before the date of the sale of the property. Hence, he denied the deduction claimed u/s 54. The CIT(A) on appeal, relying on the Madras High Court decision in the case of Late R Krishnaswamy (ITA No.697 & 698 of 2013 dated 26.11.2013), held that the date of registration of sale deed was material for the purpose of determining the date of purchase of a flat. Accordingly, the CIT(A) concurred with the views of the AO and held that the assessee had not acquired the new flat within one year before the sale of the Long Term Capital Asset and thus denied the benefit u/s 54 claimed by the assessee.

Before the Tribunal in support of the orders of the lower authorities, the revenue relied on the decision of the Gujarat High Court in the case of CIV s. Jindas Panachand Gandhi [2005] 279 ITR 552.

HELD
The Tribunal noted that the flat intended to be purchased by the assessee was not at all constructed on 28.12.2007 when the agreement for purchase was entered into. Eventually property’s possession was given to the assessee by the builder only on 11.09.2009. According to the Tribunal, the agreement for purchase was just a right for purchase of a flat in the proposed construction. The Tribunal also agreed with the assessee that the acquisition of the property is to be considered only when the possession of the flat was given to the assessee by the builder and that date was on 11.09.2009. Thus, the vital conditions of section 54 of the Act were fulfilled when the property’s possession was handed over to the assessee by the builder on 11.09.2009 i.e. within the time limit prescribed u/s. 54 of the Act for claiming deduction u/s 54 of the Act. In arriving at the above conclusion, the Tribunal also relied on the decision of the Mumbai tribunal in the case of V M Dujodwala vs. ITO (36 ITD 130) and of the Bombay High Court in the case of CIT vs. Smt. Beena K Jain (217 ITR 363).

Shivam Steel & Tubes Pvt. Ltd. vs. ACIT Income Tax Appellate Tribunal “E” Bench, Mumbai Before Rajendra (A. M.) and C. N. Prasad (J. M) ITA No.: 4691/Mum/2014 A.Y.: 2009-10. Date of order: 5th August, 2016 Counsel for Assessee / Revenue: Sanjeev Kashyap / Jayesh Dadia

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Section 271(1)(c) – Non-filing of appeal against the additions made cannot be a ground for justifying levy of penalty.

FACTS
During the assessment proceedings the AO made two disallowances viz., Rs. 0.17 lakh u/s. 14A and Rs. 10.71 lakh u/s.80IB. Penalty proceedings u/s.27l(1)(c) were also initiated at the time of assessment. In its reply to penalty notice, the assessee submitted that it had furnished all details of expenditure. However, according to the AO, the assessee by not filing any appeal against the additions has admitted its fault and hence, he levied a penalty of Rs. 3.7 lakh. On appeal, the first appellate authority confirmed the order of the AO.

Before the Tribunal the revenue justified the orders of the lower authorities on the ground that the assessee filed the revised computation after the AO made enquiries. Assessee is a corporate entity, that it had made a patently wrong claim. It relied upon the cases of Mak Data (350 ITR 593) and Zoom communications (327 ITR 590).

HELD
According to the Tribunal, penalty cannot be levied just because additions are made during assessment proceedings and the assessee did not agitate the additions before the Appellate Authorities. As per the settled principles of taxation jurisprudence penalty proceeding and assessment proceedings are totally separate and distinct. Addition made during assessment cannot and should not result in automatic levy of penalty. Penalty has to be levied considering the explanation of assessee filed during penalty proceedings. According to the Tribunal, disallowance u/s 14A does not prove filing of inaccurate particulars of income. As regards the claim u/s 80IB, according to the Tribunal, the assessee had reasonable cause in as much as the claims – original as well as revised, both were made as per the advice of the chartered accountant. Further, relying on the Bombay high court decision in the case of CIT vs. Somany Evergreen Knits Ltd. (352 ITR 592) and considering the peculiar facts and circumstances of the case, the Tribunal was of the opinion that the assesse had not furnished inaccurate particulars of income and reversed the order of the lower authorities.

[2016] 72 taxmann.com 147 (Delhi – Trib.) Sanjeev Puri vs. DCIT A.Y.: 2010-11 Date of order: 11th July, 2016

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Section 54F – For the purposes of section 54F, the question whether the assessee owns more than one residential house other than the new asset is to be determined based on the actual user of the property and not on the basis of what is shown in municipal record and therefore, ownership of a flat which is shown as a residential house in municipal records but is actually used as an office is not to be regarded as ownership of a “residential house”.

FACTS
During the previous year relevant to the assessment year 2010-11, the assessee, a senior advocate, sold his rights in his Gurgaon Flat and earned long term capital gain of Rs. 1,48,23,645. This long term capital gain was invested in a residential property within the specified time and exemption claimed u/s. 54F of the Act. This claim for exemption u/s. 54F was denied by the Assessing Officer (AO) on the ground that the assessee was owner of more than one residential house.

The contention of the assessee that the property belonging to the assessee being property at E-575A, Ground floor, Gr. Kailash-II, New Delhi was used by the assessee as his office and therefore the same is not regarded as a residential house owned by the assessee for the purposes of section 54F of the Act was not accepted by the AO on the ground that as per the municipal records and the sale deed this property was a residential property.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that there was no dispute about the fact that the property E-575A, GK-II, New Delhi, owned by the assessee was being used by him as his office during the relevant period but the only dispute between the assessee and the Revenue remained on the entitlement of the deduction u/s. 54F of the Act on the basis of actual user of the property i.e. office use and not merely on the basis of the municipal record showing the property meant for residential use or in the sale deed shown as residential type.

The Tribunal noted that the ratio of the following decisions

(i) CIT vs. Geeta Duggal (357 ITR 153)(Del);

(ii) ITO vs. Ouseph Chacko (271 ITR 29 (Ker);

(iii) Smt. P. K. Vasanthi Rangarajan vs. CIT (23 taxmann. com 229)(Mad);

(iv) ITO vs.. Rasiklal & Satra (98 ITD 335)(Mum Trib); and

(v) ITO vs.. Smt. Rohini Reddy (122 TTJ 423)(Hyd.)

support the stand of the assessee that for availing the deduction u/s. 54F of the Act, the property though shown as residential on the record of the municipality but the test will be actual user of the premises by the assessee during the relevant period. It held that the actual user thereof by the assessee will be considered while adjudicating upon the eligibility of deduction u/s. 54F of the Act and the fact that the property has been shown as residential house on the record of the government authority does not make a difference.

The Tribunal held that the AO should not have considered the property E-575A, GK-II, New Delhi to be residential property on the basis of municipal record by ignoring the actual use thereof as office of the assessee. The authorities below were held to be not justified in denying the claim of deduction u/s. 54F on the basis that the assessee was owning more than one residential house by including the said house used as office to be a residential house.

The Tribunal allowed the appeal filed by the assessee.

[2016] 159 ITD 165 (Pune Trib.) Cooper Corporation (P.) Ltd. vs. Deputy CIT A.Y.: 2008-09. Date of order: 29th April, 2016.

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Section 37(1) – When the assessee converts Indian rupee loan borrowed for purchasing assets from India into foreign currency loan for taking benefit of lower interest rates and thereafter as per AS – 11 translates foreign currency loan into Indian Rupees by applying the foreign exchange rate as on the closing day of reporting period and such translation results in business loss, then the resultant loss is allowed as deduction u/s 37(1) as such loss is dictated by revenue considerations of saving interest costs.

FACTS
The assessee had initially availed various term loans in Indian rupees from banks for acquisition of assets and for expansion of project, etc. Subsequently, said loans were converted into foreign currency loans to take benefit of lower rate of interest on such foreign currency loans visa- vis loans in Indian rupee.

The assessee, following Accounting Standard – 11 (AS- 11) issued by Institute of Chartered Accountants of India (ICAI), translated foreign currency loan into Indian Rupees by applying the foreign exchange rate as on the closing day of reporting period and the same resulted in exchange loss. The said translation loss resulted in business loss which was disallowed by the AO.

The assessee argued before the AO that there is no provision in the Income-tax Act to reject the loss incurred on fluctuation in exchange as revenue expense except section 43A which provides for capitalization of such loss where the loan was taken on acquisition of any capital asset outside India. Since the assessee had not acquired assets from a country outside India section 43A was not applicable.

However, the AO held that the so-called loss was merely a notional loss and not an actual loss incurred by the company. The Assessing Officer further observed that even presuming that increased liability for repayment of foreign currency loans had been saddled on the assessee, still the same would be a payment of capital nature since impugned loans were obtained for acquiring the capital asset. The AO, thus, held that the loss claimed on account of fluctuation in the foreign exchange rate could not be allowed as revenue expenditure.

On appeal, the CIT-(A) granted partial relief to assessee on account of foreign currency fluctuation loss arising on loans found by him to be connected to revenue items such as bill discounting, debtors, etc. However, in respect of other loans, the CIT-(A) observed that such loans were taken for capital purposes such as acquisition of assets and expansion of the projects and, therefore, the assessee was not entitled to losses from fluctuation in currency as revenue expenditure.

On second appeal:

HELD
It may be pertinent to examine whether the increased liability due to fluctuation loss can be added to the carrying costs of corresponding capital assets with reference to section 43(1). Section 43(1) defines the expression ‘actual cost’. As per section 43(1), actual cost means actual cost of the assets of the assessee, reduced by that portion of the costs as has been met directly or indirectly by any other person or authority. Several Explanations have been appended to section 43(1). However, the section nowhere specifies that any gain or loss on foreign currency loan acquired for purchase of indigenous assets will have to be reduced or added to the costs of the assets.

The issue is also tested in the light of provision of section 36(1)(iii) governing deduction of interest costs on borrowings. Section 36(1)(iii) states that utilization of loan for capital account or revenue account purpose has nothing to do with allowing deduction of corresponding interest expenditure. A proviso inserted thereto by Finance Act, 2003, also prohibits claim of interest expenditure in revenue account only upto the date on which capital asset is put to use. Once the capital asset is put to use, the interest expenditure on money borrowed for acquisition of capital asset is also treated as revenue expenditure.

Thus, viewed from the perspective of section 43(1) and section 36(1)(iii), such increased liability cannot be bracketed with cost of acquisition of capital assets save and except in terms of overriding provisions of section 43A.

CBDT notification S.O. 892(E) dated 31-3-2015 also inter alia deals with recognition of exchange differences. The notification also sets out that the exchange differences arising on foreign currency transactions have to be recognized as income or business expense in the period in which they arise subject to exception as set out in section 43A or rule 115 of the Income Tax Rules, 1962 as the case may be.

A bare reading of section 43A, which opens with a non obstante and overriding clause, would show that it comes into play only when the assets are acquired from a country outside India and does not apply to acquisition of indigenous assets. Another notable feature is that section 43A provides for making corresponding adjustments to the costs of assets only in relation to exchange gains/ losses arising at the time of making payment. It, therefore, deals with realised exchange gain/loss. The treatment of unrealised exchange gain/loss is not covered under the scope of section 43A. It is, thus, apparent that special provision of section 43A has no application to the facts of the case. Therefore, the issue whether the loss is on revenue account or a capital one is required to be tested in the light of generally accepted accounting principles, pronouncements and guidelines, etc.

The Supreme Court in the case of CIT vs. Tata Iron and Steel Co. Ltd. [1998] 231 ITR 285 held that cost of an asset and cost of raising money for purchase of asset are two different and independent transactions. Therefore, fluctuations in foreign exchange rate while repaying instalments of foreign loan raised to acquire asset cannot alter actual cost of assets. The assessee may have raised funds to purchase the asset by borrowing but what the assessee has paid to acquire asset is the price of the asset. That price cannot change by any event subsequent to the acquisition of the asset.

The assessee has inter alia applied AS-11 dealing with effects of the changes in the exchange rate to record the losses incurred owing to fluctuation in the foreign exchange. AS-11 enjoins reporting of monetary items denominated foreign currency using the closing rate at the end of the accounting year. It also requires that any difference, loss or gain, arising from such conversion of the liability at the closing rate should be recognized in the profit & loss account for the reporting period.

As per section 209 of the Companies Act, 1956, the assessee being a company is required to compulsorily follow mercantile system of accounting. Section 211 of the Companies Act, 1956 also mandates that accounting standards as applicable are required to be followed while drawing statement of affairs. Section 145 of the Income Tax Act, 1961 similarly casts obligation to compute business income either by cash or mercantile system of accounting. The Supreme Court in the case of CIT vs. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254 has observed that AS-11 is mandatory in nature. Thus, in view of the various provisions of the Companies Act and the Income-tax Act, it was mandatory for the assessee to draw accounts as per AS-11. Thus, the loss recognized on account of foreign exchange fluctuation as per notified accounting standard AS 11 is an accrued and subsisting liability and not merely a contingent or a hypothetical liability. A legal liability also exists against the assessee due to fluctuation and loss arising there from. Actual payment of expense is an irrelevant consideration to ascertain the point of accrual of liability. As a corollary, the revenue has committed error in holding the liability as notional or contingent.

Besides AS-11, the claim of exchange fluctuation loss as revenue account is also founded on the argument that the aforesaid action was taken to save interest costs and, consequently, to augment the profitability or reduce revenue losses of the assessee. The impugned fluctuation loss therefore, has a direct nexus to the saving in interest costs without bringing any new capital assets into existence. Thus, the business exigencies are implicit as well explicit in the action of the assessee. The argument that the act of conversion has served a hedging mechanism against revenue receipts from export also portrays commercial expediency. Thus, the plea of the assessee that claim of expenditure is attributable to revenue account has considerable merits.

For the aforesaid reasons and in the light of the fact that the conversion in foreign currency loans which led to impugned loss were dictated by revenue considerations towards saving interest costs, etc., the said loss is considered as being on revenue account and is an allowable expenditure u/s. 37(1). The order of the CIT-(A) sustaining the disallowance is thus reversed.

[2016] 71 taxmann.com 136 (Delhi-Trib)(SMC) Sushil Kumar Jain vs. ACIT A.Y.: 2006-07 Date of order: 24th June, 2016

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Section 147 r.w.s. 154 – Initiation of two parallel proceedings on a similar subject matter, cannot sustain. If first proceedings have been validly initiated, then such proceedings must come to an end for making a way for the initiation of another proceedings on the same subject matter. Unless the earlier proceedings are buried, either by way of an order on merits or by dropping the same, no fresh subsequent proceedings on the same subject matter can be initiated.

FACTS
The assessee, a senior advocate by profession, filed his return of income for assessment year 2006-07 declaring total income of Rs. 8,39,253. The Assessing Officer (AO) vide order dated 26.3.2008, assessed the total income of the assessee to be Rs. 8,56,753.

The AO issued notice u/s. 154 of the Act dated 23.2.2011 intimating the assessee that he proposes to rectify the order passed u/s. 143(3) of the Act to include in his total income receipts of Rs. 4,47,600 which were received by the assessee, as per TDS certificates, but which were not included in total income.

Subsequently, the AO reopened the assessment on the ground that assessee has claimed credit for TDS against current years income on receipts of Rs. 4,47,600 but the same have not been offered for taxation. The assessment was completed u/s. 147 r.w.s. 143(3) of the Act by making a total addition of Rs. 2,37,500.

Aggrieved, the assessee preferred an appeal to CIT(A) and interalia argued that since the AO had issued notice u/s. 154 of the Act initiation of reassessment proceedings was not valid.The CIT(A) upheld the initiation of reassessment proceedings and the additions made.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal on perusal of copy of notice u/s. 154 along with the reasons recorded for reopening observed that the subject matter of both the notices was the same viz. receipts of Rs. 4,47,600 which in the opinion of the AO had escaped taxation. The Tribunal observed that during the continuation of the proceedings u/s. 154, the AO embarked upon the same issue by means of a separate reassessment proceedings without concluding the earlier proceedings initiated u/s. 154. It goes without saying that initiation of two parallel proceedings on a similar subject matter, cannot be sustained. If first proceedings have been validly initiated, then such proceedings must come to an end for making a way for the initiation of another proceedings on the same subject matter. Unless the earlier proceedings are buried, either by way of an order on merits or by dropping the same, no fresh subsequent proceedings on the same subject matter can be sustained. The Tribunal held that since the rectification proceedings u/s. 154 were initiated in 2011 and these were still on in the year 2013, when the proceedings u/s. 147 were initiated on the same subject matter, the proceedings u/s. 147 cannot stand during the continuation of proceedings u/s. 154. The Tribunal set aside the initiation of reassessment proceedings by means of a notice u/s. 148 and the proceedings flowing therefrom.

The appeal filed by the assessee was allowed.

[2016] 159 ITD 199 (Ahmedabad – Trib.) Urvi Chirag Sheth vs. ITO A.Y.: 2012-13. Date of order: 31st May, 2016.

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Sections. 2 and 4, read with sections 45, 56(2) (viii) and 145A – If the assessee receives interest, to compensate for the time value of money, on account of delay in payment of the motor accident compensation, then such interest takes the same character as that of the accident compensation and since the said accident compensation, being capital receipt, is not taxable, consequently receipt of interest on such compensation is also not taxable.

FACTS
The assessee had met with a serious motor car accident which had left her permanently disabled. The competent authority termed the disability at ninety per cent level.

She had claimed compensation of Rs.15,00,000/- for this tragic loss of her physical abilities. She was, finally after 21 years, awarded the said compensation along with the interest of Rs.14,94,286/- by Hon’ble Supreme Court. The said interest was computed using 8% interest rate, on the enhanced compensation, from the date of filing the claim petition before MACT (Motor Accidents Claims Tribunal) till the date of realization.

The assessee had not offered the said interest income to tax. The main contention of the assessee was that the interest which is received by any person under any statute is taxable under the Act, however, if the interest is awarded by courts of higher authorities as part of fair and equitable compensation, the same is capital receipt and hence not taxable in the hands of the assessee.

The AO was of the opinion that the interest received on the said compensation came within the purview of section 145A(b) read with section 56(2)(viii) and hence, after allowing deduction of Rs.7,47,143/- as per provisions of section 57(iv) of the Act, taxed the balance Rs.7,47,143/- as income from other source.

The CIT-(A) upheld order of the AO.

On second appeal before the Tribunal.

HELD
Section 145A provides that interest received on compensation or enhanced compensation shall be deemed to be income of the year in which it is received. This provision was enacted with a view to mitigate hardship to taxpayers, where interested was awarded by judicial forums but on account of the decision being challenged the same was not received.Clause (viii) in sub-section (2) of section 56 provides that income by way of interest received on compensation or on enhanced compensation referred to in sub-section (2) of section 145A shall be assessed as ‘income from other sources’ in the year in which it is received.’

Section 145A deals with the method of accounting i.e. cash or mercantile and has its focus on the point of time when an income is taxable rather than taxability of income itself. Thus, when an income is not taxable, section 145A has no relevance. Nothing else needs to be read in this provision.

Section 56(2)(viii), is only an enabling provision, to bring interest income to tax in the year of receipt rather than in the year of accrual.

Thus only when interest received by the assessee is in the nature of income, such interest can be taxed u/s. 56(2)(viii). Section 56(1) makes this aspect even more clear when it states that income of every kind, which is not to be excluded from the total income under the Incometax Act, shall be chargeable to income tax under the head income from other sources, if it is not chargeable to income tax under any of the heads, and then, in the subsequent provision, i.e., section 56(2), proceeds to set out an illustrative, rather than exhaustive list of, such ‘incomes’. Clearly, section 56 does not decide what constitutes income. What section 56 holds is that if there is an income, which is not taxable under any of the other heads u/s. 14, then it is taxable under the head ‘income from other sources’.

To suggest that since an item is listed u/s. 56(2), even without there being anything to show that it is of income nature, it can be brought to tax is like putting the cart before the horse.

The payment made to the assessee is in the nature of compensation for the loss of her mobility and physical damages. Clearly, such a receipt, in principle, is a capital receipt and beyond the ambit of taxability of income, since only such capital receipts can be brought to tax which are specifically taxable u/s. 45. As it is the settled law, that a capital receipt, in principle, is outside the scope of income chargeable to tax and a receipt cannot be taxed as income unless it is in the nature of a revenue receipt or is specifically brought within ambit of income by way of specific provisions. The accident compensation is thus not taxable as income of the assessee.

What is termed as interest takes the same character as that of the accident compensation and it seeks to compensate the time value of money on account of delay in payment of the compensation. Such an interest cannot have a standalone character of income, unless the interest itself is a kind of statutory interest at the prescribed rate of interest. In this case, the interest is awarded by the Supreme Court in its complete and somewhat unfettered discretion. An interest of this nature is essentially a compensation in the sense it accounts for a fall in value of money itself at the point of time when compensation became payable vis-a-vis the point of time when it was actually paid, or, for the shrinkage of, what can be termed as, a measuring rod of value of compensation. If the money was given on the date of presenting the claim before the Motor Accident Claims Tribunal, it would have been principal sum but since there is an inordinate, though partial, delay in payment of this amount, interest payment is to factor for fall in value of money in the meantime. The transaction thus remains the same, i.e., compensation for disability, and the interest rate, on a rather notional basis, is taken into account to compute the present value of the compensation which was lawfully due to the assessee in a somewhat distant past.

If compensation itself is not taxable, the interest on account of delay in payment of compensation cannot be taxable either. Essentially, this conclusion supports the school of thought that when principal transaction itself is outside the ambit of taxation, similar fate must follow for the subsidiary transaction as well.

The authorities below were thus completely in error in bringing the interest awarded by the Supreme Court to tax. The question of deduction u/s. 57(iii), given the above conclusion, is wholly irrelevant. The order of the AO taxing the interest on accident compensation and the order of the

CIT-(A) confirming AO’s order is disapproved.

In result, the appeal of the assessee is allowed.

Condonation of delay – Appeal filed in wrong jurisdiction – An unintentional lapse on the part of the litigant – Liable to be condoned :

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Prashanth Projects Ltd vs. The Deputy Commissioner of Income Tax10(3), tax Appeal no – 192 of 2014 dt – 19/07/2016 (Bombay High Court).

[Prashanth Projects Ltd vs. The Deputy Commissioner of Income Tax10(3),; ITA No. 7167/Mum/2011 Bench: C ; dt: 04/09/2013 ; (A Y: 2005-06 )]

Assessee company, engaged in the business of construction of storage handling Terminal of Petroleum Products, filed its return of income on 31.10.2005 . The AO finalised the assessment order u/s.143(3) determining the total income at Rs.1,11,17.010/-. Assessment order was received by the assessee on 25.01.2008 and accordingly appeal was to be filed by 24.02.2008, however, by mistake instead of the appeal being filed in the office of the CIT(A), it was filed on 8th February, 2008 (within the period of limitation) with the office of the Assessing Officer i.e. Deputy Commissioner of Income Tax10( 3), who accepted the same. Later on in May,2011,when it came to know that appeal was to be filed before the CIT(A), an application was moved by it to the AO for transferring the appeal to the office of the CIT(A). However same was refused. This resulted in the appellant having to file a fresh appeal on 9th June, 2011 to the CIT(A) from the order of the Assessing Officer dated 31st December, 2007. This appeal was accompanied alongwith an application for condonation of delay . Thus, there was delay of more than 3 years. The reason for the delay as explained by the assessee, was that by mistake it filed appeal in the office of the ACIT. After considering the submissions of the assessee,CIT(A) dismissed the appeal filed by it.

Effective Ground of appeal before ITAT was about not admitting the appeal by the CIT(A) on the ground of delay. Being aggrieved, the appellant filed a further appeal to the Tribunal. The Tribunal after citing various decisions of the Courts indicating the manner in which the application for condonation of delay has to be dealt with proceeded to reject the appeal.

The Assessee filed an appeal before the High court challenging the order of ITAT . The High Court held that it is an undisputed position that the appeal from order dated 31st December, 2007 of the Assessing Officer was prepared and filed in the prescribed Proforma viz. Form No.35. It was addressed to CIT(A). However, by mistake the same was tendered to the office of the Assessing Officer and the office of the Assessing Officer also accepted the same. In fact, as the appeal pertained to the CIT(A) and not its office, the Assessing Officer ought to have immediately returned the appeal which was filed in the office of the Assessing Officer. This would have enabled the appellant to take appropriate steps and file the appeal with the office of the CIT(A). It is not the case of the Revenue that the appeal addressed to the CIT(A) was not filed with the Office of the Assessing Officer on 8th February, 2008 i.e. within the period of limitation. In case, the Assessing Officer had returned the appeal immediately to the appellant or had forwarded it to the office of the CIT(A) as would be expected of the State no delay would have taken place. This would have resulted in the appeal being considered on merits.

Further, from the application made for stay in the same proceeding , it is very clear that the appellant as well as the department bonafide proceeded on the basis that its appeal before the CIT(A) was pending. The lapse on the part of the assessee was unintentional. Further, the analogy made in the impugned order with nature is inappropriate. Human interaction is influenced by human nature. Inherent in human nature is the likelihood of error. Therefore, the adage “to err is human”. Thus, the power to condone delay while applying the law of limitation. This power of condonation is only in view of human fallibility. The laws of nature are not subject to human error, thus beyond human correction. In fact, the Apex Court in State of Madhya Pradesh vs. Pradip Kumar 2000(7) SCC 372 has observed to the effect that although the law assists the vigilant, an unintentional lapse on the part of the litigant would not normally close the doors of adjudication so as to be permanently closed, as it is human to err. The High Court held that it was an unintentional lapse on the part of the appellant.

The appeal was restored to the file of the CIT(A) for fresh disposal in accordance with law, on payment of costs of Rs.10,000/- by a pay order drawn in the name of “The Principal Commissioner of Income Tax15, Mumbai”.

Estimate – on money – It is a settled principle of statistics that principle of averaging provides results of reliable nature – Such average minimizes the errors and brings out reasonable and reliable results.:

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The CIT- III vs. Prime Developers. [Income tax Appeal no 2452 of 2013 dt -18/07/2016 , AY 2004-05 (Bombay High Court)].

[Prime Developers. vs. DCIT, CC-33,; I.T.A. NO.323/M/2010, 321/M/2010, 322/M/2010, 324/M/2010 Bh – C, dt : 22/03/2013, AY: 2004-05 to 2007-08,]

Assessee was engaged in the business of construction. During the subject assessment year the assessee undertook construction of a project called ‘Prime Mall’. However in its return of income filed for the subject assessment year the assessee did not disclose any profits on its above project as it was following the Project Completion Method. There was a search on the assessee under Section 1 32 of the Act.

During the course of the search it was found that during the previous year relevant to assessment year under consideration it was found that the assessee had sold 14 units in its Prime Mall Project and received 65% of the total sales consideration as ‘on money’. Consequent to the search, the assessee contended that in the subject assessment year no income is chargeable to tax as it is following the Project Completion Method of Accounting . Therefore the profit, if any, would be subject to tax on completion of the project which takes place only for the A.Y. 2006- 07( 90%) and A.Y. 2007- 08.

The Assessing Officer did not accept the assessee’s contention of Project Completion Method and brought to tax, the entire amount received as ‘on money’ consideration i.e. 65% of total sales value (35% recorded plus 65% ‘on money’) of the 14 unit sold.

In appeal, the CIT(A) modified the order of the Assessing Officer to the extent it held that the total consideration received in respect of sales of 14 unit during the subject assessment year would be taxed at 40% as net profit of the total consideration in place of 65% in respect of sales of 14 units. The CIT(A) did not accept the assessee’s contention that only 8% should be taken as net profit of the unaccounted turnover. This was in view of the fact that annexure L found during the course of the search indicated the net profit at 28.18%.

Being aggrieved, both the Revenue as well as the assessee carried the issue in appeal to the Tribunal. The Tribunal after considering the facts and the NP of assessee held that the reasonable percentage of profits of the project – Prime Mall was somewhere in the range of said NPs ie 13.735% – 23.99% . It was a settled principle of statistics that principle of averaging provides results of reliable nature. Such average minimizes the errors and brings out reasonable and reliable results. The average of the 13.735% and 23.99% would give rise to a reasonable percentage of NP ie 17.08%. The issue was restored to the Assessing Officer to work out the taxable profits after adopting a reasonable net profit of 17.08% on its gross sales turnover of Rs.11.60 crore in the subject AY .

The Revenue challenged before High Court the adoption of net profit of 17.08% as determined by the Tribunal was not correct . The High Court observed that the Revenue sought to substitute the estimated net profit arrived at by the Tribunal with a new figure of net profit . This was without showing that the estimate arrived at by the Tribunal in the impugned order was perverse. It was a settled position of law that in estimated net profit arrived at by the authorities is a question of fact and if the material on record supported the estimate arrived at by the Tribunal then it didnot give rise to any substantial question of law (see CIT v/s. Piramal Spinning and Weaving Mills Ltd. 124 ITR 408). In this case, High Court held that the net profit estimated at 17.08% was a very possible view on the facts found and dismissed revenue appeal.

Infrastructure Facility – Deduction u/s 80-IA(4) whether admissible to inland container depots and inland freight stations – SLP Granted-

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CIT. vs. Continental Warehousing Corporation (Nhava Sheva) Ltd, (2016) 380 ITR (St) 80 ; (Affirmed CIT vs. Continental Warehousing Corporation (Nhava Sheva) Ltd [2013] 374 ITR 645(Bom))

The assessee company is engaged in the operation of a Container Freight Station (CFS) and claimed that the activities therein qualify as a port. That is one of the infrastructure facilities for the purpose of section 80- IA(4) of the IT Act. The assessee produced a certificate dated 13th July, 2006, from the Jawaharlal Nehru Port Trust (JNPT) Nhava Sheva declaring that the assessee is considered as an extended arm of port related services. However, on enquiry u/s. 133(6) of the IT Act, it was revealed that this certificate was withdrawn by JNPT on 5th October, 2007. That is how the deduction claimed came to be disallowed.

Being aggrieved by this order of the Assessing Officer, the assessee preferred an appeal before the First Appellate Authority. He dismissed the assessee’s appeal and confirmed the view of the Assessing Officer.

Being aggrieved by the order passed by the CIT(A) , the assessee approached the Tribunal, the Tribunal allowed its appeal. On the issue of deduction under section 80- IA(4) it was concluded that the CFS is a inland port and its income is entitled to deduction under section 80-IA(4) of the IT Act.

Aggrieved by the ITAT order, Revenue filed an appeal before High Court.

The other appeal being Income Tax Appeal No.1969 of 2013 (All Cargo Global Logistics Ltd.), was also heard alongwith the present appeal before High Court. A special Bench of the Tribunal was constituted to hear the this appeal and the same was proposed for purposes of deciding two questions, namely, what is the scope of assessment u/s. 153A of the IT Act. Whether that encompasses additions not based on any incriminating material found during the search and whether the Commissioner of Income-tax (Appeals) was justified in upholding the disallowance of deduction under section 80-IA(4) of the IT Act, 1961.

The High Court held that an ICD is not a port but it is an inland port. The case of CFS is similar situated in the sense that both carry out similar functions, i.e. ware housing, customs clearance, and transport of goods from its location to the seaports and vice-versa by railway or by trucks in containers. Thus, the issue is no longer res-integra. Respectfully following this decision, it is held that a CFS is an inland port whose income is entitled to deduction u/s 80IA(4).Therefore, dismiss the Revenue appeals and answer the substantial questions of law against the Revenue and in favour of the assessee.

The Revenue filed SLP before Supreme Court which was granted

Techinical services – transmission of electricity – Without any human intervention – No TDS u/s 194J – SLP Dismissed

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SLP CIT (TDS). vs. Delhi Transco Ltd,(2016) 380 ITR (St) 79 ; (Affirmed CIT vs. Delhi Transco Ltd [2015] 380 ITR 398(Del))

The assessee Delhi Transco Ltd. (DTL) entered into Bulk Power Transmission Agreement (BPTA ) with the Power Grid Corporation India Ltd. (PGCIL). In one of the preamble clauses of the BPTA , it was recorded that DTL “is desirous of receiving energy through power grid transmission system on mutually agreed terms and conditions”. The BPTA defined several terms including the term wheeling as under: “The operation whereby the distribution system and associated facilities of a transmission licensee or distribution licensee, as the case may be, are used by another person for the conveyance of electricity on payment of charges to be determined under Section of Section 62 (sic) of the Electricity Act, 2003 and its subsequent amendments.” Under Clause 8 of the BPTA , it was agreed that the transmission charges would be paid to PGCIL by DTL for transmitting private sector power through PGCIL lines as per the guidelines of the Central Electricity Regulatory Commission (CERC). Clause 10 stated that the transmission tariff and terms and conditions for the power to be transferred by PGCIL would be in terms of the notification to be issued by CERC from time to time. On the commissioning of the new transmission system DTL was to pay “the provisional transmission tariff in line with the tariff norms issued by CERC”. The tariff was subject to adjustment in terms of CERC notification. The wheeling for the transmission power was to be in terms of the CERC guidelines.

A survey was carried out in the business premises of DTL under Section 133-A of the Act. It was noticed that DTL had deducted tax at source (TDS) at 2% under Section 194C of the Act on the wheeling charges paid to PGCIL. The AO held that DTL was not only using the transmission system set up of PGCIL but also availing of other services from PGCIL “such as maintaining the delivery voltage, economic transmission, minimum loss of electricity in transmission of regular and uninterrupted supply etc., which are technical services”. According to the AO, “the value of these services cannot be bifurcated from the total value paid by the assessee to PGCIL for transmission services in the name of wheeling charges. The transmission lines could not be of any use in isolation and without other associated services the transmission of electricity could not have been possible”. Accordingly, the AO held that wheeling charges paid by DTL were fees for technical services liable for TDS u/s. 194J of the Act. The AO held that in terms of the CBDT circular the demand u/s. 201(1) would not be enforced but that would not affect the liability of DTL regarding interest under Section 201(1A) of the Act

Aggrieved by the AO’s order, DTL filed an appeal before CIT(A). The CIT (A), confirmed the said order of the AO. DTL then carried the matter further in appeal to the ITAT . The ITAT agreed with the DTL that what had been availed by it from PGCIL was not a technical service. It was held that DTL was not liable to be saddled with higher liability of TDS. The appeal was accordingly allowed. The ITAT based its opinion on the decision of this Court in CIT vs. Bharti Cellular Ltd. (2008) 220 CTR (Del) 258 and of the Madras High Court in Skycell Communications Ltd. vs. DCIT (2001) 251 ITR 53 (Mad). The ITAT noted that both the decisions laid emphasis on the involvement of a ‘human element’ for rendering technical services and imparting of technical knowledge. The ITAT held that none of those conditions were satisfied in the present case. While there might be supervision of transmission work by the technical personnel of the payee “there is no human intervention in so far as the assessee is concerned regarding the transmission”. It was further held that even if technical knowledge could be upgraded without “presence of human beings by way of handing over drawings and designs or a technical service can be rendered by robot (machines) without intervention of human element, the classification of the services rendered by the assessee as technical service is not free from doubt”.

The Hon’ble High Court observed that by virtue of the BPTA agreement between DTL and PGCIL there is transportation of the electricity from PGCIL to DTL, through the equipment and network required statutorily to be maintained by PGCIL through its technical personnel using technical expertise. This, however, does not result in PGCIL providing technical services to DTL. Therefore the wheeling charges paid by DTL to PGCIL for such transportation of electricity cannot be characterized as fee for technical service. The ultimate conclusion of the ITAT is therefore not erroneous. Accordingly the question framed by the Court was answered in the negative i.e., against the Revenue and in favour of the Assessee. The appeals were dismissed affirming the order of the ITAT.

The Revenue filed SLP before Supreme Court which was dismissed.

Additional Evidence – Sub-rule (3) of Rule 46AOpportunity of hearing should be provided, to the Assessing Officer to examine the additional documents – SLP Dismissed

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Trimline Vyapaar Pvt. Ltd. vs. CIT (2015) 378 ITR ( St) 34 ; [Affirmed CIT, Kolkata-III. vs. Trimline Vyapaar Pvt. Ltd.[2013] 370 ITR 373(Cal)]

The Assessing Officer completed the assessment u/s. 147/143(3) of the Act, principally, on the basis of information received about cash deposit. The AO had issued notice u/s. 133(6) of the Act to various parties however the same were returned with postal remark “ Not known”.

The assessee challenged the aforesaid orders, and preferred an appeal. The assessee contented that all the parties to whom notices u/s 133(6) were issued complied to the same and confirmed the transactions with the appellant company. The inspector also verified the transactions with their books of accounts. Thereafter, again the ITO issued notices u/s. 131 asking for the same details as were asked for in the notices issued u/s. 133(6) of the Act. Once again all the companies furnished replies giving full details of the transactions with the Assessee company.

The assessee in support of his aforesaid contention raised before the CIT (A) and the learned Tribunal filed various documents in order to show that each of the parties to whom notices under section 133(6) of the Act were issued by the Assessing Officer had duly replied to his queries and had also confirmed that they had purchased shares from the assessee and paid for the same in cash and also contended that these documents were also before the Assessing Officer.

The Revenue submitted before High Court that these documents were not before the Assessing Officer. They were documents relied upon and adduced by way of additional evidence by the assessee before the CIT (A) which he allowed to be taken on record without affording any opportunity, far less a reasonable opportunity, to the Assessing Officer to examine them and thereby violated sub-rule (3) of Rule 46A of the Income Tax Rules.

The assessee submitted that there is no question of any violation of sub-rule (3) because his client did not adduce any additional evidence. He added that, in any event, alleged violation of sub-rule (3) can only be made provided any additional evidence has been adduced. Additional evidence, according to him, cannot be adduced unless subrule (1) of Rule 46A of the Income Tax Rules is complied.

The High Court observed that the documents relied upon by the assessee before the appellate authority are not documents of the assessee. The findings recorded by the Assessing Officer could not have been upset by the CIT (A) without giving an opportunity to the former to explain, merely because the assessee took the stand that “all the parties to whom notices under section 133 (6) were issued complied to the same and confirmed the transaction”. The submission that there could be no violation of sub-rule (3) except in a case covered by sub-rule (1) of Rule 46A would make the situation worse. Sub-rule (1) of Rule 46A contemplates a case where the assessee himself wants to adduce evidence at the appellate stage. The assessee in the case before us wanted to rely, at the appellate stage, upon documents allegedly submitted by the noticees under sections 133(6) and 131 of the Act. All these noticees were third parties who according to the Assessing Officer did not respond and could not also be served. The alleged replies allegedly made by the third parties are not and could not have been in the possession or control of the assessee.

The High court held that the finding of the Tribunal was based on the inadmissible additional evidence adduced by the assessee before the CIT (A) and was perverse .

The appeal was thus allowed by the High Court. The Assessee filed SLP before Supreme Court which was dismissed.

Trust – forfeiture of exemption for breach of section 13(1)(d) – proviso to section 164(2) – levy of maximum marginal rate of tax only to that part of the income which has forfeited exemption – It does not refer to the entire income being subjected to maximum marginal rate of tax – SLP Dismissed

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DIT. vs. Working Women’s Forum (2015) 378 ITR (St) 35 ; [Affirmed CIT vs. Working Women’s Forum [2014] 365 ITR 353(Madras)]

The assessee is a trust registered under section 12AA of the Income -tax Act, 1961, and is providing employment to poor women, assisting weaker sections of the society for personal development, maintaining destitute homes, rehabilitation of victim of national calamities, etc. Evidently, the assessee had invested a sum of Rs. 20,000 in the share of MIOT Hospitals Ltd. Since section 13(1)(d) recognises investment only in specified assets. Failure to invest in such specified business would disentitle the assessee for exemption. Consequently, the Assessing Officer passed an order denying the exemption under sections 11 and 12 of the Act. Aggrieved by this, the assessee went on appeal before the CIT(A) , who followed the decision of the Tribunal and decision of CIT vs. Tuluva Vellala Association in T.C. No. 477 of 1989, dated March 16, 1999, that only such part of the income which was violative of section 13(1)(d) could be brought to tax at the maximum marginal rate. Thus, the first appellate authority allowed the assessee’s appeals that the entirety of the income of the assessee could not be denied of exemption.

Aggrieved by this, the Revenue went on appeal before the Tribunal. The Tribunal rejected the Revenue’s appeals.

The Hon’ble High Court held that violation of section 11(5) read with section 13(1)(d) by the assessee would result in the maximum marginal rate of tax only on the dividend income on shares, which was not the recognised mode of investment and that the assessee would not be vested with marginal rate of tax on the entire income. Therefore, the income other than dividend income has to be taxed only to the extent to which the violation was found by the Assessing Officer. Under section 161(1A), which begins with a non obstante clause, it is provided that where any income in respect of which a person is liable as a representative assessee consists of profits of business, then tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate. Therefore, reading the above two phrases show that the Legislature has clearly indicated its mind in the proviso to section 164(2) when it categorically refers to forfeiture of exemption for breach of section 13(1)(d), resulting in levy of maximum marginal rate of tax only to that part of the income which has forfeited exemption. It does not refer to the entire income being subjected to maximum marginal rate of tax. The High court followed the decision of Bombay High Court in DIT (Exemptions) vs. Sheth Mafatlal Gagalbhai Foundation Trust : [2001] 249 ITR 533 (Bom.) and confirmed the order of the Tribunal, thereby rejected the Revenue’s appeals.

The Revenue filed SLP before Supreme Court which was dismissed.

Krupa D. Doshi vs. ACIT ITAT Mumbai `A’ Bench Before R. C. Sharma (AM) and Amarjit Singh (JM) ITA No. 2983/Mum/2013 A.Y.: 2009-10. Date of order: 10 May, 2016. Counsel for assessee / revenue: Vijay Mehta / Ms. Arju Goradia

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Section 22 – Charges for amenities which flow from the rental rent agreement itself and which amenities are an integral part of the property rented are to be charged under the head `Income from House Property’ and not `Income from Other Sources’.

FACTS
The assessee had let out office premises. He had entered into two separate agreements i.e. one for license fee and other for amenities. Rent was Rs. 50,25,000 and amenities charges as per amenities agreement dated 5.6.2006 were Rs. 36,00,000.

The amenities provided as per Annexure `A’ to the amenities agreement were – (1) to help in obtaining all the necessary licenses and the premises from BMC and other Government authorities; (2) liaison with local government authorities, BMC for smooth running of business of user; (3) liaison with electrical and water authorities for uninterrupted and smooth supply of water and electricity; (4) perform and carry out all the above listed work in a good workmanlike manner and to the best of amenities provider’s abilities; (5) separate entrance gate; and (6) open parking provision”.

The total of rent plus amenities charges i.e. Rs. 86,25,000 was offered by the assessee for taxation under the head `Income from House Property.

The Assessing Officer (AO) asked the assessee to show cause why receipts as per the amenities agreement should not be charged to tax under the head `Income from Other Sources’. The assessee submitted that since the premises could not be let without the amenities and therefore, the receipts under amenities agreement also are chargeable to tax under the head `income from house property’. The AO held that since the receipts under the amenities agreement were for specifically providing certain services to the tenant but not for letting out the premises, the same were taxable under the head `Income from Other Sources’. The AO taxed the sum of Rs. 36,00,000 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 found that the nature of amenities provided flew out of the rent agreement itself. All the amenities were integral part of the property rented. It is not uncommon to provide these amenities along with the rented premises and it is not the case that these are provided as per the specific requirements of the tenants business. The Tribunal observed that keeping in view the nature of the rent agreement, the amenities provided by the assessee were to exploit the property in most profitable manner, and as the agreement itself states that they were provided for smooth running of the business of the user. The amenities provided were very basic and without which it would be impossible to use the premises, which are, supply of continuous water and electrical supply, parking, entrance and liasoning of the same. The fact that amenities were provided under a separate agreement would not make a difference. The Tribunal noted the ratio of the decision of co-ordinate Bench in the case of Narendra Gupta (ITA No. 3269/Mum/2013, order dated 3.2.2016). It also noted that the Bombay High Court has in the case of J K Investors (Bom) Ltd., 25 taxmann.com 12 held that where service charges are found to be profit under service agreement in respect of staircase of building, lift, common entrance and where these services were not separately provided but went along with occupation of the property, the amount received as service charges was a part of rent received and subjected to tax under the head `Income from House Property’. Since the amenities, in the present case, were an integral part of the rent, the Tribunal following the order of the co-ordinate bench and the Hon’ble jurisdictional High Court, held that the receipts under the amenities agreement are to be charged under the head `Income from House Property’.

The Tribunal allowed the appeal filed by the assessee.

Subhi Construction Pvt. Ltd. vs. ACIT ITAT Mumbai `E’ Bench Before B. R. Baskaran (AM) and Amit Shukla (JM) ITA No. 2318/Mum/2014 A.Y.: 2010-11. Date of order: 4 May, 2016. Counsel for assessee / revenue: Vimal Punmiya / A. K. Nayak

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Section 23 – While computing annual value of the property, municipal taxes of the property are to be deducted even though a part of the property has been let out.

FACTS
The assessee was owner of a commercial tower known as “Blue Wave”. The said property consisted of 8 floors of which 3 were let out to three different persons under different leave and license agreements. The assessee had shown rental income of Rs. 3,22,73,900 on letting of these floors. The municipal tax levied by the local authority in respect of the building was Rs. 1,10,30,098 which was paid by the assessee during the previous year. The assessee had recovered from tenants Rs. 55,77,635 towards municipal taxes. While computing the annual value the assessee deducted Rs. 54,22,365 (Rs. 1,10,30,098 minus Rs. 55,77,635 recovered from tenants and Rs. 30,098 being municipal tax not paid during the year).

The Assessing Officer (AO) observed that while only 3 floors were let out, property tax in respect of the entire building was claimed as a deduction. The AO asked the assessee to show cause why proportionate property tax attributable to the portion not let out should not be disallowed. The assessee submitted that all the floors of the building collectively constituted one single building and hence theory of slicing or proportion is not at all warranted and requested that the deduction claimed be allowed. The assessee, without prejudice to its contention that property tax of the entire building is allowable, submitted working showing property tax attributable to each floor in the building.

The AO noted that the assessee has entered into 3 different agreements with 3 different parties and the license fees is different in respect of each of the floors let out and also because assessee has rented the office premises by slicing it into different floors to different parties, property tax in respect of floors lying vacant cannot be claimed against floors let out. He held that the working filed by the assessee was not proper. Therefore, he held property tax allowable to be 3/8th of the property tax of the entire building. He disallowed the claim of property tax to the extent of Rs. 33,88,879.

Aggrieved, the assessee preferred an appeal to the CIT(A) who held that the proportionate disallowance has to be worked out as per details of municipal tax actually levied in respect of each of the floors. He directed the AO to restrict the disallowance to Rs. 10,12,604 in place of Rs. 33,88,979.

Aggrieved by the order of CIT(A), both the parties preferred an appeal to the Tribunal.

HELD
The Tribunal observed that a perusal of provisions of section 23 show that while determining the annual letting value of the property, the fact as to whether it is wholly let or partially let is to be considered. However, proviso to section 23 of the Act provides for deduction of taxes levied by any local authority “in respect of the property” shall be deducted in determining the annual value of the property of that previous year in which taxes are “actually paid”. It noted that the reference is to “the property” and not to “whole or any part of the property”. It also noticed that the municipal taxes have to be deducted in the year of payment, even though, it may relate to any of the years. Thus, the importance is given to the “year of payment”, whether or not it pertains to the year in which the property income is assessed.It observed that even though the provisions of section 23(b) and 23(c) make a reference to “any part of property”, yet what is relevant is whether the amount of actual rent received or receivable by the owner is in excess of the sum referred to in section 23(a) of the Act.

The Tribunal held that the question of apportionment of rent / municipal taxes may arise only if it is shown that each floor of the property is a distinct and separate property which it observed was not the case in the facts before it. The copies of municipal tax receipts showed that BMC had given a single number to the impugned property and hence BMC also was considering the entire building as a single property. The Tribunal found merit in the contention of the assessee and held that the authorities were not justified in making proportionate disallowance of municipal taxes actually paid by the assessee.

The Tribunal allowed the appeal filed by the assessee and dismissed the appeal filed by the Revenue.

Shyam Mandir Committee, Khatushyamji vs. ACIT ITAT Jaipur Bench Before T. R. Meena (AM) and Lalit Kumar (JM) ITA No. 651/Jp/2013 A.Y.: 2007-08. Date of order: 2 June, 2016. Counsel for assessee / revenue: Mahendra Gargieya / S. K. Jain

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Section 12A – The proviso to section 12A(2) has retrospective application and has been inserted in the Act to remove the hardship of the charitable trusts / institutions.

FACTS
On 4.3.1986, the assessee trust was registered and started doing its activities. The primary activity of the trust was to look after, manage and admister the affairs of the famous temple of Lord Shyamji at Khatushyamji. Various gulaks/hundies were kept in the temple for collecting the donations, etc. The Trust applied for exemption under section 12AA vide its application dated 16.3.2009. Vide order dated 28.1.2010, the Tribunal in ITA No. 789/ Jp/2009 directed grant of registration to the assessee trust w.e.f. 1.4.2008.

For AY 2007-08, the assessee filed its return of income on 28.1.2008, in response to notice u/s. 148. The return was processed on 12.3.2010 and assessment was completed under section 143(3) r.w.s. 147 on 26.12.2011. The AO taxed a sum of Rs. 2,08,00,000 and rejected the contention of the assessee that it was a capital receipt not chargeable to tax since it was an unregistered trust.

Aggrieved, the assessee preferred an appeal to CIT(A) who held that the receipts of Rs. 2,08,00,000 represented income of the assessee trust u/s. 2(24) and 115BBC of the Act.

Aggrieved, the assessee preferred an appeal to the Tribunal where it took an additional ground viz. that the action taken under section 147/148 is bad in law and without jurisdiction and being void ab-initio the assessment be quashed which was admitted by the Tribunal.

HELD
The Tribunal noted that the Finance Act No. 2 of 2014 has inserted the proviso to sub-section (2) of section 12A w.e.f. 1.10.2014. A reading of the said proviso provides that if at the time of grant of registration u/s. 12A, the assessment proceedings are pending before the AO and the object and activities of the trust remain the same for such preceding years, then the benefit of registration for sections 11 & 12 are required to be given to the trust on the income derived from the property held in the trust.

The Tribunal noted that the assessee had filed application for grant of registration on 16.3.2009 and registration was directed to be granted by the order of the Tribunal w.e.f. 1.4.2008. The return of income was processed u/s. 143(1) on 13.3.2010 and the assessment order was passed on 26.12.2011 u/s. 143(3) read with section 147 of the Act. Thus, when the order was passed by the Tribunal on 28.1.2010 the assessment proceedings were pending before the AO. Therefore, it held that the benefit of registration is required to be given for the preceding assessment year i.e. AY 2007-08.

The Tribunal held that the proviso to sub-section (2) of section 12A has retrospective application and has been inserted in the Act to remove the hardship of charitable trusts / institutions. It held that in the present case when registration was granted on 5.3.2010 w.e.f. 1.4.2008, the assessment proceedings for AY 2007-08 were pending before the AO. Therefore, the assessee cannot be treated as an AOP and was required to be treated as a registered trust under section 12A of the Act. The Tribunal concurred with the decision of the co-ordinate bench in the case of SNDP Yogam vs. ADIT(Exemption) in ITO NO. 503 to 506 & 569/Coch/2014 where the co-ordinate Bench had given benefit of registration of trust for AY 2006-07 though the application for registration was granted on 29.7.2013. Following the said judgment it held that the assessee was to be treated as a registered trust for AY 2007-08 dehors the direction issued by the Tribunal to grant the registration w.e.f. 1.4.2008, in the light of the new amendment.

The Tribunal observed that since it has held that the assessee is required to be treated as registered trust w.e.f. 1.4.2007, the second proviso to section 12A(2) applies and the reopening u/s. 147/148 is not permissible. The Tribunal held that reopening made was ill founded and not in accordance with law. It decided the ground in favor of the assessee.

The appeal filed by the assessee was allowed.

J M Financial & Investment Consultants Pvt. Ltd. vs. DCIT ITAT Mumbai `J’ Bench Before R. C. Sharma (AM) and Sanjay Garg (JM) ITA No.: 92/Mum/2012 A.Y.: 2008-09. Date of order: 11 May, 2016. Counsel for assessee / revenue : Dr. K. Shivram / Shabana Parveen

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Section 14A, Rule 8D – While computing amount of
average investment as per rule 8D, strategic investment is not to be
taken into account.

Section 48 – Interest on borrowings
utilized for application of shares is allowable as deduction while
computing capital gains if the same has not been claimed as revenue
expenditure.

FACTS I
The assessee in its return
of income had offered a sum of Rs. 40,000 as disallowance in respect of
expenditure incurred for earning tax free income. In the course of
assessment proceedings, on being asked by the Assessing Officer (AO) to
furnish a computation, the assessee furnished working of disallowance as
per rule 8D. The AO did not reject the amount of disallowance offered
by the assessee. The AO while computing the amount of disallowance under
section 14A did not exclude investment of Rs. 46,86,46,983 in the group
concerns being strategic investments since the said concerns were
subsidiaries or group concerns of the assessee.

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 I
The
Tribunal noted that while computing the disallowance under Rule 8D, the
AO has not excluded amount of strategic investment while computing
average investment as per Rule 8D. It observed that as per the ratio of
the decision of Delhi Bench of ITAT in the case of Interglobe
Enterprises Ltd. (ITA NO. 1362 & 1032/Del/2013, order dated
4.4.2014) and the decision of Mumbai Bench of the Tribunal in the case
of Garware Wall Ropes Ltd., strategic investment is not to be taken into
account. Following the ratio of these decisions, the Tribunal restored
the matter to the file of the AO and directed the AO to recompute the
disallowance under rule 8D after excluding strategic investment out of
average investment so made by the assessee.

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

FACTS II
The
assessee applied for allotment of shares of Cairn India Ltd by
utilizing monies raised by way of borrowings from DSP Mutual Fund. It
paid interest of Rs. 2,57,97,463 on the borrowings utilized for the
purpose of allotment of shares of Cairn India Ltd. Upon allotment, the
shares were sold and short term capital gain was computed. While
computing the short term capital gain the assessee claimed interest as
part of cost of shares sold and therefore, reduced it from sale
consideration to arrive at capital gains. In the tax audit report, the
auditor had classified this expenditure as capital expenditure. This
expenditure was not claimed by the assessee either as business
expenditure or u/s. 57 but was added to the cost of shares allotted.

The
AO rejected the claim of the assessee by holding that the said
expenditure can be claimed only u/s. 57 but it is disallowable since
dividend income is exempt. He held that the said expenditure is not
allowable while computing short term capital gain.

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. Before the Tribunal,
the assessee relied upon the ratio of the following decisions –

a) DCIT vs. Finav Securities Pvt. Ltd. (ITA No. 1010/ Mum/2011; Bench `F’, Order dated 3rd April, 2013);

b) ITO vs. Global Assets Holding Corporation Ltd. (ITA No. 4738/Mum/2010; Bench `G’, order dated 27th July, 2011);

c) Pratibha Paliwal vs. ACIT 11 ITR (Trib) 586 (Del);

d) S. Balan alias Shanmugam vs. DCIT (2009) 120 ITD 469 (Pune);

e)
DCIT vs. KRA Holding & Trading (P.) Ltd. 54 SOT 493 (Pune) –
Portfolio management fees paid by the assessee was to be allowed as
deduction while computing capital gains arising from sale of shares;

f) CIT vs. Sri Hariram Hotels P. Ltd. (2010) 325 ITR 136 (Karn);

g) Smt. Neera Jain vs. ACIT (ITA No. 1861/Mum/2009; decided on 22.2.2010).

HELD II
The
Tribunal upon consideration of the facts and having deliberated on the
judicial pronouncements relied upon by the assessee found that the
assessee has not claimed interest as revenue expenditure but the same
has been capitalized. It held that in view of the judicial
pronouncements relied upon by the assessee, interest expenditure is to
be considered as cost of acquisition of shares / cost of improvement,
therefore, allowable while computing capital gain under section 48 of
the Act. The Tribunal directed the AO to allow assessee’s claim of
interest u/s. 48 of the Act.

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

[2016] 158 ITD 480 (Mumbai Trib.) Siemens Nixdorf Informationssysteme GmbH vs. DDIT (International Taxation) A.Y.: 2002-03 Date of order: 31 March, 2016

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Section 2(14) – a non-resident company, gavea loan to its wholly owned subsidiary which constituted property – in sense it is was an assetwhich a person could hold and enjoyand not covered by exclusion clauses set out in section 2(14), it was required to be treated as a ‘capital asset’ and consequently any loss arising on sale of said asset, would be treated as short term capital loss.

FACTS
The assessee, a non-resident company, had given loan to its wholly owned subsidiary in India as its subsidiary had run into serious financial troubles and there was also a proposal to wind up the said subsidiary. The assessee sold the debt, that it had given to its subsidiary, Siemens AG, for a less consideration and claimed the short term capital loss on this transaction of sale of book debt.

The AO disallowed the deduction of capital loss on the basis of the reasoning that

a. the assessee’s right to recover the loan of Euro 90,00,000 from its subsidiary was not a capital asset u/s. 2(14);

b. the assignment of this debt, or the right to recover the money from subsidiary, was not a transfer u/s. 2(47);

c. even going by the valuation report, what was recoverable was part of said sum i.e. Euro 7,31,000 only and what was not recoverable could not be transferred either; and

d. it was a sham transaction only with the tax motives since the advance to the subsidiary was in the capital field and a capital loss was not allowed as deduction.

The CIT-(A) confirmed the order of the AO.

On second appeal before the Tribunal.

HELD
The advance given by the assessee to its subsidiary was a property, in the sense it was an interest which a person could hold and enjoy. Section 2(14) defines a ‘capital asset’ as ‘property of any kind held by an assessee, whether or not connected with his business or profession’ except as specifically excluded in the said section. So far as business assets are concerned, the exclusion is only for ‘(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession’.

Thus the said advance was required to be treated as a ‘capital asset’.

Unless the amount due is treated as a capital asset, there was obviously no question of the short term capital loss. As a matter of fact, it was not even the case of the revenue, and rightly so, that the debt was not a capital asset. As regards CIT-(A)’s observation to the effect that ‘a loan is a current asset and not a capital asset’, it was pointed out that the concept of ‘current asset’ is alien to the law on taxation of capital gains, or, for that purpose, to the law on taxation of income. The expression ‘capital asset’ is a defined expression u/s. 2(14) and, even though it may be more appropriate to describe an advance, a debt or a recoverable amount as a ‘current asset’ from an accountant’s perspective or from any other perspective, as long as such an advance, debt or recoverable amount satisfies the requirements of section 2(14), it will have to be treated as a ‘capital asset’ for the purposes of computation of capital gains.

As regards the CIT-(A)’s observations that the assessee did not have a PE in India, that the assessee was not carrying out any business in India and that the assessee was not required to file a return of income in India, there is no relevance or basis in these observations. The capital asset was the money recoverable from an Indian entity which was thus essentially required to be treated as in India, and, as was mandate of section 9(1)(i) any income, inter alia, ‘through the capital asset situated in India’ is deemed to accrue or arise in India. As a corollary to this taxability of income, the loss through the capital asset situated in India is also required to be taken into account. The authorities below were, in determining whether or not the amount recoverable from an Indian entity was a capital asset u/s. (14), swayed by the considerations which were not germane in this context

Section 2(47)(i) provides that ‘transfer, in relation to a capital asset, includes: sale, exchange or relinquishment of the asset’. Therewas no dispute that all the rights to recover the money from the Indian entity, which was what the capital asset was in this case, was sold to Siemens AG for a consideration of Euro 7,31,000. The sale of trade debts, or even loans, is a part of day to day trade and commerce. The CIT-(A) has not even raised any issues on this aspect of the matter.

As for the vague allegations about the tax evasion motive, nothing cogent has been brought on record at all. The authorities below were in error in fighting shy of the tax corollaries of a legally valid commercial transaction, without bringing on record any material to disprove its bona fides or to show that it’s a sham transaction, just because of their apprehensions about tax motives of the transaction. Just because a transaction results in a tax benefit, unless it is a sham transaction, it cannot be ignored.

There is also no dispute that if the capital loss was to be allowed, the loss had to be short-term capital loss.

In view of the above discussions, as also bearing in mind entirety of the case, the AO was directed to allow the shortterm capital loss.

[2016] 70 taxmann.com 265 (Chandigarh – Trib.) Sanjeev Aggarwal vs. DCIT A.Y.: 2011-12 Date of order: 25 May, 2016

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Sub-section 143(2), 147, 292BB – Failure to
issue notice u/s. 143(2) could not be cured by resorting to deeming
fiction under section 292BB.

FACTS
The assessee had
filed its return of income on 14.8.2011 declaring total income of Rs.
30,10,400 which was processed u/s. 143(1) on 12.10.2011 and subsequently
the case was reopened after recording reasons on 18.3.2014 and notice
u/s. 148 was issued and duly served on the assessee on 25.3.2014. In
response, the assessee vide his letter dated 25.6.2014 submitted that
the original return of income filed by him may be treated as a return
filed in response to notice issued u/s. 148 and requested for reasons
recorded for reopening the assessment which were provided to the
assessee vide letter dated 27.6.2014. Notice dated 25.9.2014 was issued
u/s. 142(1) of the Act along with detailed questionnaire. After a
detailed discussion the Assessing Officer (AO) passed an order dated
31.12.2014 u/s. 147 r.w.s. 143(3) of the Act assessing the total income
to be Rs. 1,42,64,299.

Aggrieved, the assessee preferred an
appeal to the CIT(A) where it took a legal ground that assessment
completed by the AO needs to be quashed and declared to be null and void
since no notice u/s. 143(2) of the Act was issued. The CIT(A) held that
since the assessee had appeared in the assessment proceedings, by
virtue of provisions of section 292BB it is deemed that the notice
required to be served on the assessee was duly served on him in time.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The
Tribunal noted that it is undisputed that the notice under section
143(2) of the Act was not issued by the AO. Therefore, the only issue
before it was whether in the absence of issue of notice under section
143(2) of the Act, the assessment framed u/s.147 r.w.s. 143(2) of the
Act is valid in the background of provisions of section 292BB of the
Act.

The Tribunal on perusal of section 292BB concluded that
section 292BB talks about only the situation where the assessee raises
the issue of non-service of a notice and still co-operates with the
Department. Otherwise also, it stated that the issuance of statutory
notice cannot be dispensed with by the co-operation of the assessee. It
concurred with the assessee that the judgment of Punjab & Haryana
High Court has in the case of CIT vs. Cebon India Ltd. (2012) 347 ITR
583 (Punj. & Har.) has held that the absence of a statutory notice
cannot be cured u/s. 292BB of the Act.

As regards the contention
of the revenue that the provisions of section 148 constitute a complete
code by itself, the Tribunal held that the provisions of section 148 of
the Act itself negate the view taken by the revenue. It observed that
once the assessee files return in pursuance of notice u/s. 148 of the
Act, which is deemed to be filed u/s. 139 of the Act and in case the AO
wants to proceed with the return filed by the assessee, he has to issue a
notice u/s. 143(2) of the Act. Any assessment framed without issue of
notice u/s. 143(2) of the Act, suffers from jurisdictional error. This
position of law has also been clarified by the Delhi High Court in the
case of Alpine Electronics Asia Pte Ltd. vs. DGIT (2012) 341 ITR 247
(Delhi).

In view of the above, the Tribunal quashed the order of
the AO since it was made without issue of notice u/s. 143(2) of the
Act.

This ground of appeal filed by the assessee was allowed.

[2016] 70 taxmann.com 261 (Pune- Trib.) S. R. Thorat Milk Products (P.) Ltd. vs. ACIT A.Ys.: 2004-05, 2005-06, 2007-08 to 2009-10 Date of order: 20 May, 2016

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Sub-section 36(1)(iii), 37 – Interest paid on share application money pending allotment would be allowable as a revenue expenditure. Share application money per se cannot be characterized and equated with share capital. Obligation to return the money is always implicit in the event of non-allotment of shares in lieu of share application money received.

FACTS
The assessee, a closely held company, engaged in the business of processing of milk and manufacturing of milk products, had in its return of income for assessment year 2004-05 claimed interest expense of Rs. 23,04,273 on account of interest paid on share application money received from existing shareholders pending allotment. Similar expense was claimed in other assessment years.

The Assessing Officer (AO) was of the view that the expenditure cannot be allowed under section 37 since it is a capital expenditure and it cannot be allowed u/s. 36(1) (iii) since the ingredients of borrowing by the assessee as also a positive act of lending by one and expense thereof by the other, coupled with an obligation of refund or repayment thereof were not present when the interest is paid on receipts in the nature of share application money. The AO disallowed the interest claimed to have been paid at the rate of 12% per annum.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the issue is squarely covered by the decision of the co-ordinate bench of the Tribunal in the case of ACIT vs. Rohit Exhaust Systems (P.) Ltd. in ITA No. 686/PN/2011 and others, order dated 5.10.2012. In view of the decision of the co-ordinate bench, the Tribunal held that the share application money per se cannot be characterized and equated with share capital. The obligation to return the money is always implicit in the event of non-allotment of shares in lieu of the share application money received. Allotment of a share is subject to certain regulations and restrictions as provided under the Companies Act. Therefore, receipt by way of share application money is not receipt held towards share capital before its conversion (sic allotment). Therefore, payment of interest on share application money cannot be treated differently in the Income-tax Act. Once the contention of the assessee that the money has been utilized for the purpose of business remains uncontroverted, there is no justification to hold the issue against the assessee. The Tribunal directed the AO to delete the addition on merits.

The Tribunal allowed the appeals filed by the assessee.

[2016] 70 taxmann.com 389 (Raipur) ACIT vs. Jindal Power Ltd. A.Y.: 2008-09 Date of order: 23 June, 2016

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Section 37, Explanation 2 to section 37 – Voluntary expenses incurred, prior to 1.4.2015, on corporate social responsibility are deductible. Explanation 2 to section 37(1) inserted with effect from 1.4.2015 providing that expenditure incurred on corporate social responsibility referred to in Companies Act, 2013 shall not be deemed to be an expenditure incurred for purpose of business or profession does not have retrospective effect.

FACTS
The assessee had in its return of income claimed a sum of Rs. 24,45,435 on account of expenses incurred on discharging corporate social responsibility. This expenditure mainly related to expenses incurred on construction of school building, devasthan / temple, drainage, barbed wire fencing, educational schemes and distribution of clothes, etc voluntarily. The Assessing Officer (AO) disallowed this expenditure on the ground that it was incurred voluntarily, and was not for business purpose.

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

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD
As regards the contention of the AO that the expenditure is voluntary and not mandatory, the Tribunal held that as long as the expenses are incurred wholly and exclusively for the purposes of earning the income from business or profession, merely because some of these expenses are incurred voluntarily, i.e. without there being any legal or contractual obligation to incur the same, those expenses do not cease to be deductible in nature.

As regards the contention on behalf of the revenue that the provisions of Explanation 2 to Section 37(1) be regarded as clarificatary in nature, the Tribunal held that the Explanation refers only to such corporate social responsibility expenses which fall under section 135 of the Companies Act, 2013, and as such, it cannot have any application for the period not covered by this statutory provision which itself came into existence in 2013. Explanation 2 to section 37(1) was held to be inherently incapable of retrospective application any further. The Tribunal also noted that the amendment in the scheme of section 37(1) is not specifically stated to be retrospective and the said Explanation is inserted only with effect from 1.4.2015 and in this view of the matter also, there is no reason to hold this provision to be retrospective in application.

The Tribunal observed that the amendment in law, which was accompanied by the statutory requirement with regard to discharging the corporate social responsibility, is a disabling provision which puts an additional tax burden on the assessee in the sense that the expenses that the assessee is required to incur, under a statutory obligation, in the course of his business are not allowed as deduction in computation of income. This disallowance is restricted to the expenses incurred by the assessee under a statutory obligation under section 135 of the Companies Act, 2013 and there is thus now a line of demarcation between the expenses incurred by the assessee on discharging corporate social responsibility under such a statutory obligation and under a voluntary assumption of responsibility. As for the former, the disallowance under Explanation 2 to section 37(1) comes into play, but, as for latter, there is no such disabling provision as long as the expenses, even in discharge of corporate social responsibility on voluntary basis, can be said to be “wholly and exclusively for the purposes of business”. The Tribunal observed that there is no dispute that the expenses in question are not incurred under the aforesaid statutory obligation. For this reason also, as also the basic reason that the Explanation 2 to section 37(1) comes into play with effect from 1st April, 2015, the Tribunal held that the disabling provision of Explanation 2 to section 37(1) does not apply to the facts of the case.

This ground of appeal of the revenue was dismissed.

Deduction u/s. 10A- Export turnover – Allowable Expenditure- telecommunication and insurance expenses have been incurred in local currency in India and not with regard to providing software services outside India: Explanation (2) to Section 10A

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CIT vs. 3D PLM Software Solutions Ltd. [ Income tax Appeal no 46 of 2014, 110 of 2014 & 112 of 2014 dt : 09/06/2016 (Bombay High Court)].

[3D PLM Software Solutions Ltd vs. ITO, Range-10(2) (1). [ITA Nos. 4538/MUM/2010, 5839/MUM/2010, 123/ MUM/2011, 178/MUM/2012 ; Bench : D; dated 03/07/2013; A Y: 2005- 2006, 2006-2007, 2007-2008. Mum. ITAT ]

The assessee was engaged in the business of software development and filed the return of income declaring the total income of Rs. 18,65,361/-. As a result of scrutiny assessment assessed income of the assessee was determined at Rs.39,05,180/-.

The AO invoked the provisions of Explanation (2) to section 10A of the Act and proposed to adjust the Export Turnover (ETO ) qua the insurance and telecommunication expenses for the purpose of computing the deduction u/s 10A of the Act. The AO held that the insurance expenses of Rs. 14,37,288/- and communication expenses of Rs. 41,96,206/- were not to be reduced from the Export Turnover for computing the deduction u/s 10A of the Act.

The assessee submitted that for downward revision of the ETO , the expenses are in the nature of freight telecommunication charges or insurance must be attributable to the export of computer software and only then such expenditure can be reduced from the export turnover.

Further, he explained that no such expenditure is required to be reduced in this case for the reason that expense on telecommunication and insurance expenses incurred for software development were not incurred in foreign exchange attributable to the delivery of stocks outside India. Assessee also explained that the said expenditure was incurred in local currency for carrying on day-to-day software development work from the locations within India. As per the assessee, these expenses are not attributable to export of computer software outside India. Therefore, the export turnover need not be adjusted qua telecommunication expenses.

On considering the submissions of the assessee, CIT(A) appreciated that the impugned expenses were not incurred outside India and they are attributable to the delivery of articles within India. He also appreciated the fact that while making disallowance, AO should have come to a clear finding as to why the telecommunication and insurance expenses were attributable to the said computer software outside India. On the above said facts, CIT (A) granted relief to the assessee.

Being aggrieved by the order of CIT(A), the Revenue filed an appeal to Tribunal . The Tribunal observed that the issue for adjudication relates to the applicability of the provisions of clause-(iv) to the Explanation-2 to section 10A of the Act. Clause (iv) provides for definition of “export turnover”.

The Tribunal held that the export turnover means consideration in respect of the export received by the assessee in convertible foreign exchange. But it does not include freight telecommunication charges or insurance attributable to the delivery of the stocks outside India or expenses incurred in foreign exchange in providing technical services outside India. Thus, the expenses incurred in local currency in India on account of telecommunications and insurance are outside the scope of the above said definition given in clause-(iv). . Therefore, grounds raised by the Revenue was dismissed.

The Revenue filed an appeal before High Court. The Hon. High court found that the Assessing Officer has in the order not given any finding with regard to assessee’s contention that this expenditure had been incurred only in India and not with regard to export of software outside India. The CIT (A) as well as the Tribunal have rendered finding of fact that this telecommunication and insurance expenses have been incurred in local currency in India and not with regard to providing software services outside India. This concurrent finding of fact has not been shown to be perverse in any manner. On the above finding of fact, it is evident that exclusion part of Explanation 2(iv) of section 10A of the Act will not apply to the present facts. Therefore , the question raised by revenue does not give rise to any substantial question of law. Accordingly appeal was dismissed.

Transfer pricing- Reference to TPO (Opportunity of hearing)- Section 92CA of I. T. Act, 1961- A. Y. 2010-11- Assessing Officer is obliged to give assessee an opportunity of being heard prior to making reference where an objection as to jurisdiction is raised by assessee in relation to making a reference-

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Indorama Synthetics (India) Ltd. vs. Addl. CIT; [2016] 71 taxmann.com 349 (Delhi):

The assessee-company entered into transactions of import of raw material amounting from ‘TPL’, a company incorporated in Thailand. It filed return of income declaring ‘Nil’ income. During pendency of assessment proceedings, the Assessing Officer referred the assessee’s case to TPO for determination of ALP in relation to the international transactions undertaken by the assessee with AE

The assessee filed writ petition contending that Assessing Officer could not have referred the matter to TPO without giving it an opportunity of being heard. The Delhi High Court allowed the assessee’s writ petition and held as under:

“i) The main issue is whether it was incumbent on the Assessing Officer to have given the assessee an opportunity of being heard before making a reference to the TPO u/s. 92CA(1). Section 92CA reveals that there are certain jurisdictional prerequisites for the making of a reference by the Assessing Officer to the TPO. In the first place, the Assessing Officer has to be satisfied that the assessee has entered into an international transaction or a specified domestic transaction. Whereas in the present case, the assessee raises a threshold objection that it has not entered into any international transaction within the meaning of section 92B, it is imperative for the Assessing Officer to deal with such an objection. If the Assessing Officer decides to nevertheless make a reference, he has to record the reasons, even prima facie, why he considers it necessary and expedient to make such a reference to the TPO.

ii) What is referred to the TPO is the determination of the ALP of the said international transaction or specified domestic transaction. Therefore, the satisfaction to be arrived at by the Assessing Officer regarding the existence of the international transaction or specified domestic transaction, even prima facie, is a sine qua non for making the reference to the TPO. Where such an accountant’s report is submitted by the assessee in Form 3CEB, then there should be no difficulty for the Assessing Officer to form an opinion, even a prima facie one, that it is necessary and expedient to make a reference to the TPO on the question of the determination of the ALP of such international transaction involving the assessee.

iii) CBDT’s Instruction No. 3 of 2003 categorically states that in order to make a reference to the TPO, the Assessing Officer has to satisfy himself that the assessee has entered into an international transaction with its AE. One of the sources from which the factual information regarding the international transaction can be gathered is Form No. 3 CEB filed with the return which is in the nature of an accountant’s report containing the details of the international transaction entered into by the taxpayer during the assessment year in question. Where no such report in Form 3 CEB is filed by the assessee, what will be the basis for the Assessing Officer to record that it is necessary and expedient to refer the question of determination of the ALP of such transaction to the TPO? Where the Assessing Officer is of the view that a transaction reflected in the filed return partakes of the character of an international transaction, he will put the assessee on notice of his proposal to make a reference to the TPO u/s. 92CA (1) of the Act. Before making a reference to the TPO, the Assessing Officer has to seek approval of the Commissioner/Director as contemplated under the Act. Therefore, all transactions have to be explicitly mentioned in the letter of reference. The very nature of this exercise is such that the Assessing Officer will first put the assessee on notice of his proposing to make a reference to the TPO and seek information and clarification from the assessee. If at this stage, the assessee raises an objection as to the very jurisdiction of the Assessing Officer to make the reference, then it will be incumbent on the Assessing Officer to deal with such objection on merits.

iv) While section 92CA (1) does not itself talk about a hearing having to be given to the assessee upon the latter raising an objection as to the jurisdiction of the Assessing Officer to make a reference, such requirement appears to be implicit in the very nature of the procedure that is expected to be followed by the Assessing Officer. As already noticed, the Assessing Officer has to record that he considers it necessary and expedient to make a reference. The Assessing Officer has to deal with the objections raised by the assessee. It is only thereafter that the Assessing Officer can come to the conclusion, even prime facie, that it is necessary and expedient to make the reference. This has to be done prior to making a reference

v) As far as the present case is concerned, the assessee has not filed the accountant’s report u/s. 92E yet the Assessing Officer has to proceed to determine the ALP u/s. 92C (3) or refer the matter to the TPO to determine the ALP u/s. 92CA (1) in case the assessee has not declared one or more international transactions in the report filed u/s. 92E of the Act. As explained above, the Assessing Officer must provide an opportunity of being heard to the taxpayer before recording his satisfaction or otherwise

vi) For all the aforesaid reasons, it is opined that the references made by the Assessing Officer to the TPO on the question of determination of ALP of the alleged international transactions involving the petitioner and its AE have been made without affording the petitioner an opportunity of being heard as was required by law. Accordingly, the said reference made by the Assessing Officer to the TPO is hereby set aside.

vii) The question of whether or not a reference should be made to the TPO, has to be determined by the Assessing Officer afresh after giving the assessee an opportunity of being heard.”

TDS- Interest- Section 194A of I. T. Act, 1961- Motor Vehicles Act- Compensation to victims of motor accident- Tax not deductible from compensation or interest thereon-

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MD Tamil Nadu State Transport Corporation (Salem) Ltd. vs. Chinnadurai; 385 ITR 656 (Mad):

Dealing with the scope of the provisions of TDS on compensation and interest thereon payable to victims of motor accidents, the Madras High Court held as under:

“i) If there is a conflict between a social welfare legislation and a taxation legislation legislation, then, the social welfare legislation should prevail since it subserves larger public interest. The Motor Vehicles Act, 1988 is one such legislation which has been passed with a benevolent intention for compensating the accident victims who have suffered bodily disablement or loss of life and the Income-tax Act which is primarily intended for tax collection by the state cannot spoke in the effective and efficacious enforcement of the Motor Vehicles Act.

ii) The Income-tax Department had issued a circular dated October 4, 2011 whereby deduction of incometax has been ordered on the award amount and the interest accrued on the deposits made under the order of the court in motor accident cases. Taking a serious view of this circular, the Division Bench of the Himachal Pradesh High Court took suomoto cognizance of the matter and considered it as public interest litigation in the Judgment reported in Court on its Motion vs. H. P. Co-operative Bank Ltd. 2014 SCC Online HP 4273 and quashed the circular.

iii) The compensation awarded by the Motor Accident Claims Tribunal or other interest accruing thereon cannot be subjected to deduction of tax at source and since the compensation and the interest awarded therein do not fall under the term “income” as defined under the Income-tax Act.”

Speculation business- Section 73 of I. T. Act, 1961- A. Y. 2004-05- Trading in units of mutual funds or bonds- Not trading in shares- Not speculation business-

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CIT vs. Hertz Chemicals Ltd.; 386 ITR 39 (Bom):

In the A. Y. 2004-05, the Assessing Officer found that the assessee had offered its profits and loss from share trading as profit and loss of speculation business for the purpose of section 73 of the Income-tax Act, 1961 and amounts received from mutual funds/bonds as business income. For the year ending on March 31, 2003, the assessee had offered profit and loss from share trading as well as from mutual funds as income from speculation business showing the closing stock of shares at Rs. 6.69 crore while the opening stock as on April 1, 2003 for the assessment year in question was shown as Rs. 1.01 crores and the balance of Rs. 5.67 crore was shown as opening stock of mutual funds and bonds. The Assessing Officer held that bifurcation was not permissible and considered the activity of dealing in mutual funds and bonds to be an activity of dealing in shares as speculation business. The Tribunal allowed the assessee’s claim and deleted the addition.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under: “i) Units were not shares and trading in units was not speculation business. The Tribunal was justified in confirming the deletion of the addition made by the Assessing Officer on account of the assesee’s trading activities in mutual funds and bonds. ii) No question of law arose.”

Search and seizure- Cash seized from third person- Third person stating that cash belonged to asessee and assessee admitting it- Amount included in return filed by assessee- Request to adjust tax dues and return balance to assessee- Request cannot be refused on ground that cash had been seized from third person-

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Hemal Dilipbhai Shah vs. ACIT; 386 ITR 91 (Guj):

In February 2012, Rs. 26 lakhs in cash were seized by the Department from one VS. VS stated that the cash did not belong to him but to the assessee. Such statement of VS was also confirmed by the assessee. The assessee filed his return for the A. Y. 2012-13 declaring total income of Rs. 27,52,100 including the income declared of Rs. 21,73,000 on account of unexplained cash. The assessee filed an application to the Assessing Officer to adjust the tax liability from the seized amount. Thereafter the asessee filed an application for release of the balance of the seized amount along with interest after adjusting the demand. By a communication, the Assessing Officer informed the assessee that the Department is not in a position to issue the refund until completion of assessment of the VS.

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

“i) The fact as emerging from the record clearly revealed that in proceedings u/s. 132A of the Income-tax Act, 1961, VS from whom the cash had been seized had clearly stated that it belonged to the assessee and the assessee had also in proceedings u/s. 153C admitted this.

ii) The Department had treated the cash as belonging to the assessee. There was no dispute as regards the title to the seized assets (cash). The Department was, therefore, not justified in not releasing the balance amount to the assessee on the ground that the cash had been seized from VS.

iii) The Department is directed to forthwith refund the balance amount after adjusting the tax dues of the petitioner with interest.”

Income or capital- A. Y. 2009-10- Income from sale of carbon credits- Carbon credits not a by-product of business but an offshoot of environmental concerns- Is capital receipt and not income-

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CIT vs. Subhash Kabini Power Corporation Ltd.; 385 ITR 592 (Karn):

Tribunal held that the receipts on sale of carbon credits is capital receipt and not chargeable to tax.

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

“(i) In order to find out whether the particular amount received is a capital receipt or income out of business, there cannot be any standard yardstick or a straight jacket formula.

ii) Carbon credit is not an offshoot of business, but an offshoot of environmental concerns. Income received by sale of carbon credits is a capital receipt.”

Revision- Sections. 143, 145 and 163 of I. T. Act, 1961- A. Y. 2005-06- Solicitor following cash system of accounting- Advance deposits received from clients treated as liabilities in accounts and adjusted towards fees for expenditure incurred on behalf of clients in subsequent years- No loss of revenue- Revision to bring deposits shown in balance sheet to tax not proper-

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CIT vs. Bijoy Kumar Jain; 385 ITR 339 (Cal):

The assessee was a solicitor and followed the cash method of accounting. He received advance deposits from his clients which he treated in his books as his liability. In subsequent years when expenses were incurred both out of pocket and on account of his fees the liability was adjusted. The advances were not treated as his income in his assessment. The Commissioner passed an order of revision u/s. 263 of the Income-tax Act, 1961 holding that the order of assessment was erroneous and prejudicial to the interest of the Revenue because the deposits had not been included in the assessee’s income despite the assessee’s following cash system of accounting. The Appellate Tribunal set aside the order passed by the Commissioner u/s. 263 interalia holding that the assessee had established that all the advances as on March 31, 2005 had been adjusted in the subsequent assessment years and the Department could not contradict the case of the assessee and that there was no justification for invoking the provisions of section 263.

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

“The deposits were treated by the assessee as a capital receipt and the deposits were adjusted in the subsequent years against the expenditure incurred for or on behalf of the client from whom the deposit was received. Such expenditure also included the fees of the assessee himself. It was at that stage that the money was earned by him. Before that, he was holding the money as a agent or as a fiduciary of his client. The Appellate Tribunal was right in taking the view that it did.”

Charitable purpose- Registration of trusts- Application for registration- Audited accounts submitted subsequently- Registration to be allowed from the date of filing application and not from date on which defects in application cured-

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CIT vs. Garment Exporters Association of Rajasthan; 386 ITR 20 (Raj):

The assessee, a charitable trust had filed an application u/s. 12AA(1)(b)(ii) of the Income-tax Act, 1961 for registration without submitting the audited accounts while filing the application. The audited accounts were subsequently filed. The Commissioner granted registration from the date of filing the audited accounts and refused to grant it from the date of application. The Tribunal found that the filing of the audited accounts along with the application was not mandatory and allowed the registration from the date of submission of the application.

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

“i) The application was filed without any defect and the audited accounts were submitted later on because submission of audited accounts along with the application was not mandatory.

ii) There was no error in the order of the Tribunal which allowed the registration from the date of submission of the application by the assessee. The Tribunal and the Department had not pointed out any defect in the application other than non filing of the audited accounts with the application, which was not mandatory.

iii) We find no error in the order passed by the Tribunal.”

Business expenditure- Disallowance u/s. 43B of I. T. Act, 1961- Provident fund- Employers and employees contribution- Although technical reading of section 43B and the provisions of subsection (2) of section 24 (x) read with section 36 (1) (va) creates the impression that the employees’ contribution would continue to be treated differently under a different head of deduction, as the head of deduction is separate u/s. 43B and section 36 but on a broader reading of the amendments made to section 43B repeatedly and the intention of Parliament, there appears to be sufficient justification for taking the view that the employees’ and the employer’s contribution ought to be treated in the same manner-

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Bihar State Warehousing Corporation Ltd. vs. CIT; [2016] 71 taxmann.com 247 (Patna):

The assessee was a Public Sector Undertaking of the Government of Bihar and was carrying on the business of warehousing. During assessment, the Assessing Officer after considering the fact that the contribution had been made after due date statutorily prescribed disallowed the payment of employer’s contribution to EPF u/s. 43B and also disallowed the employees’ contribution to Provident Fund treating the same as income from other sources as per the provision of sub-section (2) of section 24 read with section 36(1)(va). On appeal, the Commissioner(Appeals) allowed the appeal so far as the delayed payment of employer’s contribution to EPF u/s. 43B was concerned and deleted said addition. So far as the delayed payment of the employees’ contribution to EPF is concerned, the addition of the same was confirmed holding that no relief was allowable on the ground of section 43B as the omission of second proviso to the said section with effect from 1-4-2004 does not apply to delayed payment of employees’ contribution to any Provident Fund or any fund mentioned in sub-section (2) of section 24. The same was confirmed by the Tribunal.

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

“Both the Bombay High Court in CIT vs. Ghatge Patil Transports Ltd. [2014] 368 ITR 749 (Bom) and Punjab and Haryana High Court in the case of CIT vs. Hemla Embroidery Mills (P.) Ltd. [2014] 366 ITR 167 (P. & H.)) have deallt with the issue as to whether a distinction can be made between the employees’ contribution and employer’s contribution with regard to applicability of section 43B and held that both the employees’ and employer’s contributions are covered by the amendment of section 43B. Thus following same both contributions were to be treated on the same footing.”

Educational Institution – Exemption – Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes as intuition for the purpose of making profits – Assessing Authorities must continuously monitor from assessment year to assessment year whether such institutions continue to apply their income and invest or deposit their funds in accordance with the law laid down.

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Chief CIT vs. ST. Peter’s Educational Society [2016] 385 ITR 66 (SC)

The petitioner Society registered under the Societies Registration Act, 1860 as well as under the provisions of the Bombay Public Trusts Act, 1950, was engaged in imparting higher and specialised education. It is specialised in imparting education in the field of communication including advertising and its related subjects. The petitioner had also been granted the registration u/s. 12A of the Act. The Director of Income Tax (Exemption) had issued a notice u/s. 12AA(3) of the Act and called upon the petitioner to explain as to why its registration u/s. 12A of the Act should not be withdrawn. The said notice came to be challenged by the petitioner before the Gujarat High Court by filing a writ petition, which was withdrawn at a later stage in view of the fact that only show-cause notice was under challenge. However, the procedure initiated by the Director of income tax (Exemption) u/s. 12AA(3) of the Act were dropped by an order dated March 3, 2014 and accordingly the registration granted in favour of the petitioner u/s. 12A of the Act, remained intact. The petitioner submitted an application for getting an exemption certification u/s. 10 (23C)(vi) of the Act, for the assessment year 2013- 14 and onwards on September 30, 2013. The petitioner was called upon to make submissions. By two letters dated February 28, 2014 and August 13, 2014 detailed submissions were made before the Commissioner with whom the application was pending for adjudication. By the order dated September 29, 2014 the Commissioner refused to issue the certificate u/s. 10(23C)(vi) of the Act on various grounds.

By way of a writ petition under articles 14, 19(1)(g) and 226 of the Constitution of India the petitioner challenged the order dated September 29, 2014 passed by the Commissioner by which the application submitted by the by the petitioner to issue exemption certificate in its favour u/s. 10(23C)(vi) of the Act. had been refused.

The High Court noted that it was an admitted position that a certificate u/s. 12A of the Act had already been issued in favour of the petitioner and the same had continued till date. Therefore, according to the High Court it was established that the petitioner-institution was a charitable trust as far as applicability of the Income-tax Act was concerned.

The High Court held that the sole object of the institution was to impart education. By providing latest information and thereafter training to those people who were already in the field of advertising communication, etc. and in such process if certain persons became super-specialists in a particular field, and for which the institution was charging fee, such a case would not fall under proviso to section 2(15).

The High Court concluded that the petitioner institution was established for the sole purpose of imparting education in a specialized field.

Before the Supreme Court, the learned Solicitor General appearing for the Income-tax Department and the counsel appearing for the respondent-assessee in the appeal did not dispute that the issue involved in these appeals was squarely covered by the judgment of the Supreme Court in Queen’s Educational Society vs. CIT [2015] 372 ITR 699 (SC). The Supreme Court noted that the matter pertained to the exemption to the educational institutions u/s.10(23C) of the Income-tax Act, 1961. In the said judgment, the court summarized the legal position as under:

“11. Thus, the law common to section 10(23C) (iiiad) and (vi) may be summed up as follow:

(1) Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes as intuition for the purpose of making profits.

(2) The predominant object test be applied- the purpose of education should not be submerged by a profit making motive. .

(3) A distinction must be drawn between the making of the surplus and an institution being carried on ‘for profit’. No inference arises that merely because imparting education result in making a profit, it becomes an activity for profit.

(4) If after meeting the expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not cease to be one existing solely for educational purposes.

(5) The ultimate test is whether on an overall view of the matter in the concerned assessment year the object is to make profit as opposed to educating persons.”

The Supreme Court noted that there was a difference of opinion amongst various High Courts on the aforesaid issue. While summarizing the law, it approved the judgments of Punjab and Haryana High Court, Delhi and Bombay High Courts and reversed the view taken by the Uttarakhand High Court. In so far as the judgment of the Punjab and Haryana High Court was concerned, it was given in the case of Pinegrove International Charitable Trust vs. Union of India [2010] 327 ITR 73 (P&H). The relevant para in this behalf which also stated as to how such cases were to be dealt with reads as under:

“25. We approve the judgment of the Punjab and Haryana, Delhi and Bombay High Courts. Since we have set aside the judgment the Uttarakhand High Court and since the Chief Commissioner of Income-tax’s orders cancelling exemption which were set aside by the Punjab and Haryana High Court were passed almost solely upon the law declared by the Uttarakhand High Court, it is clear that these orders cannot stand. Consequently, the Revenue’s appeal from the Punjab and Haryana High Court’s judgment dated January 29, 2010, and the judgments following it are dismissed. We reiterate that the correct tests which have been culled out in the three Supreme Court judgment stated above, namely, Surat Art Silk Cloth, Aditanar and American Hotel and Lodging, would all apply to determine whether an educational institution exists solely for educational purposes and not for purposes of profits. In addition, we hasten to add that the 13th proviso to section 10(23C) is of great importance in that assessing authorities must continuously monitor from assessment year to assessment year whether such institutions continue to apply their income and invest or deposit their funds in accordance with the law laid down. Further, it is of great importance that the activities of such institution be looked at carefully. If they are not genuine, or are not being carried out in accordance with all or any of the conditions subject to which approval has been given, such approval and exemption must forthwith be withdrawn. All these cases are disposed of making it clear that the Revenue is at liberty to pass fresh order if such necessity is felt after taking into consideration the various provisions of law contained in section 10(23C) read with section 11 of the Income-tax Act.”

The Supreme Court dismissed the appeal clarifying that the observations made in para. 25 in Queen’s Educational Society (supra) shall be followed

Business expenditure- TDS- Disallowance- Section 40(a)(ia) of I. T. Act, 1961- A. Y. 2006- 07- Freight charges- Supplier making payments to transporters- Assessee, buyer, reimbursing transportation expenses- Liability to deduct TDS on supplier under agreement- No liability on assessee to deduct tax and disallowance u/s. 40(a) (ia) not attracted-

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Hightension Switchgear Pvt. Ltd. vs. CIT; 385 ITR 575 (Cal):

For the A. Y. 2006-07, the Assessing Officer disallowed the payments made by the assessee on account of freight charges on the ground that it had failed to deduct tax at source u/s. 194C of the Income-tax Act, 1961. In its appeal before CIT(A) and the Tribunal the assesee submitted that its supplier, IPCL, had reimbursed the total freight charges in its invoices and had paid them to the transporter, RLL after deducting tax at source which had been deposited by the supplier with the Department. The Commissioner (Appeals) and the Tribunal upheld the disallowance.

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

“i) Under the contract of sale, the seller was bound to send the goods to the buyer. The relevant part of the price list had showed that the seller was bound to pay the transportation charges to the transport agency and was entitled to recover it from the buyer. The assessee had merely reimbursed the cost of transportation incurred by the seller. The liability to deduct and pay the tax was that of the seller who have admitted to have done that. In case the seller was unable to show that he had made the deduction, section 40(a)(ia) might be applied to his case but not to the case of the assessee who was the buyer.

ii) Even if it was assumed that the supplier, when it had transported the goods to the assessee, had acted as an agent of the assessee and the assessee had reimbursed the freight charges to the supplier, who in turn had paid to the transporters as the Tribunal had held, it was conceptually correct and no other conclusion was possible. The agent being the supplier had admittedly paid to the transporters and had also deducted tax at source. When the agent had complied with the provision, the principal could not have been visited with penal consequences. For one payment there could not have been two deductions. Moreover, when a person acted through another, in law, he acted himself.

iii) The Tribunal was wrong in holding that the assessee was liable to deduct tax at source in respect of the freight component. When the assessee was not liable to make any deduction u/s. 194C the rigours of section 40(a)(ia) could not have been applied to it. The question is answered in favour of the assessee.”

Reassessment – Rent enhanced in 1994 with effect from 1-9-1987- Notice issued u/s.148 seeking to reopen the concluded assessment for the assessment year 1989-90- The notice was without jurisdiction inasmuch as such enhancement though with retrospective effect, was made only in the year 1994.

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P.G. And W Sawoo Pvt. Ltd. vs. ACIT (SC) [2016] 385 ITR 60 (SC)

The premises belonging to the appellant were let out on rent to the Government of India. The rent was enhanced from Rs.4.00 to Rs. 8.11 per sq. ft. per month effective from September 1, 1987. The said enhancement of rent was made by a letter dated March 29, 1994 of the Estate Manager of the Government of India. The enhancement was subject to conditions including execution of a fresh lease agreement and communication of acceptance of the conditions incorporated therein. Such acceptance was communicated by the appellant by letter dated March 30, 1994.

A notice was issued u/s. 148 of the Income-tax Act, 1961 (“the Act”) seeking to reopen the concluded assessment of the appellant-assessee for the assessment year 1989- 90 (for the period of 21 month commencing on July 1, 1987 and ending on March 31, 1989).

The contention of the assessee before the Supreme Court was that having regard to the provisions of sections 5, 22 and 23 of the Act and the decision of the Supreme Court in E. D. Sassoon and Co. Ltd. v. CIT [1954] 26 ITR 27 (SC), no income accrued or arose and no annual value which is taxable under sections 22 and 23 of the Act was received or receivable by the assessee at any point of time during the previous year corresponding to the assessment year 1989-90. Hence, the impugned notice seeking to reopen the assessment in question was without jurisdiction or authority of law.

The Respondent –Revenue contended that the enhancement of rent was retrospective, i.e. from September 1, 1987 and, therefore, the income must have to be understood to have been received in the said assessment year, i.e. 1989-90.

The Supreme Court held that no such right to receive the rent accrued to the assessee at any point of time during the assessment year in question, inasmuch as such enhancement though with retrospective effect, was made only in the year 1994. The contention of Revenue that the enhancement was with retrospective effect did not alter the situation as retrospectivity was with regard to the right to receive rent with effect from an anterior date. The right, however, came to be vested only in the year 1994.

The Supreme Court therefore concluded that the notice seeking to reopen the assessment for the assessment year 1989-90 was without jurisdiction and authority of law. The said notice, therefore, was liable to be interfered with and the order of the High Court set aside. The Supreme Court ordered accordingly and consequently, the appeal was allowed.

Business of Derivatives Trading & Explanation to Section 73

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Issue for Consideration
Section 73 of
the Income Tax Act, 1961 provides that any loss, computed in respect of a
speculation business carried on by the assessee, cannot be set off
except against profits of another speculation business. Explanation 2 to
section 28 provides that where speculative transactions carried on by
an assessee are of such a nature as to constitute a business, the
business is deemed to be distinct and separate from any other business,
and is referred to as ‘speculation business’ for the purposes of the
Act.

Section 43(5) defines the term “speculative transaction”,
as a transaction in which a contract for the purchase or sale of any
commodity, including stocks and shares, is periodically or ultimately
settled otherwise than by the actual delivery or transfer of the
commodity or scrips. Proviso to section 43(5) lists certain exceptions
to the ‘speculative transactions’, vide clasues (a) to (e). Clause (d)
of the proviso provides that an ‘eligible transaction’ in respect of
trading in derivatives referred to in section 2(ac) of the Securities
Contracts (Regulation) Act, 1956 carried out on a recognised stock
exchange shall be deemed not to be a speculative transaction.

Therefore,
derivatives transactions satisfying the needs of being treated as
‘eligible transactions’ are not regarded as speculative transactions for
the purposes of computing business profits u/s. 28.

The
explanation to section 73 provides for a deeming fiction where under
certain business carried on by a company is deemed to be a speculation
business. This fiction of explanation to section 73 applies only to a
company. If any part of the business of the company consists in the
purchase and sale of shares of other companies, such company is deemed
to be carrying on a speculation business to the extent to which the
business consists of the purchase and sale of such shares. Certain
exceptions to this fiction are provided in this regard.

An
interesting issue which has come up for consideration before the courts
is as to whether the business of derivatives transactions, which are not
regarded as speculative transactions by virtue of the proviso to
section 43(5), can be deemed to be a speculation business by virtue of
the explanation to section 73. While the Delhi High Court has taken the
view that the provisions of the explanation to section 73 do apply to
such derivatives trading business, and it is therefore deemed to be a
speculation business, the Calcutta High Court has taken a contrary view
and held that the explanation to section 73 applies only to transactions
in shares, and not to transactions in derivatives, and that therefore
derivatives trading business cannot be deemed to be a speculation
business.

DLF Commercial Developers’ Case
The issue first came up before the Delhi High Court in the case of CIT vs. DLF Commercial Developers Ltd 218 Taxmann 45.

In
this case, the assessee claimed a loss of Rs 492.71 lakh on account of
purchase and sale of derivatives. It claimed that the loss in trading of
derivatives was not a speculation loss in terms of section 43(5), and
could not be disallowed as a speculation loss under any provisions of
the Income Tax Act. The assessing officer rejected that submission, and
held that the explanation to section 73 applied, since it was
independent of section 43(5). He therefore treated the loss as a
speculation loss, and did not permit the adjustment of the loss against
business income.

The Commissioner(Appeals) rejected the
assessee’s contention. In further appeal to the tribunal, the tribunal
held that the explanation to section 73 was not applicable, and granted
relief to the assessee.

Before the Delhi High Court, on behalf
of the revenue, it was argued that the explanation to section 73
categorically provided that where any part of the business of the
company included purchase and sale of shares of another company, it
should l be deemed that the company was carrying on speculation business
to the extent to which the business consisted of that activity. It was
further argued that the intention of section 43 was to define certain
terms for the purposes of sections 28 to 41. It was argued that clause
(d) of the proviso to section 43(5) had restricted application, in that
it excluded transactions in derivatives only for a limited purpose. It
was claimed that section 73 had wider application and related to all
manner of losses concerning shares.

Reliance was placed on
behalf of the revenue on the decisions in the cases of CIT vs.
Intermetal Trade Ltd 285 ITR 536 (MP), CIT vs. Arvind Investments Ltd
192 ITR 365 (Cal) and Eastern Aviation and Industries Ltd vs. CIT 208
ITR 1023 (Cal). It was argued that the specific inclusion of the
activity of sale and purchase of shares of other companies from the
otherwise general application of principles underlying section 73 meant
that those transactions could not claim the benefit of the provision of
s.43(5). It was pointed out that derivatives of the kind and nature
traded by the assessee in the case before the court related to stocks
and shares, and were the subject matter of transactions on a stock
exchange. It was therefore claimed that the tribunal ought not to have
permitted the assessee the benefit of set of such loss.

On
behalf of the assessee, it was argued that the transactions in
derivatives were specifically excluded from the definition of
speculative transactions. Even though that definition was in section
43(5), it could not be ignored, since there was no other definition of
derivatives in the Income Tax Act. It was highlighted that derivatives
need not be only in respect of stocks and shares, but could also be in
respect of commodities. Reliance was placed on the decision of the
Madras High Court in Rajshree Sugars and Chemicals Ltd vs. Axis Bank Ltd
AIR 2011 Mad 144, for this proposition. The attention of the court was
also drawn to the decision of the Bombay High Court in the case of CIT
vs. Bharat R Ruia (HUF) 337 ITR 452, where the court had considered the
pre-amended section 43(5) before insertion of clause (d) in the proviso,
and held that derivatives in the light of the then existing law were
speculative transactions, but that the position had changed after
1.4.2006, when clause (d) was inserted in the proviso to section 43(5).
It was therefore argued that the tribunal had correctly held that the
assessee was entitled to the benefit of set off of the losses.

The
Delhi High Court analysing the provisions of section 73 and section
43(5) held that ; the term “speculative transaction” was defined only in
section 43(5) and the scope of the definition was restricted in its
application to working out the mandate of sections 28 to 41 in as much
as those provisions dealt with the computation of business income and
that it was not possible for the court to ignore or overlook that the
definition was confined in its application, to the extent it excluded
such transactions from the mischief of the expression “speculative
transactions”.

The Delhi High Court observed that while it was
tempting to hold that since the expression “derivatives” was defined
only in section 43(5), and since it excluded such transaction from the
odium of speculative transactions, and further, since it had not been
excluded from section 73, the explanation to section 73 did not apply,
however by doing so, the court would be doing violence to the
parliamentary intendment. This was because a definition enacted for only
a restricted purpose or objective should not be applied to achieve
other ends or purposes. Doing so would be contrary to the statute.

The
High Court stressed the contextual application of a definition or term.
The High Court observed that the stated objective of section 73, as was
apparent from the tenor of its language, was to deny speculative
businesses the benefit of set off of losses against other business
income.

The explanation to section 73 had been enacted to
clarify beyond any shadow of doubt that share business of of companies,
subject to certin exceptions, was deemed to be speculative. The fact
that in another part of the statute, which dealt with the competition of
business income, derivatives were excluded from the definition of
speculative transaction only underlined that such exclusion was limited
for the purposes of those provisions or sections. In the case before it,
the High Court noted that the derivatives were based on stocks and
shares, which fell squarely within the explanation to section 73.

According
to the Delhi High Court, it was therefore ideal to contend that
derivatives did not fall within the provision, when the underlying asset
itself did not qualify for the benefit, as derivatives were entirely
dependent on stocks and shares for the determination of their value. The
Delhi High Court therefore held that the explanation to section 73
applied to the case before it, and that the loss on trading in
derivatives could not be set off against other income.

Asian Financial Services’ Case
The
issue again came up recently before the Calcutta High Court In the case
of Asian Financial Services Ltd vs. CIT 70 taxmann.com 9.

In
this case, the assessee, a company, incurred a loss of Rs. 3,24,76,185
in futures and options transactions in shares being loss in derivatives
transactions. It claimed that this loss should be set off against other
business income, including profit from transactions in shares. The
assessing officer, for the purposes of s. 73, treated such loss as a
deemed speculation loss and did not allow set off of the loss against
the business income, by applying the explanation to section 73. While
the Commissioner (Appeals) allowed the assessee’s appeal, the tribunal
held against the assessee, holding that the explanation to section 73
applied, and the loss was a speculation loss, which could not be set off
against any other income.

Before the Calcutta High Court, on
behalf of the assessee, it was argued that the loss was on account of
derivatives being the futures and options which was excepted from the
definition of the speculative transaction and as a consequence the loss
was to be treated as a business loss under the proviso to section 43(5).
It was argued that once it was deemed to be a business loss under the
proviso to section 43(5), the question of applying section 73 or the
explanation to that section for the purpose of refusing the loss to be
set off against business income was palpably wrong. It was claimed that
the decision of the Delhi High Court relied upon by the tribunal did not
lay down good law, and that the Delhi High Court erred in holding that
dealing in derivatives was also a speculation loss within the meaning of
section 73.

On behalf of the revenue, it was argued that
section 43(5) was a general provision, while section 73 was a specific
provision. Attention was drawn to the explanation to section 73 to
submit that a company dealing in purchase and sale of shares amongst
others, which did not come within the exceptions carved out in the
explanation itself, was hit by the mischief of the explanation. A
question was raised that whether it could be said that when a business
consisting of purchase and sale of shares of other companies amounted to
a speculation business, business in derivatives, which depended on the
value of the underlying shares, was anything other than a speculation
business. It was argued that the view taken by the Delhi High Court in
DLF Commercial Developers’ case ( supra) was the correct view.

The
Calcutta High Court rejected the arguments of the revenue, observing
that, it could not be said that section 43(5) was a general provision
and section 73 was a specific provision. The Calcutta High Court in
fact, expressed the contrary view that the object of section 43(5) was
to define “speculative business”. The High Court observed that chapter
IV-D of the Income Tax Act, consisting of sections 28 to 44DB, dealt
with profits and losses of business or profession. It observed that when
the statute talked of profit, it also referred to losses, because loss
had been construed as a negative profit.

The Calcutta High Court
noted the language of the explanation to section 28 and observed that
from a plain reading of the explanation, the following deductions could
be made:

1. speculative transactions carried on by an assessee might be of such a nature as to constitute a business;

2. such speculation business carried on by an assessee should be deemed to be distinct and separate from any other business.

The
Calcutta High Court therefore concluded that speculation transactions
might partake the character of deemed business where the statute so
provided. The court then noted the definition of speculative transaction
contained in section 43(5), and the five exceptions contained in the
proviso thereto, and observed that such excepted transactions came
within the category of deemed business, which was distinct and separate
from any other business.

Addressing the question as to whether
loss arising out of such deemed business could be set off against the
profit arising out of other business or businesses, the High Court noted
that the provisions of section 70 permitted an assessee to set off loss
against his income from any other source under the same head, unless
otherwise provided. Therefore, the losses from the deemed business could
be set off against other business profits, unless otherwise provided.
The question was whether the explanation to section 73 provided
otherwise. According to the Calcutta High Court, a plain reading of the
explanation showed that it did not provide otherwise. Therefore,
according to the Calcutta High Court, the irresistible conclusion was
that the assessee was entitled to set of such loss arising out of deemed
business against other business income.

While the Calcutta High
Court agreed with the view of the Delhi High Court that shares fell
squarely within the explanation to section 73, it expressed its
disagreement with the treatment of derivatives at par with shares by the
Delhi High Court, since the Legislature had treated them differently.

The
Calcutta High Court therefore allowed the appeal of the assessee,
holding that the loss in derivatives transactions was not covered by the
explanation to section 73, and could be set off against other business
profits.

Observations
The definition of “securities”
u/s. 2(h) of the Securities Contracts (Regulation Act), 1956 makes it
clear that shares and derivatives are distinct from each other, though
both are securities, and even though derivatives derive their value from
the underlying shares or commodities.

The Companies Act, 2013
eliminates any possibility of treating the derivatives and shares to be
one. Section 2(84) defines ‘shares’ while section 2(33) defines the term
’derivatives’ and section 2(81) defines ‘securities’ and a combined
reading of all of them clearly confirm that the shares are not
derivatives for the purposes of the Companies Act, 2013 and if they are
not so there is no reason to treat as one and the same unless they are
defined to mean so for the purposes of the Income tax Act. In fact,
clause(d) of section 43(5) in turn refers to clause (ac) of section 2 of
the SCRA for providing the meaning to the term ‘derivatives’ for the
purposes of the Income tax Act.

It is well settled that a
deeming fiction is to be strictly construed. The explanation to section
73 deems certain business to be a speculation business, and is therefore
a deeming fiction. This deeming fiction merely refers to purchase and
sale of shares, and does not refer to purchase and sale of any other
securities. Therefore, given the fact that derivatives are not referred
to in the explanation, the deeming fiction of the explanation cannot be
extended to cover derivatives.

This view is supported by the
decision of the Supreme Court in the case of CIT vs. Apollo Tyres Ltd
255 ITR 273, where the Supreme Court held that units of mutual funds
were not shares, and therefore that the business loss in dealing in such
units was not covered by the explanation to section 73. In the case of
units of mutual fund also, as in the case of derivatives, the value of
the mutual fund units is derived from the underlying assets, which are
shares. If transactions of trading in mutual fund units do not fall
within the ambit of the explanation to section 73, logically,
transactions of trading in derivatives should also not fall within the
ambit of the explanation.

We have no doubt that the decision of
the Delhi high court could have been different had the court’s attention
been drawn to the decision of the apex court delivered in the context
of explanation to section 73 i.e on the same subject as is the subject
of discussion here.

Further, the provisions of section 43(5),
explanation 2 to section 28, and section 73 should be regarded as one
integrated scheme, for the limited purpose of set off of business loss
against any other income.

The term “speculation” is not used in
any other section of the Income Tax Act, and therefore this is a logical
interpretation. In the absence of section 73, there was no necessity of
the definition of speculative transaction in section 43(5), nor of
explanation 2 to section 28. When an item is specifically excluded from
the provisions of section 43(5), the intention clearly is to exclude it
also from the provisions of section 73, unless section 73 expressly
provides to the contrary. In any case, the explanation to section 73
while referring only to shares, clearly indicates that loss of trading
in derivatives does not fall within the deeming fiction of the
explanation.

The better view, therefore, seems to be that of the
Calcutta High Court, that loss on trading in derivatives is not
governed by the explanation to section 73, and that such loss incurred
by companies can be set off against other income.

Is there a limitation for ‘reassessment’ when the return is processed U/s.143(1)?

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The culminating point of the return filing exercise under the Income-tax Act, 1961 is its assessment. It may so happen that the income returned is accepted per se or subjected to some increase by virtue of the provisions of law. Section 2(8) very briefly defines the term ‘assessment’ as “assessment includes reassessment”. However, there is no definition of the term ‘reassessment’ under the Act.

When a return of income is filed by the taxpayer , it could be accepted. Later on, it could also be selected for detailed verification technically known as “scrutiny assessment”. However, there is a time limit for selecting a return for scrutiny assessment viz. six months from the end of the financial year in which the return was filed. Once this time limit expires, whether the tax authorities can invoke reassessment provisions which provide longer time limit has been litigated..

Recently, the Gujarat High Court in Olwin Tiles India P Ltd v. Dy. CIT (2016) 130 DTR (Guj) 209 analysed whether the Assessing Officer without having any extra material / information could reopen the case. This article discusses this decision which dissented from the decision in the case of CIT v. Orient Craft Ltd (2013) 87 DTR (Del) 313 / 354 ITR 536 (Del) as well asthe recent statutory amendments which require further fine tuning for having hassle free tax compliance in respect of the majority of taxpayers whose returns are accepted as it is by the tax authorities.

Olwin Tiles India (P) Ltd ’s case
The assessee filed its return of income declaring “nil” income. It was processed u/s. 143(1) and later on, a notice u/s. 148 was issued for reopening the assessment.

The reason given by the Assessing Officer for reopening the assessment was that the assessee had issued 60,000 equity shares of Rs.10 each at a premium of Rs.990 per share. The Assessing Officer based on the assets and liabilities furnished in the return of income computed the ‘net worth’ of the company and found book value of equity share to be Rs.33 per share. Hence, the Assessing Officer concluded that the shares were issued to the shareholders at a premium which was far above their book value or intrinsic worth.

Readers may note that the facts of the case relate to assessment year 2011-12 and hence clause (viib) of section 56(2) could not be applied as the said provision became operational by virtue of the Finance Act, 2012 w.e.f. the assessment year 2013-14.

The assessee submitted that the return having been accepted by the Assessing Officer cannot be subjected to reassessment on the basis of materials which are already available on record. It was contended that the Assessing Officer must have some tangible material which did not form part of the original record to enable him to reopen the case or else, it would amount to mere review of the earlier assessment, which is impermissible in law.

The reason recorded by the Assessing Officer was that the investors invested in the shares of the company at a value far above the net asset value which implied that the additional amounts represent unexplained cash credits chargeable to tax under section 68 of the Act.

The assessee relied on the decision in the case of CIT vs. Orient Craft Ltd (2013) 354 ITR 536 (Del).

Orient Craft’s case
The assessee in this case for the assessment year 2002- 03 filed its return of income declaring total income of Rs.445.35 lakh. The income returned included inter alia (i) claim of deduction u/s. 80HHC; and (ii) deduction u/s. 10B. The return was processed u/s. 143(1).

Later, a notice u/s. 148 was issued on the ground that the income chargeable to tax had escaped assessment by virtue of the items such as (i) duty drawback; (ii) DEPB; (iii) premium on DEPB; and (iv) sale of quota all of which were included in the ‘export turnover’ and thus excess deduction was allowed u/s. 80HHC. The assessee filed a return in response to the notice issued under section 148 declaring the same total income as was admitted in the original return.

The assessee questioned the reopening of assessment which the Assessing Officer rejected by citing clause (c) of the Explanation to section 147. The Assessing Officer claimed that the assessee had claimed excess deduction under section 80HHC by including ineligible items. The reassessment was completed by scaling down the deduction u/s. 80HHC to Rs.683.95 lakh from the original claim of Rs.874.21 lakh.

The assessee challenged the reassessment order both on the grounds of jurisdiction and merit. The CIT (Appeals) rejected the objection to jurisdiction , but on merit decided the issue in favour of the assessee. Before the tribunal, both the assessee and the Revenue filed cross appeals. The assessee challenged the jurisdiction assumed for reopening the assessment u/s. 147 as also certain other issues on merit which were decided against it by the CIT (Appeals).

The tribunal examined the assessee’s claim and found that the issue was decided in favour of the assessee for the earlier assessment years and accordingly decided the case by citing decision in the case of CIT vs. Kelvinator of India Ltd (2010) 320 ITR 561 (SC) in which it was observed “since there was no tangible material available with the Assessing Officer to form the requisite belief of escapement of income, the reopening of the completed assessment is unsustainable in the eyes of law. The same is, therefore cancelled”.

The matter went to the Delhi High Court where the court held that even an assessment u/s. 143(1) can be reopened u/s. 147 subject to fulfillment of the conditions precedent, which includes that the Assessing Officer must have “reason to believe” that income chargeable to tax has escaped assessment.

Though no assessment order was passed and intimation u/s. 143(1) is sent, the apex court in Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd (2007) 291 ITR 500 (SC) has held that for initiating the proceedings u/s. 147 the ingredients of section 147 are to be fulfilled. The ingredient is the presence of “reason to believe” that income chargeable to tax has escaped assessment. The court held that this judgment does not give carte blanche to disturb the finality of the intimation issued u/s. 143(1).

The Delhi High Court finally held that the reasons recorded by the Assessing Officer were not based on any tangible material which came to his possession subsequent to the issue of intimation u/s. 143(1). It held that reopening of assessment after issue of intimation without any fresh material reflects an arbitrary exercise of the powers conferred u/s. 147. The decision hence was in favour of the assessee.

Reasoning in Olwin Tiles case
The Gujarat High Court referred to its precedent in Inductotherm India (P) Ltd vs. M.Gopalan, Dy. CIT (2012) 356 ITR 481 (Guj) where it was held that no assessment had taken place when an intimation under section 143(1) was issued accepting the return filed by the assessee. It held that the Assessing Officer would not have formed any opinion with respect to any of the aspect arising in such return. The power to reopen assessment is available when a return has been accepted u/s. 143(1) or a scrutiny assessment has been framed u/s. 143(3) of the Act. The common requirement in both the situations is that the Assessing Officer should have reason to believe that any income chargeable to tax has escaped assessment.

The Gujarat High Court in Olwin Tiles case (Supra) hence held that it cannot accept the contention of the assessee that the Assessing Officer must have some material outside or extraneous to the records to enable him to form an opinion or entertain a belief that income chargeable to tax has escaped assessment. The only requirement to be fulfilled for issuing a notice for reopening the assessment is the ‘reason to believe’ that income chargeable to tax had escaped assessment.

It adverted to the decision of the Supreme Court in the case of Rajesh Jhaveri’s case (Supra) where it has been highlighted that ‘reason to believe’ does not have to be a final opinion that the additions would certainly be made to the income originally admitted / assessed. The reason recorded in Olwin Tiles case (Supra) by the Assessing Officer was that the share valuation of the company on the basis of balance sheet furnished in the return of income was only Rs.33 as against the issued price of Rs.1000 per share.

The court observed that the assessee-company had not commenced manufacturing activity and whether or not it has earned income cannot be gone into at this stage viz. at the time of deciding the validity of reassessment notice. The court accordingly held that it was not inclined to terminate the reassessment proceedings at this stage on the grounds put forth by the appellant.

Olwin Tiles vS. Orient Crafts – a comparative study
Prima facie the decision of the Gujarat High Court in Olwin Tiles case (Supra) was in favour of the Revenue and it dissented from the Delhi High Court decision in the case of Orient Crafts Ltd (Supra).

The decision rendered in Orient Craft’s case related to assessment year 2002-03 being an era preceding the electronic filing / processing of returns. Hence, at that time the assessee would have furnished the necessary details along with the return of income. Whereas in Olwin Tiles case (Supra) which pertained to assessment year 2011-12, the return of income would have been filed electronically and is an annexure-less return. No further details except the return form duly filled in were available with the tax authorities. This would show that a return processed u/s. 143(1) is prima facie an acknowledgement of the return, subject to a cursory verification of the claims contained therein.

Further tax returns are presently processed by Centralized Processing Centres (CPC). Though CPC is managed by the officials of the Department, it is not possible to analyse or validate the contents of the return filed by the taxpayers in the absence of supporting documents / evidences as the returns filed nowadays are annexure-less.

In this backdrop, it is debatable whether the return processed by CPC can be called as an appraisal of the return of income filed by the taxpayers. It appears that the e processing of the return is adequate only for detection of apparent errors or inconsistencies detected by the software based on the schedules forming part of the return, Thus processing of return and issue of intimation u/s. 143(1) in all fairness cannot taken as approval of the return filed by the taxpayers.

If the Delhi High Court (dealt with Orient Craft’s case) had dealt with the assessment year where the return is processed by CPC and not by the jurisdictional Assessing Officer, perhaps the decision may have been different. The decision of the Gujarat High Court (in Olwin Tiles case) is to be read in the context of the situation on the ground. Therefore a subsequent appraisal of the information contained in the return may also lead to formation of a reason to believe, and a consequent reopening.

Amendments in Finance Act, 2016
The Finance Act, 2016 probably taking note of the limitations in processing of returns by CPC enlarged the scope for adjustments on processing of returns which hitherto was limited to adjusting (i) arithmetical errors; and (ii) incorrect claims which are apparent from any information in the return.

Now w.e.f. 01.04.2017, four more sub-clauses to section 143(1) are inserted which validate adjustments to the returned income while processing the returns either by the Department (in the case of paper returns) or CPC which processes e-returns. These adjustments are popularly known as prima facie adjustments and they covers the following:

(i) Incorrect claim of brought forward loss when the return of the assessment year in which the loss was incurred, is filed beyond the ‘due date’ specified in section 139(1);

(ii) Disallowance of expenditure which could be deciphered from the audit report filed with the return but was not to be taken into account while computing the total income;

(iii) Disallowance of deduction under sections 10AA, 80- IA, 80-IAB, 80-IB, 80-IC, 80-ID or 80-IE when the return is furnished beyond the ‘due date’ specified in section 139(1); and

(iv) Addition of income due to mismatch of figures between Form 26AS or Form 16A or Form 16 vis a vis the income disclosed in the return.

Though the first three adjustments are are fully justified while processing the return u/s. 143(1), the fourth one could create substantial hardship, particularly when the mismatch arises on account of difference in method of accounting followed by the deductor and deductee. Consequently , if for any reason an adjustment falling within these categories is not made in processing u/s. 143(1), the provisions of section 148 cannot be resorted to subsequently. The tax authorities may invoke section 154 if such omitted adjustments would fall in the category of error apparent on record. Other debatable claim of expenditure or income, which do not require any disclosure in the return or in the audit report continue to remain beyond the scope of the said adjustments, and therefore possibly attract the provisions of section 148..An explicit amendment in sections 147 /148 would put an end to this kind of controversy.

Yet another subsisting controversy resolved by the Finance Act, 2016 relates to substitution of sub-section (1D) to section 143 by mandating processing of returns u/s. 143(1) before issue of notice u/s. 143(2). This is applicable w.e.f. 01.04.2017. However, processing of returns u/s. 143(1) is not permitted after issuance of an order u/s. 143(3). This amendment would provide the taxpayers the benefit of cash flow viz. refund of tax if any, on processing of return under section 143(1) which was hitherto kept in abeyance till the completion of assessment u/s. 143(3). Further as a corollary to insertion of sub-clauses (iii) to (vi) to section 143(1), the concept of limited scrutiny has been done away with by amending section 143(2) w.e.f. 01.06.2016.

Revision under section 263
Section 263 empowers the Commissioner to assume jurisdiction where any order passed by the Assessing Officer is erroneous or prejudicial to the interests of the revenue. Whether intimation u/s. 143(1) is an ‘order’ to permit the CIT to assume the revisionary jurisdiction u/s. 263 has also been litigated at various points of time.

The legislature by amending the law and the courts by interpreting the law have provided safeguards when Commissioner exercises revisionary powers u/s. 263 such as (i) revision not permissible in respect of debatable claims; (ii) mandating recording of reasons for revision; (iii) revision of matters limited to issues not pending in appeal; and (iv) wider meaning of ‘record’ for the purpose of permitting revision.

The catch phrase in section 263 is “any order passed therein by the Assessing Officer” which is erroneous or prejudicial to the interests of revenue. Prima facie, when the return is processed u/s. 143(1), there is no examination of the claims made in the return except prima facie items listed in section 143(1). Thus the intimation issued u/s. 143(1) may not qualify as an ‘order’ for the purpose of revision u/s. 263.

However, the Bombay High Court in CIT vs. Anderson Marine & Sons (P) Ltd (2004) 266 ITR 694 has held that the intimation u/s. 143(1) will have to be understood as having the force of an ‘order’ on self-assessment. By legal fiction, intimation u/s. 143(1) shall be deemed to be a notice of demand issued u/s.156 and all the provisions of the Act are applicable.

Thus the court held in the affirmative that intimation u/s. 143(1) is eligible for interference u/s. 263.

Conclusion
Based on the two legal decisions given at different points of time in the light of the fact that the returns were processed manually vis a vis electronically and the provisions of law as it stands now, one may summarize the position as follows:

(i) A return processed u/s. 143(1) in spite of the expanded scope of adjustments may be subjected to reassessment proceedings provided the Assessing Officer has reason to believe escapement of income or on the basis of some credible information from which he entertains the belief of escapement of income chargeable to tax.

(ii) Processing of a return u/s. 143(1), in the current scenario does not indicate appraisal of the return. Thus it appears that formation of the belief on the basis of a scrutiny of the return subsequent to the processing might result in a notice u/s. 148 and possession of information or knowledge by the tax authorities beyond the return may not be mandatory for issue of notice u/s. 148.

Res – judicata – Not apply in tax matter – Each assessment year gives rise to a separate cause of action: Capital Gain or business income – Sale of Shares

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Veena S. Kalra vs. The Assistant Commissioner of Income tax & anr. [ Income tax Appeal no 2437 of 2013 dt : 07/06/2016 (Bombay High Court)].[ACIT- Circle 16(1) vs. Veena S. Kalra. [ITA No. 2403/MUM/2012 ; Bench : F ; dated 10/07/2013 ; A Y: 2008- 2009. Mum. ITAT ]

The assessee is an individual and filed the return declaring the total income of Rs. 3.16 crore. Assessee is engaged in the business of dealing in derivatives and F&O. The return was revised u/s 139(5) of the Act making downward revisions of his income to Rs. 2,78,55,600/-. In the revised return of income, assessee made a significant revision qua the STCG from Rs. 2,54,92,016/- to Rs 2,17,24,104/-. Thus, as per the revised return of income, STCG was Rs.2,17,24,104/-; income from other sources is Rs.1,70,071/-; business income was Rs. 60,03,269/-. The dividend income declared was Rs. 9,68,732/- and the LTCG was Rs. 8,65,373/-. During the assessment proceedings, AO raised the issue of treating the STCG as business income of the assessee. Assessee submitted the following reply which is as under:

(a) All investments had been made from own funds, and there were borrowed funds

(b) She had earned dividend as well as LTCG, which show the intent

(c) In the AY 2006-07 & 2007-08, the assessee had returned STCG as well as LTCG and classified her share holdings as “investment” and not as “Stock in Trade”. An investment register was maintained on FIFO basis.

(d) The total number of scrips were 31, number of purchase transactions were 70 and sale were transactions 104. Number of days on which transactions took place are less than 150. Therefore, the activity could not be termed as trading.

AO reasoned that the assessee, who wasalready in the business of dealing in shares, derivatives, Futures & Options and dealt with the common scrips qua the capital gains transactions, is only segregated certain shares/ business profits as short term Capital Gains for the benefits of the tax rate. Further, he distinguished the decision relied upon by the assessee. Finally, relying on the decision of the Tribunal in the case of Smt. Harsha N Mehta vs. DCIT in ITA No.1859/Mum/2009, dated 17.7.2010 and also keeping in view the contents of Circular No.4/2007 of the CBDT, dated 15.6.2007, AO treated the impugned STCG of Rs. 2,17,24,104/- as business income of the assessee.

In appeal, the CIT(A) sustained the order of the Assessing Officer to the extent of Rs.21.50 lakh holding that the same was assessable as business income in respect of 11 scrips as the assessee had re-entered the same after selling it. However, the balance amount of Rs.1.96 crore was held to be as short term capital gain.

The Revenue carried the issue in appeal to the Tribunal. The Tribunal on a detailed analysis of the transactions which were carried out by the assessee concluded that for the subject AY , the entire amount of Rs.1.96 crore is also to be brought to tax under the head ‘business income’. Thus, the entire amount of Rs.2.17 crore i.e. Rs.21.50 lakh + Rs.1.96 crore was to be brought to tax as business income. The Tribunal held that the intention of the assessee while doing business in shares was to make quick profit and not hold the shares as investment. It was observed that during the subject AY the assessee had purchased shares valued at Rs.25.37 crore and sold shares valued at Rs.28.92 crore. Thus indicating that what was purchased during the year had been sold in its entirety during the same year. The stock turnover ratio and capital turnover ratio is recorded in the order at 1:16 and 1:10 during the subject AY . On these facts, the Tribunal allowed the Revenue’s appeal treating the entire amount of Rs.2.17 crore as income from trading in shares i.e. business income.

Being aggrieved , the assessee filed a appeal before High Court. The contended that for the earlier and subsequent AY ’s the Revenue has accepted the assessee’s claim of trading in shares as being an action of investment resulting in short term capital gains. Thus, invoking the decision of this Court in CIT vs. Gopal Purohit 336 ITR 287 it was submitted that consistency has to be followed and in this year also the profits made on account of purchase and sale of shares should be taxed under the head ‘short term capital gain’.

The Hon. High Court held that the order of the Tribunal has elaborately dealt with the contention of the assessee that as for the earlier and subsequent AYs profits arising on account of purchase and sale of shares has been classified as short term capital gains, the same should be done in the subject AY . The Tribunal on analysis of the facts noticed that the facts in the subject AY are different from the facts in the earlier and subsequent AY ’s. Particularly the number of transactions in shares were in single or double digits in the years sought to be compared while transactions of purchase and sale of shares is of the magnitude of 346 transactions in the subject AY . Further differences in facts was also brought out in a chart in the impugned order on 13 parameters between the subject AY and the earlier and subsequent AY ’s. In these circumstances the order was upheld . It was further held that the rule of consistency would not apply in the present case as there was a change in facts existing in the subject AY . In fact the decision in the case of Gopal Purohit (supra) relied upon by the assessee itself proceeds on the basis of no change in facts and circumstances in the two years. It is a settled principle of law that res judicata does not apply in tax matters However, as held by the Apex Court in BSNL vs. Union of India 282 ITR 273 the orders passed in the earlier AY s are generally accepted and followed not on the basis of principle of res judicata but on the doctrine of precedence so as to ensure that on identical facts in the absence of change in law the Revenue is bound to follow the view taken earlier.

Thus, the Appeal of assessee was dismissed.

[2016] 73 taxmann.com 363 (Pune – Trib.) Quality Industries vs. ACIT A.Y.: 2010-11 Date of Order: 9th September, 2016

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Section 14A   – interest paid on
partners’ capital does not qualify as `expenditure’ for the purpose of section
14A.

Facts

The assessee firm, engaged in the
business of manufacturing of chemicals etc., filed return of income for  assessment 
year  2010-11  declaring 
total  income of Rs.95,65,090/-.
in the course of assessment proceedings, 
the Assessing  Officer  (AO) 
noticed  that the assessee has,
inter-alia, earned tax free dividend income amounting to Rs.24,63,700/- from
investment in mutual funds which was claimed as exempt income under section
10(35) of the Act. The  AO also noted
that the assessee’s investments in mutual funds as on 31.3.2010 was Rs.4,41,88,955/- and the corresponding amount
as on 31.03.2009 was Rs.3,18,39,548/-. He observed that the partners of the
assessee firm were charging interest on capital introduced by them into the
firm. Total interest claimed as deduction against taxable income was Rs. 75,63,615
which comprised of interest on bank loans Rs.75,615/- and interest on partner’s
capital to the tune of Rs.74,88,000/-.

The  assessee contended that interest on partners
capital is not an `expenditure’ per se, as specified u/s.14A of the act and
that even income-tax law understands it this way as such interest in partners’
hand is taxable as “profits from business” and not as “income from other
sources”. It was also contended that expenditure needs presence of two parties
i.e. spender and earner. The firm has no separate existence from its partners.
The assessee firm is a separate entity under income-tax act only for taxation
purposes.  This   is the very reason that deduction  of interest and salary to partners is allowed
as a separate deduction and not as an expenditure under separate section from
sections 30 to 43 of the act. These interest and  salaries 
to  partners  are 
for this  very  reason 
not liable to TDS provisions under the act. The AO,  however, Held that assessee has incurred
expenditure including interest expenses which are attributable to earning
dividend income from investment in mutual funds which is exempt and not
includible in total income.  he invoked
the provisions of section 14a of the act read with rule 8D of the income-tax
rules, 1962 (“rules”) and disallowed the a sum Rs. 29,25,362 being estimated
expenditure incurred in relation to dividend income so earned in terms of the
formula provided under rule 8D of the rules.

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 noted that interest
and salary received by the partners are treated on a different footing by the
act and not in its ordinary sense of term. Section 28(v) treats the passive
income accrued by way of interest as also salary received by a partner of the
firm as a ‘business receipt’ unlike different treatments given to similar
receipts in the hands of entities other than partners. The tribunal  observed that under proviso to section 28(v),
the disallowance of such interest is only in reference to section 40(b) and not
section 36 or section 37. This also gives a clue that deduction towards
interest is regulated only under section 40(b) and the deduction of such interest
to partners is out of the purview of section 36 or 37 of the act.

Firm and partners of the firm are
not separate person under Partnership act although separate unit of assessment
for tax purposes. There cannot therefore be a relationship inferred between
partner and firm as that of lender of funds (capital) and borrower, hence,
section 36(1)(iii) is not applicable at all. 
Section 40(b) is the only section governing deduction towards interest
to partners. In view of section 40(b) of the Act, the Assessing Officer
purportedly has no jurisdiction to apply the test laid down u/s. 36 of the Act
to find out whether the capital was borrowed for the purposes of business or
not. Thus,  the question of allowability
or otherwise of deduction does not arise except for section 40(b) of the act.

The interest paid to partners and
simultaneously getting subjected to tax in the hands of its partners is merely
in the nature of contra items in the hands of the firms and partners.
Consequently interest paid to its partners cannot be treated at par with the
other interest payable to outside parties. Thus, in substance, the revenue is
not adversely affected at all by the claim of interest on capital employed with
the firm by the partnership firm and partners put together. Thus, capital
diverted in the mutual funds to generate alleged tax free income does not lead
to any loss in revenue by this action of the assessee. In view of the inherent
mutuality, when the partnership firm and its partners are seen holistically and
in a combined manner with costs towards interest eliminated in contra, the
investment in mutual funds generating tax free income bears the characteristic
of and attributable to its own capital where no disallowance u/s.14A read with
rule 8D is warranted.  The tribunal Held
that it found merit in the plea of the assessee in so far as interest
attributable to partners.

The Tribunal allowed the ground
of appeal filed by the assessee to the extent of interest on partners capital.

[2016] 74 taxmann.com 90 (Kolkata – Trib.) Soma Rani Ghosh vs. DCIT A.Y.: 2012-13 Date of Order: 9th September,2016

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Sections 40(a)(ia), 194C – Since the assessee had, in the
course of assessment proceedings, submitted to the AO PAN and addresses of the transporters,
in respect of whose payments tax was not deducted at source, disallowance u/s.
40(a)(ia) is not called for.

Facts

The   assessee, 
an  individual,  carried 
on  proprietary export business in
export of Chemical, Surgical and Clinical 
Goods.  During the  previous 
year  relevant  to the assessment year under consideration
the assessee incurred transport charges by way of lorry  hire Charges, both in relation to Purchases,
referred to as Carriage inward, and exports to Bangladesh referred to as
Carriage outward.

The
Assessing Officer (AO) on the premise that the assessee was required to deduct
tax at source under the provisions of section 194C of the act disallowed the
expenses of rs.1,63,78,648/- claimed towards Carriage inward  and rs.1,13,00,980/- claimed as Carriage
outward  by invoking the provisions of
section 40(a)(ia) of the act,  since the
assessee had not deducted tax at source.

Aggrieved,  the 
assessee  preferred  an 
appeal  to  the CIT(A) and  contended 
that  because  of 
the  provision of section 194C(6),
she was not liable to deduct tax at source on payments to transporters who had
submitted their Pan,  and those details
of Pan  and addressees of the transporters
were filed during the course of scrutiny assessment before the AO.

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 CIT(A) had
dismissed the appeal of the assessee on the ground that the assessee is a
contractor making payments to the transporter for carrying of goods and was
thus liable to deduct TDS on such payment. According to the CIT(A), section
194C(6) will not apply to payments made by a person who himself is not a transporter,
to another sub-contractor for plying, hiring or leasing goods carriage.
Further,  the CIT(A) Held that provisions
of section 194C(6) and 194C(7) have to be read together and the benefit u/s.
194C (6) is available only when the assessee fulfils the conditions laid down
in s/s. 194C(7) of the act.

The
Tribunal Held that –

(a)   in the context of section 194C (1), person
undertaking to do the work is the contractor and the person so engaging the
contractor is the contractee;

(b)   by 
virtue  of  the 
amendment  introduced  by  the
finance  (no.2) act 2009, the distinction
between a contractor and a sub-contractor has been done away with and
clause(iii) of explanation u/s. 194C(7) now clarifies that contract shall
include sub-contract;

(c)   subject to compliance with the provisions of
section 194C (6), immunity from TDS u/s. 194C (1) in relation to payments to
transporters applies transporter and non-transporter contractees alike;

(d)   u/s. 194C (6), as it stood prior to the
amendment in 2015, in order to get immunity from the obligation of TDS, filing
of PAN of the payee transporter alone is sufficient and no confirmation letter
is required;

(e)   Section 194C (6) and section 194C (7) are
independent of each other and cannot be read together to attract disallowance
u/s. 40(a) (ia) read with section 194C; and

(f)    if 
the  assessee  complies 
with  the  provisions 
of section 194C(6), no disallowance u/s. 40(a)(ia) is permissible, even
there is violation of the provisions of section 194C(7).

Therefore,
the payments made by the assessee to the transporters for carriage inward and
carriage outward were not disallowable u/s. 40(a)(ia).

The
Tribunal allowed the appeal filed by the assessee.

Asst. CIT vs. Majmudar & Co. ITAT “B” Bench, Mumbai Before Mahavir Singh (J. M.) and Rajesh Kumar (A. M.) ITA No. 3063 to 3067 and 6604 /Mum/2012 A.Ys.: 2004-05 to 2009-10. Date of order: 19th August, 2016 Counsel for Revenue / Assessee: N.P. Singh / Arvind Sonde

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Section 10B – Export  of legal data base eligible for deduction.

Facts

The assessee, a firm of  Advocate & Solicitors, is engaged in production and export of customised electronic data or legal database.  The unit of the firm was recognised as a 100% EOU by the development Commissioner SEZ, SEEPZ and its entire sale proceeds from export of such legal services was brought in india in convertible foreign exchange. according to the assessee, it has transferred the customised electronic data to its client therefore it forms part of computer software as per explanation 2 to section 10B of the act. accordingly, it claimed deduction u/s 10B of the act. However, the claim of the assessee was rejected by the AO on the grounds amongst others that, the assessee was engaged in providing legal services to its foreign clients and not engaged in exporting legal database which was one of the items notified by the CBDT for the purpose of “Computer Software” on which deduction u/s. 10B was admissible. Rendering of legal services by the assessee firm to the foreign clients cannot be termed as export of legal database from india.

Held

The tribunal noted that the services provided by the assessee i.e. legal services, are recognised by the Government of India for the various benefits under the scheme of EOU as per EXIM Policy 2002-2007.  Section 10B of the Act was introduced to give benefit to such EOU under the Income-tax Act, reflecting the intention of law to provide encouragement to the exporters of services to enhance their capacity for provision of services and in turn earn valuable foreign exchange for our country. According to the Tribunal, the assessee has fulfilled the specific requirements of Section 10B by providing legal  Services using  legal   database.  legal database  is  recognised by the Board vide its notification No. S.O.890(E) dated September 26, 2000 as one of the eligible information technology enabled services. Explanation 2(i) (b) defines computer software to include, inter alia, a “Customised Electronic Service as notified by the Board”. As legal database is notified by the Board for this purpose and the assessee has provided services by using such legal database via electronic media i.e. via emails and internet facilities, the claim of the assessee for deduction u/s. 10B of the Act in the light of Explanation 2(i) (b) is fully justified.

[2016] 74 taxmann.com 99 (Mumbai – Trib.) Voltas Ltd. vs. ITO A.Y.: 2005-06 Date of Order: 16th September, 2016

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Section 50C – Provisions of section 50C are not applicable
to transfer of development rights in land.

Facts

The
assessee company owned a plot of land at Panchpakdi, thane,  in respect of which it entered into a
development agreement with m/s. Sheth developers Pvt.  Ltd., 
on  8.6.2004.  In 
the  return  of 
income  filed by the assessee,
long term capital gains arising as a result of entering into the development
agreement were computed with reference to consideration mentioned in the
agreement.

During
the course of assessment proceedings, the Assessing Officer (AO) asked the
assessee to show cause why sales consideration should not be substituted with
the value adopted by the stamp valuation authority in view of section 50C of
the act. In response, the assessee objected to the value adopted by the stamp
valuation authority and also objected to the very invoking of section 50C of
the act upon the impugned transaction of sale of development rights.

The
AO referred the matter to District Valuation Officer for valuation of the sales
consideration as well as cost of acquisition of the property.  But, 
valuation  report of the dvo was
not received by the ao till conclusion of  
the   assessment   proceedings  
and   therefore   the ao adopted value of stamp valuation
authority and substituted it with actual sales consideration shown by the assessee
and computed the long term capital gains on sale of development rights of the
land accordingly. Subsequently, upon receiving the valuation from the DVO, the
AO rectified the assessment order by passing an order u/s.154 of the Act.

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

Aggrieved,
the assessee preferred an appeal to the Tribunal where it, interalia, contended
that the transaction of sale of development rights is not covered u/s 50C.

Held

The
Tribunal Held that the scope of term ‘capital asset’ mentioned in the section
50C specifically refers and confines its meaning to ‘land or building or both’.
The scope of section 50C is restricted by the legislature itself to these two
types of capital assets only.

It
noted that the capital asset transferred by the assessee was ‘development   rights in the  land’ 
and  not  the ‘land’ 
itself.

The  Tribunal having noted a few other similar
provisions of the act found that in section 269a and section 269UA ‘rights’ in
`land & building’ have been specifically included as per requirement of
these sections. It concluded that term ‘land & building’ and ‘rights
therein’ have been clearly understood and treated as independent from each
other. A perusal of the definitions given in these sections when compared with
section 50C shows that legislature was conscious about the proper expression to
be used as per its intention, scope, object and purpose of the section 50C,
wherein it has been expressly mentioned that capital asset should be ‘land or
building or both’. It has not been mentioned that any type of ‘rights’ shall
also be included in the definition of capital assets to be transferred by an
assessee.

Since
the provisions of section 50C are deeming provisions, the settled law and well
accepted rule of interpretation is that deeming provisions are to be construed
strictly. While interpreting deeming provisions neither any words can be added
nor deleted from language used expressly. The Tribunal Held that the ‘rule of
Strict interpretation’ as well as ‘rule of literal Construction’ should be
applied while understanding the meaning and scope of deeming provisions. it
Held that the provisions of section 50C have been wrongly applied to the
impugned transaction since the capital asset transferred by the assessee, upon
which long term capital gain has been computed by the ao, is development rights
in the land of the assessee. The land itself has not been transferred by the
assessee. The Tribunal reversed the action of lower authorities in applying the
provisions of section 50C and in substituting any value other than the amount
of actual sales consideration received by the assessee.

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

Rajeev B. Shah vs. ITO ITAT “SMC” Bench, Mumbai Before Mahavir Singh, Judicial Member ITA No.: 262/Mum/2015. A.Y.: 2010-11. Date of Order: 8th July, 2016 Counsel for Assessee / Revenue: Subhash Shetty & R. N. Vasani / Somanath S. Ukkali

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Section 54F – due to fault of the builder project not
completed on time. assessee  entitled to relief.

Facts
The assessee sold a plot of land for a consideration of Rs.19.35 lakh and
earned long term  Capital Gains of Rs.14.81 lakh. The assessee invested a
sum of Rs. 18.60 lakhs for buying a residential flat under construction. The
Developer allotted flat no.602 in the project for a sum of Rs.143.96 lakh on
the terms and conditions given in the letter of allotment issued to him by the
Builder dated 16­03-2010. The AO rejected the claim of deduction u/s. 54F of
the act on the ground that the property is incomplete and registered document
was not filed by the assessee to claim deduction u/s. 54F of the act.

Before the Tribunal, the assessee explained that the builder was avoiding the
customers due to disputes and the project was also stalled and there was no
further progress in construction of the project. the  assessee also
filed civil suit before the Hon’ble Bombay High Court for an order and direction
calling upon the developer to commence construction of the project as per the
agreement evidenced by the allotment letter.

Held
According to the Tribunal,  it was not in the assessee’s hands to get the
flat completed or to get the flat registered in his name. The intention of the
assessee was very clear and he has invested almost the entire sale
consideration of land in purchase of this residential flat. It was impossible
for the assessee to complete the formalities i.e. taking over possession for
getting the flat registered in his name and this cannot be the reason for
denying the claim of the assessee for deduction u/s. 54 of the act. in view of
the above, the Tribunal held that the assessee is entitled for deduction u/s.
54F  of the Act.

Penalty- When amount received from affiliated companies was not chargeable to tax – interpretation placed upon the DTAA – Not liable: Section 271(1)(c)

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DCIT vs. Koninklijke-DSM-NV. [Income tax Appeal no: 432 of
2014 dt : 07/09/2016 (Bombay High Court)].

[DCIT vs. Koninklijke-DSM-NV. [ITA No.  978/PN/2011 
; Bench : B ; dated 15/07/2013 ; A Y: 2006- 2007. PUNE. ITAT ]

The  assessee was a company incorporated and based
in Netherlands. The assessee qualified as a tax resident of netherlands as per
dtaa between india and netherlands. The assessee had  affiliated companies operating in India and
received income from them. This income was in respect of Corporate Services and
CICT Charges (cost incurred on share of email, network and internet charges).
however, the assessee being of the view that 
the above income was not chargeable to tax, in its return of income
filed electronically for A.Y. 2006-07 
declared total income at nil. During assessment proceedings, the
assessing Officer on examination of the DTAA, held that the fees received in
respect of CICT Services and for Corporate Services from its affiliated
companies was in fact in  the nature of
fees for technical services. This was on the basis of article  12 of the dtaa between india and netherlands
and therefore   chargeable to tax in
india. Consequently, the income of Rs.2.34 
crores received from its indian affiliates on the above two counts was
brought to tax by an assessment order.

The   assessee 
tried  to justify its claim of
non-taxability of those incomes in india. according to the information given by
the assessee, C-ICT charges represented cost incurred  by 
the  assessee  on 
share  of  e-mail, 
network and  internet  charges. 
The  assessing  Officer 
examined the  agreement  between 
the  assessee  and 
its  affiliates more particularly
between DEPIPL. after  examining the
agreement between the assessee and its affiliates, the Assessing  Officer 
concluded  that  the 
assessee  was not only providing
the basic it services such as e-mail, network 
and  internet  charges 
but  much  more 
than that which was the it infrastructure to have access to those
facilities.

The
assessee did not contest the assessment order. The Assessing Officer issued the
show cause notice to the assessee why the penalty should not be levied u/s.
271(1) (c) of the Act.

The
assessee while responding pointed out that all the relevant facts and details
with regard to the nature of receipt on account of CICT Service and Corporate
Services along with the basis of its non-taxability was mentioned in the notes
to its accounts. The above amount of Rs. 2.34 crore on the above two counts was
not offered to tax on the basis of its interpretation of the DTAA and judicial
decisions. This led to a bonafide belief that the receipt of amounts from its
affiliated companies was not chargeable to tax. Thus, it was submitted that it
was not a case of filing inaccurate particulars of income or concealment of
income which would warrant imposition of penalty u/s. 271(1)(c) of the Act. The
Assessing Officer did not accept the aforesaid contention and imposed a penalty
of rs.25 lakh u/s. 271(1) (c) of the Act.

Being
aggrieved, the assessee carried the issue in appeal to the CIT(A). the   CIT(A) noted that identical services were
being rendered by the assessee to its Indian affiliated companies from the
assessment  year 2002-03 onwards and in
the earlier returns also the receipt from the affiliated companies were not
shown as income. On the contrary, the tax which was deducted at source by the
affiliated companies while making payments to the assessee, was refunded by the
revenue. It was further noted that for several assessment years before the
filing of returns by Corporates in electronic form was made mandatory in the
subject AY, the notes to accounts filed along with the returns of income
completely disclosed not only the facts of receipt of amounts from affiliated
companies but the nature of the receipts. The filing of return in Electronic
media did not provide for filing notes to Accounts along with the Return. Thus
the non offering of Income to tax was bonafide. This was based upon past practice
and grant of refund of the tax deducted by the affiliated companies on the
payments made to it. Moreover, the entire basis of holding that the amount
received from affiliated companies was not chargeable to tax was the
interpretation placed upon the dtaa by the assessee. On the aforesaid facts,
the CIT(A) held that there was no concealing of particulars of income or
furnishing inaccurate particulars of income. Accordingly, the penalty was
deleted.

Being
aggrieved, the revenue carried the issue in appeal to  the 
tribunal.  The   tribunal, 
by  the  impugned 
order, upheld the finding of the CIT(A). In particular, the impugned
order records the fact that the compulsory filing of e-return by Corporates had
started for the first time only from the subject assessment year. This new
system had no provision for attaching the computation or notes while filing the
return in the prescribed form. The impugned order of the tribunal also records
the fact that the balance sheet and books of accounts also duly reflected that
the Assessee had received payments from its Indian affiliates for providing
services. Thus,   mere non-acceptance of
the claim made by the assessee,  would
not by itself lead to an imposition of penalty, when the claim made was
bonafide. Further, the impugned order holds that even the Assessing Officer had
on an interpretation of article 12 of the dtaa came to a conclusion that the
amounts received from the affiliated companies are chargeable to tax as they
were in the nature of fees for technical services. The impugned order also
placed reliance upon the decision of the apex Court in CIT vs. Reliance Petroproducts Pvt. Ltd. to conclude that a
bonafide claim not accepted by the Assessing Officer would not by itself
warrant imposition of penalty.

Being
aggrieved, the revenue carried the issue in appeal to the high Court. High
Court held  assessee’s  claim that amount received from its
affiliated companies on account of CICT and Corporate Services is not taxable
was based on an interpretation of DTAA. It is a settled position of law that
where the issue is debatable then mere making of a claim on the basis of a
particular interpretation would not lead to an imposition of penalty. Bearing
in mind that for the earlier assessment years, the assessee had claimed and
been granted refund of taxes deducted at source by the affiliated companies in
respect of the payment received by it for Corporate Services and CICT Services
would also establish that the claim made by the assessee that the income
received is not chargeable to tax was a bonafide claim.

In
view of the above concurrent finding of fact by CIT(A) and the tribunal the appeal
of revenue was dismissed.

Service tax – no deduction claimed on account of service tax which is payable to the Government – Section 43B of the Act would have no application – Section 145A(a)(ii) deals with goods and not services- Section 43B rws 145A(a)(ii) of the Act.

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CIT -2 vs. Knight Frank (India) Pvt. Ltd. [Income tax Appeal
no. 247 of 2014 with 255 of 2014, dt : 16/08/2016 (Bombay High Court)].

[Knight Frank (India) Pvt. Ltd..   vs. Asst. CIT ,. [ITA No. 2021/MUM/2011,
6286/MUM/2010, 123/MUM/2011, 178/ MUM/2012 ; 
Bench : A ; dated 10/07/2013 ; 
AYs : 2007- 2008 & 2008-2009. Mum. ITAT ]

The
assessee was engaged in the business of real estate consultancy / agency and
property management services. during the course of the assessment proceedings,
the assessing Officer sought to include the service tax billed by it for
rendering services to the service receivers as trading receipts on invocation
of section 145A(ii) of the act. Besides, the assessing Officer also sought to
invoke section 43B of the act on the ground that the billed amount of service
tax had not been paid over to the Government till the due date of filing the
return of income. The assessing Officer also sought to recast the assessee
profit and loss account so as to reflect the receivable service tax as a part
of the consideration for the services rendered. The assessee contended that
section 145A(a)(ii) of the act would have no application to the present facts
as service tax is not mentioned therein. Further,  it was submitted that as the assessee has
claimed no deduction on account of service tax which is payable to the
Government, and therefore, section 43B of the act would have no application.
However, the same was not accepted by the Assessing Officer and he added the
service tax billed by the assessee to its service receivers as a part of its
turnover / consideration received for services rendered. Further,  section 43B of the act was invoked to add the
service tax billed, which has not been paid over to the Government.

In
appeal, the CIT(A) held that section 145A(a)(ii) of the act would apply as it
is not restricted only to manufacturing and trading companies. It was concluded
that the service tax stands on the same footing as excise duties, sales tax and
other taxes, which are collected to be paid over to the Government. Similarly,
the order of the Assessing Officer with regard to section 43B of the act was
also upheld.

On
further appeal, the tribunal by the impugned order held that section 145A(a)(ii)
of the act would have no application in respect of the service tax billed on
rendering of services. This for the reason the section 145A(a)(ii) deals with
goods and not services. It also held that section 43B of the act would have no
application in the present facts as no liability to pay the same to the
Government arose before the last date of filing of the Returns. Besides, it
held that no deduction had been claimed on the aforesaid amounts while
determining its  income.  Accordingly, 
the  appeal  of 
the  assessee was allowed.

On
further appeal to the high Court, it was held that it is very clear from the
reading of section 145A(a)(ii) of the act that it only covers cases where the
amount of tax, duty, cess or fee is actually paid or incurred by the assessee
to bring the goods to the place of its location and condition as on the date of
valuation. In this case, the assessee has admittedly not paid or incurred any
liability for the purposes of bringing any goods to the place of its location.
In this case, the assessee is rendering services. Thus,  on the plain reading of section145A(a)(ii) of
the act, it is self evident that the same would not apply to the service tax
billed on rendering of services. This is so as the service tax billed has no
relation to any goods, nor does it have anything to do with bringing the goods
to a particular location. The explanation to section 145A(a) of the act does
not expand its scope. An explanation normally does not widen the scope of the
main section. It merely helps clarifying an ambiguity. (relied on : Zakiyr
Begam v/s. Shanaz Ali & Ors., 2010 (9) SCC 280). The main part of the
section specifically restricts its ambit only to valuation of purchase and sale
of goods and inventory. Rendering of service is not goods or inventory. The
Explanation in this case clarifies/explains that any tax, duty, cess or fee paid
or incurred will have to be taken into account for valuation of goods even if
such payment results in any benefit/right to the person making the payment. It
does not even remotely deal with the issue of service tax. Thus, it is clear
that the legislature never intended to restrict the applicability of section 145A
of the act only to goods and not extend it to Services. as observed by the apex
Court In State of Bihar vs. S. K. Roy
AIR 1966 (SC) 1995:“ It is well recognised principle in dealing with
construction that a subsequent legislation may be looked at in order to see
what is the proper interpretation to be put upon an earlier Act where the
earlier Act is obscure or capable of more then one interpretation.”

Therefore,
section 145A of the act would have no application in cases where service is
provided by the assessee. The assessee had not claimed any deduction on account
of the service tax payable in order to determine its taxable income. In the
above view, there can be no occasion to invoke section 43B of the act.
Accordingly, both the appeals were dismissed.

TDS – Fees for technical services- Section 194J – Assessee purchasing and selling electricity – Transmission of electricity by State Power Transmission Corporation – Not technical services – Tax not deductible u/s. 194J on amount paid for such transmission –

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ACIT vs. Gulbarga Electricity Supply Co. Ltd.- 387 ITR 484
(Karn):

The
assessee was in the business of buying and selling of electricity. The assessee
purchased electricity from the generators of the Karnataka Power Corporation
etc. and sold it to different categories of consumers in its jurisdiction. The
power from the generation point to the customers was  transmitted 
through  the  transmission 
network  of the Corporation. The
Assessing Officer found that the assessee had made payment of transmission charges
to the Corporation, without deducting tax at source thereon. He held that the
assessee was an assessee in default u/s. 201(1) of the income-tax act, 1961 in
respect of payment of transmission charges u/s. 194J. The Commissioner
(appeals) and the tribunal set aside the order.

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

“i)
 The 
provisions of section 194J  of the
act, was not attracted in the present case and the assessee was not liable to
deduct the tax at source from the payment of transmission charges made to the
Corporation and the order of the Assessing Officer was rightly set aside by the
tribunal.

ii)  Accordingly, appeal of the revenue is
dismissed.”

TDS – Commission- Sections 194H and 201(1) – A. Ys. 2008-09 to 2010-11- Assessee paying incentive under trade discount scheme to retail dealers through del creder agents – Transactions between assessee and retail dealers on principal to principal basis- No principal agent relationship – No services rendered by retail dealers to assesse – Incentive given only to promote sales – not commission – Tax not deductible

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CIT vs. United Breweries Ltd.; 387 ITR 150 (T&AP):

The
assessee was engaged in the manufacture and sale of beer to the andhra Pradesh
Beverage Corporation. The Corporation, in turn, sold beer purchased from the
assessee, to retail dealers. The assessee paid incentives under the trade
discount scheme to the retail dealers through del creder agents. The Assessing
Officer held that for the payment made to the retail dealers, section 194H of
the income-tax act, 1961 was applicable and the assessee had committed default
in terms of section 201(1) in not having deducted tax at source on the payments
and levied interest u/s. 201(1A) of the act in respect of the amounts paid
under the trade scheme and discounts. The tribunal held the payments
constituted sales promotion expenses and did not fall in the category of
“commission” attracting 194H of the act.

On
appeal by the Revenue, the Telangana and Andhra Pradesh High Court upheld the
decision of the tribunal and held as under:

“i)  It was evident that beer was sold by the
assessee to the Corporation, and the Corporation, in turn, sold the beer
purchased from the assessee, to retail dealers. The two transactions were
independent of each other, and were on a principal to principal basis. No
services rendered by the retail dealers to the assessee, and the incentive
given by the assessee to the retailers as trade discount was only to promote
their sales.

ii)
The tribunal rightly held that in the absence of a relationship of principal
and agent, and as there was no direct relationship between the assessee and the
retailer, the discount offered by the assessee to the retailers could only be
treated as sales promotion expenses, and not as commission, as no services were
rendered by the retailers to the assessee.”