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Category: Direct Taxes

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.”

Search and seizure – Block assessment – Notice u/s158BC – Where condition precedent to issue notice u/s. 158BC, viz. undisclosed income found during search proceedings was not satisfied, no notice u/s. 158BC could have been be issued to petitioner

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Dr. Gautam Sen vs. CCIT; [2016] 74 taxmann.com 128 (Bom):

Revenue carried out the search on
16th january, 1999 u/s. 132 of the income-tax act, 1961 on the Petitioner and
his premises. During the course of the search, an amount of Rs.20,000/- in cash
was found in his house which was explained to the satisfaction of the revenue. Nothing
incriminating was found during the course of search.  However, a notice dated 16th May 2000 was
issued u/s. 158BC of the Act to the Petitioner to file his return of income for
the block period covered by the search.

The petitioner filed a writ
petition before the Bombay High Court challenging the validity of the notice on
the ground that during course of search, nothing was found with the Petitioner,
so as to infer that he was in possession of any undisclosed income either at
the time of search or at any time prior thereto. Consequently, in the absence
of there being undisclosed income, the Assessing Officer would not have any
justification to issue the impugned notice u/s. 158BC of the act.

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

“i) Action of the revenue in
issuing section 158BC notice despite the appraisal report clearly stating that
no incriminating material was found against petitioner was highly deplorable as
it amounted to harassment of the taxpayer. The Officers of the income tax
department  are obliged to proceed
in   accordance   with  
the   statutory   provisions and cannot act on their whim and
fancy. The department should adopt a standard operating procedure to provide
adequate safeguards before issuing notices under Chapter XVIB.

ii)  In the above facts, the impugned notice is
quashed and set aside.

iii) This is the fit case where
costs should be awarded to the Petitioner. The Respondents-revenue i.e. the jurisdictional Chief Commissioner of income
tax (respondent no.1) is directed to pay the costs of Rs.20,000/- to the
Petitioner within four weeks from today.”

Search and seizure- Assessment of third person- Section 153C – A. Ys. 2003-04 to 2008-09- Condition precedent – Cheque book pertaining to assessee reflecting issue of cheques only document seized during search – No other evidence of undisclosed income – Proceedings u/s. 153C not valid

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CIT vs. Refam Management Services P. Ltd.; 386 ITR 693 (Del)

Pursuant to a search and seizure
operation undertaken u/s. 132 of the income-tax act, 1961 in the case of a
third party, cheque books of the assessee reflecting issue of cheques were
found. Assessments were made for the assessment years 2003-04 to 2008-09 u/s.
153C of the act. Certain additions u/s. 69C and certain disallowances were
made. The CIT(a) and the tribunal deleted the additions and disallowances. In
view of such deletion assesee’s ground that assessments were illegal and
invalid were not decided.

On appeal by the revenue, the
assessee raised the ground that the assessments u/s. 153C were illegal and
invalid.

The Delhi High Court held as
under:

“The  only document seized during the search was a
cheque book pertaining to the assessee which reflected the  issue 
of  cheques  during 
the  period august  2008 to october  2008, relevant to the A. Y. 2009-10. Since there was no other evidence
of undisclosed income, the proceedings u/s. 153C were not valid.”

Search and seizure- Limitation for assessment- Period reckoned from date of conclusion of search- Restraint order not extended and no action taken pursuant to search after three months- Search to be taken to have been concluded on expiry of restraint order- Visit of officers to assessee’s premises two years later to record conclusion of search not material- Period of limitation to pass assessment order not to be reckoned from such date- Assessment barred by limitation

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CIT vs. Ritika Ltd.; 284 ITR 434 (Cal):

Pursuant to a search and seizure in the premises of the assessee, a restraint order was issued on October 15, 1998 for a period of sixty days which was later extended for another thirty days upto January 15, 1999. Thereafter it was not extended. On November 21 2000, the Department called on the assessee at his premises for the purpose of recording that the search was at an end. Thereafter assessment order was passed after January 2001. The Department took the view that the period of limitation of two years commenced from November 21, 2000 and therefore the assessment order is passed within the period of limitation. The Tribunal held that the period of limitation of two years for passing assessment order was to be reckoned from 15th January 1999 and not from 21st November 2000 and accordingly the assessment order was passed beyond the period of limitation.

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

“i) The Tribunal’s order was unimpeachable. The restraint order was not extended by the Department after January 15, 1999, which meant that the search was also abandoned and had ended. The search did not stand revived when the officers of the Department called at the house of the assessee merely for the purpose of recording that the search was at an end almost after two years.

ii) The order of assessment was passed beyond the limitation period of two years after conclusion of the search and hence was invalid.”

Return of loss- Section 139(1), (3) of I. T. Act, 1961- A. Y. 2010-11- Delay of one day in filing return satisfactorily explained by assessee- Assessee not to be denied carry forward of loss- direction to CBDT to accept return of assessee-

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Regen Infrastructure and Services Pvt. Ltd. vs. CBDT; 384 ITR 407 (Mad):

For the A. Y. 2010-11, the last date for filing returns was extended to October 15, 2010.The assessee filed return of loss on the last day i.e. October 15, 2010. The uploading was delayed by a few hours due to a technical snag. The Assessing Officer took the date of filing as October 16, 2010 but did not treat it as a belated return and passed an assessment order u/s. 143(3) of the Income-tax Act, 1961, allowing the claim to carry forward loss. The Commissioner issued a show cause notice u/s. 263 of the Act stating that the benefit of carry forward of losses allowed to the assessee was erroneous and prejudicial to the Revenue due to the assessee’s delay in filing the return. The assessee filed an application to the CBDT for condonation of delay of two hours due to which the date of filing was reckoned as October 16, 2010. CBDT rejected the application on the ground that there was no justifiable reason to condone the delay.

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

“i) When the assesee was entitled to claim the carry forward of loss u/s. 139(3) of the Act, it could not have been stated that the delay in filing the return had occurred deliberately on account of culpable negligence or on account of mala fides. Mere delay ought not to have defeated the claim of the assessee. When the delay was satisfactorily explained by the assessee, the approach of the CBDT should have been justice oriented so as to have advanced the cause of justice and the delay should have been condoned.

ii) The CBDT is directed to accept the return filed by the petitioner company for the A. Y. 2010-11 u/s. 139(1) of the Act.”

Recovery of tax pending stay application – Ss. 220(6) and 226(3) – A. Y. 2009-10 – Notice of demand – Attachment of bank accounts – No recovery permissible till stay application is disposed of – Pending stay application withdrawal of part of attached amount from banks is without jurisdiction and unlawful – Garnishee notice quashed – Direction issued to deposit withdrawn amount and dispose of stay application –

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Khandelwal Laboratories P. Ltd. vs. Dy. CIT; 383 ITR 485 (Bom):

For the A. Y. 2009-10, the assessee had filed an appeal against the order u/s. 143(3) of the Income-tax Act, 1961 and had also made an application for stay of the demand u/s. 220(6) of the Act, inter alia on the ground that the issue arising in this case had been concluded in its favour by the decision of the Tribunal in its own case for the A. Y. 2000-01. The Assessing Officer attached the bank accounts of the assessee u/s. 226(3) of the Act and later withdrew amounts of Rs. 7,59,185/- and Rs. 34,265/- from the assessee’s bank accounts.

The Bombay High Court allowed the assessee’s writ petition and held as under:
“i) The right to file an application u/s. 220(6) of the Act is a statutory right available to an assessee. Any action to recover taxes adopting coercive means is not permissible till the assessee’s application for stay u/s. 220(6) of the Act is disposed of. An order disposing of the stay application must give some prima facie reasons in the context of the submission for stay made by the assessee.

ii) The Assessing Officer had only dealt with the assessee’s rectification application and not with the assessee’s application for stay. The third paragraph in that order calling upon the assessee to pay the entire demand within five days, could not be read as a communication rejecting the stay application filed by the assessee.

iii) In any case, the order was bereft of any consideration of the assessee’s primary contention that the issue in appeal is concluded in its favour by virtue of a Tribunal’s order for A. Y. 2000-01 in the assessee’s own case. Thus, the application for stay filed had not yet been disposed of by the Assessing Officer.

iv) Therefore, the action of the Assessing Officer in attaching the assessee’s bank accounts was without jurisdiction and bad in law. The notices u/s. 226(3) of the Act, issued by the Assessing Officer to the assessee’s bankers were to be quashed and set aside. The Assessing Officer was to deposit the amounts of Rs. 7,59,185 and Rs. 34,265 respectively in the assessee’s bank accounts and dispose of the assessee’s pending stay application in accordance with law.”

Income from house property vs. income from other sources – Section 22, 28(i) & 56 – A. Y. 2008-09 – Income from licensing of terrace floor for telecom antenna, constructing room for its personnel and storage – receipts are income from house property –

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Naigara Hotels and Builders (P) Ltd. vs. CIT; 286 CTR 94 (Del):

The assessee had let out the terrace floor for raising telecom antenna and constructing a room for its personnel and storage. The Assessee offered the license fees as income from house property. The Assessing Officer assessed it as business income. The Tribunal held that it is income from other sources.

On appeal the Delhi High Court allowed the assessee’s claim and held that the income is to be assed under the head “Income from house property.”

Inland port – Deduction u/s. 80-IA – A. Y. 2009- 10 – Container freight stations are inland ports within the meaning of section 80IA(4)(i) – Assessee entitled to benefit u/s. 80IA –

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CIT vs. Kailash Shipping Services P. Ltd.; 283 ITR 630 (Mad):

The assessee is a clearing and forwarding agent. For the A. Y. 2009-10 the assessee claimed deduction u/s. 80IA of the Income-tax Act, 1961, on the container freight station. The Assessing Officer disallowed the claim holding that the container freight station could not be classified as an inland port for the purpose of section 80IA(4)(i) of the Act. The Commissioner (Appeals) and the Tribunal allowed the assessee’s claim.

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

“i) The office memorandum of Ministry of Commerce and Industry dated May 21, 2009 clarified the status of the container freight stations as inland ports and the Chennai Port Trust had issued a certificate stating that the container freight station of the assessee might be considered an extended arm of the port in accordance with the CBDT Circular No. 793 dated 23/06/2000 read with Circular No. 133 of 1995 dated 22/12/1995 of CBEC.

ii) The assessee was entitled to the benefit u/s. 80IA of the Act.”

Industrial Undertaking – Special Deduction – Profits derived from business – So long as the profits and gains emanate directly from the business itself, the fact that the immediate source of the subsidies (which reimburses, wholly or partially, costs actually incurred) is the Government would make no difference and thus are qualified for deduction u/s. 80-IB(4)

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CIT vs. Meghalaya Steels Ltd. [2016] 383 ITR 217 (SC)

The
assessee was engaged in the business of manufacturing of steel and
ferro silicon. The assessee submitted its return of income for the year
2004-05 disclosing an income of Rs.2,06,970 after claiming deduction
u/s. 80-IB of the Income Tax Act, 1961 on the profits and gains of
business of its industrial undertaking. The assessee had received the
following amounts on account of subsides:

The
Assessing Officer, in the assessment order held that the amounts
received by the assessee as subsides were revenue receipts and did not
qualify for deduction u/s. 80-IB(4) of the Act and accordingly, the
assessee’s claim for deduction of an amount of Rs.2,74,09,386 on account
of the three subsidies aforementioned were disallowed. The assessee
preferred an appeal before the Commissioner of Income-tax (Appeals),
who, dismissed the appeal of the assessee. Aggrieved by the aforesaid
order, the assessee preferred an appeal before the Income-tax Appellate
Tribunal which allowed the appeal of the assessee. The Revenue carried
the matter to the High Court u/s. 260A of the Act, which decided the
matter against the Revenue. The Revenue therefore filed an appeal before
the Supreme Court against this judgment.

The Supreme Court
analysed all the decisions cited on behalf of the Revenue. The Supreme
Court noted that in the first decision, that is, in Cambay Electric
Supply Industrial Co. Ltd. vs. CIT (113 ITR 84), it was held that since
an expression of wider import had been used, namely, “attributable to”
instead of “derived from”, the Legislature intended to cover receipts
from sources other than the actual conduct of the business of generation
and distribution of electricity. In short, a step removed from the
business of the industrial undertaking would also be subsumed within the
meaning of the expression “attributable to”. The Supreme Court observed
that since it was directly concerned with the expression “derived
from”, this judgment was relevant only in so far as it made distinction
between the expression “derived from”, as being something directly from,
as opposed to “attributable to”, which could be said to include
something which was indirect as well.

The Supreme Court noted
that the judgment in Sterling Foods (237 ITR 579) laid down a very
important test in order to determine whether profits and gains are
derived from business or an industrial undertaking. It has stated that
there would be a direct nexus between such profits and gains and the
industrial undertaking or business. Such nexus cannot be only
incidental. It therefore found, on the facts before it, that by reason
of an export promotion scheme, an assessee was entitled to import
entitlements which it would thereafter sell. Obviously, the sale
consideration therefrom could not be said directly from profits and
gains by the industrial undertaking but only attributable to such
industrial undertaking inasmuch as such import entitlements did not
relate to manufacture or sale of the products of the undertaking, but
related only to an event which was post manufacture namely, export. The
Supreme Court held that on an application of the aforesaid test to the
facts of the present case, it could be said that as all the four
subsidies in the present case were revenue receipts which were
reimbursed to the assessee for elements of cost relating to manufacture
or sale of their products, there could certainly be said to be a direct
nexus between profits and gains of the industrial undertaking or
business, and reimbursement of such subsidies. The Supreme Court noted
that according to the Counsel for the Revenue the fact that the
immediate source of the subsides was the fact that the Government gave
them and that, therefore, the immediate source not being from the
business of the assessee, the element of directness was missing. The
Supreme Court did not agree with this contention. According to the
Supreme Court, what is to be seen for the applicability of section 80-IB
and 80-IC is whether the profits and gains are derived from the
business. So long as profits and gains emanate directly from the
business itself, the fact that the immediate source of the subsidies is
the Government would make no difference, as it cannot be disputed that
the said subsidies are only in order to reimburse, wholly or partially,
costs actually incurred by the assessee in the manufacturing and selling
of its products. The “profits and gains” spoken of by sections 80-IB
and 80-IC have reference to net profit. And net profit can only be
calculated by deducting from the sale price of an article all elements
of cost which go into manufacturing or selling it. Thus understood, it
was clear that profits and gains are derived from the business of the
assessee, namely profits arrived at after deducting manufacturing cost
and selling costs reimbursed to the assessee by the Government
concerned.

According to the Supreme Court the judgment in
Pandian Chemicals Limited vs. CIT (262 ITR 278) was also
distinguishable, as interest on a deposit made for supply of electricity
was not an element of cost at all, and this being so, was therefore a
step removed from the business of the industrial undertaking. The
derivation of profits on such a deposit made with the Electricity Board
could not therefore be said to flow directly from the industrial
undertaking itself, unlike the facts of the present case, in which, as
has held above, all the subsidies aforementioned went towards
reimbursement of actual costs of manufacture and sale of the product of
the business of the assessee.

Further, the Supreme Court
observed that Liberty India (317 ITR 218) being the fourth judgment in
this line also did not help the Revenue. What the court was concerned
with was an export incentive, which was very far removed from
reimbursement of an element of cost. A Duty Entitlement Pass Book
Drawback Scheme was not related to the business of an industrial
undertaking or selling its products. Duty entitlement pass book
entitlement arose only when the undertaking exported the said product,
that is after it manufactured or produced the same. Pithily put, if
there were no export, there were no duty entitlement pass book
entitlement, and therefore its relation to manufacture of a product and
or sale within India was not proximate or direct but was one step
removed. Also, the object behind the duty entitlement pass book
entitlement, as has been held by the court, was to neutralize the
incidence of customs duty payment on the import content of the export
product which was provided for by credit to customs duty against the
export product. In such a scenario, it could not be said that such duty
exemption scheme was derived from profits and gains made by the
industrial undertaking or business itself.

The Supreme Court
referred to the decision of the Calcutta High Court in Merinoply and
Chemicals Ltd. vs. CIT [1994] 209 ITR 508 (Cal), in which it was held
that transport subsidies were inseparably connected with the business
carried on by the assessee.

The Supreme Court noted that
however, in CIT vs. Andaman Timber Industries Ltd.[2000] 242 ITR
204(Cal), the same High Court had arrived at an opposite conclusion in
considering whether a deduction was allowable u/s. 80HH of the Act in
respect of transport subsidy without noticing the aforesaid earlier
judgment of a Division Bench of that very court.

The Supreme
Court further observed that a Division Bench of the Calcutta High Court
in CIT v. Cement Manufacturing Company Limited, distinguished the
judgment in CIT vs. Andaman Timber Industries Ltd. and followed the
impugned judgment of the Gauhati High Court in the present case.

According
to the Supreme Court the judgment in Merinoply and Chemicals Ltd. and
the recent judgment of the Calcutta High Court had correctly appreciated
the legal position.

The Supreme Court thereafter referred to
the judgment in Jai Bhagwan Oil and Flour Mills [(2009) 14 SCC 63] in
which it was held that and economically viable transport subsidy was
given so that industry could become competitive.

Further, the
Supreme Court referred to the decision in Sahney Steel and Press Works
Ltd. vs. CIT[1997] 228 ITR 253(SC), which dealt with subsidy received
from the state Government in the form of refund of sales tax paid on raw
materials, machinery, and finished goods subsidy on power consumed by
the industry; and exemption from water rate. It was held that such
subsidies were treated as assistance given for the purpose of carrying
on the business of the assessee.

The Supreme Court thereafter
referred to a Delhi High Court judgment in CIT vs. Dharam Pal Prem Chand
Ltd. [2009] 317 ITR 353 (Delhi) from which a special leave petition
preferred in the Supreme Court was dismissed. This judgment also
concerned itself with section 80-IB of the Act, in which it was held
that refund of excise duty should not be excluded in arriving at the
profit derived from business for the purpose of claiming deduction u/s.
80-IB of the Act.

The Supreme Court thereafter considered one
further argument made by the Counsel for the Revenue. He had argued that
as the subsidies that were received by the respondent, would be income
from other sources referable to section 56 of the Income-tax Act, any
deduction that was to be made, could only be made from income from other
sources and not from profits and gains of business, which was a
separate and distinct head as recognised by section 14 of the Income-tax
Act. The Supreme Court held that the Counsel for the Revenue was not
correct in his submission that assistance by way of subsidies which were
reimbursed on the incurring of costs relatable to a business, were
under the head “Income from other sources”, which is a residuary head of
income that could be availed only if income did not fall under any of
the other four heads of income. The Supreme Court held that section
28(iii)(b) specifically states that income from cash assistance, by
whatever name called, received or receivable by any person against
exports under any scheme of the Government of India, would be income
chargeable to income-tax under the head “Profits and gains of business
or profession”. If cash assistance received or receivable against
exports schemes are included as being income under the head “Profits and
gains of business or profession”, it was obvious that subsidies which
go to reimbursement of cost in the production of goods of a particular
business would also have to be included under the head “Profits and
gains of business of profession”, and not under the head “Income from
other sources”.

The Supreme Court therefore dismissed the appeal.

Charitable purpose – Depreciation – Disallowance u/s. 11(6) – A. Y. 2005-06 – Section 11(6) barring allowance of depreciation on such assets is prospective in nature operating w.e.f. 01/04/2015 – Depreciation on assets allowable for earlier period –

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DIT vs. Al-Ameen Charitable Fund Trust; 283 ITR 517 (Karn):

The assessee is a charitable institution registered u/ss. 12AA and 10(23C) . For the A. Y. 2005-06, the Assessing Officer completed the assessment u/s. 144 of the Act denying exemption u/s. 10(23C) of the Act. The Assessing Officer disallowed the claim for depreciation on the ground that the assets were acquired out of the exempt income. The Commissioner(Appeals) and the Tribunal allowed the assessee’s claim.

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

“i) The argument advanced by the Department apprehending double deduction was misconceived. While in the year of acquiring the capital asset, what is allowed as exemption is income out of which such acquisition is made, when depreciation is allowed in the subsequent years, it is for the losses or expenses representing the wear and tear of such capital incurred, and if it is not allowed there is no way to preserve the corpus for deriving its income. The Appellate Tribunal was right in holding that depreciation was allowable u/s. 11 of the Act and there was no double claim of the capital expenditure.

ii) Section 11(6) of the Act, which provides for disallowance of the depreciation is prospective in nature and operates w.e.f. April 1, 2015.”

Disallowance of expenditure in respect of exempt income – Section 14A – A. Y. 2009-10 – Investment from common pool – Non-interest bearing funds more than investment in tax free securities No interest disallowance can be made u/s. 14A –

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CIT vs. Microlabs; 383 ITR 490 (Karn):

Dealing with the scope of section 14A read with Rule 8D the Karnataka High Court held as under:

“When investments are made out of a common pool of funds and non-interest bearing funds were more than the investments in tax-free securities, no disallowance of interest expenditure can be made u/s. 14A of the Incometax Act, 1961.”

Reassessment – Validity – Section 147 – A. Y. 1993 -94 – Non-supply by the AO of reasons recorded for reopening the assessment (even where the 14 reopening is prior to GKN Driveshafts 259 ITR 19 (SC)) renders the reassessment order bad as being without jurisdiction

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CIT vs. IDBI (Bom); ITA No. 494 of 2014 dated 19/09/2016; www.itatonline.org:

For the A. Y. 1993-94, the
assessment of the assessee was reopened by issuing notice u/s. 148 of the
income­ tax Act, 1961. The assessee filed return in response to the notice and
requested the reasons for reopening. In spite of the repeated request the
reasons were not furnished but the reassessment was completed. The assesee
challenged the reassessment order on the ground that the reassessment made
without furnishing the reasons for reopening is invalid. The tribunal accepted
the assessee’s claim and held that the reassessment order is invalid.

On appeal by the revenue, the
Bombay high Court upheld the decision of the tribunal and held as under:

“i) The   question as framed proceeds on the basis
that the respondent assessee was aware of the reasons for reassessment.
the  only basis for the aforesaid
submission is the submission made by the revenue before the tribunal that the
respondent assessee is a public sector institution who was aware that search
action has been initiated on certain lessees in respect of transactions with
idBi i.e. assessee. On the basis of the above, it is to be inferred that the
reason for reassessment was known to the respondent assessee.

ii) The supply of reason in
support of the notice for reopening of an assessment is a jurisdictional
requirement. The reasons recorded form the basis to examine whether the
Assessing Officer had at all applied his mind to the facts and had reasons to
believe that taxable income has escaped reassessment. It is these reasons,
which have to be made available to the assessee and it could give rise to a
challenge to the reopening notice. It is undisputed that the reasons recorded
for issuing reopening notice were never communicated to the respondent assessee
in spite of its repeated requests. Thus, the grievance of the revenue on the
above count is unsustainable.

iii) An  alternative submission is made on behalf of
the revenue that the obligation to supply reasons on the Assessing Officer was
consequent to the decision of the apex Court that GKN Driveshafts (India) Ltd.
vs. Income-tax Officer (2003) 259 ITR 19 (SC) rendered in 2003 while, in the
present case, the reopening notice is dated 9th 
December 1996. Thus it submitted at the time when the notice u/s. 148 of
the act was issued and the time when assessment was completed, there was no
such requirement to furnish  to the  assessee 
a  copy of the reasons recorded. This
submission is not correct. We find that the impugned order relies upon the
decision of this Court in Seista Steel Construction (P.) ltd.  [1984] 17 taxman 122(Bom.) when it is held
that in the absence of supply of reasons recorded for issue of reopening notice
the assessment order would be without jurisdiction and needs to be quashed. The
above view as taken by the tribunal has also been taken by this Court in CIT
vs. Videsh Sanchar Nigam Ltd. [2012] 21 Taxmann 53 (Bombay) viz. non-supply of
reasons recorded to issue a reopening notice would make the order of assessment
passed thereon bad as being without jurisdiction.

iv) In view of the above, the
appeal is dismissed”

Search and Seizure – Block Assessment – Limitation – As a general rule, when there is no stay of the assessment proceedings passed by the court, Explanation 1 to section 158BE of the Act may not be attracted. In those cases where stay of some other nature is granted than the stay of the assessment proceedings but the effect of such stay is to prevent the Assessing Officer from effectively passing assessment order, even that kind of stay order may be treated as stay of the assessment proceedings. Search and Seizure – Block Assessment – Limitation to be reckoned with the last panchnama when the search is finally concluded in the absence any challenge to subsequent searches

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VLS Finance Ltd. & Anr. vs. CIT & Anr. [2016] 384 ITR 1 (SC)

Search and seizure took place in the business premises of the appellant companies on June 22, 1998 on the strength of warrant of authorisation dated June 19, 1998, which went up to in the morning hours of June 23, 1998. It was followed by further searches from time to time which went on till August 5.

Notice u/s. 158BC(c) of the Income-tax Act, 1991 (hereinafter referred to as the “Act”), was issued on June 28, 1999 requiring the appellants to furnish return for the block period from April 1, 1988 to June 22, 1998. This notice was withdrawn and another notice was issued on July 26, 1999. In response thereto, the appellants filed return for the aforesaid block period on September 10, 1999. As per section 158BE of the Act, assessment is to be completed within two years from the end of the month in which the last of the authorised for search under section 132 or for requisition u/s. 132A, as the case may be. However, the Assessing Officer could not do so because of certain developments which took place.

A direction u/s. 142(2A) was issued on June 29, 2000, which was served to the appellants on July 19, 2000 for conducting special audit for the aforesaid block period.

A writ petition (Civil) no.4685 of 2000 was filed by the Appellants, wherein a challenge was laid to the aforesaid order dated June 29, 2000, issued by Respondent No.2 directing a special audit in respect of appellants u/s. 142(2A) of the Act. In the said writ petition, the appellants also challenged the clarificatory order dated August 10, 2000 issued by respondent No.2 with regasrd to special audit in respect of appellant No.1 for the period from the assessment year 1994-95 to assessment year 1998-99 and in so far as appellant No.2 the period for assessment year 1994-95 to assessment year 1996-97.

During the pendency of the writ petition, as amendment application was filed being CM No. 9305 of 2006, seeking to add addional ground that the block assessment proceedings u/s. 158BC (c) of the Act were time barred. The appellant submitted that the time limit for completion of block assessment expired on June 30, 2000 in terms of section 158BE of the Act, since 2 years period expired on that date. It was further submitted that the authorization executed on June 22, 1998 could not have been utilised for conducting further search till August, 1998. It was also contended that the order u/s. 142(2A) of the Act was issued in violation of principles of natural justice as there was no complexity in the accounts of the appellants and, therefore, there was no justification in law to order special audit u/s. 142(2A) of the Act.

The respondents filed their affidavit in reply to the show cause explaining that the order for special audit u/s. 142(2A) of the Act was issued with proper authorization made by the Commissioner of Income Tax after due deliberation and on the basis of the report of the Assessing Officer, viz., Assistant Commissioner of Income Tax, New Delhi. It was further submitted that the period of completion of block assessment was to expire on August 31, 2000 and not on June 30, 2000 as claimed by the appellants. As per the respondents, since seizure operations were conducted from June 22, 1998 and there operations concluded only on August 5, 1998, the time limit of two years for completion of “block assessment” was to expire only on August 31, 2000.

In Writ Petition (Civil) No.4685 of 2000, interim order dated August 24, 2000 was passed, giving interim stay of the orders dated June 29, 2000.

This stay remained in operation during the pendency of the writ petition.

The matter was finally heard and decided by the Delhi High Court vide judgment dated December 15, 2006. It has quashed the direction for special audit in view of the fact that no hearing was afforded to the appellant before issuing such direction, which was necessary as per the law laid down in the case of Rajesh Kumar vs. Deputy CIT(287 ITR 91).

However, the High Court decided the question of limitation in favour of the Department holding that the period between August 24, 2000, i.e., date on which interim order was passed staying special audit direction under section 142(2A) dated June 29, 2000 and December 15, 2016, i.e., when the High Court has passed the order setting aside the direction for appeal audit, be excluded in counting limitation for concluding block assessment.

The appellant contended before the High Court that since there was no stay on block assessment proceedings in terms of interim order dated August 24, 2000, the direction to exclude the period between August 24, 2000 to December 15, 2006 was beyond its jurisdiction. It was alternatively contended before the High Court that the limitation for passing the block assessment having expired on June 30, 2000 in terms of section 158.

BE(1) of the Act, the direction to exclude the limitation period between August 24, 2000 to December 15, 2006 would not, in any case, save limitation. While rejecting the aforesaid contentions raised by the appellants, the High Court held that since special audit was an important and integral step in the assessment proceedings, once the direction for special audit was stayed by the High Court, assessment proceedings ipso facto could not go on. The High Court rejected the assessee’s second alternative argument holding that limitation period of two years was years was to be calculated from August 5, 1998, on which date last panchnama was drawn.

On appeal, the Supreme Court observed that in effect the central issue was one of limitation, which had the following two facts, viz:

(a) Whether the period of limitation expired on August 31, 2000 or the last date for completing block assessment was June 30, 2000?

(b) Whether the period between August 24, 2000 and December 15, 2006, when interim stay was in operation, required to be excluded for the purposes of counting limitation period?

The Supreme Court taking the second issue first, noted that it was not in dispute that the period during which interim stay of the order passed by the court was in operation had to be excluded while computing the period of two years as limitation period prescribed for completing the block assessment. The parties had, however, joined issue on the nature of stay order which qualify for such exclusion.

The Supreme Court noted that the plea of the appellants was that only that period could be excluded in computing the period of limitation, during which assessment proceedings were stayed. A certain distinction was tried to be drawn in the instant case by referring to the interim order which was passed by the High Court on August 24, 2000 which had stayed the order of the Department directing compulsory audit. It was, thus, argued that stay was limited only to conducting compulsory audit and there was no stay of the assessment proceedings.

The Supreme Court referring the language of Explanation 1 held that it was not in doubt that this explanation granted benefit of exclusion only for those cases where “the assessment proceeding is stayed by an order or injunction” of the court. On literal construction, therefore, it became clear from the reading of this provision that the period that was to be excluded while computing the period of limitation for completion of block assessments was the period during which assessment proceedings are stayed by an order of a court and this provision shall not apply if the stay of some other kind, i.e., other than staying the assessment proceedings, was passed. The counsel for the appellants were justified in their contention that the provision relating to limitation need to be strictly construed.

The Supreme Court further held that as a general rule, therefore, when there is no stay of the assessment proceedings passed by the court, Explanation 1 to section 158BE of the Act may not be attracted. However, this general statement of legal principle has to be read subject to an exception in order to interpret it rationally and practically. In those cases where stay of some other nature is granted than the stay of the assessment proceedings but the effect of such stay is to prevent the Assessing Officer from effectively passing assessment order, even that kind of stay order may be treated as stay of the assessment proceedings because of the reason that such stay order becomes an obstacle for the Assessing Officer to pass an assessment order thereby preventing the Assessing Officer to proceed with the assessment proceedings and carry out appropriate assessment. For an example, if the court passes an order injecting the Assessing Officer from summoning certain records either from the assessee or even from a third party and without those records it is not possible to proceed with the assessment proceedings and pass the assessment order even such type of order may amount to staying the assessment proceedings. In that context, the High Court, in the impugned judgment had propounded the correct and relevant test, viz,. whether the special audit is an intergral pat of the assessment proceedings, i.e., without special audit it is not possible for the Assessing Officer to carry out the assessment ? If it is so, the stay of the special audit may qualify as stay of assessment proceedings and, therefore, would be covered by the said Explanation.

The Supreme Court agreed with the High Court that the special audit was an integral step towards assessment proceedings. The argument of the appellants that the writ petition of the appellant was ultimately allowed and the court had quashed the order directing special audit would mean that no special audit was needed and, therefore, it was not open to the respondent to wait for special audit, would not be a valid argument to the issue that was being dealt with. The Assessing Officer had, after going through the matter, formed an opinion that there was a need for special audit and the report of special audit was necessary for carrying out the assessment. Once such an opinion was formed, naturally, the Assessing Officer would not proceed with the assessment till the time that special audit report is received, inasmuch as in his opinion, report of the special audit was necessary. Take a situation where the order of special audit is not challenged. The Assessing Officer would naturally wait for this report before proceeding further. Order of special audit followed by conducting special audit and report thereof, thus, become part of assessment proceedings. If the order directing special audit is challenged and an interim order is granted staying the making of a special report, the Assessing Officer would not proceed with the assessment in the absence of the audit as he thought, in his wisdom, that special audit report is needed. That would be the normal and natural approach of the Assessing Officer at that time. It is stated at the cost of repetition that in the estimation of the Assessing Officer special audit was essential for passing proper assessment order. If the court, while undertaking judicial review of such an order of the Assessing Officer directing special audit ultimately holds that such an order is wrong (for whatever reason) that event happens at a later date and would not mean that the benefit of exclusion of the period during which there was a stay order is not to be given to the Revenue. Explanation 1 which permits exclusion of such a time is not dependent upon the final outcome of the proceedings in which interim stay was granted.

The Supreme Court therefore, answered this question in favour of Revenue.

With this, the Supreme Court reverted to the other question, viz., from which date the period of limitation was to be counted, i.e., from June 22, 1998 when the respondent authorities visited the premises of the appellants on the basis of warrant of authorization dated June 19, 1998 or August 5, 1998, on which date the Revenue authorities last visited the premises of the appellants on the basis of the same warrant of authorization dated June 19, 1998 and conducted the search of the appellant’s premises. If the period was to be counted from June 19, 1998, the last date by which the assessment was to be carried would be June 30, 2000. If it was to be counted from August 5, 1998, then the limitation period was to expire on August 31, 2000. In the event the last date for completing the block assessment was held to be June 30, 2000, then the assessment became time barred even before the interim stay was granted by the High Court as it was granted on August 24, 2000, i.e., after the supposed limitation period was over and, therefore, the conclusion was reached in answering the other question, as above, would not come to the rescue of the Department. On the other hand, if the period of limitation was to expire on August 31, 2000, then by virtue of our answer to the first issue, the period of limitation for block assessment had not expired inasmuch as this court had passed an order dated February 5, 2007 that audit may go on but no final assessment order be passed.

The Supreme Court observed that the Revenue authorities visited and searched the premises of the appellants for the first time on June 22, 1998. In the panchanama drawn on that date, it was remarked “temporarily concluded”, meaning thereby, according to the Revenue authorities, search had not been concluded. For this reason, the respondent authorities visited many times on subsequent occasions and every time panchnama was drawn with the same remarks, i.e., “temporarily concluded”. It was only on August 5, 1998 when the premises were searched last, the panchnama drawn on that date recorded the remarks that the search was “finally concluded”. Thus, according to the respondents, the search had finally been completed only on August 5, 1998 and panchnama was duly drawn on the said date as well. The appellants, in the writ petition filed, had nowhere challenged the validity of searches on the subsequent dates raising a plea that the same were illegal in the absence of any fresh and valid authorization. On the contrary, the appellant proceeded on the basis that search was conducted from June 22, 1998 and finally concluded on August 5, 1998.

On the aforesaid facts and in the absence of any challenge by the appellants to the subsequent searches, the Court held that it cannot countenance the arguments of the appellants that limitation period was not to be counted from the last date of search when the search operation completed, i.e., August 5, 1998. The Supreme Court, therefore, decided this issue also in favour of the respondents.

Whether payment of transaction charges to stock exchange amounts FTS – SecTION 194J – Part – II

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CIT vS. Kotak Securities Ltd . – Unreported – Civil Appeal No. 3141 of 2016 (SC)

3. As stated in Part I of this write-up, the Bombay High Court in the case of Kotak Securities Ltd. took the view that the Stock Exchange is rendering managerial services by providing in-built mechanism for trading in securities to its members and therefore, the payment of transaction charges by the members to the Stock Exchange is ‘fees for technical services’ [FTS] as the definition of the FTS includes consideration for ‘managerial services’ and accordingly, the same is covered by section 194J. At the same time, the High Court also held that both the parties for a decade proceeded on the footing that provisions to Sec. 194J were not applicable in this case and therefore, the disallowance u/s. 40(a)(ia) is not justified. Taking this judgment of the Bombay High Court as a lead case for the purpose of deciding the similar issues arising in various appeals before the Apex Court, the Court dealt with the judgment of the Bombay High Court for the purpose of deciding the issue referred to in para 1.5 of Part-I of this write-up.

3.1 For the purpose of deciding the issue of applicability of section 194J to the payment of transaction charges and consequent disallowance of the expenses in computing the business income, the Court noted the view taken by the Bombay High Court referred to in para 3 above. Before the Apex Court, the assessee had challenged the view of the Bombay High Court that the payment of the transaction charges to the Stock Exchange amounts to FTS covered u/s. 194J and the Revenue had challenged the view of the High Court that the disallowance u/s. 40(a)(ia) cannot be made for the Asst. Year in question.

3.2 The Court then noted the relevant parts of provisions of section 194J, Sec. 40(a)(ia) and the definition of FTS given in the said Explanation to section 9(1)(vii) as they stood at the relevant time.

3.3 Having referred to the relevant provisions of the Act, the Court stated that the moot question is what meaning should be ascribed to the expression ‘technical services’ [TS] appearing in the definition of FTS. For this purpose, the Court noted the following observations from its judgment in the case of Bharti Cellular Ltd (referred to in para 1.4 of Part –I of this write-up) :

“Right from 1979, various judgments of the High Courts and Tribunals have taken the view that the words “technical services” have got to be read in the narrower sense by applying the rule of noscitur a sociis, particularly, because the words “technical services” in section 9(1)(vii) read with Explanation 2 comes in between the words “managerial and consultancy services”.

3.3.1 Dealing with the above view taken in the case of Bharti Cellular Ltd (supra), the Court observed as under:

“Managerial and consultancy services” and, therefore, necessarily “technical services”, would obviously involve services rendered by human efforts. This has been the consistent view taken by the courts including this Court in Bharti Cellular Ltd. (supra). However, it cannot be lost sight of that modern day scientific and technological developments may tend to blur the specific human element in an otherwise fully automated process by which such services may be provided. The search for a more effective basis, therefore, must be made.”

3.4 Referring to a lengthy discourse on the services made available by the Stock Exchange contained in the Assessment order, the Court observed that this would go to show that apart from facilities of a faceless screen-based transaction, a constant up gradation of such services and surveillance of the essential parameters connected with the trade including those of a particular/single transaction that would lead credence to its authenticity is provided by the Stock Exchange and specifically noted that all such fully automated services are available to all the members of Stock Exchange in respect of every transaction entered into by them. The Court also noted that there is nothing special/exclusive or customized in the service that is rendered by the Stock Exchange.

3.4.1 Having noted the above factual position, the Court proceeded to deal with the meaning of words ‘technical services’ in the context of the definition of the FTS and its applicability to the present case. In this context, the Court stated as under:

“. . .Technical services” like “Managerial and Consultancy service” would denote seeking of services to cater to the special needs of the consumer/user as may be felt necessary and the making of the same available by the service provider. It is the above feature that would distinguish/identify a service provided from a facility offered. While the former is special and exclusive to the seeker of the service, the latter, even if termed as a service, is available to all and would therefore stand out in distinction to the former. The service provided by the Stock Exchange for which transaction charges are paid fails to satisfy the aforesaid test of specialized, exclusive and individual requirement of the user or consumer who may approach the service provider for such assistance/service. It is only service of the above kind that, according to us, should come within the ambit of the expression “technical services” appearing in Explanation 2 of Section 9(1)(vii) of the Act. In the absence of the above distinguishing feature, service, though rendered, would be mere in the nature of a facility offered or available which would not be covered by the aforesaid provision of the Act. ”

3.4.2 Having taken a view that the services rendered by the Stock Exchange would be merely in the nature of facility offered or available to its all members which cannot be regarded as ‘technical services’ as contemplated in the definition of the FTS as given in the said Explanation, the Court felt that another aspect of this matter also requires to be specifically noted and that is, each and every transaction by a member involves the use of such services provided by the Stock Exchange on compulsory payment of additional charges based on transaction value over and above the membership charges. The Court also noted that the view taken by the High Court that the member of the Stock Exchange has the option of trading through an alternative mode is not correct and the member has no option in this matter but to avail of such services. Having noted this additional specific aspect, the Court further stated as under:

“. . . The above features of the services provided by the Stock Exchange would make the same a kind of a facility provided by the Stock Exchange for transacting business rather than a technical service provided to one or a section of the members of the Stock Exchange to deal with special situations faced by such a member(s) or the special needs of such member(s) in the conduct of business in the Stock Exchange. In other words, there is no exclusivity to the services rendered by the Stock Exchange and each and every member has to necessarily avail of such services in the normal course of trading in securities in the Stock Exchange. Such services, therefore, would undoubtedly be appropriate to be termed as facilities provided by the Stock Exchange on payment and does not amount to “technical services” provided by the Stock Exchange, not being services specifically sought for by the user or the consumer. It is the aforesaid latter feature of a service rendered which is the essential hallmark of the expression “technical services” as appearing in Explanation 2 to section 9(1)(vii) of the Act.”

3.5 Finally, while deciding the issue raised by the assessee in appeal in its favour, the Court concluded as under:

“For the aforesaid reasons, we hold that the view taken by the Bombay High court that the transaction charges paid to the Bombay Stock Exchange by its members are for ‘technical services’ rendered is not an appropriate view. Such charges, really, are in the nature of payments made for facilities provided by the Stock Exchange. No TDS on such payments would, therefore, be deductible under Section 194J of the Act.”

3.6 Having decided that the services rendered by the Stock Exchange would be termed as facilities provided by the Stock Exchange which does not amount to TS as contemplated in the definition of the FTS given in the said Explanation and hence, the payment of transaction charges does not amount to FTS u/s. 194J, the Court further decided that in view of this conclusion, it is not necessary to examine the correctness of the view of the Bombay High Court with regard to the issue of disallowance u/s. 40(a)(ia). As such, this issue still remains open.

Conclusions
4 From the above judgment, the position is now settled that there is a clear distinction between services and facilities provided by the service provider and the latter, even if termed as a service, cannot be regarded as TS within the narrower meaning of those words appearing in the definition of FTS.

4.1.1 From the above judgment, in the context of meaning of the words TS appearing in the definition of FTS, it becomes clear that for a service to be regarded as TS, like ‘managerial and consultancy service’, it should cater to special needs of the customer/ user, as may be felt necessary, which is rendered by the service provider. Accordingly, it should be specialised and exclusive to the service seeker. It has to be a service specifically sought by the user or customer. This feature of a service rendered is the essential hallmark of the expression TS. As such, in this context, the test of specialised, exclusive and individual requirement of the user/ consumer [`exclusivity test’] should be satisfied to treat the consideration for service as FTS. Therefore, it appears that the general/standard services provided by an entity, which is available to everyone who intends to avail the same, should be regarded as service in the nature of facility offered or available to all and the same will not fall within the meaning of TS as contemplated in the definition of FTS.

4.1.2 The above meaning of the words TS appearing in the definition of FTS would go a long way in considering the applicability of section 9(1)(vii) as well as of section 194J. As such, this would also be very useful for interpreting the expression FTS under many Double Tax Avoidance Agreements (‘tax treaties’) entered into by India with other countries where the relevant portion of the definition of the expression FTS is identical to the one given in the said Explanation.

4.1.3 The services provided by the Stock Exchange in the above case do not satisfy the ‘exclusivity test’. As such payment of transaction charges does not amount to FTS and therefore, cannot be regarded as TS.

4.2 From the observations of the Apex Court in the above case mentioned in para 3.3 above, it would appear that the Court reiterated the principle emerging from the judgment of Apex Court in the case of Bharat Cellular Ltd. (supra) that the words TS appearing in the definition of FTS have got to be read in a narrower sense.

4.2.1 In the above context, the Court also reaffirmed the interpretation that human involvement is necessary for treating a service provided as TS within the meaning of the definition of FTS.

4.2.2 Further, in the above context, the Court also felt that modern day scientific and technological developments may tend to blur the specific human element in an otherwise fully automated process by which service may be provided and hence, search for a more effective basis may be made. It seems that these observations of the Court do not affect the settled position referred to in paras 4.2 and 4.2.1 and the same should be read in the context of the facts of the case before the Court.

4.3 Interestingly, the Bombay High Court treated the payment of transaction charges as FTS covered u/s. 194J on the ground that the services rendered by the Stock Exchange are in the nature of ‘managerial services’ as mentioned in para 2.8.1 of Part-I of this write-up and para 3 above. However, the Apex Court did not deal with this specific view taken by the Bombay High Court but dealt with the meaning of the words TS appearing in the definition of FTS and proceeded on that basis to decide the issue without considering the aspect of ‘managerial services’ considered by the Bombay High Court. However, it seems to us that this should not make any difference to the final view taken by the Apex Court. In the above case, the Court has also held that the services rendered by the Stock Exchange are in the nature of facility offered or available and they also do not satisfy the ‘exclusivity test’.

4.4 As pointed out in para 2.9 of Part- I of this write-up and para 3 above, the Bombay High Court also took the view that for a decade, both the parties have proceeded on the footing that section 194J was not applicable to the payment of transaction charges. On this peculiar facts, the disallowance u/s. 40(a) (ia) cannot be made for the year in question before the Court. The correctness of this view has not been examined by the Apex Court as stated in the para 3.6 above. In view of this, the said view of the Bombay High Court stills holds good and could be useful to contest the disallowance u/s. 40(a)(ia), if the facts of a particular case are similar to the case before the Bombay High Court in the case of Kotak Securities Ltd. (supra)

4.5 As mentioned in para 1.1 of Part- I of this writeup, section 194J is amended with effect from 13/7/2006 to include within its scope payment by way of ’royalty’. For this purpose, the definition of royalty given in Explanation 2 to section 9(1)(vi) is made applicable, which, in turn, is very wide and includes any consideration paid for the use of any industrial, commercial or scientific equipment (with some exceptions) – popularly known as ‘equipment royalty’, etc,. From the judgment of the Bombay High Court in the above case, it appears that the assessee had started deducting tax u/s. 194J from the subsequent year from payment of transaction charges as ‘royalty’ as observed by the Bombay High Court (refer para 2.9 of Part- I of this write-up).

4.5.1 In the above judgment, the Apex Court has taken a view that the Stock Exchange is rendering services which are in the nature of facility provided/offered and therefore, not a TS within the meaning of the definition of FTS as mentioned in paras 3.4.1 & 3.4.2 above. Therefore, the moot question may arise as to whether the payment of transaction charges could at all be regarded as ‘royalty’, the same being paid primarily for the services rendered, which, though, may be regarded as in the nature of facility provided/offered. This may need separate consideration.

4.6 In view of the amendment made in section 40(a) (ia) by the Finance Act, 2012, with the introduction of the second proviso w.e.f. 1/4/2013, providing relaxation from the rigor of this provision for disallowance, when certain conditions mentioned in the first proviso [introduced by the Finance Act, 2012 w.e.f. 1/7/2012] to section 201(1) are met [such as the resident payee has furnished the Return of Income u/s. 139, he has taken into account such payment in computing his income, etc.], the disallowance u/s. 40(a)(ia) could be avoided on that basis. However, this relaxation applies only when the payee is a resident and, the benefit of this relaxation is not available if the payee is not a resident. As such, the above judgment would be more useful in cases where the payee is not a resident and the applicability of TDS requirement to the payment for services as well as disallowance u/s. 40(a)(i) is to be contested.

Interest paid on borrowings for purchase of house- SECTION 24 & SECTION 48

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ISSUE FOR CONSIDERATION
An assessee acquiring a house property with borrowed funds, pays interest on such borrowed funds, till such time as the borrowed funds are repaid by him. In most of the cases, the funds are repaid over a period of years, for which the interest is paid on the borrowings made.

In computing the income from such house property, a deduction is allowed u/s. 24(b) of the Income Tax Act of interest on such borrowings subject to certain conditions contained in the said provisions.

The interest so paid, over the period of years, is paid for the purposes of acquiring a capital asset, namely, the house property, and accordingly, the interest paid constitutes the cost of acquisition or the cost of improvement for the purposes of section 48 and generally qualifies for deduction in computing the capital gains arising on transfer of such house property.

Cases have come up wherein the assesses, who are allowed a deduction u/s. 24(b) of interest paid in computing the income from house property, have, on transfer of the house property, claimed deduction for the said interest in computing the capital gains on the ground that such an interest was a part of the cost of acquisition /improvement of the said asset. Obviously the Income Tax department, in such cases, has refused to allow deduction for interest paid in computing the capital gains on the ground that a deduction was already allowed, in the past assessment years, in computing the income from house property.

Conflicting decisions by different benches of the Income Tax Appellate Tribunal have warranted attention to this interesting issue. The Chennai bench of the tribunal has held that the deduction in computing the capital gains for interest is allowable while the Bangalore bench has held that such a deduction is not permissible in computing the capital gains.

C. Ramabrahmam’s case
The issue arose in the case of ACIT v. C. Ramabrahmam, 57 SOT 130 (Chennai), for the A.Y 2007-08 during which year the assessee had transferred a house property for a valuable consideration. In computing the capital gains, on transfer of the said house property, a deduction was claimed for an amount of Rs. 4,82,042, which amount represented the interest paid on a housing loan, taken in the year 2003, for purchasing the property, a deduction for which was allowed u/s. 24(b), in computing total income for A.Y. 2004-05 to 2006-07. The Assessing Officer disallowed the claim for deduction of the said interest in computing the capital gains for A.Y. 2007-08. On appeal, the CIT(A) allowed the claim of the assessee, by holding that the assessee was entitled to claim the deduction for interest u/s. 48, despite the fact that the same had been claimed u/s. 24(b) while computing income from house property.

In appeal to the tribunal, the Revenue contended that once the assessee had availed a deduction u/s. 24(b) for interest, he could not claim again a deduction for the same amount for the purposes of computation of Capital Gains. In reply, the assessee relied upon the findings and the order of the CIT(A).

The tribunal noted that there was no dispute about the fact that the interest in question was claimed and allowed as a deduction in the past in computing the income from house property under the statutory provisions of section 24(b). It further noted that the assessee had chosen to claim the said interest again as a deduction in computing the Capital Gains.

The Chennai tribunal, on consideration of the facts and the law, held in Para 8 of the order that; “We are of the opinion that deduction u/s. 24(b) and computation of capital gains u/s. 48 of the “Act” are altogether covered by different heads of income i.e., ‘income from house property’ and ‘capital gains’. Further, a perusal of both the provisions makes it unambiguous that none of them excludes operation of the other. In other words, a deduction u/s. 24(b) is claimed when concerned assessee declares income from ‘house property’, whereas, the cost of the same asset is taken into consideration when it is sold and capital gains are computed u/s 48. We do not have even a slightest doubt that the interest in question is indeed an expenditure in acquiring the asset. Since both provisions are altogether different, the assessee in the instant case is certainly entitled to include the interest amount at the time of computing capital gains u/s 48 of the “Act”. Therefore, the CIT(A) has rightly accepted the assessee’s contention and deleted the addition made by the Assessing officer. Hence, qua this ground, we uphold the order of the CIT(A).”

Captain B. L. Lingaraju’s case
The issue once again arose in the case of Captain B L Lingaraju vs. ACIT, before the Bangalore bench of the tribunal in ITA No. 906/Bang/2014 for A.Y 2009-10. In that case, the claim of the assessee for deduction u/s.48, of interest paid on a loan amounting to Rs.13,24,841, was disallowed by the A.O. on the ground that the said interest was allowed as the deduction u/s.24(b), in computing the income from house property. The action of the A.O. was upheld by the CIT(A).

In appeal to the tribunal, the assessee filed a paperbook containing written submissions and supported his claim by relying on the decisions of the Karnataka high court in the cases of CIT vs. Sri Hariram Hotels (P) Ltd., 229 TR 455 and CIT vs. Maithreyi Pai, 152 ITR 247 and also on the decisions of the Delhi and Madras high courts. He however did not appear for hearing and the appeal was decided ex-parte, qua the assessee.

The tribunal, on consideration of the written submissions and the decisions relied upon by the assessee therein, noted that the Court in the case of Sri Hariram Hotels (supra) had followed its earlier decision in the case of Maithreyi Pai (supra) to hold in Hariram Hotels case, that an interest paid on borrowings for the acquisition of capital asset must fall for deduction u/s.48 only if the same was not allowable as deduction u/s.57 of the Act and that no assessee under the scheme of the Act could be allowed a deduction of the same amount twice over. On the facts in B L Lingaraju’s case, the tribunal noted that the assessee had claimed a deduction of interest of Rs.1,50,000 in computing the income from self-occupied house property as per section 24(b) of the Act. Relying on the decision of the jurisdictional Karnataka high court in the case of Maithreyi Pai (supra), the tribunal held that no deduction u/s.48 could be allowed for the same interest in computing the Capital Gains, where it was allowed as deduction or was allowable as a deduction. The appeal of the assessee was thus dismissed by the tribunal.

Observations
Section 24(b) reads as under:

“Income chargeable under the head “Income from house property” shall be computed after making the following deductions, namely:—
(a) …………………………………..

(b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital:

Provided ………………………………”

The relevant part of Section 48 reads as under:

“The income chargeable under the head “Capital gains” shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :—

(i) expenditure incurred wholly and exclusively in connection with such transfer;

(ii) the cost of acquisition of the asset and the cost of any improvement thereto:

Provided ……………………………”

The principle that the cost of acquisition is a dynamic and a fluctuating number is by now widely accepted; it may increase in a subsequent year as a result of a liability or expenditure incurred after the date of acquisition. The cost of acquisition can increase on account of the interest paid, post acquisition of asset, on borrowings made for the acquisition of the asset. CIT vs. Mithlesh Kumar 92 ITR 9(Delhi), CIT vs. K.S Gupta 119 ITR 372 (AP), CIT vs. A.R Damodara Mudaliar & Co. 119 ITR 583 (Madras), CIT vs. K Raja Gopala Rao 252 ITR 459 (Madras) and CIT vs. Maithreyi Pai 152 ITR 247 (supra).

While the above stated principle permits increase in the cost of acquisition by the amount of interest, such an increase has been made conditional by the Karnataka high court in Maithreyi Pai’s case(supra), by observing that an interest which had already been allowed as revenue expenditure could not be virtually deducted again u/s 48 MLG Enterprise vs. CIT 167 ITR 11.

Usually unless otherwise prohibited, a deduction under a specific provision cannot be denied under a different provision for the same expenditure. The Act has a few parallels wherein such deductions or allowances are found by the courts to be allowable; for example the investments in depreciable assets are treated as an application for charitable purposes, and depreciation on such assets has been held to be eligible for deduction again from income u/s 11, in computing the income of a charitable institution.

The Income Tax Act is replete with examples of the provisions which specifically provide that no deduction under any other provision of the Act would be allowable in the cases where a deduction is allowed under a particular provision; e.g. section 35AD(3). The present day’s trend therefore appears to be that the legislature, wherever intended, makes a specific provision for denying double deductions. No such express provision is found either in section 24(b) or in section 48, as has been confirmed by the Chennai bench of the tribunal. These provisions operate in different fields and that too for computation of income under two different heads of income. Further the deduction in one case is a statutory deduction, whereas in the other, it is on capital account. One may at the same time have to look into the reasons behind the observations of the Karnataka high court in the case of Maithreyi Pai (supra) wherein the court observed that an interest for which a deduction had already been allowed could not be allowed twice over while computing the capital gains u/s. 48. Apparently, one does not find any express provisions in any of the provisions of the Act, at least not in section 48 and section 24(b), which could have formed the basis for the court to have observed as it did.

One may also ascertain whether there is anything in the law of taxation that has prompted the court to hold that a deduction u/s. 48 was not allowable once it was allowed in the past. The Supreme court held in Escorts Ltd vs. UOI, 191 ITR 43 a double deduction could not be a matter of inference; it must be provided for in clear and expressive language, regard being had to its unusual nature and its serious impact on the revenues of the State. Having noted the findings of the apex court, one is required to appreciate that the case of the assessee, in the issue under consideration, is not a case of having claimed a deduction for revenue expenditure at all. In the facts of the case, under the issue, a specific deduction is allowed u/s. 24(b) in computing the income from house property and, in another case, the interest constitutes the cost of acquisition and is therefore claimed as a deduction representing the capital expenditure. Considering the distinction, it may be possible to contend that the case under consideration, is not squarely covered by the decision of the Supreme court in Escort’s case. Whether it is a case of double deduction, at all, is the question that remains to be concluded.

In B. L. Lingaraju’s case, the deduction for interest was restricted to Rs.1,50,000/-, though actual interest paid was much higher than the said amount, leaving open a possibility for claiming a deduction u/s. 48, at least for the balance unclaimed amount of interest, that was not allowed and was not even allowable.

RULE FOR INTERPRETATION OF TAX STATUTES PAR T-IV

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Introduction:
In the April, May and June issues of the BCAJ I had discussed the basic rules of interpretation of tax statutes and have tried to explain some rules with binding precedents. Other rules / concepts / dictums are finally discussed hereafter.

1. Harmonious Construction :

It is well settled that the provisions of a statute must be read harmoniously together. However, if this is not possible then it is settled law that where there is a conflict between two sections, and one cannot reconcile the two, one has to determine which is the leading provision and which is the subordinate provision, and which must give way to the other. A legislative instrument must be construed on the prima facie basis that its provisions are intended to give effect to harmonious goals. Where conflict appears to arise from the language of particular provisions, the conflict must be alleviated, so far as possible, by adjusting the meaning of the competing provisions to achieve that result which will best give effect to the purpose and language of those provisions while maintaining the unity of all the statutory provisions. Reconciling conflict provisions will often require to determine which is the leading provision and which the subordinate provision, and which must give way to the other. Only by determining the hierarchy of the provisions will it be possible in many cases to give each provision the meaning which best gives effect to its purpose and language while maintaining the unity of the statutory scheme.

2. Construction of a document :

A document, as is well known, must be read in its entirety. When character of a document is in question, although the heading thereof would not be conclusive, it plays a significant role. Intention of the parties must be gathered from the document itself but therefore circumstances attending thereto would also be relevant; particularly when the relationship between the parties is in question. For the said purpose, it is essential that all parts of the deed should be read in their entirety. A document as is well known, must primarily be construed on the basis of the terms and conditions contained therein. It is also trite that while construing a document the court shall not supply any words which the author thereof did not use.

3. Ratio decendi, the words and expressions :

It is a well settled principle of law that the decision on an interpretation of one statute can be followed while interpreting another provided both the statutes are in parimateria and they deal with identical scheme. However, the definition of an expression in one statute cannot be automatically applied to another statute whose object and purpose are entirely different. One should not place reliance on decisions without discussing how the factual situation fits in with the fact situation of the decision on which reliance is placed. There is always peril in treating the words of a speech or judgment as though they were words in a legislative enactment. Judicial utterances are made in the setting of the facts of particular cases. Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases.

3.1. For reliance on the words and expressions defined in one statute and applying to the other statute it has also to be seen as to whether the aim and object of the two legislation, is similar. When the word is not so defined in the Act it may be permissible to refer to the dictionary to find out the meaning of that word as it is understood in the common parlance. But where the dictionary gives divergent or more than one meaning of a word, in that case it is not safe to construe the said word according to the suggested dictionary meaning of that word. In such a situation, the word has to be construed in the context of the provisions of the Act and regard must also be had to the legislative history of the provisions of the Act and the scheme of the Act. It is a settled principle of interpretation that the meaning of the words, occurring in the provisions of the Act must take their colour from the context in which they are so used. In other words, for arriving at the true meaning of a word, the said word should not be detached from the context. Thus, when the word; read in the context conveys a meaning, that meaning would be the appropriate meaning of that word and in that case we need not rely upon the dictionary meaning of that word.

4. Discretion :

Many provisions confer discretion on the Court or the Authority. Discretion should be exercised judiciously as a judicial authority well versed in law. In Halsbury’s Laws of England, it has been observed: “A statutory discretion is not, however, necessarily or, indeed, usually absolute; it may be qualified by express and implied legal duties to comply with substantive and procedural requirements before a decision is taken whether to act and how to act. Moreover, there may be a discretion whether to exercise a power, but; no discretion as to the mode of its exercise; or a duty to act when certain conditions are present, but a discretion how to act. Discretion may thus be coupled with duties”.

4.1. Discretion, in general, is the discernment of what is right and proper. It denotes knowledge and prudence, that discernment which enables a person to judge critically of what is correct and proper united with caution; nice discernment, and judgment directed by circumspection; deliberate judgement; soundness of judgment; a science or understanding to discern between falsity and truth between wrong and right, between shadow and substance, between equity and colourable glosses and pretences, and not to do according to the will and private affections of persons. When it is said that something is to be done within the discretion of the authorities, that something is to be done according to the rules of reason and justice, not according to private opinion; according to law and not humour. It is to be not arbitrary, vague, and fanciful, but legal and regular. And it must be exercised within the limit, to which an honest man, competent to the discharge of his office ought to confine; himself. (See S.G. Jaisinghani vs. Unkon of India and other AIR 1967 SC 1427.

4.2. The word ‘discretion’ standing single and unsupported by circumstances signifies exercise of judgement, skill or wisdom as distinguished from folly, unthinking or haste; evidently therefore a discretion cannot be arbitrary but must be a result of judicial thinking. The word in itself implies vigilant circumspection and care; therefore, where the Legislature concedes discretion it also imposes a heavy responsibility to exercise it soundly and properly.

5. Other Considerations :

Recourse to construction or interpretation of statute is necessary when there is ambiguity, obscurity or inconsistency therein and not otherwise. An effort must be made to give effect to all parts of statute and unless absolutely necessary, no part thereof shall be rendered surplus or redundant. True meaning of a provision of law has to be determined on the basis of what provides by its clear language, with due regard to the scheme of law. Scope of the legislation on the intention of the Legislature cannot be enlarged when the language of the provision is plain and unambiguous. In other words statutory enactments must ordinarily be construed according to its plain meaning and no words shall be added, altered or modified unless it is plainly necessary to do so to prevent a provision from being unintelligible, absurd, unreasonable, unworkable or totally irreconcilable with the rest of the statute. It is also well settled that a beneficent provision of legislation must be liberally construed so as to fulfill the statutory purpose and not to frustrate it.

5.1. In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can look fairly at the language used.” This view has been reiterated by the Supreme Court time and again. In State of Bombay vs. Automobile and Agricultural Industries Corporation (1961) 12 STC 122, the court said (page 125) : “But the courts in interpreting a taxing statute will not be justified in adding words thereto so as to make out some presumed object of the Legislature……. If the Legislature has failed to clarify its meaning by the use of appropriate language, the benefit thereof must go to the taxpayer. It is settled law that in case of doubt, that interpretation of a taxing statute which is beneficial to the taxpayer must be adopted.”

5.2. To the extent not prohibited by the statute, the incidents of the general law are attracted to ascertain the legal nature and character of a transaction. This is quite apart from distinguishing the “substance” of the transaction from its “form”. The court is not precluded from treating what the transaction is in point of fact as one in point of law also. To say that the court could not resort to the so-called “equitable construction” of a taxing statute is not to say that, where a strict literal construction leads to a result not intended to subserve the object of the legislation another construction, permissible in the context, should not be adopted. In this respect, taxing statutes are not different from other statutes.

5.3. A public authority cannot be stopped from doing its duty, but can be estopped from relying on a technicality as said by the Lord Denning. Francis Bennion in his Statutory Interpretation, “Unnecessary technically : Modern courts seek to cut down technicalities attendant upon a statutory procedure where these cannot be shown to be necessary to the fulfilment of the purposes of the Legislation.”

5.4. The definition section of the Act in which various terms have been defined, if it opens with the words “in this Act, unless the context otherwise requires” would indicate that the definitions, which are indicated to be conclusive may not be treated to be conclusive if it was otherwise required by the context. This implies that a definition, like any other word in a statute, has to be read in the light of the context and scheme of the Act as also the object for which the Act was made by the legislature. While interpreting a definition, it has to be borne in mind that the interpretation placed on it should not only be not repugnant to the context, it should also be such as would aid the achievement of the purpose which is sought to be served by the Act. A construction which would defeat or was likely to defeat the purpose of the Act has to be ignored and not accepted.

5.5. In Raja Jagdambika Pratap Narain Singh vs. C.B.D.T. (1975) 100-ITR-698, Supreme Court held that “equity and income-tax have been described as strangers”. The Act, in the very nature of things, cannot be absolutely cast upon logic. It is to be read and understood according to its language. If a plain reading of the language compels the court to adopt an approach different from that dictated by any rule of logic, the court may have to adopt it, vide Azam Jah Bahadur (H.H. Prince) vs. E.T.O. (1972) 83- ITR-82 (SC). Logic alone will not be determinative of a controversy arising from a taxing statute. Equally, common sense is a stranger and an incompatible partner to the Income-tax Act. It does not concern itself with the principles of morality or ethics. It is concerned with the very limited question as to whether the amount brought to tax constitutes the income of the assessee. It is equally settled law that if the language is plain and unambiguous, one can only look fairly at the language used and interpret it to give effect to the legislative intention. Nevertheless, tax laws have to be interpreted reasonably and in consonance with justice adopting a purposive approach. The contextual meaning has to be ascertained and given effect to. A provision for deduction, exemption or relief should be construed reasonably and in favour of the assessee.

5.6. When a word is not defined in the Act itself, it is permissible to refer to dictionaries to find out the general sense in which that word is understood in common parlance. However, in selecting one out of the various meanings of a word, regard must always be had to the context, as it is a fundamental rule that ‘the meaning of words and expressions used in an Act must take their colour from the context in which they appear’.”

5.7. When a recognized body of accountants, such as the Institute of Chartered Accountants of India, after due deliberation and consideration publishes certain material for its members, one can rely upon it. The meaning given by the Institute clearly denotes that in normal accounting parlance the word “turnover” would mean “total sales”. The sales would definitely not include scrap which is either to be deducted from the cost of raw material or is to be shown separately under a different head. There is no reason not to accept the meaning of the term “turnover” given by a body of accountants, having statutory recognition. If all accountants, auditors, businessmen, manufacturers normally interpret the term “turnover” as sale proceeds of the commodity in which the business unit is dealing, there is no reason to take a different view, as held in C.I.T. vs. Punjab Stainless Steel Industries (2014) 364-ITR-144 (SC).

5.8. The principle of statutory interpretation embodies the policy of the law, which is in turn based on public policy. The court presumes, unless the contrary intention appears, that the legislator intended to conform to this legal policy. A principle of statutory interpretation can therefore be described as a principle of legal policy formulated as a guide to legislative intention.

5.9. Justice P. N. Bhagwati in Francis Coralie Mullin vs. Administrator, Union Territory of Delhi, AIR 1981 S.C. 746 ‘emphasized the importance of reading the text of the Constitution in a progressive manner in tune with the social reality and to serve the cause of improverished sections of humanity : “The principle of interpretation which requires that a constitutional provision must be construed, not in a narrow and constricted sense, but in a wide and liberal manner so as to anticipate and take account of changing conditions and purposes so that constitutional provision does not get atrophied or fossilized but remains flexible enough to meet the newly emerging problems and challenges….”

6. Some Words & Doctrines :

(i) “Profit” : means the gross proceeds of a business transaction less the costs of the transaction. Profits imply a comparison of the value of an asset when the asset is acquired with the value of the asset when the asset is transferred and the difference between the two values is the amount of profit or gain made by a person. E.D. Sassoon and Company Ltd. vs. CIT (1954) 26-ITR-27 (SC).

(ii) “Without Prejudice” : The term “without prejudice” means (i) that the cause of the matter has not been decided on merits, (ii) that fresh proceedings according to law were not barred, as held in Superintendent (Tech.I) Central Excise, I.D.D. Jabalpur vs. Pratap Rai (1978) 114- ITR-231 (SC). It signifies that the mere filing of a return will not be allowed to be used against the assessee implying its admission. “Without prejudice” implies future rectification in accordance with law, as held in C.W.T. vs. Apar Ltd. (2004) 267-ITR-705 (Bom.).

(iii) “Sums Paid” : The context in which the expression “sums paid by the assessee” has been used makes the legislative intent clear that it refers to the amount of money paid by the assessee as donation, as held in H.H. Sri Rama Verma vs. C.I.T. (1991) 187-ITR-303 (SC).

(iv) “Presumption” : A presumption is an inference of fact drawn from other known or proved facts. It is a rule of law under which courts are authorized to draw a particular reference from a particular fact. It is of three types, (i) “may presume”, (ii) “shall presume” and (iii) “conclusive proof”. “May presume” leaves it to the discretion of the court to make the presumption according to the circumstances of the case. “Shall presume” leaves no option with the court not to make the presumption. The court is bound to take the fact as proved until evidence is given to disprove it. In this sense such presumption is also rebuttable. “Conclusive proof” gives an artificial probative effect by the law to certain facts. No evidence is allowed to be produced with a view to combating that effect. In this sense, this is an irrebuttable presumption- as held in P.R. Metrani vs. C.I.T. (2006) 287-ITR-209 (SC) at 211.

(v) “Suo Moto” : “Means of own accord or on its own motion. However the Judge, even when he is free, is still not wholly free. He is not to innovate at pleasure. He is not a knighterrant roaming at will in pursuit of his own ideal of beauty or of goodness. He is to draw his inspiration from consecrated principles. He is not to yield to spasmodic sentiment, to vague and unregulated benevolence. He is to exercise a discretion informed by tradition, methodized by analogy, disciplined by system, and subordinated to “the primordial necessity of order in the social life”. Wide enough in all conscience is the field of discretion that remains” as observed by Benjamin N. Cardozo in the legal classic “The Nature of the Judicial Process”.

(vi) Doctrine of lifting Veil : The doctrine of ‘piercing the veil’ is applied to reach at reality, substance and avoid façade. It can be invoked if the public interest so requires or if there is allegation of violation of law by using the device of corporate entity or when the corporate personality is being blatantly used as a cloak for fraud or improper conduct or where the protection of public interests is of paramount importance or where the Company has been formed to evade obligations imposed by law or to evade an existing obligation to circumvent a statue or to avoid a welfare legislation etc. State of Rajasthan vs. Gotam Lime Khanij Udhyog Pvt. Ltd. – AIR 2016 S.C. 510.

7. Conclusion :

General principles of interpretation of Law including the Tax Laws are to protect a citizen against the excesses of the Executive, Administration, Corrupt authority, erring individuals and the Legislature. It is an aid to protect and uphold ‘enduring values’ enshrined in the Constitution and Laws enacted by the Parliament/Legislatures. It is to assist, to arrive at the real intention, object and purpose for which Laws are enacted and to make life of each citizen worth living. Let the hopes of the framers of the Constitution and the father of Nation, Mahatma Gandhi, inspire all Constitutional functionaries, Judges, Jurists, Members of Tribunals, Advocates, Chartered Accountants and the people of India to preserve their freedom and mould their lives on sound principles of interpretation of Laws. Endeavour should be to deliver justice, which is a divine act.

Interpolation of seized material – There are no other materials – Notings recorded on the seized material found with the searched person other than the assessee- SLP Dismissed-

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CIT. vs. Kumar Co, (2016) 383 ITR (St) 7 ; (Affirmed CIT vs. Kumar Co ITA. No. 912/2011 dt 9/4/2014 (Bom))

The assessee is a partnership firm. There was a search and seizure operation under section 132 on 1st September 2004 in the case of Raut Group of Cases (Rauts) and one Shri Sandeep S Deo. Pertinently, there is no search on the assessee. The search of Raut and Deo resulted in seizure of various documents from their premises. The statements of both were recorded. The discovery and the seizure of page 82 of loose paper bundle no.1 from the premises of Deo and seizure of page 42 to 46 from the premises of Rauts is claimed to be an important one. The issue in the Appeals is in relation to additions by way of estimation of sale of TDRs

The assessee had sold a total of 2,16,507.10 sq.ft of Transferable Development Rights (“TDR”). Out of this, sale of 4133 sq.mt of TDR is mentioned at page 82 of the document. On the facts of the case, the Tribunal directed that as against the rate of Rs.225/applied by the Assessing Officer, the rate of Rs.220/should apply to work out unaccounted receipts. However, the Tribunal directed that this rate should be applied only in respect of TDR of 4133 against the entire sale of 21,650 sq.mt.

The Tribunal held that apart from the loose sheet page 82 and page 42 containing an unsigned copy of the Agreement indirectly confirming the contents of page 82, there are no other materials. Therefore, there is no material to estimate the sale of other TDR’s. The above documents at best would enable estimation of those TDR’s mentioned at page 82. The page 42 is also not conclusive evidence and merely relying on certain notings recorded on the seized material found with the searched person other than the assessee. It also refers to the second limb about failure to take cognizance of direct evidence such as confirmation letter by the respective purchasers of TDR. The Tribunal dismissed the revenue’s Appeals.

Aggrieved by the ITAT order, Revenue filed an appeal before High Court. The Hon. High Court dismissed the appeals affirming the order of the ITAT. The High Court observed that there is no material to estimate the sale of other TDR’s.

The Revenue filed SLP before Supreme Court which was dismissed.

Search and seizure- Assessment- Ss. 132, 153A of I. T. Act, 1961: A. Y. 2005-06: No assessment pending at time of initiation of search proceedings- Finding by Tribunal that no incriminating evidence found during course of search- Finalised assessment or reassessment shall not abate

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CIT Vs. Gurinder Singh Bawa; 386 ITR 483 (Bom):

For the A. Y. 2005-06, the assesee’s return was processed u/s. 143(1) of the Income-tax Act, 1961 and no notice u/s. 143(2) was issued. Thereafter on January 5, 2007 a search was conducted in the case of the assessee but no incriminating material was found. However, proceedings u/s. 153A were initiated for the A. Y. 2005-06 and the Assessing Officer added an amount of Rs. 93.72 lakhs u/s. 68 and Rs. 43.67 u/s. 2(22)(e) of the Act. The assesee challenged the validity of the assessment made u/s. 153A, on the ground that no assessment in respect of the six assessment years was pending so as to have abated. The Tribunal accepted the assessee’s submission and held that no incriminating material having been found during the course of search, the entire proceeding u/s. 153A were without jurisdiction and therefore, the addition made had to be deleted.   

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

“Once an assessment was not pending but had attained finality for a particular year, it could not be subject to proceedings u/s. 153A of the Act, if no incriminating materials were gathered in the course of the search or during the proceedings u/s. 153A, which were contrary to and were not disclosed during the regular assessment proceedings.”

Reassessment- Ss. 147, 148, 152 of I. T. Act, 1961- A. Y. 2011-12- Effect of section 152- Reassessment not resulting in assessment of higher income

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Notice not valid- Motto Tiles P. Ltd.; 386 ITR 280 (Guj):

For the A. Y. 2011-12, the assessee had filed return of income computing a loss of Rs. 77,51,810/- and a book profit of Rs. 35,96,518/- and the same was processed u/s. 143(1) of the Income-tax Act, 1961. The assessment was reopened by issuing notice u/s. 148 proposing to make an addition of Rs. 81,18,000/- to the normal income. The objections filed by the assessee were rejected.

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

“i)    The learned counsel for the petitioner has drawn the attention of the court to the provisions of section 152(2) of the Act, which provides that where an assessment is reopened u/s. 147, the assessee may, if he has not impugned any part of the original assessment order for that year either u/ss 246 to 248 or u/s. 264, claim that the proceedings u/s. 147 shall be dropped on his showing that he had been assessed on an amount or to a sum not lower than what he would be rightly liable for if the income alleged to have escaped assessment had been taken into account, or the assessment or computation had been properly made. It was submitted that in view of the above provision, the proceedings are required to be dropped because even if the income which is alleged to have escaped assessment is taken into account, the petitioner would not be assessed at a higher amount.

ii)    The controversy stands squarely concluded by the decision of this court in the case of India Gelatine and Chemicals Ltd. Vs. ACIT; 364 ITR 649 (Guj), wherein the court in a case where the assessee had declared a loss of Rs. 1.44 crores under the normal computation and the assessment was framed on book profits of Rs. 2.89 crores, had held that even if the expenditure of Rs. 116.86 lakhs is disallowed, there would no change in the resultant change in the petitioner’s tax liability since the petitioner had already paid much higher tax and had allowed the petition.

iii)    It appears that the Revenue had accepted the said decision and had not challenged the same before the higher forum. The learned counsel for the Respondent has urged that the decision requires reconsideration. Having regard to the facts and circumstances of the case, as well as the fact that the Revenue had accepted the said decision, the court does not find any reason to refer the matter for consideration to a larger bench.

iv)    For the foregoing reasons, the petition succeeds and is accordingly allowed.”

Penalty- Concealment of income- S. 271(1)(c) of I. T. Act, 1961: A. Y. 2005-06- Compensation paid for mining ores claimed as deduction in year of payment but allowed over five year period of mining- Assessee accepting order and revising subsequent returns- Levy of penalty u/s. 271(1)(c) not warranted

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CIT Vs. Thakur Prasad Sao and Sons (P) Ltd.; 386 ITR 448 (Cal):

The assessee had paid Rs. 2.75 crores on account of compensation for mining ores for a period of five years which claimed as revenue expenditure in the A. Y. 2005-06. The Assessing Officer was of the view that the expenditure was allowable over a period of five years which was the period during which the mining was to be conducted. The assessee accepted that order and accordingly revised the subsequent returns. The Assessing Officer levied penalty u/s. 271(1)(c) of the Income-tax Act, 1961. The Tribunal held that it was not possible to hold that the assessee furnished inaccurate particulars or concealed its income and accordingly deleted the penalty.

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

“The assessee did not accept the disallowance; that there was no disallowance as such. The imposition of penalty was not warranted.”

Export- Hotel business- Deduction u/ss. 80HHC and 80HHD of I. T. Act, 1961- A. Y. 2004-05- Computation- Deduction for export earnings not to be affected by computation of deduction for hotel business- Assessee entitled to deduction on both- Total turnover for computation of deduction of profits from export to be taken excluding foreign exchange receipts from hotel business

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CIT Vs. ITC Ltd.; 386 ITR 487 (Cal):

Assessee was engaged in the business of hotel and export of goods with receipts in foreign exchange. For the A. Y. 2004-05, the Assessing Officer allowed the deduction u/s. 80HHD of the Income-tax Act, 1961 on the income of the hotel business and in arriving at the income earned by the assessee from export business for computing the deduction u/s. 80HHC, he was of opinion that the turnover of the hotel business had to be taken into account, i.e., he included it in the total turnover, thus reducing the percentage of profit available for deduction. The Tribunal held in favour of the assessee following its own earlier judgment wherein it had held that the turnover has to be restricted to such receipts which had an element of profit derived from the export of goods and that the total turnover had to be reduced by the amount of gross receipts from the hotel business in order to keep the parity between the numerator and the denominator.

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

“i)    The assessee was entitled to deductions both u/s. 80HHC and s. 80HHD of the Act. The assessee had income from convertible foreign exchange which arose from its hotel business in India and income from its export business. It was not the legislative intent that the benefit u/s. 80HHC was to be regulated by the turnover of the hotel business to which section 80HHD was applicable.  

ii)    The reasons advanced by the Tribunal in its earlier judgments were proper.”

Business expenditure- S. 37 of I. T. Act, 1961- A. Y. 2003-04- Fines and penalties- Penalty charges paid to Pollution Control Board for failure to install pollution control equipment at factory premises- Is expenditure incurred for compensating damage caused to environment- Payment according to “polluter pays” principle- Compensation for purpose of business

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Expenditure allowable- Shyam Sel Ltd. Vs. Dy. CIT; 386 ITR 492 (Cal):

For the A. Y. 2003-04, the assessee debited in the profit and loss account the penalty charges paid to the Pollution Control Board for non installation of pollution control equipment at the factory premises. The Assessing Officer disallowed the expenditure which was upheld by the Tribunal.

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

“i) The payment made by the assessee was for the purpose of compensating the damage to the environment and this compensation was recovered on the “polluter pays” principle adopted by the Organization for Economic Co-operation and Development, which was judicially recognised.
ii)      It was not the case that the business pursued by the assessee was illegal. The compensation was paid because the assessee had failed to install the pollution control device within the time prescribed. Therefore, the penalty payment made by the assessee was not hit by Explanation 1 to section 37 of the Income-tax Act, 1961. The payment was undoubtedly for the purpose of business or was in consequence of business carried on by the assessee and was thus covered by section 37 of the Act. The question is answered in favour of the assessee.”

Assessment – Limitation – Draft Assessment Order – Income Tax Authorities ¬– Even though an order is made u/s. 125A(1) empowering the Inspecting Assistant Commissioner (IAC) to perform the function of an Income Tax Officer, yet if he has not exercised the power or performed the function of Income-Tax Officer, the provisions requiring approval or sanction of the IAC would be applicable – Provisions of section 144B would not apply only if the Inspecting Assistant Commissioner exercises powers or performs the function of Income-tax Officer – In absence of actual exercise of powers the period during which the draft assessment order was forwarded to the IAC till the receiving of the instructions from IAC u/s. 144B is to be excluded in computing the period of limitation.

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CIT v. Saurasthra Cement and Chem. Industries Ltd. and Saraya Sugar Mills Pvt. Ltd. v. CIT (2016) 384 ITR 186 (SC)

In terms of section 153 of the Income-tax Act 1961 (hereinafter referred to as “the Act”), time limit for completion of the assessment to be made under section 143 or 144 of the Act is at any time before the expiry of two years from the end of the assessment year in which the income is first assessable, where assessment year is commencing on or after April 1, 1969.  On this reckoning, the date by which assessment should have been carried out by the Assessing Officer in respect of the assessment year 1981-82 was March 31, 1984.  The assessment order was, however, passed on September 1, 1984.  The Revenue claimed that this assessment order was still within the prescribed period of limitation because of the reason that on March 13, 1984 draft assessment  order was passed pertaining to the aforesaid assessment year and forwarded to the Inspecting Assistant Commissioner, Central Range-II, Ahmadabad  on March 13, 1984 (i.e., before March 31, 1984).  The Inspecting Assistant Commissioner issued instructions under section 144B of the Act on August 31, 1984 and based on that the Assessing Officer framed the assessment on September 1, 1984 under section 143(3) of the Act read with section 144B of the Act.

The Supreme Court noted that the position that was taken by the Revenue was that the period from March13, 1984 to August 31, 1984, when the matter was before the Inspecting Assistant Commissioner, had to be excluded while computing the period of limitation of two years and once the period is excluded the assessment order was passed within the period of limitation.
The contention of the responding-assessee, on the other hand, was that, by order dated August 29, 1983, the Commissioner of Income Tax, Central, Ahmedabad  passed under section 125A(1) of the Act had assigned all the powers and functions of the Income Tax Officer, Central Circle, Jamnagar to the Inspecting Assistant Commissioner.  This order was passed specifically in case of the respondent herein which became effective from September 1, 1983.  It was the submission that once, by virtue of the aforesaid order dated August 29, 1983, passed by the Commissioner of Income-tax, the Inspecting Assistant Commissioner is conferred concurrent jurisdiction, along with the Income-tax Office, empowering him to make assessment order in the case of the assessee, there was no question of  forwarding the draft assessment order by the Income-tax Officer to the Inspecting Assistant Commissioner and this unnecessary and superfluous exercise would not enure to the advantage of the Revenue giving it the benefit of the period from March 13, 1984 to August 31, 1984 while calculating the period of limitation of two years provided under section 153 of the Act.

The Supreme Court noted that the Income-tax Appellate Tribunal found force in the said submission of the assessee and allowed the appeal thereby setting aside the assessment order.  The Gujarat High Court,  upheld this view of the Income-tax Appellate Tribunal, resulting in the dismissal of the appeal of the Appellant.

The Supreme Court  also noted that in the appeal arising out of SLP(C) No.13766 of 2001 which was preferred by the assessee  M/s.  Saraya Sugar Mills Pvt. Ltd., in the same circumstances, on the same question, the Allahabad High Court has taken a contrary view.  The High Court of Allahabad has found merit in the stand taken by the Revenue and excluded the period during which the draft assessment was forwarded to the Inspecting Assistant Commissioner till the date of receiving the instructions from the Inspecting Assistant Commissioner under section 144B of the Act.

The Supreme Court thus, faced with two conflicting views and had  to decide as to which High Court had correctly decided the issue of limitation.

The Supreme Court noted that section 144B of the Act deals with a situation where the Income-tax Officer intends to pass an assessment order which is in variation to the income or loss that is shown in the return of the assessee and the amount of such variation exceeds the amount that can be fixed by the Board under sub-section (6) thereof. In such a situation, the Income-tax Officer is under obligation to first forward a draft of the proposed order of assessment to the assessee who can file his objections within 7 days thereof and if the objections are received, the Income-tax Officer is to forward the draft order together with objections to the Inspecting Assistant Commissioner. The Inspecting Assistant Commissioner, after considering the draft order and the objections, is empowered to issue such direction as he thinks fit for the guidance of the Income-Tax Officer to complete the assessment.

The Supreme Court further noted from the reading of section 153, the period (not exceeding 180 days) commencing from the date on which the Income –tax Officer forwards the draft order under sub-section (1) of section 144B to the assessee and ending with the date on which the Income-tax Officer receives the directions from the Inspecting Assistant Commissioner under sub-section (a) of section 144B, is to be excluded while computing the period of limitation.

Before the Supreme Court, thrust   of the counsel for the assessee was on sub-section (4) of section 125A with the submission that on the conferment of the concurrent jurisdiction, provisions of the Act requiring approval and the sanction of the Inspecting Assistant Commissioner were not applicable and, therefore, the provisions of section 144B ceased to apply and should not have been invoked by the Income-tax Officer in the instant case. It was also argued that the High Court in the impugned judgment had rightly discussed that with the passing of a specific order dated August 29, 1983 by the Commissioner of Income-tax directing that all the powers and functions assigned to the Income-tax Officer, Central Circle, Jamnagar were thereby available to the Inspecting Assistant Commissioner, Central Range II, Ahmedabad, the Inspecting Assistant Commissioner,  Central Range II, Ahmedabad was brought at par with the Income-tax Officer, in so far as it pertains to the assessment of the assessee herein and he did not remain an Officer higher in status than the Income-tax Officer in so far as assessment of the assessee was concerned and for this reason also no such reference to the Inspecting Assistant Commissioner was called for.

According to the Supreme Court, these arguments were without any force and the result which the respondent-assessee wants did not flow from the reading of section 125A of the Act. The Supreme Court held that a bare reading of sub-section (4) of section 125A of the Act provides that where –

(a) An order is made under sub-section (1), and

(b) The Inspecting Assistant Commissioner exercises the powers or performs the functions of an Income-tax Officer in relation to any area, or persons or classes of persons, or incomes or classes of income, or cases or classes of cases –

(i) references in this Act or in any rule made there under to the Income-tax Officer shall be constructed as references to the Inspecting Assistant Commissioner, and

(ii) any provision of this Act requiring approval or sanction of the Inspecting Assistant Commissioner will not be applicable.

The Supreme Court held that, hence, the provision of the Act requiring the approval or sanction of the Inspecting Assistant Commissioner will not be applicable only in those cases where both the aforementioned conditions (a) and (b) are are satisfied.  It would mean that, even though an order is made under section 125A(1) empowering the Inspecting Assistant Commissioner to perform the functions of an Income-tax Officer, yet if he has not exercised the power or performed the function of an Income-tax Officer, the provisions requiring approval or sanction of the Inspecting Assistant Commissioner will be applicable.  Sub-section (4) nowhere provides that, if some directions by the Inspecting Assistant Commissioner are issued as provided under sub-section (2), the provisions requiring approval or sanction of the Inspecting Assistant Commissioner will not be applicable.

The Supreme Court, in the instant case, found that it was not the Inspecting Assistant Commissioner who exercised the powers or performed the functions of the Income-tax Officer, even when such a power was conferred upon him, concurrently with the Incom-tax Officer.  The significant feature of section 125A of the Act is that even when the Inspecting Assistant Commissioner is given the same powers and functions which are to be performed by the Income-tax Officer in relation to any area or classes or person or income or classes of income or cases or classes of cases, on the conferment of such powers, the Income Tax Officer does not stand denuded of those powers.  With conferment of such powers on the Inspecting Assistant Commissioner gives him “concurrent” jurisdiction which means that both, the Income-tax Officer as well as the Inspecting Assistant Commissioner, are empowered to exercise those functions including passing assessment order.  It is still open to the Income-tax Officer to assume the jurisdiction and pass the order in case the Inspecting Assistant Commissioner does not exercise those powers in respect of the assessment year.  Provisions of section 144B would not apply only if the Inspecting Assistant Commissioner exercises powers or performs the functions of Income-tax Officer.  What is important is the actual exercise of powers and not merely conferment of the powers that are borne out from the bare reading of sub-section (4) of section 125B.

According to the Supreme Court, the position would become abundantly clear when one reads section 144B, particularly, sub-section (7) thereof.

Sub-section (7), in no uncertain terms, mentions that section 144B will not apply in that case where the Inspecting Assistant Commissioner “exercises the powers or performs the functions of an Income-tax Officer” in pursuance of an order made under section 125 or section 125A.

The Supreme Court observed that in the instant case, as already noted above, no such power was exercised or function of an Income-tax Officer was performed by the Inspecting Assistant Commissioner.

The Supreme Court observed that the High Court of Gujarat while dismissing the appeal of the Revenue failed to take into account the earlier judgment of the Co-ordinate Bench of the High Court in CIT v. Shree Digvijay Woolllen Mills Ltd. [1995]  212 ITR 310 (Guj), which had taken the above  view. The Supreme Court agreed with the view taken in CIT v. Shree Digvijay Woolllen Mills Ltd. thereby allowed Civil Appeal No.2984 of 2008 and setting aside the impugned judgment of the Gujarat High Court.

For these reasons, the Civil Appeal arising out of SLP(C) No.13766 of 2011 filed by the assessee against the judgment of the Allahabad High Court was dismissed affirming the view in the said case.

3.Commissioner of Income Tax-4 vs. M/s. J.M. Financial Securities Pvt. Ltd. [ Income tax Appeal no 235 of 2014 dt : 27/07/2016 (Bombay High Court)].

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[Affirmed M/s. J.M. Financial Securities
Pvt. Ltd. vs Asst CIT – 4(3)  . [ITA No.
4289/Mum/11  ;  Bench : J ; dated 19/04/2013 ; A Y: 2004- 2005,
Mum.  ITAT ]

 Expenses
– Liability Disputed   – Once
the assessee stopped contesting the claim of SEBI, the liability was crystallized
during the year: Sec 37

The
Assessing Officer disallowed assessee’s claim for expenditure aggregating to
Rs.1.86 crores. This expenditure was on account of payment to SEBI of Registration
Fees and interest paid thereon on account of late payment. The explanation of
the  assessee was that there was a dispute
between SEBI and assessee with regard to the fees payable for registration in
respect of its taking over the business of M/s. J.M. Financial & Investment
Consultancy Services Ltd. However, in the subject assessment year, the assessee
decided to accept the contention of the SEBI on the question of fees payable
for registration with SEBI along with interest as contended by the SEBI. This
was warranted in view of the communication dated 19th November, 2003 from SEBI
to National Stock Exchange returning its application for trading in Future and
Options. 

Being
aggrieved the assessee carried the issue in appeal to the CIT(A). The CIT(A)
dismissed the assessee’s appeal. 

On further
appeal, the Tribunal held that the only reason for not accepting the claim of
the  assessee as given by the lower
Authorities was that the assessee was not able to produce supporting documents
to evidence that the payment in fact had been made to SEBI. The evidence of
payment provided was a copy of the cheque issued in favour of SEBI drawn on
HDFC Bank.

The Hon’ble
High  Court observed that  there was no dispute that the  assessee had taken over the business of one
M/s. J.M. Financial Investment Consultant Services Pvt. Ltd. and a final
registration had to be applied for with SEBI. The assessee had earlier
contested the claim of SEBI in respect of the fees payable. However, during the
previous year relevant to the subject assessment year, the  assessee decided to accept the claim of SEBI
and pay the fees.

Once the assessee
acceptedthe claim of SEBI, the liability had crystallized during the year and
had to be allowed as an expenditure. So far as payment during the year is
concerned, the examination thereof may strictly be not necessary in view of the
above findings as the assessee is following Mercantile System of Accounting.
Nevertheless, the view taken by the Tribunal is a factual finding. The evidence
was in the form of copy of a cheque in favour of SEBI drawn on HDFC Bank.
Accordingly, appeal of the dept was dismissed  as the question framed does not give rise to
any substantial question of law.

2.CIT -16 vs. Sadanand B. Sule. [ Income tax Appeal no 300 of 2014,: 02/08/2016 (Bombay High Court)]. [Affirmed DCIT 16(2) vs. Sadanand B. Sule,. [ITA No. 831/MUM/2009, ; Bench : E ; dated : 07/08/2013 ; A Y: 2005- 2006, Mum. ITAT ]

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Cost of Acquisition of Shares –Vendor not disclosing the
receipt in their return – Assessee cannot be held responsible – for default
made by the vendors –  Consideration for
the sale of shares by account payee cheques is also significant:

The Assessee
sold 7,49,000 equity shares and 29,97,867 6% redeemable preference shares of
Lavasa Corporation Pvt. Ltd in the year under consideration, to Hindustan
Construction Corporation Ltd.. The Assessee disclosed long term capital gains
on sale of 7,49,000 equity shares and 24,97,867 6% redeemable preference shares
of Lavasa Corporation Ltd and short term capital gains on sale of 5,00,000 6%
redeemable preference shares of Lavasa Corporation Ltd.

The Assessee
had obtained 12,48,750 equity shares and 26,64,000 6% redeemable preference
shares of Lavasa Corporation on the merger of Yashomala Leasing & Finance
(P) Ltd. with Lake City Corporation (former name Lavasa Corporation) on the
basis of scheme of amalgamation approved by the Bombay High Court dated 1st
Aug. 2002. The assessee further purchased 5,00,000 6% redeemable preference
shares in the year 2003.

 As far as the long term capital gains was
concerned the assessee had considered the investment in the shares of the
company, Yashomala Leasing & Finance (P) Ltd. as the cost of acquisition as
he had obtained the shares sold, on the merger of the Yashomala Finance & Leasing
(P) Ltd with Lake City Corporation Ltd. The assessee purchased 1665 shares of
Yashomala Leasing Finance Pvt. Ltd  on  April, 2001 from Mr. Arvind Bhale and Mrs.
Jyoti Bhale. Yashomala had directly allotted one share to the assessee.

The
Assessing Officer does not dispute that the 
assessee was owner of the 1665 shares in Lavasa Corporation Ltd. and had
sold the shares along with other shares in the company during the previous year
relevant to the subject assessment year. However, during the assessment
proceedings the Assessing Officer by order dated 31st December, 2007 held that
the assessee had failed to establish the purchase of 1665 shares in 2001. In
particular he noted that the consideration claimed to have been paid by the assessee
to the vendors of the 1665 shares viz. Mr. and Mrs. Bhale was not found
unreliable. This was for the reason that the vendors had not shown any receipt
on account of sale of 1665 shares in its returns of income for Assessment Year
2001-02. On the basis of the above, the Assessing Officer concluded that as
date of acquisition of the shares is not known, the entire receipt on sale of
the shares has to be treated as short term capital gain and not at the value
claimed by the assessee but at an value worked out by him. 

 The CIT(A) allowed the assessee’s appeal on
consideration of facts .. It held that the basis of the Assessing Officer not
accepting the cost and the date of purchase of 1665 equity shares from Mr. and
Mrs. Bhale was not correct in view of explanation offered by the assessee. In
the explanation, the assessee’s claim of having purchased the shares during the
assessment year 2002-03 and the cost of acquisition was taken at Rs.41.25 lakhs
for computation of capital gains on its sale. 

Being
aggrieved, the Revenue carried the issue in appeal before the Tribunal. The
Tribunal upheld the order of the CIT(A). In particular, it noted that the
assessee could not be held responsible for the failure of the vendors of the
shares i.e. Mr. and Mrs. Bhale to show the receipts on sale of shares in its
return of income for paying tax on the same. It noted the fact that all
payments made for the purchase of shares from Mr. and Mrs. Bhale were made
through account payee cheques. Further there were confirmation letters filed by
the vendors Mr. and Mrs. Bhale which were not even considered by the Assessing
Officer. The ITAT order also found that the order of the CIT(A) accepting the
explanation of the assessee for the discrepancies in its return of income could
not be found fault with. The Tribunal upheld the order of the CIT(A).

Being aggrieved, the Revenue filed a  appeal before High Court. The Hon. High court held that the
purchasers of shares cannot be held responsible for default made by the vendors
of shares in filing their return of income and not disclosing consideration
received by them for sale of their shares. It was further observed that the
Assessing Officer completely ignored the confirmation letter given by vendors
of 1665 shares. Further fact that the assessee had paid the consideration for
the sale of 1665 shares by account payee cheques is also significant .. The
view taken by both authorities on the basis of evidence and explanation made
available before them was a possible and reasonable view. In the above view the
question raised does not give rise to any substantial question of law. High
court upheld the Tribunal order and dismissed the  Revenue appeal.

Revision – Jurisdiction – Condition Precedent – Satisfaction that an order passed by the authority under the Act is erroneous and prejudicial to the interest of the Revenue – Once satisfaction is reached, jurisdiction to exercise the power would be available subject to observance of the principles of natural justice – Unlike the power of reopening an assessment u/s. 147 of the Act, the power of revision u/s. 263 is not contingent on the giving of a notice to show cause.

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CIT v. Amitabh Bachchan [2016] 384 ITR 200 (SC)

For the assessment year 2001-02 the
assessment order was passed on March 30, 2004. 
After the assessment as above was finalized, a show-cause notice dated
November 7, 2005 under section 263 of the Act was issed by the learned
Commissioner of Income Tax detailing as many as eleven (11) issues/grounds on
which the assessment order was proposed to be revised under section 263 of the
Act.  The respondent-assessee filed his
reply to the said show-case notice on consideration of which by order dated
March 20, 2006 the learned Commissioner of Income Tax set aside the order  of assessment dated March 30, 2004 and
directed a fresh assessment to be made. 
Aggrieved, the respondent-assessee challenged the said order before the
learned Tribunal which was allowed by the order dated August 28, 2007.

Aggrieved
by the order dated August 28, 2007 of the learned Tribunal, the Revenue filed
an appeal under section 260A of the Act before the High Court  of Bombay. 
The aforesaid appeal, i.e. I.T.A. No.293 of 2008 was dismissed by the
High Court by the order dated August 7, 2008 holding that as the Commissioner
of Income Tax had gone beyond the scope of the show-cause notice dated
November7, 2005 and had dealt with the issues not covered/mentioned in the said
notice, the   revisional order dated March 20, 2006 was in
violation of the principles of natural justice. 
So far as the question as to whether the Assessing Officer had made
sufficient enquiries about the assessee’s claim of expenses made in the
re-revised return of income was concerned, which question was formulated as
question No.2 for the High Court’s consideration, the High Court took the view
that the said question raised pure questions of fact and, therefore, ought not
to be examined under section 260A of the Act. 
The appeal of the Revenue was consequently dismissed.  Aggrieved, appeal was filed before the Supreme
Court upon grant of leave under article 136 of the Constitution of India.

The
Supreme Court noted that the assessment in question was set aside by the  Commissioner of Income Tax by the order dated
March 20, 2006 on the principal ground that requisite and due enquires were not
made by the Assessing Officer prior to finalization of the assessment by order
dated March 30, 2004.  In this
connection, the   Commissioner of Income Tax on consideration of
the facts of the case and the record of the proceedings came to the conclusion
that in the course of the assessment proceedings despite several opportunities
the assessee did not submit the requisite books of account and documents and
deliberately dragged the matter leading to one adjournment after the  other. 
Eventually, the Assessing Officer, to avoid the bar of limitation, had
no option but to “hurriedly” finalise the assessment proceedings which on due
and proper scrutiny disclosed that the necessary enquires were not made.  On the said basis the Commissioner of Income
Tax came to the conclusion that the assessment order in question was erroneous
and prejudicial to the interests of the Revenue warranting exercise of power
under section 263 of the Act.  Consequently,
the assessment for the year 2001-02 was set aside and a fresh assessment was
ordered.  In the order dated March 20,
2006 the  Commissioner of Income Tax
arrived at findings and conclusions in respect of issues which were not
specifically mentioned in the show-cause notice dated November 7, 2005.  In fact, on as many as seven/eight (07/08)
issues mentioned in the said show-cause notice the   Commissioner of Income Tax did not record any
finding   whereas conclusions adverse to the assessee
were recorded on issues not specifically mentioned in the said notice before
proceeding to hold that the assessment needs to be set aside.  However, three (03) of the issues, were  common to the show-cause notice as well as the
revisional order of the learned Commissioner of Income Tax.

On
appeal, the   Tribunal took the view that the   Commissioner of Income Tax exercising powers
under section 263 of the Act could not have gone beyond the issues mentioned in
the show-cause notice dated November 7, 2005. 
The Tribunal, therefore, thought it proper to take the view that in
respect of the issues not mentioned in the show-cause notice the findings as
recorded in the revisional order dated March 20, 2006 have to be understood to
be in breach of the principles of natural justice.  The Tribunal also specifically considered the
three (03) common issues mentioned above and on such consideration arrived at
the conclusion that the reasons disclosed by the   Commissioner of Income Tax in the order dated March
20, 2006 for holding the assessment to be liable for cancellation on that basis
were not tenable.  Accordingly, the
Tribunal allowed the appeal of the assessee and reversed the order  of the suo motu revision dated March 20,
2006.

The
Supreme Court, in an appeal filed by the Revenue, observed that under the Act
different shades of power have been conferred on different authorities to deal
with orders of assessment passed by the primary authority.  While section 147 confers power on the
assessing authority itself to proceed against income escaping assessment, section
154 of the Act empowers such authority to correct a mistake apparent on the
face of the record.  The power of appeal
and revision is contained in Chapter XX of the Act  which includes section 263 that concern suo
motu power of revision on the   Commissioner of Income Tax.  The different shades of power conferred on
different authorities under the Act has to be exercised within the areas
specifically delineated by the Act and the exercise of power under one
provision cannot trench upon the powers available under another provision of
the Act.

The
Supreme Court reverting to the specific provisions of section 263 of the Act held
that what has to be seen is that a satisfaction that an order passed by the
authority under the Act is erroneous and prejudicial to the interests of the
Revenue is the basic pre-condition for exercise of jurisdiction under section
263 of the Act.  Both are twin conditions
that have to be conjointly present.  Once
such satisfaction is reached, jurisdiction to exercise the power would be
available subject to observance of the principles of natural justice which is
implicit in the requirement cast by the section to give the assessee an
opportunity of being heard.  It is in the
context of the above position that this court has repeatedly held that unlike
the power of reopening an assessment under section 147 of the Act, the power of
revision under section 263 is not contingent on the giving of a notice to show
cause.  In fact, section 263 has been
understood not to require any specific show-cause notice to be served on the
assessee.  Rather, what is required under
the said provision is an opportunity of hearing to the assessee.  The two requirements are different; the first
would comprehend a prior notice detailing the specific grounds on which
revision of the assessment order is tentatively being proposed.  Such a notice is not required.  What is contemplated by section 263, is an
opportunity of hearing to be afforded to the assessee.  Failure to give such an opportunity would
render the revisional order legally fragile not on the ground of lack of
jurisdiction but on the ground of violation of principles of natural justice.

It
may be that in a given case and in most cases it is so done a notice proposing
the revisional exercise is given to the assessee indicating therein broadly or
even specifically the grounds on which the exercise is felt necessary.  But there is nothing in the section  (section 263) to raise the said notice to the
status of a mandatory show-cause notice affecting the initiation of the
exercise in the absence thereof or to require the Commissioner of Income Tax to
confine himself to the terms of the notice and foreclosing consideration of any
other issue or question of fact.  This is
not the purport of section 263.  There
can be no dispute that while the Commissioner of Income Tax is free to exercise
his jurisdiction on consideration of all relevant facts, a full opportunity to
controvert the same and to explain the circumstances surrounding such facts,
as  may be considered relevant by the
assessee, must be afforded to him by the Commissioner of Income Tax prior to
the finalization of the decision.

The
Supreme Court held that in the present case, there was no dispute that in the
order dated March 20, 2006 passed by the   Commissioner of Income Tax under section 263
of the Act findings have been recorded on issues that are not specifically
mentioned in the show-cause notice dated November 7, 2005 though there are
three (03) issues mentioned in the show-cause notice dated 7, 2005 which had
specifically been dealt with in order dated March 20, 2006.  The Tribunal in its order dated August 28,
2007 put the aforesaid two features of the case into two different
compartments.  In so far as the first
question, i.e., findings contained in the order of the Commissioner of Income
Tax dated March 20, 2006 beyond the issues mentioned in the show-cause notice was
concerned, the Tribunal held that the revision order was bad in law and also
violative of principles of natural justice and thus not maintainable. 

According
to the Supreme Court, the above ground which had led the Tribunal to interfere
with the order of the Commissioner of Income Tax seemed to be contrary to the
settled position in law, as indicated above and the two decisions of the
Supreme Court in Gita Devi Aggarwal (76 ITR 496) and Electro House (82 ITR 824).  The   Tribunal in its order dated August 28, 2007
had not recorded any findings that in course of the suo motu revisional
proceedings, hearing of which was spread over many days and attended to by the
authorized representative of the assessee, opportunity of hearing was not
afforded to the assessee and that the assessee was denied an opportunity to
contest the facts on the basis of which the   Commissioner of Income Tax had come to his
conclusions as recorded in the order dated March 20, 2006.

The
Supreme Court observed that in the course of the revisional exercise relevant
facts, documents and books of account which were over looked in the assessment
proceedings were considered.  On such
re-scrutiny it was revealed that the original assessment order on several heads
was erroneous and had the potential of causing loss of revenue to the
State.  It is on the aforesaid basis that
the necessary satisfaction that the assessment order dated March 30, 2004 was
erroneous and prejudicial to the interests of the Revenue was recorded by the
Commissioner of Income Tax.  At each
stage of the revisional proceedings, the authorized representative of the
assessee had appeared and had full opportunity to contest the basis on which
the revisional authority was proceeding/ had proceeded in the matter.  The Supreme Court held that if the revisional
authority had come to its conclusions in the matter on the basis of the record
of the assessment proceedings which was open for scrutiny by the assessee and
available to his authorized representative at all times, it was difficult to
see as to how the requirement of giving of reasonable opportunity of being
heard as contemplated by section 263 of the Act had been breached in the
present case.  The order of the   Tribunal in so far as the first issue i.e. the
revisional order going beyond the show-cause notice was concerned, therefore,  could not  accepted.

The
Supreme Court therefore considered the second limb of the case as dealt with by
the Tribunal, namely, that tenability of the order of the Commissioner of
Income Tax on the three (03) issues mentioned in the show-cause notice and also
dealt with in the revisional order dated March 20, 2006.  The aforesaid three (03) issues were:

         (i)  The
assessee maintaining 5 bank accounts and the Assessing Officer not examining
the 5th bank account, books of account and any other bank account
where receipts related to KBC were banked.

       (ii) Regarding
claim of deposit of Rs.5206 lakh in Bank the a/c No. 11155 under the head
“Receipt on behalf of Mrs. Jaya Bachchan, and  

        (iii)  Regarding
the claim of additional expenses in the re-revised return. 

On the
above issues, the   Tribunal had given detailed reasons for not
accepting the grounds cited in the revisional order for setting aside the
assessment under section 263 of the Act. 
According to the Supreme Court, the reasons cited by the   Tribunal in so far as the first two issues
were  concerned may not justify a serious
relook and hence not be gone into.  The Supreme
Court however was of the opinion the third question would, however, require
some detailed attention.  The said
question was with regard to the claim of additional expenses made by the
assessee in its re-revised return which was subsequently withdrawn. 


The Supreme Court held
that there could  be no doubt that so
long as the view taken by the Assessing officer is a possible view, the same
ought not to be interfered with by the Commissioner of Income Tax under section
263 of the Act merelyon the ground that there is another possible view of the
matter.  Permitting exercise of
revisional power in a situation where two views are possible would really
amount of conferring some kind of an appellate power in the revisional
authority.  This is a course of action
that must be desisted from.  However, according
to the Supreme Court the above was not the situation in the present case in
view of the reasons stated by the Commissioner of Income Tax on the basis of
which the said authority felt that the matter needed further investigation, a
view with which the Supreme Court wholly agreed.  Making a claim which would prima facie
disclose that the expenses in respect of which deduction had been claimed had
been incurred and thereafter abandoning/withdrawing the same gave rise to the
necessity of further enquiry in the interests of the Revenue.  The notice issued under section 69C of the
Act could not have been simply dropped on the ground that the claim had been
withdrawn.  The Supreme Court, therefore,
was of the opinion that the   Commissioner of Income Tax was perfectly
justified in coming to his conclusions in so far as the issue No. (iii) was
concerned and in passing the impugned order on that basis.  The Tribunal as well as the High Court, therefore,
ought not to have interfered with the said conclusion.

The Supreme Court concluded that the present was a fit case for
exercise of the suo motu revisional powers of the   Commissioner of Income Tax under section 263
of the Act.

1.Commissioner of Income tax- 3 vs. SICOM LTD. [ Income tax Appeal no 137 of 2014 dt : 08/08/2016 (Bombay High Court)].

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[Affirmed  SICOM LTD  vs.  Dy. Commissioner of Income Tax Range 3(3),. [ITA No. 3130/MUM/2011  ;  Bench : E ; dated 10/10/2012 ; A Y: 2003- 2004.  (Mum).  ITAT ]

Reopening – Within 4 years – Change of opinion –  reopening  not permissible :Sec 148                                                                          

The
assessee company is engaged in the business of finance, leasing, banking and
investment company (non-banking financial company). The return was filed
declaring total loss of Rs. 84,29,79,390/- for AY 2003-04 . The assessment was
completed for an income of Rs. 30,90,29,470/- 
u/s 143(3) of the Act.  

Subsequently, the A.O. reopened the assessment by
issuance of notice u/s 148 of the Act on 28-3-2008 after recording the reasons relating to write off of inter corporate  deposit (ICD), investment etc.


The assessee vide letter dtd. 18-7-2008 stated that
there has been no failure on their part to disclose all the material facts in
its return of income. However, the WA.O. observed that the assessee failed to furnish
necessary details in respect of nature of assets written off. Therefore, it was
a failure on the part of the assessee to disclose all the material facts in its
return of income.


According to the A.O., the write off of investment wasa
capital loss,  and the same couldnot be
allowed as a revenue expenditure. Similarly, ICD and other assets written off
constituted capital loss as these were the capital assets of the assessee,
therefore, they were also not allowable as revenue expenditure and accordingly
the A.O. added the same.


The assessee on the reopening of the assessment submitted
that the assessee in response to the query raised by the A.O. in respect of
write off done in the books of accounts of inter-corporate deposits, other
assets and investment has filed detailed reply dtd. 10-11-2005 supported by the
finding given by the Tribunal in assessee’s own case for the AY’s 1981-82,
1982-83  and 1983-84. It was  further submitted that the A.O. after
considering the same has passed the assessment order u/s 143(3) of the Act. It
was  further submitted that reopening of
the assessment on the same sets of fact is 
not permissible as it amounts to change of opinion.


The ITAT observed that in the course of original
assessment proceeding the A.O. has considered and examined the particular
aspect, the said aspect cannot be made a ground to reopen and initiate
reassessment proceedings. The assessing authority cannot have a fresh look and reopen
an assessment on the ground of change of opinion. The A.O. had considered and
examined whether or not write off of the amount of inter-corporate deposits,
other assets and investments was of revenue nature. The A.O. accepted the stand
of the assessee and has made no addition in the original assessment
proceedings. The reassessment proceeding cannot, therefore, be initiated on the
ground that the said claim of the assessee cannot be allowed as permissible deduction
under the provisions of the Act.  In the
present case it is noticeable that the assessee had disclosed fully and truly
all the material facts relevant for the assessment. There is no indication and
it is not alleged that there was “tangible material” to come to the conclusion
that there is escapement of income from assessment.  The reassessment proceeding  were quashed.


Being aggrieved by the order of ITAT, the Revenue filed
 appeal before the Hon.  High Court. The High court  upheld the Tribunal order and dismissed
the  Revenue appeal holding that Revenue has not been able to point out any
fallacy in the reasoning of the Tribunal to come to the conclusion that the
reopening notice is without jurisdiction

NEED FOR DEPOSITS UNDER CAPITAL GAIN ACCOUNTS SCHEME

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Issues for Consideration

       Section
54(2) and a set of other similar provisions, provide for the deposit of Capital
Gains or the net consideration in a bank account in accordance with the Capital
Gains Account Schemes, 1988, in a case where such amount is not appropriated or
utilized by the assessee towards the purchase or construction of the new asset
before the date of furnishing return of income u/s. 139 of the Income Tax Act.

The amount so
deposited under this Scheme, is required to be utilized for investment in the
specified new asset, within the specified period by withdrawal from the same account
in accordance with the Scheme. The amount in the bank account remaining
unutilized, shall be charged as the Capital Gains for the year in which the
period of reinvestment expires and the assessee shall be entitled to withdraw
the same unutilized balance.

Instances happen
whereunder, an assessee utilizes the amount of the Capital Gains or the net
consideration in reinvesting the same in the specified new asset, within the
permissible time of 2 or 3 years, after filing the return of income u/s. 139,
without first depositing such amount in the designated account and routing the
investment through such account.

Issues arise in such
cases about the eligibility of the assessee, for claim of exemption from the
liability to tax on Capital Gains. The courts, in considering the issue, have
delivered conflicting decisions. The Karnataka High Court had held, that the assessee
should be eligible for the relief once the amount in question was utilized
within the permissible time. However, the Bombay High Court recently held, that
it was essential for an assessee to first deposit the unutilized amount in the
designated account and any failure to do so would result in denial of the
relief, even where he had utilized the amount of gains or consideration in
purchase or construction of a new asset with the overall permissible time
frame.

K Ramachandra Rao’s case

The issue arose before the Karnataka High Court in the case of the CIT
v. K. Ramachandra Rao, 230 Taxman 334. In that case, the assessee sold
certain converted lands for a consideration of Rs.2.87 crore. The assessee
constructed the residential premises on another plot of land owned by him,
for which certain payments towards construction were made within a period of one
year of the transfer of the said lands, some payments were made within one
year before the transfer of the said lands and balance payments were made after
the transfer and after the due date of filing return of income u/s 139(1)
directly, without depositing the same in the designated bank account under
the Capital Gains Scheme. The construction of the premises was completed
within a period of three years of the transfer. The assessee claimed
exemption u/s 54F from taxation in respect of the capital gains arising on
the transfer of the said lands. The AO denied the claim for exemption on the
ground that a part was invested before the transfer of the said lands in
construction, and that the balance was invested directly without depositing
the same in the designated bank account.  

 

On appeal, the Commissioner(Appeals) held that the payments made within
one year before the date of transfer and also the payments made after
transfer were eligible for exemption in spite of the fact that the proceeds
were not deposited in the designated bank account. The tribunal, on appeal by
the revenue, confirmed the findings of the Commissioner(Appeals).    

 

In appeal to the High Court, the Revenue, besides another question, raised
the following substantial question of law:

 

“When the assessee invests the entire sale consideration construction of
a residential house within three years from the date of transfer can he be
denied exemption under Section 54F on the ground that he did not deposit the
said amount in capital gains account scheme before the due date prescribed
under Section 139(1) of the IT Act?”

 

The decision,
as reported, does not record the conflicting stands presented by the parties to
the appeal nor does it record the observations of the court that led to the
decision of the  High Court rejecting the
appeal of the Revenue, which  held as
under;

“As is clear from
Sub-section (4) in the event of the assessee not investing the capital gains
either in purchasing the residential house or in constructing a residential house
within the period stipulated in Section 54F(1), if the assessee wants the
benefit of Section 54F, then he should deposit the said capital gains in an
account which is duly notified by the Central Government. In other words if he
want of (sic) claim exemption from payment of income tax by retaining the cash,
then the said amount is to be invested in the said account. If the intention is
not to retain cash but to invest in construction or any purchase of the
property and if such investment is made within the period stipulated therein,
then Section 54F(4) is not at all attracted and therefore the contention that
the assessee has not deposited the amount in the Bank account as stipulated and
therefore, he is not entitled to the benefit even though he has invested the
money in construction is also not correct.”

 

Humayun Suleman Merchant’s case

 

The issue again
came up recently before the Bombay High Court in the case of Humayun Suleman
Merchant v CCIT, ITA No 545 of 2002 dated 18th August 2016.

 

In this case,
the assessee sold a plot of land for a consideration of Rs. 85.33 lakh on 29th
April 1995. The due date of filing of his return of income was 31st
October 1996. He entered into an agreement to purchase a flat for a
consideration of Rs. 69.60 lakh on 16th July 1996. Under this
agreement, 2 instalments of Rs. 10 lakh each were paid on 17th July
1996 and 23rd October 1996 to the developer/builder. A further
payment of Rs. 15 lakh was made on 1st November 1996 under the
agreement to purchase the flat. The possession of the new flat was obtained on
27th January 1997. No amount was deposited in the capital gains
account scheme.

 

The assessee
filed his return of income on 4th November 1996, after the due date
of filing of his return of income. In the return, exemption under section 54F
was claimed in respect of the entire cost of the new flat of Rs. 69.60 lakh.

 

The assessing
officer allowed exemption from capital gains under section 54F in respect of
the amount of Rs. 35 lakh paid till the date of the filing of the return, and
did not consider the balance amount of Rs 34.60 lakh paid subsequently for the
flat, on account of the assessee’s failure to deposit the unutilised consideration
for purchase on the flat in the specified bank account in accordance with the
capital gains account scheme. The Commissioner(Appeals) upheld the order of the
assessing officer. The tribunal also dismissed the appeal of the assessee.

 

Before the Bombay
High Court, on behalf of the assessee, it was argued that:

1.      The issue was covered by the decision of the Bombay High Court in the case
of CIT v Hilla J B Wadia 261 ITR 376, read with CBDT circulars dated 15 October
1986 and 16 December 1993. Further, the decision of the Madhya Pradesh High
Court in the case of Smt Shashi Varma v CIT 224 ITR 106 also applied. Besides,
the decision of the Karnataka High Court in the case of K Ramachandra Rao
(supra) covered the issue.

2.      Section 54F had been brought into the Act with the object of encouraging
the housing sector. Therefore, a liberal/beneficial interpretation/construction
should be given to section 54F(4). Reliance was placed upon the decision of the
Delhi High Court in the case of CIT v Ravinder Kumar Arora 342 ITR 38.

3.      Section 54F(4) deliberately use the word “appropriation” while extending
the benefit, since it intended to expand the scope of the benefit. Since the
word “appropriation” meant setting apart, once an agreement to purchase the
flat was executed in July 1996, and the consideration was set aside, though not
paid, it should be considered to be appropriated towards the purchase of a
flat, and hence the benefit of section 54F was available.

4.      Alternatively, the requirements of section 54F(4) had been satisfied, as
the entire amount had been paid to the developer before the last date
prescribed to file the return of income [the date prescribed under section 139
(4)], as held by the Gauhati High Court in the case of CIT v Rajesh Kumar Jalan
286 ITR 274.

 

On behalf of
the revenue, it was argued that:

1.      on a plain reading of section 54F(4), the assessee had not utilised the
entire net consideration taxable under the head capital gains for purchase of
the flat, nor had he deposited the balance unutilised consideration in a
specified bank account as notified in terms of section 54F(4), and was
therefore not entitled to the benefit of exemption from capital gains under
section 54F to the extent the requirements of the section were not met.

2.      The decision of the Bombay High Court in Hilla J B Wadia (supra), as well
as the circulars cited on behalf of the assessee had no application to the
facts of the case, as these were not in the context of section 54F(4), which
was not existing in the statute books at that point of time.

3.      The word “appropriation” only covered cases where the flat had already been
purchased within one year before the date on which the capital gains arose on
the transfer of the asset. In the present case, there was no purchase of a flat
prior to the sale of the capital asset, but the purchase was post sale of the
capital asset, which required utilisation and deposit in the specified account
to the extent not utilised.

4.      The decision of the Gauhati High Court in Rajesh Kumar Jalan had no
application to this case, as the amounts had not been utilised or deposited in
the specified bank account before the assessee filed his return of income on 4th
November 1996.

 

The Bombay High
Court analysed the provisions of section 54F. It noted that, while implementing
section 54F, it was noticed that at times assessments were completed prior to
the expiry of the period of 2 or 3 years from the date of sale of the capital
asset, and the assessee had not utilised the amount within the prescribed
period. This led to assessment orders being rectified by appropriate orders, to
withdraw the excess exemption allowed under section 54F. It was for this reason
that section 54F(4) was introduced. Further, the provisions of section 54F(1)
were made subject to the provisions of section 54F(4). Therefore, where the
consideration received on sale of the capital asset was not appropriated (where
purchase was earlier than sale) or utilised (where purchase was after the
sale), then the gains were subject to the charge of capital gains tax, unless
the unutilised amounts were deposited in the specified bank account as notified
under the capital gains account scheme. The exemption was available to the
unutilised amounts only if the mandate of section 54F(4) was complied with. A
further safeguard was provided to the revenue, where the assessee had not
invested the amounts in purchase/construction of a house property within the
specified time under section 54F(1), by providing that in such cases, capital
gains would be charged on the unutilised amount as income of the previous year
in which the period of 3 years from the date of the transfer of the capital
asset expired.

 

Applying this
analysis of the provisions to the facts before it, the Bombay High Court noted
that the entire net consideration which was to be utilised in purchase of the
new flat and which had not been utilised, had not been deposited in the
specified bank account before the due date of filing of the return under
section 139(1). The High Court noted that except Rs. 35 lakh, the balance of
the net consideration to be utilised, had not been utilised before the date of
furnishing of the return, 4th November 1996. Therefore, according to
the High Court, the order of the tribunal was correct.

 

The Bombay High
Court noted that the ratio of the cases of Hilla J B Wadia (supra) and Smt.
Shashi Varma did not apply, as in those cases, at the relevant point of time,
there was no requirement of depositing any unutilised amount in a specified
bank account under the capital gains account scheme. Further, the Bombay High
Court noted that the 2 CBDT circulars relied upon on behalf of the assessee did
not do away with and/or relax the statutory mandate of depositing the
unutilised amount in the specified bank account as required by section 54F(4).

 

Referring to
the decision of the Karnataka High Court in K Ramachandra Rao (supra), the
Bombay High Court expressed its inability to accept the reasoning adopted by
the Karnataka High Court. According to the Bombay High Court, the mandate of
section 54F(4) was clear, that an amount which had not been utilised in
construction and/or purchase of property before filing the return of income
must necessarily be deposited in an account under the capital gains account
scheme, so as to claim exemption. According to the Bombay High Court, this
aspect had not been noticed by the Karnataka High Court, and the entire basis
of the decision of the Karnataka High Court was the intent of the parties.
According to the Bombay High Court, in interpreting a fiscal statute, one must
have regard to the strict letter of law, and intent can never override the
plain and unambiguous letter of the law. The Bombay High Court observed that
while it should not easily depart from a view taken by another High Court on
considerations of certainty and consistency in law, the view of other High
Courts were not binding upon it unlike a decision of the Supreme Court or of a
larger or coordinate bench of the same court. If, on an examination of the
decision of the other High Court, it was unable to accept the same, it was not
bound to follow/accept the interpretation of the other High Court, leading to a
particular conclusion.

 

In the case
before it, the Bombay High Court found that the decision of the Karnataka High
Court was rendered sub-silentio; i.e. no argument was made with regard to the
requirement of deposit in notified bank account under the capital gains account
scheme before the due date as required by section 54F(4). The Bombay High Court
relied on Salmond’s Jurisprudence for the proposition that a precedent
sub-silentio is not authoritative. The Bombay High Court therefore held that it
could not place any reliance upon the decision to conclude the issue on the
basis of that decision.

The
Bombay High Court further rejected the reliance on the decision of the Delhi
High Court in the case of Ravindra Kumar Arora (supra), where the court had
held that the provisions of section 54F should be liberally construed, on the
grounds that in that case, all the requirements of section 54F stood satisfied,
and the only issue was the addition of the name of his wife in the purchase, on
the ground that that case had no application to the facts before it.

According
to the Bombay High Court, no occasion to give a beneficial constructions to a
statute could arise when there was no ambiguity in the provision of law, which
was subject to interpretation. In the face of the clear words of the statute,
the intent of parties and/or beneficial construction was irrelevant. It relied
on the decisions of the Supreme Court in the cases of Sales Tax Commissioner,
vs Modi Sugar Mills 12 STC 182, Mathuram Agarwal vs State of Madhya Pradesh 8
SCC 67 and CIT vs. Thana Electricity Supply Ltd 206 ITR 727 for this
proposition.

The
Bombay High Court also rejected the argument that since the funds had been
earmarked to be invested in construction of a house, the funds could be
regarded as appropriated for the purpose of purchase of new residential house,
and therefore the requirements of section 54F(4) were satisfied. According to
the Bombay High Court, the word “appropriated” had been used with reference to
the cases where property had already been purchased prior to the sale of the
capital asset, and the amount received on sale of the capital asset was
appropriated towards consideration which had been paid for purchase of the
property. According to it, the plain language of the section made a clear
distinction between cases of appropriation (purchase prior to sale of capital
asset) and utilisation (purchase/construction after the sale of capital assets).
Therefore, the word “appropriated” would have no application in cases of
purchase/construction of a house after the sale of capital asset, as was the
fact in the case before it.

Referring
to the argument on behalf of the assessee, that since the entire amount had
been paid before the last due date to file the return specified in section
139(4), the exemption was available, based on the decision of the Gauhati High
Court in the case of Rajesh Kumar Jalan, the Bombay High Court noted that the
factual situation before it was different. In the case before the Gauhati High
Court, the amounts were utilised before the date of filing of the return of
income, whereas in the case before the Bombay High Court, only a part of the
amounts were utilised before the date of filing of the return of income.
Therefore, the Bombay High Court was of the view that the decision of the
Gauhati High Court in that case was not applicable to the case before it.

The
Bombay High Court therefore held that the assessee was entitled to an exemption
under section 54F only in respect of the amount of Rs. 35 lakh actually paid
before the date of filing of the return of income, and not in respect of the
entire amount of Rs. 69.60 lakh agreed to be paid for purchase of the new
house.

Observations

Section 54 (2) reads
as under:

The amount of the capital gain which is not
appropriated by the assessee towards the purchase of the new asset made within
one year before the date on which the transfer of the original asset took
place, or which is not utilised by him for the purchase or construction of the
new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit
being made in any case not later than the due date applicable in the case of
the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be
specified in, and utilised in accordance with, any Scheme which the Central
Government may, by notification in the Official Gazette, frame in this behalf
and such return shall be accompanied by proof of such deposit; and, for the
purposes of sub-section (1), the amount, if any, already utilised by the
assessee for the purchase or construction of the new asset together with the
amount so deposited shall be deemed to be the cost of the new asset :

Provided that if the amount deposited under this
sub-section is not utilised wholly or partly for the purchase or construction
of the new asset within the period specified in sub-section (1), then,—

 (i)  The amount not so
utilized shall be charged under section 45 as the income of the previous year in which
the period of three years from the date of the transfer of the original asset
expires; and

(ii)  The assessee shall be
entitled to withdraw such amount in accordance with the Scheme aforesaid.

The said sub-section
was introduced in the Finance Act, 1987 w.e.f. 01.04.1988. The intention behind
the introduction is explained vide memorandum explaining the provisions, as
under:

“The existing provisions under sec. 54, ….. the original assessments
need rectification whenever the taxpayer fails to acquire the corresponding new
asset. With a view to dispensing with such rectification of assessment, the
bill seeks to provide for new Scheme for deposit of amounts meant for
reinvestment in the new asset. Under the proposed amendment, … also.”

Circular No. 495 dt.
22.9.1987 has explained the amendment vide para 26.2 & 26.3 to avoid the
need for rectification of the assessment order of the year of transfer on
account of the assessee’s failure to acquire corresponding new asset within the
permissible time.

On a combined reading,
it is gathered that sub-section 2 has been introduced to provide for the
deposit of that part of the gain which has remained unutilized upto the date of
filing of return. The provision simultaneously ensures that the amount so
deposited in the designated account shall be deemed to be the cost of the new
asset, so as to enable an assessee to claim relief for the assessment year
corresponding to the year of transfer of the original asset without any further
compliance needed. As it is seen, the provision is primarily introduced to
avoid any rectification of the original assessment that maybe required, to meet
the consequences of the failure of the assessee to acquire the new asset within
the overall time permitted by law. Apparently, the law of sec. 54 and other
similar sections permitted and continue to permit an assessee to reinvest the
gains or the consideration within the prescribed time. This relief has neither
been taken away by the amendment nor is it intended to be taken away. In that view
of the matter, the core requirement for a relief continues to be the reinvestment
of the gains or consideration within the overall framework of the law.

The only purpose of
the amendment, therefore is to provide for a procedural mechanism in the form
of introduction of the Scheme so as to avoid the consequential rectification in
limited cases of failure of an assessee to reinvest. It may therefore not be
appropriate, to altogether deny the benefit to an assessee in a case where he
has reinvested the gains or the consideration in new asset within the
permissible time, though without depositing the gain or the consideration under
the Scheme. This more so, as in the case before the Bombay High Court, the
entire payment has been made before the date of the assessment.

In reality, one
routinely comes across cases where the payment of consideration is deferred for
several reasons, leading to non-compliance of conditions for deposit under the Scheme.
However, the transferor, on receipt of the consideration after the filing of
return of income, acquires or is in a position to acquire the new asset within
the specified period. Many intended transactions are seen to be not implemented
simply for inability to realize the funds by the due date of filing the return
of income. A provision introduced to facilitate the smooth assessment cannot be
so construed as to defeat the provisions of law.

The Courts seem to be favoring
the view that the deposits made within the extended time of s.139(4) would be
in compliance with the provisions of law. The Courts also seem to be of the
view that the benefit of the sections should not be denied in cases where the
new asset is purchased or constructed within the time extended u/s.139(4), even
where the deposits are made under the Scheme. Under the circumstances, no
serious controversy should arise in cases where reinvestment is made within
such extended time, with or without routing the investment through the
designated account.

One may also consider
the possibility of always routing the reinvestment through the designated
account, irrespective of the delay in depositing the gains or consideration
under the Scheme. This may help the assessee in contending that he has complied
with the provisions of law, but for the delay in depositing under the Scheme,
which delay may be condoned.

There is no doubt that
the entire Scheme of exempting the Capital Gains from taxation on reinvestment is
for the benefit of the assessee and for directing the investments in the
desired channels. It is a settled position in law that such provisions being beneficial
provisions for the assessee, should be construed liberally, so as to facilitate
the deduction and not to deny it.

In view of the above
discussion, it appears that the view of the Karnataka High Court is a better
view, in as much as the court has taken a view that promotes the legislative
intent behind the main provisions of law. It is respectfully submitted that an
important factor that should have been appreciated in Humayun’s case was that
there had been no loss of revenue nor was there any delay in reinvestment, and
that the entire payment for the new house had been made by the time the
assessment was completed.

Mangal Singh Palsania vs. ACIT ITAT Jaipur Bench Before Vikram Singh Yadav (AM) and Laliet Kumar (JM) ITA No. 53/JP/14 A.Y.: 2008-09. Date of order: 31.03.2016 Counsel for Assessee / Revenue: M. Gargieya / Ajay Malik

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Section 32(1) – In order to claim depreciation on vehicles, registration of vehicles under the Motor Vehicle Act is not essential requirement.

FACTS
The assessee derives income from transport business. The tankers used in the business were not registered in the name of the assessee. Hence, the depreciation claimed Rs. 21.02 lacs was denied by the AO. On appeal, the CIT(A) confirmed the order of the AO.

Being aggrieved the assessee appealed before the Tribunal. Before the Tribunal, the revenue submitted that the test of ownership is governed by the registration under the Motor Vehicle Act and since the tankers were not registered in the name of the assessee, the AO was justified in denying the depreciation claim.

HELD
The Tribunal referred to the observations of the Supreme Court in the case of I.C.D.S vs. CIT (29 Taxman 129) that the repository of a general statement of law on ownership may be the Sale of Goods Act. The Motor Vehicle Act was not a statement of law on ownership. Further, it also noted the observation of the Apex Court in the case of Mysore Minerals Ltd. vs. CIT (239 ITR 779) that anyone in possession of property in his own title exercising such dominion over the property as would enable others being excluded therefrom and having right to use and occupy the property in his own right would be considered as the owner of the property for the purpose of section 32(1) though a formal deed of title may not have been executed and registered. According to the Tribunal, the above proposition of law was fully satisfied by the assessee. The assessee was having possession and dominion over the income and control over the operation of the tankers. Accordingly, the Tribunal held that the assessee was eligible to claim depreciation.

Income Tax Officer vs. Rajeshwaree Shipping & Logistics ITAT “D” Bench, Mumbai

[2016] 70 taxmann.com 33 (Ahmedabad – Trib.) Urvi Chirag Sheth vs. ITO ITA Nos. 630 /Ahd/2016 A.Y.: 2012-13 Date of order: 31.05.2016

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Section 56 – Interest on accident compensation, which is a capital receipt, can be characterized as income only if interest is a kind of statutory interest. Otherwise it retains the same character as that of the compensation and is not liable to tax

FACTS
The assessee met with a serious accident leaving her permanently disabled. She claimed compensation of Rs. 15,00,000 which was awarded to her by the Supreme Court. The Supreme Court also granted her interest at the rate of 8% on the enhanced compensation from the date of filing the claim petition before Motor Accidents Claims Tribunal (MACT) till the date of realisation. The amount of interest worked to Rs. 7,47,143. The Assessing Officer held that this interest of Rs. 7,47,143 is taxable and is covered by section 145A(b) r.w.s. 56(viii) of the Act.

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 payment made to the assessee was in the nature of compensation for the loss of her mobility and physical damages and was therefore 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 under section 45. What is termed as interest also is of the same character and seeks to compensate the time value of money on account of delay in payment. On the first principles, such an interest cannot have a standalone character of income, unless the interest itself is a kind of statutory interest at the prescribed rate. It noted that in the present case interest was 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-à-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 MACT, it would have been Rs 15 lacs but since there was an inordinate delay, though partially, delay in payment of this amount, interest is to factor for fall in the 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 the distant past. Viewed thus, the amount of compensation received at this point of time, whichever way it is computed, has the same character. If compensation itself is not taxable, the interest on account of delay in payment of compensation cannot be taxable either. The Tribunal held that the conclusion of the Allahabad High Court in the case of CIT v. Oriental Insurance Co. Ltd. 92012) 211 Taxman 369 (All) supports the school of thought that when principal transaction, i.e. accident compensation for delayed payment of which interest is awarded, itself is outside the ambit of taxation, similar fate must follow for the subsidiary transaction, i.e. interest for delay in payment of compensation as well. It also noted that the decision of the Punjab & Haryana High Court in the case of CIT v. B Rai (2004) 264 ITR 617 (P & H) which draws a line of demarcation between the interest granted under a statutory provision and interest granted under discretion of the court and holds that the latter is outside the scope of `income’ which can be brought to tax under the Act. It noted that the situation before it is covered by the observation of the Punjab & Haryana High Court viz. “where interest ….. is to be paid is in the discretion of the court, as in the present case, the said interest would not amount to `income’ for the purposes of income-tax”.

The Tribunal held that the authorities below were completely in error in bringing the interest awarded by the Supreme Court to tax. The Tribunal vacated the action of the AO and disapproved the CIT(A)’s action of confirming the same.

The appeal filed by the assessee was allowed.

2016 – TIOL – 1063 – ITAT – VIZAG ITO vs. Mother Theresa Educational Society ITA No. 326/Vizag/2013 A. Y.: 2009-10 Date of order: 31.03.2016

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Ss. 40(a)(ia) and 43B – When income is computed under section 11 of the Act, the provisions of section 40(a)(ia) and 43B are not applicable.

FACTS
The assessee society, registered under Andhra Pradesh Societies Registration Act and also registered under section 12A of the Act, filed its return of income declaring total income to be Nil by claiming exemption under section 11 of the Act. In the course of assessment proceedings the AO noticed that assessee was deriving income from various sources such as fees from students, income from hospital, income from pharmacy, rent from premises and interest on bank deposits against which various expenses such as salaries of faculty and administrative staff, administrative expenses, college maintenance, etc were claimed. The AO observed that the receipts of the society increased from Rs. 1,58,84,406 to Rs. 22,57,55,509 over a period of four years from AY 2005-06 to 2008-09. He also noticed that the society had availed term loans from banks for construction of college buildings, etc.

The AO observed that though the objects are not under dispute, not is any case being made out for reconsidering the exemptions by virtue of registration under section 12A of the Act. However, he held that since the assessee’s activities are akin to any commercial activity income needs to be assessed under the head `income from business’. While assessing income under the head `Income from Business’, he disallowed various expenditures by invoking provisions of sections 40(a)(ia) and 43B of the Act.

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
The Tribunal observed that the AO has neither doubted the genuineness of the activities nor pointed out any violations referred to in sections 13(1)(c) or 13(1)(d), which are preconditions for denying exemption u/s. 11. The Tribunal held that the AO was not correct in denying exemption under section 11 and having assessed income under the head `profits and gains of business or profession’.

The Tribunal noted that Chapter III of the Act deals with incomes which do not form part of total income. Sections 11, 12 and 13 deal with income from property held for charitable or religious purposes and the mode of computation of income subject to certain conditions. Accordingly, income of any charitable trust or society is exempt from tax, if such conditions are fulfilled. Sections 40(a)(ia) and 43B fall under Chapter IVD, which deals with computation of profits and gains from business or profession. The provisions of sections 40(a)(ia) and 43B are relevant if income is computed under the head `profits and gains of business or profession’.

The Tribunal held that the concept of computation of income under section 11 is real income concept, which is computed on the principles of real income generated from property held under trust and not notional income like under other provisions of the Act. Section 11(1)(a) provides for application of income for charitable purpose, therefore, the question of application of income arises only when income is available for application. If any expenditure is disallowed by invoking the provisions of section 40(a)(ia) and 43B, it leads to a situation where assessee income available for application is enhanced without there being any real income for application for charitable purpose, which leads to an absurd situation where the trusts / societies enjoying exemption u/s 11 have to pay taxes. This is because, the assessee claiming exemption under section 11 shall apply 85% of income for objects of the trust. The legislature in its wisdom has kept separate provisions which are independent from any other provisions of the Act for computation of income of trusts claiming exemption u/s 11 of the Act. The Tribunal held that when income is computed under section 11 of the Act, the provisions of section 40(a)(ia) and section 43B of the Act are not applicable. This was also the ratio of the decision of the co-ordinate Bench in the case of Mahatma Gandhi Seva Mandir v. DDIT (Exemption) (2012) 52 SOT 26 (Mum.).

The Tribunal held that the CIT(A) had rightly deleted the additions.

The appeal filed by the revenue was dismissed.

[2016] 158 ITD 329 (Bangalore Trib.) T. Shiva Kumar vs. ITO A.Y.: 2009-10. Date of order: 19.02.2016

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Section 54 – Where assessee after selling residential property; pays sale consideration to another person, within the time limit prescribed under section 54, for purchase of house property then assessee’s claim for deduction under section 54 is to be allowed even though the said purchase transaction does not eventually materialise and another person refunds the consideration paid by the assessee.

FACTS
For the relevant assessment year, the assessee had filed his return declaring income of about 3 lakhs. During the course of assessment proceedings, the AO noted that the assessee had sold a house property and the conveyance deed in relation to the said sale was executed on 15-4- 2008. However, the assessee had not shown any capital gains in his return of income.

The assessee’s case was that it had intention to invest in a residential house building from the very beginning as the entire sum realized on sale was given by him to his brother for acquiring a house property owned by his brother. However, the transaction did not go through and the amount was returned to the assessee.

Subsequently, said sum was paid to one ‘M’ for acquiring a residence owned by her on basis of agreement entered into on 10-3-2010. The said transaction also did not eventually materialise.

The AO thus denied the exemption claimed by assessee u/s. 54 as the assessee could neither show that he purchased a house within two years from the date of transfer of the original asset nor could the assessee show that he had constructed a residential house within three years of such transfer.

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

On second appeal before the Tribunal.

HELD
The time period allowed for making a purchase if it is done after the date of transfer is two years and if it is construction it is three years. Thus, if the intention was to construct a residential house the period is three years, the outer limit of three years for constructing a house in the given case was 14-4-2011. Vide sub-section (2) of section 54 a deposit under capital gains scheme, if the capital gain is not appropriated for such construction, has to be done before the due date for furnishing the return of income under section (1) of section 139.

The Hon’ble Punjab & Haryana High Court in the case of CIT vs. Ms Jagriti Aggarwal [2011] 339 ITR 610 has held that sub-section (4) of section 139 can only be construed as a proviso to sub-section (1) and thus, the due date of furnishing the return mentioned in section 139(1) is subject to the extended period provided under section 139(4). The impugned assessment year is assessment year 2009-10, and the extended time period under section 139(4) is before expiry of one year from the end of the relevant assessment year or before completion of assessment whichever is earlier. One year from the end of the impugned assessment year would expire only on 31-3-2011.

The assessment for the impugned assessment year having been completed only on 29-12-2011 the date to be reckoned for the purpose of application of sub-section (2) of section 54 in this case is 31-3-2011. Thus, it is clear that the assessee had time upto 31-3-2011 to deposit the capital gains in capital gains account scheme, if he could not utilise it for acquiring or constructing a residence.

This brings us to the question of whether assessee can be considered to have constructed or acquired a residence before 31-3-2011. Apart from the transaction that assessee claimed to have made with his brother, the assessee had undisputedly entered into a purchase agreement with one ‘M’ on 10-3-2010. The assessee had also paid a post-dated cheque pursuant to such agreement. The agreement dated 30-3-2011 through which consideration originally agreed by the assessee with ‘M’ was reduced from Rs. 70 lakhs to Rs. 40 lakhs has been placed on record. It is clearly mentioned therein that assessee had issued a cheque dated 2-12-2010 to ‘M’ for Rs. 40 lakhs. The bank account of the assessee shows that the above cheque was encashed by ‘M’ on 18- 12-2010. The agreement clearly mentions the intention of the seller to sell a building. It is also mentioned therein that the reduction in the consideration was due to vendor’s inability to complete the work of the residence before the agreed date. The agreement also mentions that the vendor had delivered to the assessee the original documents of title and the vacant possession of the scheduled property.

The liberal interpretation of the term purchase as it appears in section 54 has to be given also to the term ‘constructs’ appearing therein, in conjunction to the former. The Hon’ble Karnataka High Court in the case of CIT vs. Smt. B. S. Shanthakumari [2015] 233 Taxman 347 has held that the completion of construction within three years period was not mandatory and what was necessary was that the construction should have commenced. There is no dispute that the construction of the property for which agreement was entered by the assessee with ‘M’ had already begun. The question whether the above agreement finally fructified is a different matter altogether. Assessee had for all purposes satisfied the conditions u/s. 54 and earnestly demonstrated his intention to invest the capital gain in a residential house. Therefore, the disallowance of such claim stands deleted.

In the result, the appeal filed by the assessee is treated as allowed.

[2016] 158 ITD 179 (Hyderabad Trib.) Heritage Hospitality Ltd. vs. DCIT A.Y.: 2007-08. Date of order: 22.01.2016.

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Sections 28(i) and 22 – Where assessee does not let out any property but receives occupancy charges on daily basis for accommodating employees of various companies and moreover assessee’s memorandum of association indicates that main object of the company is to carry on the business of hotels, resorts, boarding, lodges, guest houses, etc, the occupancy charges so received is assessed as income from business and not income from house property.

FACTS
The assessee owns property on which it is running the hospitality business. The assessee had entered into agreements with various companies for accommodating their employees in assessee’s guest rooms and received rental receipts charged on daily basis for the same. Such incomes had been accepted up to assessment year 2006- 07 as ‘income from business’.

For relevant assessment year, the Assessing Officer (AO) opined that the assessee had let out the property and did not have any license to run the catering part and on enquiry it was found out that the assessee was not running a kitchen but providing food by outsourcing, on cost to cost basis. He, accordingly, held that the income received by the assessee should be brought to tax as ‘income from house property’.

The AO also noted that various companies deducted tax at source u/s. 194-I and, consequently, the rentals received were to be assessed as ‘income from house property’. The AO also opined that in case assessee’s incomes were to be assessed as ‘business income’, the expenditure could not be allowed fully. Therefore, he had substantially disallowed the amounts on a protective basis.

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

On second appeal before the Tribunal.

HELD
There is no dispute with reference to certain facts as follows; (i) assessee owns the property on which it is running the hospitality business; (ii) assessee has not let out property per se but has entered into agreement for providing accommodation to the software engineers of various companies in its property; (iii) the agreement indicates that the charges are payable on occupancy basis on per day basis without any food, except providing coffee and tea and light snacks; (iv) the receipts which are received are for occupancy only of the seven rooms assessee is owning.

There is no letting out of any property as such, but the amounts were paid by the said companies as rent for occupation of the property. It is also not in dispute that in earlier years, assessee’s receipts were accepted under the head ‘business’. Moreover, assessee’s memorandum of association indicates that main object of the company is to carry on the business of hotels, resorts, boarding, lodges, guest houses, etc.

The Hon’ble Supreme Court in the case of Chennai Properties & Investments Ltd. vs. CIT [2015] 373 ITR 673 has held that where in terms of Memorandum of Association, main object of the assessee-company was to acquire properties and earn income by letting out the same, the said income is to be brought to tax as ‘income from business’ and not as ‘income from house property’. In assessee’s case, assessee has not let out any property but has allowed the occupancy of its properties charged on a daily rental basis and thus AO’s contention that income has to be assessed under ‘house property’ has no basis at all.

Provisions of section 194-I may be applied for any rental income paid, but as seen from the definition of ‘rent’ in section 194-I, rent includes any payment by whatever name called, for use of buildings including factory buildings, equipment, furniture or fittings. Even if machinery was leased, the consequent rent comes under the definition of section 194-I. But machinery lease cannot be considered under ‘income from house property’. Thus AO’s opinion that since TDS made under section 194-I, incomes are to be assessed under head ‘income from house property’ cannot be accepted.

Therefore, both on facts of the case and also on law, as established by the Hon’ble Supreme Court in the above said case, receipts of the assessee cannot be brought to tax under the head ‘house property’. The same is to be assessed under the head ‘Profits and gains of business or profession’ only. Thus the issue of head of income to be assessed is decided in favour of assessee and the issue of allowance of expenditure is restored to the file of AO for fresh consideration.

The CIT 11 vs. M/s. Goodwill Theatres Pvt.Ltd [Income tax Appeal no- 2356 of 2013 dt – 6/06/2016 (Bombay High Court)].[Affirmed The CIT 11 vs. M/s. Goodwill Theatres Pvt.Ltd) ; ITA No. 8185/Mum/2011 Bench G ; dt 19/6/2013 (A Y: 2008-09 )]

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Mesne Profits- Not taxable- Amount received from a person in wrongful possession of its property, would be mesne profits and was capital in nature.

The assessee company received mense profit for unauthorised occupation of the premises (Novelty Chambers) from Central Bank of India who was in possession of the rented premise in the Novelty Chambers. The tenancy of Central Bank of India ended on 1.6.2000. As per the order of the Supreme Court in which the court directed the Bank to hand over the possession to the assessee company by 30/06/2003 due to which the Bank gave possession of Novelty Chambers to the assessee company on 30/09/2003. Hence a suit was filed by the assessee company for mesne profit for the aforesaid period. The Small Causes Court at Mumbai passed an order dated 28/03/2007 wherein the Mesne Profit was fixed at Rs.8,33,474/- per month for the period between 1/06/2000 to 30/09/2003 plus interest thereon. The period was decided on the basis of the fact that the tenancy of Central Bank of India was terminated on 1/06/2000 and it vacated the premises and gave peaceful possession to the assessee company on 30/09/2003. The total compensation was thus fixed at Rs.3,33,38,960/- plus interest thereon at the rate of 6%. Thereafter, Central Bank of India filed an Application to the Small Causes Court for staying execution and operation of the order dated 28/03/2007 which was disposed by directing the appellant to pay Rs.1,47,28,280/-. Central Bank of India had also preferred an appeal against the said determination of mesne profit which was admitted and was pending. Thus, in the mean time during AY 08-09, Central Bank of India paid Rs.1,47,18,280/- to the assessee company which the assessee company had directly taken to the capital reserve without crediting the profit and loss account holding it to be a capital receipt exempt from Income-tax. The appeal of the Central Bank of India was still pending for adjudication.

The Department did not accept the assessee’s contention that mesne profits of Rs.1,47,18,280/- received by it constituted a capital receipt not chargeable to tax, in spite of the decision of the Hon’ble Madras High Court in the case of CIT vs. P. Mariappa Gounder, 147 ITR 676, holding the same to be revenue in nature.

Assessee preferred appeal before the CIT(A). Since the mesne profit was capital in nature in view of the decision of the Special Bench, in case of Narang Overseas Pvt Ltd. therefore, they cannot be brought to tax under Section 115JB of the Act. Even the Explanation 2 to Section 115JB supports the case of the assessee. The CIT (A) allowed the appeal. The ITAT confirmed the order of CIT(A)

The Revenue filed an appeal before the High Court challenging the order of ITAT . Revenue had preferred an appeal against the decision of the Special Bench in Narang Overseas Pvt. Ltd. 100 ITD (Mum)(SB)

The Hon’ble COurt found that the issue before the Special Bench of the Tribunal in Narang Overseas Pvt. Ltd., (supra) was to determine the character of mesne profits being either capital or revenue in nature. The Special Bench of the Tribunal in Narang Overseas Pvt. Ltd., (supra) held that the same is capital in nature. There was no doubt that the issue arising herein was also with regard to the character of mesne profits received by the Assessee. Accordingly, the appeal if the revenue was dismissed.

Palkhi Investments & Trading Co. P. Ltd., Mumbai .. vs. The Income Tax Officer, Mumbai [INCOME TAX APPEAL NO.50 OF 2014; dt 9/6/2016 (Bombay High Court )] Affirmed [Palkhi Investments & Trading Co. Pvt Ltd vs. ITO CIR 9(2)(4) (ITA No.2623/Mum/2011 AY-2005-06; 24- 07-2013)]

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Penalty u/s. 271(1)(c) – Addition made u/s 41(1) of the Act on account cessation of liabilities – Liabilities not genuine- Reflecting such liabilities without bonafide belief of their existence amounted to furnishing of inaccurate particulars:

The Assessing Officer made an addition of Rs.1.26 crore to the total income declared by the assessee. This addition was in respect of trade liabilities which had ceased to exist and represented income in terms of Sec. 41(1) of the Act. Being aggrieved the assessee carried the issue in appeal to the CIT (Appeal), who confirmed the same. On further appeal, the Tribunal reduced the addition u/s. 41(1) of the Act from Rs.1.26 crores to Rs.1.05 crores. The assessee carried the issue in further appeal to the High Court. The Court by order dated 16th November, 2010 dismissed the appeal interalia recording as under :

“The tribunal also recorded a finding that one of the creditors had even denied that any amount was due to it from the assessee. The tribunal has also recorded a finding of fact that some of the creditors named by the assessee were not found available at the addresses given by the assessee.”

The appellant filed SLP to the Supreme Court and the same was also dismissed. Thereafter review petition before High court was also dismissed on 4th August, 2015.

The Assessing Officer imposed penalty u/s 271(1)(c) of the Act. This was for furnishing inaccurate particulars of income and concealing income in its return of income for subject assessment year. The order of the Assessing Officer imposing penalty was confirmed by the CIT (A).

The Tribunal recorded the fact that the assessee was unable to prove genuineness of the amount shown as outstanding liabilities to the extent of Rs.1.05 crore. In the above view the assessee had to show on the basis of some evidence that it had a bonafide belief that the liability shown in the balance sheet was existing. During the course of hearing in penalty proceedings the Tribunal raised two queries, namely, evidence to prove as to when liability claimed to be subsisting arose for first time and other whether the assessee had received any letter from HDFC Ltd. stating that the amount due to M/s. Karamchand Chunnilal should be paid over to them as it had taken over its business as contended by the assessee. The impugned order records that the assessee was not in position to respond on both the issues. The impugned order further recorded that the claim made with regard to existing liabilities was not genuine claim as already established in quantum proceedings. The tribunal held that it was established that the assessee had filed inaccurate particulars of claim of income resulting in concealing of income. In above view, the tribunal upheld the order of AO imposing penalty of Rs.38.71 lakhs u/s. 271(1)(c) of the Act.

The Hon’ble Court observed that in quantum proceedings which were taken up to the Supreme Court the Tribunal had recorded a fact that a creditor had denied that any amount was due to the appellant and one of them was also not found at the address given. Further, in penalty proceedings all three authorities have concurrently arrived at a finding of fact that the claim made by the assessee with regard to its outstanding liabilities for subject assessment year was false. These findings of fact are not shown to be perverse in any manner. The legal claim made before the court that once a liablility is shown in the balance sheet, it must follow that it is bonafide, is not understood. The liability shown in the balance sheet as existing is found to be false. The assessee has to show the reason why he believed at the time he filed his balance sheet, it was true. No such attempt was even made.

The fact is that in terms of section 139 of the Act a return of income under the Act has to be filed along with the balance sheet and profit and loss account. In its absence the return of income is defective. Thus, same are to be considered as a part of the return of income. Further by showing a non existing liability as an existing liability, in the subject AY , the attempt was to escape offering of the ceased liability as income obliged to do u/s. 41(1) of the Act. Thus, not offering to tax, the above ceased liabilities would by itself amounted to furnishing inaccurate particulars of income leading to escapement of income from tax. In view of the above the assessee’s appeal was dismissed.

DIT (E) vs. M/s. Khar Gymkhana Income tax Appeal no -2349 of 2013 dt : 6/06/2016 (Bombay High Court).[Affirmed M/s Khar Gymkhana vs. DIT (E) ; ITA No. 373/Mum/2012 Bench: A ; dt 10/7/2013 ;(A Y: 2009-10 )]

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Charitable Institution- Registration of a charitable institution granted u/s. 12AA – cancellation of registration is to be initiated strictly in accordance with sections 12AA (3) and 12AA (4):

The assessee came into being by virtue of Deed of Trust dated 04.10.1934 for the promotion of sports, physical culture and social inter-course among members. The assessee trust had facilities such as promotion and advancement of games like cricket, tennis, badminton, a library consisting of sports books and periodicals, other indoor and outdoor games facilities. The CIT, Bombay City IV, allowed the registration of the trust u/s. 12A(a). Since then, the assessee was enjoying the exemption granted by the Income Tax department.

In the assessment proceedings for AY : 2009-10, the AO came to a conclusion that the assessee trust was carrying on the activities, which were in the nature of trade, commerce, business etc. This, he concluded by noticing that out of the receipts, the assessee had earned income by the sale of liquor at Rs. 1,45,99,037/-, canteen compensation at Rs. 20,67,807/- card and daily games at Rs. 81,883/-, guests fee at Rs. 31,50,078/- and income from banquet hall. The AO, therefore, asked the assessee to explain as to why the registration may not be cancelled in view of the newly inserted proviso to section 2(15), applicable from 2009-10, as the objects are not merely the advancement of games and social interaction, and the activities were of nature set out in the proviso i.e.:

a) any activity in the nature of trade, commerce or business or

b) any activity of rendering any service in relation to any trade, commerce or business.

as prescribed by Circular No. 11/2008, dated 19.12.2008. The AO held that if any trust/Institution whose main object is “for advancement of any other object of general public utility” carries out any activities which are in the nature of any trade, commerce or business for a cess or fee , it brings all actions of a trust which are resulting in such receipts as part of its earnings under the ambit of aforesaid proviso. Since the receipts were in excess of monitory limit as led down in the aforesaid proviso, there was a clear cut contravention of the provisions of Section 2(15) r.w. proviso.

The Tribunal held that it was not the case of the department that the assessee crossed the twin conditions, as mentioned in the section 12AA(3), which are, ” … that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution …”. In the instant case, the department has nowhere mentioned that “social inter-course among members” was not one of the objects of the trust, when it was originally formed on 04.10.1934. The revenue authorities have erred in cancelling the registration u/s 12AA(3).

The Revenue filed an appeal before the High Court challenging the order of ITAT .

It was submitted by the assessee that in view of the CBDT Circular having Circular No. 21 of 2016 dated 27th May, 2016, the Revenue cannot press this appeal.

The Hon’ble Court observed the Circular No.21 of 2016 when read as a whole, specifically lists out in paragraphs 4 and 5 that the Registration granted under Section 12AA could not be cancelled, only when the receipts on account of business exceeded the cutoff, specified in the proviso to section 2(15) of the Act. The jurisdiction to cancel the Registration only arises if there is change in the nature of activities of the institution or the activities of the institution, are not genuine. The aforesaid Circular by placing reliance upon 13(8) of the Act inter alia provides that the Registration granted to the Trust would continue even when the receipts on account of business is in excess of Rs.25 lakhs.

In view of the issue being covered by the CBDT Circular No.21 of 2016, no grievance against the impugned order can be made by the Revenue. Therefore, the appeal of the revenue was dismissed.

The CIT: 21 vs. Parleshwar Coop. Housing Society Ltd. [Income tax Appeal no 1569 of 2007 dt -08/06/2016 (Bombay High Court)]. Affirmed decision in[Shree Parleshwar Co-Op. Housing vs. ITO, Ward 21(2)(4); AY- 1998-99 to 2000-2001 (2006 8 SOT 668 Mum)]

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Character of income- Contribution received by the Society from its four new members would be covered by the concept of mutuality and not chargeable to tax – Principle of mutuality :

The assessee was a, housing co-operative society, registered under the Maharashtra Co-operative Societies Act, 1960. The assessee fell in the category known as “tenant co-partnership housing society”. The main feature of such a society is that it owns both land and building either on leasehold or freehold basis and on construction of tenements they are allotted to its members. The society constructed 198 flats from 1954 till 1956 and allotted them to members, who, among others, had a right to transfer their right of membership and other attendant privileges.

During these assessment years the assessee society collected interest free loans from the incoming members. The AO was of the view that the loans so taken are really not refundable and consequently represented income in its hand, liable to be taxed. The assessee submitted that the loans in question were all repayable sums. In fact, all the loans were eventually repaid .

The assessee before ITAT contended that the department did not properly appreciate that the loans in question were only in the nature of loans and did not have the character of income. Even otherwise, on the basis of mutuality the sum could not be brought to tax.

The issue stood concluded against the Revenue and in favour of the assessee by the decision of the Apex Court in the case of Siddheshwar Sahakari Sakhar Karkhana Ltd. vs. Commissioner of IncomeTax, (2004), 270 ITR 1.

As regards second issue the said Society owned both the land and the building and only alloted its tenaments to its members. The respondent society was constituted in the year 1954 and had 198 members occupying its tenaments. The respondent Society had available unutilised FSI (Floor Space Index) and sought to exploit it by constructing four additional tenaments and also enclosing the balconies (Verandah) of the existing tenaments resulting in additional l00 sq.ft. to its members. None of the existing members came forward to seek allotment of the four additional tenaments which were to be constructed on exploitation of the unutilised FSI.

In 1998, four persons sought membership of the Society. The above four new members were subsequently alloted the tenaments on construction by the respondent Society. The four new members had after becoming members contributed to the Society in the aggregate an amount of Rs.1.10 Crore. This resulted in allotment of four new tenaments constructed by the Society. However, the aforesaid contribution received from the four new members was not offered to tax by the Society on the principle of mutuality. However, the Assessing Officer did not accept assessee’s contention in respect of mutuality and held that the contribution from the four new members is in fact consideration received for sale of four new tenaments and, therefore, chargeable to tax as the income of the Society.

The CIT (A) dismissed the Society’s appeal holding there is no reason to disturb the findings of the Assessing Officer.

On further appeal by the Society, the Tribunal while allowing the Society’s appeal placed reliance upon the decision of the Apex Court in Commissioner of Income Tax vs. Bankipur Club Ltd. 226 ITR 97 wherein it was held that where a number of persons combine together and contribute to a common fund for the financing of some venture or object and will in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. There must be complete identity between the contributors and the participators.

The tribunal held that the contribution received by the Society from its four new members would be covered by the concept of mutuality and not chargeable to tax

The Revenue filed an appeal before the High court challenging the order of ITAT . The High Court held that the test to determine the satisfaction of mutuality had been laid down by the decision of the Apex Court in Banglore Club vs. CIT 350 ITR, 509. The Apex Court has observed that the basis of not taxing surplus funds in the hands of an Assessee on the principle of Mutuality found its origin in the concept that no man can make a profit of himself. The Apex Court in Banglore Club (supra) set out three tests to be satisfied as under before the principle of mutuality can be applied as under :

i) There must be a complete identity between the contributors and the participants as a class;

(ii) The actions of the participants and contributors must be in furtherance of the activities of the assessee; and
(iii) There must be no scope of profiteering by the contributors from a fund made by them, which could only be expended or returned to them.

Thus, on facts, tests are satisfied therefore the Appeal of the revenue is dismissed.

CIT- 15 vs. Sanjay Manohar Vazirani. [ Income tax Appeal no 2442 of 2013 dated- 07/06/2016 (Bombay High Court)]. Affirmed [Sanjay Manohar Vazirani vs. Commissioner of Income Tax 15 . [ITA No. 5178/MUM/2012 ; Bench – E ; dated 30/01/2013 ; A Y: 2009- 2010. Mum. ITAT ]

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New Claim – Without filing revised return before AO – No Bar to entertain such claim by Appellate authority – Borrowing funds for its business of sale and purchase of shares held allowable:

The assessee in his return of income had claimed carry forward short term loss of Rs.1,17,70,414/-, in respect of sale and purchase of shares. During the course of assessment proceedings the assessee vide letter dated 17/10/2011 claimed that the activity of the assessee regarding sale and purchase of shares should be considered to be in the nature of business activity. It was pleaded that loss arising out of sale and purchase of shares should be allowed as loss arising out of business of sale and purchase of shares. A loss of Rs.5,40,98,454/- was computed by the assessee in respect of sale and purchase of shares . It was submitted that the activity of sale and purchase of shares should be considered to be business activity as all the necessary ingredients which are required to hold an activity as business activity have been fulfilled viz. (i) there is a high frequency of purchase and sale of shares; (ii) the transactions are substantial ; (iii) there is a voluminous trade as the total purchase are to the tune of Rs.51.24 crores and sales are of Rs.49.00 crores; (iv) the holding period of shares is very low; (v) the assessee has utilized borrowed funds for purchasing and holding the shares.

The AO did not accept such contentions of the assessee The AO also rejected the claim of the assessee regarding interest on loans which was claimed to the tune of Rs.71,18,278/- as according to AO only a portion of the said interest could be considered for the purpose of purchase and sale of shares. AO held that 40% of such interest is disallowable. Accordingly, he made disallowance of Rs.28,47,311/- .

Before the CIT (A) the assessee raised the same contentions . The Ld.CIT(A) did not accept the submission of the assessee on the ground that the assessee himself, in the return of income, has disclosed the income arising out of share transactions under the head capital gain; in the balance sheet, the stock had been shown under the head investment. He held that the claim made by the assessee during the course of assessment proceedings was an after thought the assessee could not be allowed to change the stand just to take advantage of some provisions of the Act; the assessee was not a trader of shares and purchase and sale of shares by him was only a part time activity because the assessee was getting regular salary income from the company; mere frequency of transactions could not be a proof of trading activity. Therefore, he held that AO was right in treating such income under the head “capital gain” and in this manner CIT(A) confirmed the action of the AO. The CIT(A) also confirmed the disallowance made by the AO in respect of interest.

The ITAT held that activity of sale and purchase entered into by the assessee was in the nature of business, as it had not been disputed by the revenue that borrowed funds on which interest had been paid by the assessee were utilized for the purpose of purchase of shares, the same was allowable out of income earned by the assessee from the activity of sale and purchase of shares. Thus appeal filed by the assessee was allowed .

The Revenue filed an appeal before the High court challenging the order of ITAT . The High Court held that the Tribunal has followed the decision of this Court in CIT vs. Pruthvi Brokers and Shareholders Pvt. Ltd. 349 ITR 336. Thus, the assessee’s contention was accepted that the gain on account of purchase and sale of shares was in the nature of business income. Consequently the interest paid by the assessee for borrowing funds for its business had necessarily to be allowed. In the above view, Appeal was dismissed.

TDS – Perquisite – A. Y. 1993-94 – Free interairline tickets provided to the employees of the assessee by other airlines – Cannot be considered as perquisite provided by assessee – No tax deductible at source –

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CIT vs. Air France; 384 ITR 142 (Del):

The assessee is in the business of air transport. The Assessing Officer treated as perquisite the free interairline tickets provided to the employees of the assessee by other airlines. He held the assessee liable for short deduction of tax at source. The CIT(Appeals) and the Tribunal allowed the assessee’s claim that there is no perquisite.

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

“The Tribunal did not commit any error in deleting the addition. The Department was unable to explain how the free air ticket provided to the employees of the assessee by some other airlines could be treated as perquisites provided by the assessee.”

TDS – Compensation or interest accruing from the compensation that has been awarded by the Motor Accident Claims Tribunal cannot be subjected to TDS and the same cannot be insisted to be paid to the Tax Authorities since the compensation and the interest awarded therein does not fall under the term income –

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Managing Director, Tamil Nadu State Transport Corpn. (Salem) Ltd. vs. Chinnadurai; [2016] 70 taxmann.com 53 (Mad)

In this case the Madras High Court considered the question as to whether it would be appropriate to insist the victim who is awarded compensation in motor accident cases to part with it or the interest that accrued on it towards payment as Tax Deduction at Source (TDS) ?

The High Court held as under:

“i) If there is a conflict between a social welfare legislation and a taxation legislation, then, this Court is of the view that a social welfare legislation should prevail since it subserves larger public interest. The Motor Vehicle Act 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 put spokes in the effective and efficacious enforcement of the Motor Vehicles Act. In fact, if one might deeply analyse, it could be seen that there is no direct conflict between any provisions of the Income Tax Act and the Motor Vehicles Act and it is only by the interpretation of the provisions the concept of compulsory payment of TDS has crept into the realm of compensation payment in Motor Vehicle Accident cases.

ii) This Court arrives at the conclusion that the compensation awarded or the interest accruing therein from the compensation that has been awarded by the Motor Accident Claims Tribunal cannot be subjected to TDS and the same cannot be insisted to be paid to the Tax Authorities since the compensation and the interest awarded therein does not fall under the term ‘income’ as defined under the Income Tax Act, 1961.

iii) Therefore, this Court directs that the Petitioner Corporation cannot deduct any amount towards TDS and the same shall also be deposited in addition to the amount that has already been deposited to the credit of M.CO.P.No.879 of 2006, on the file of the Motor Accident Claims Tribunal, Additional District Judge, Fast Track Court, Dharmapuri, within a period of four weeks from the date of receipt of a copy of this order and the Respondent is entitled to take appropriate steps in a manner known to law to withdraw the amount.”