BCAJ | Bombay Chartered Accountant Journal

S. 69A — Where the assessee had made frequent cash withdrawals and deposits, he should not be denied the benefit of peak credit and it was only peak shortage which could be added as unexplained income under section 69A.

58 (2024) 167 taxmann.com 671(Indore Trib)

Kamal Chand Sisodiya vs. ITO

ITA No.: 206(Ind) of 2024

A.Y.: 2011-12

Dated: 11^th October, 2024

S. 69A — Where the assessee had made frequent cash withdrawals and deposits, he should not be denied the benefit of peak credit and it was only peak shortage which could be added as unexplained income under section 69A.

FACTS

The assessee was an individual aged about 75 years who had retired from Government service of 39 years as teacher. During financial year 2010–11, he had made cash deposits of ₹11.61 lakhs in the bank account, which were added to the income of the assessee as unexplained cash deposits by the AO, resorting to section 147.

CIT(A) fully sustained the said addition made by the AO.

Aggrieved, the assessee filed an appeal before ITAT.

HELD

The Tribunal observed that-

(a) the AO has made impugned addition by merely aggregating various credit/deposits made by assessee throughout the financial year 2010-11 in bank account.

(b) On perusal of bank statement, it was found that the assessee has made frequent deposits in bank account, and it was not a case of one times sudden deposit. Further, the assessee had also made frequent cash withdrawals from the very same bank account.

(c) Therefore, looking at the pattern of deposits and withdrawals, the assessee should not be denied the benefit of peak credit and it was only peak shortage could be considered as unexplained income.

Accordingly, after examining the cash flow statements filed by the assessee, the Tribunal restricted the addition to peak shortage of ₹1.05 lakhs.

BCAJ Admin

Ss. 166, 160, 246A — Where the assessment order was framed in the case of the sole beneficiary of the private discretionary trust, appeal against the order could be filed by the beneficiary only and not by the trust.

57 (2024) 167 taxmann.com 378 (Raipur Trib)

Kajal Deepak Trust vs. ITO

ITA No.:70 (Rpr.) of 2024

A.Y.: 2017-18

Dated: 21^st August, 2024

Ss. 166, 160, 246A — Where the assessment order was framed in the case of the sole beneficiary of the private discretionary trust, appeal against the order could be filed by the beneficiary only and not by the trust.

FACTS

A minor was the sole beneficiary of the assessee-trust (a private discretionary trust) in which her father and mother were the trustees. The minor filed her return of income for AY 2017-18.

During the course of assessment proceedings of the minor, the AO observed that during the demonetization period, cash deposits of ₹9 lakhs were made in the bank account of the trust. The minor submitted that the cash deposits were made out of accumulated cash gifts received from her friends / relatives in the preceding years. The AO was not satisfied with the explanation and made additions under section 69A in her hands.

Although the assessment was framed in the hands of the minor, the trust filed an appeal before CIT(A). CIT(A) proceeded with the appeal, upheld the assessment order and dismissed the appeal.

Aggrieved with the order of CIT(A), the trust filed an appeal before ITAT.

HELD

The Tribunal observed that-

(a) The sole beneficiary in whose case the assessment had been framed was a separate and distinct entity as against the private discretionary trust and therefore, the appeal against the said assessment order could not be filed by the trust.

(b) Although the discretionary trust was the primary assessee whose income was liable to be brought to tax in the hands of the representative assessee under section 160(1)(iv), as per section 166, there was no bar on the department to frame direct assessment of a person on whose behalf or for whose benefit income was receivable. Accordingly, when the AO had framed the assessment in the hands of the individual beneficiary, then if the said assessment order was not accepted, it was for the beneficiary to have filed the appeal before CIT(A).

Accordingly, the appeal of the trust was dismissed with liberty to the beneficiary to file an appeal before CIT(A) who was directed to adopt a liberal approach regarding the reasons to the delay for filing of appeal.

BCAJ Admin

Transfer of Capital Asset to Subsidiary / Holding Company

ISSUE FOR CONSIDERATION

Any transfer of a capital asset by a company to its subsidiary company, subject to compliance of the specified conditions, is not regarded as a “transfer” under section 47(iv) of the Income Tax Act (“ACT”). Likewise, a transfer of a capital asset by a subsidiary company to the holding company is not regarded as a transfer under section 47(v). A company is defined by section 2(17) and includes an Indian company and a company in which, the public are substantially interested is defined by section 2(18) of the Act and includes the subsidiary company of a company in specified cases. An Indian company is defined by section 2(26) of the Act. The terms or expressions ‘subsidiary company’ or ‘holding company’ are not defined under the Income Tax Act. These terms, however, are defined under sections 2(46) and 2(87) of the Companies Act, 2013. (Section 4 of the Companies Act, 1956). The definition of a subsidiary company under the Companies Act includes a step-down subsidiary or sub-subsidiary, ie. a subsidiary of a subsidiary company.

An issue has arisen under the income tax law as to whether a step-down subsidiary is a subsidiary for the purposes of sections 47(iv) and (v) of the Act, and therefore, whether the transfer to or from such a subsidiary is regarded as a case of ‘no transfer’ for the purposes of section 2(47) of the Act; in other words, whether the capital gains on such a transfer is exempt from taxation.

The Gujarat High Court has held that a transfer of capital asset by a holding company, to its step-down subsidiary, is not covered by the provisions of section 47(iv) of the Act while the Bombay High Court, in the context of erstwhile section 108 r.w.s. 104 of the Act has held that a subsidiary included the subsidiary of a subsidiary. Recently, the Kolkata bench of the Income Tax Appellate Tribunal, following the decision of the Bombay High Court, has held that a transfer by a holding company to its step-down subsidiary is a case of transfer that is not regarded as a transfer. The Gujarat High Court in deciding the issue has specifically dissented from the decision of the Bombay High Court.

PETROSIL OIL CO. LTD.’S CASE

The issue under consideration first arose in the case of Petrosil Oil Co. Ltd. vs. CIT, 236 ITR 220 before the Bombay High Court in the context of the erstwhile section 108 r.w.s 104 of the Act.

In the said case, the assessee-company incorporated under the Companies Act, 1956 in India was a wholly owned subsidiary of a company incorporated in United Kingdom (UK company), which itself was also a subsidiary of another company based and registered in the United States of America holding its 100 per cent shares (US Company was one in which the public were substantially interested). Section 104 of the Act provided for the levy of additional tax on undistributed income of a closely held company under certain circumstances. Section 108 provided for the relief from such tax (a) to any company in which the public are substantially interested; or (b) to a subsidiary company of such company if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year.”

In the course of assessment, a controversy arose in regard to the appropriate tax rate of income-tax applicable to the assessee-company. The question arose whether the company could be considered a domestic company in which the public are substantially interested. The AO did not accept the contention of the assessee that the assessee-company, being a wholly owned subsidiary of another company which in turn was a subsidiary of another company in which the public were substantially interested, then by virtue of section 108, having been incorporated by reference in definition of ‘a company in which public were substantially interested’ in then s.2(18), it should be deemed to be a company in which public were substantially interested.

The Appellate Commissioner decided in favour of the assessee holding that a subsidiary of a subsidiary also fell within the ambit of clause (b) of section 108 if it satisfied the requirements prescribed therein. The Tribunal was however, of the view that section 108, did not cover a case of sub-subsidiary and decided the appeal before it against the assessee.

On reference, there being a point of difference between the two judges of the Division Bench – one judge holding that to qualify as a ‘company in which the public are substantially interested’ not only the assessee-company but also its parent company / companies must also be domestic company, while the other judge held that the assessee in question was a company in which public was substantially interested in as much as the holding company was the subsidiary of a company which was a company in which public was substantially interested, the case was referred to the Third Judge.

In response, the company, in the context of the relevant issue, submitted that;

The U.S. company fell within section 2(18)(b)(B)(i)(d); as 100 per cent of the shares of the U.K. company were held by the U.S. company, the U.S. company and U.K. company were one and the same; then the assessee would fall within section 2(18)(b)(B)(i)(c); a 100 per cent owned subsidiary of a 100 per cent owned subsidiary should be considered as a subsidiary.
Under section 4(1)(c) of the Companies Act, a company was deemed to be a subsidiary of another if it was a subsidiary of any company which was the subsidiary of the other; a sub-subsidiary which fulfilled the requirement of section 108(b) would be a subsidiary under section 108(b); in that case 100 per cent of the shares of the assessee were held by the U.K. company whose shares were held by the US holding company, and the assessee, thus, fulfilled the requirement of section 108(b).
Reliance was placed upon the case of Howrah Trading Co. Ltd. vs. CIT 36 ITR 215 (SC), wherein the question was whether a person, who had purchased shares in a company under blank transfer forms and in whose name the shares had not been registered in the books of the company, was or was not a shareholder within the meaning of section 18(5). The Supreme Court, whilst deciding this question, held that under the Indian Companies Act, the expression ‘shareholder’ denoted no other person except a member. The Supreme Court held that no valid reason existed why the word ‘shareholder’ as used in section 18(5) should mean a person other than the one denoted by the same expression in the Indian Companies Act. The Supreme Court was, thus, importing the definition of the term ‘shareholder’ as used in the Companies Act into the Income-tax Act.
The definition under section 4(1)(c) of the Companies Act must be imported into section 108; even on the doctrine of lifting of corporate veil, it would be found that 100 per cent of the shares of the assessee-company were held by the U.K. company and 100 per cent of the shares of the U.K. company were held by a U.S. company; it must, therefore, be held that the sub-subsidiary was also a subsidiary of the U.S. company and fell within section 108(b).

On behalf of the revenue department, in the context of the relevant issue, it was submitted that section 108(b) applied only to such companies whose entire share capital was held by a company falling under section 108(a); the definition of the expression ‘subsidiary company’ under the Companies Act could not be incorporated into section 108; neither of the two conditions prescribed under section 108(b) were satisfied by the assessee-company; the assessee was not a subsidiary of the U.S. company and, therefore, was not a subsidiary of a company falling within section 108(a); a sub-subsidiary could not be treated as a subsidiary for the purposes of section 108(b); the assessee was, thus, not a company in which the public were substantially interested.

On due consideration of the rival submissions, the court held that;

The Income-tax Act nowhere defined what was a ‘subsidiary company’. The Finance (No. 2) 1971 Act also did not define what was a ‘subsidiary company’
There would be a dichotomy if the assessee-company were to be a subsidiary company of the U.S. company for the purposes of the Companies Act but were deemed not to be a subsidiary of the U.S. company for the purposes of the Act.
The meaning given to the term ‘subsidiary company’ under section 4(1)(c) of the Companies Act must be imported into section 108. Of course, the further condition laid down under section 108(b) must also be fulfilled. Thus, a sub-subsidiary would be a subsidiary under section 108(b) if the whole of its share capital had been held by the parent company or its nominees throughout the previous year.
If that meaning was incorporated, then it was very clear that the assessee was a subsidiary within the meaning of section 108(b). This was so because, admittedly, the U.S. company was a company in which the public are substantially interested and fell within section 108(a). A 100 per cent owned sub-subsidiary of a 100 per cent owned subsidiary would be a subsidiary within the meaning of section 4(1)(c) of the Companies Act and also within the meaning of section 108(b) of the Companies Act. The assessee fulfilled the condition of section 108(b) in as much as, throughout the previous year, 100 per cent of its share capital was held by the U.K. company. Throughout the previous year, 100 per cent of the share capital of the U.K. company was held by the U.S. company. The U.K. company was, thus, a nominee of the U.S. company. The assessee would, thus, be a subsidiary within the meaning of section 108(b).
Once the definition of the expression ‘subsidiary company’ appearing in section 4(1) of the Companies Act was imported to find out the true meaning of the word ‘subsidiary company’ in clause (b) of section 108, it would have to be read in the context of the requirements of clause (b) of section 108. In other words, ‘subsidiary company’ in section 108 could be understood to mean a subsidiary company as defined in section 4(1) of the Companies Act, which met the further requirements of clause (b) of section 108, viz., if the whole of the share capital of such subsidiary company had been held by the parent company or by its nominees throughout the previous year. If company ‘A’ held 100 per cent of the shares of a subsidiary company ‘B’ which held 100 per cent of the shares of another company ‘C’, under the Companies Act, Company ‘A’ could be said to be holding 100 per cent of the shares of company ‘C’ also. In conclusion section 2(6)(a) of the Finance Act, read with section 108(b), covered the case of a subsidiary company which was a subsidiary of a subsidiary company falling therein, if it also met the requirements mentioned in that clause.

KALINDI INVESTMENT (P.) LTD.’S CASE

The issue again came up for consideration before the Gujarat High Court in the case of Kalindi Investment (P.) Ltd. vs. CIT, 256 ITR 713 in the context of section 47(iv) of the Act.

In the said case, the facts were that one Kaveri Investments (P.) Ltd. was a wholly-owned subsidiary of the assessee company. Ambernath Investments (P.) Ltd. was a wholly-owned subsidiary of Kaveri Investments (P.) Ltd. As such, Ambernath Investments (P.) Ltd. was a step-down subsidiary of the assessee company.

The assessee, a private limited holding company, was earning dividend and interest income from its activities of making or holding investments and financing industrial enterprises. It maintained its books of account on mercantile system of accounting. For the assessment year under consideration, i.e., 1975-76, for which the accounting period ended on 31^st March, 1975, the assessee-company filed its return of income declaring total loss of ₹3,02,858. The total loss included an amount of ₹1,26,201 claimed by the assessee to have been incurred on account of short-term capital loss.

At the assessment proceedings, the ITO noted that during the accounting period the assessee had sold its 2,300 shares of Sarabhai Management Corpn. Ltd., a private limited company, on 20^th January, 1975, to its subsidiary company, viz., Ambernath Investments (P.) Ltd. Co. for ₹13,600 only at the rate of ₹6 per share. The said shares had been purchased by the assessee-company on 30^th July,1973, for ₹1,38,345 at the rate of ₹60.15 per share. The difference of ₹1,24,545 was claimed by the company as short-term capital loss occasioned as a result of transfer of the said shares by it to Ambernath Investments (P.) Ltd. The ITO rejected the assessee’s claim on the ground that the transferee-company, i.e., Ambernath Investments (P.) Ltd. was a subsidiary company of the assessee-company and, therefore, the case was clearly covered by the provisions of section 47(iv) of the Income-tax Act, 1961 (‘the Act’).

The CIT(A) and the tribunal confirmed the finding of both the lower authorities that the provisions of section 47(iv) were attracted. For this purpose, the Tribunal relied on the definitions of ‘holding company’ and ‘subsidiary company’ as given in section 4 of the Companies Act, 1956.

At the instance of the assessee company the following question was referred by the Tribunal for opinion of the Gujarat Hogh Court:

“1…………….

2. Whether the Tribunal was justified in interpreting various relevant provisions of various Acts such as sections 45, 47(iv)(a), 2(17), 2(26) of the Act as well as section 4, etc., of the Companies Act, 1956, while arriving at the conclusion that the loss in question was incurred on account of transaction between the parent company and the subsidiary company and, hence, the same was disallowable under section 47(iv)(a) of the Act in spite of the fact that the assessee-company did not hold all the share capital of Ambernath Investments (P.) Ltd. ?”

The company contended before the court that:

Section 47(iv) contemplated transfer of a capital asset by a holding company to its subsidiary company and that since Ambernath Investments (P.) Ltd. was not a subsidiary company of the assessee-company, there was no question of applying section 47(iv). The assessee-company did not hold the whole of the share capital of Ambernath Investments (P.) Ltd. and, therefore, clause (a) of section 47(iv) was also not attracted. Of course, there was no dispute about the fact that Ambernath Investments (P.) Ltd. was an Indian company.
The Tribunal erred in invoking the provisions of the Companies Act, for applying section 47(iv) to the facts of the instant case. Section 4(1) of the Companies Act, commenced with the words ‘For the purposes of this Act’, and therefore the definition of ‘holding company’ contained in the aforesaid provision could not be applied for the purposes of section 47(iv) which is a different enactment altogether.
Because the transaction in question resulted into capital loss, the revenue had held that it was not a transfer, but if the transaction had resulted into capital gain, the revenue would have canvassed the other way around to rope in the income as taxable, by treating it as a transfer of capital asset outside the purview of section 47(iv). For that purpose, the revenue would have contended that Ambernath Investments (P.) Ltd. was not the immediate subsidiary of the assessee-company.

On the other hand, the Revenue, submitted that:

When the Act itself did not contain any definitions of ‘holding company’ and ‘subsidiary company’, and the Companies Act was a special enactment for companies, there was nothing wrong on the part of the Tribunal in relying on the definition of ‘holding company’ contained in section 4 of the Companies Act, more particularly, when the assessee held the entire share capital of Kaveri Investments (P.) Ltd. and Kaveri Investments (P.) Ltd., in turn, held the entire share capital of Ambernath Investments (P.) Ltd. The provisions of section 4(1)(c), read with illustration thereof were clearly applicable in the facts of the instant case.
In any event of the matter, the Commissioner (Appeals) had also given another ground for holding that there was no capital loss and, therefore, also the finding given by the Tribunal is not required to be disturbed.

Having heard the learned counsels for the parties, the court observed that;

although revenue’s first submission appeared to be prima facie attractive, there was no justification for transplanting the definition of ‘holding company’ under the Companies Act into the provisions of section 47 automatically. The Companies Act had been enacted to consolidate and amend the law relating to companies and certain other associations.
Various regulatory provisions contained in the Companies Act were meant to make the companies accountable for their activities to the authorities as well as to the shareholders and creditors.
In order to ensure that a company having controlling interest in another company did not escape the liabilities of the other company, section 4(1) gave an expanded definition of a ‘holding company’.
On the other hand, the Income-tax Act was a taxing statute for taxing the Income under various heads and subject them to levy of tax. Capital gains was one such head. Section 45 provided that any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income-tax under the head ‘Capital gains’ and shall be deemed to be the income of the previous year in which the transfer took place. Since there could be borderline transactions, the Legislature has taken care to provide in section 47 that certain transfers shall not be considered as transfers for the purpose of levy of capital gains. For instance, any distribution of capital assets on the total or partial partition of an HUF was not to be treated as a transfer for the purpose of capital gains. So also, any distribution of capital assets on the dissolution of a firm, or an AOP was not to be treated as a transfer for the purpose of capital gains. Similarly, any transfer, in a scheme of amalgamation of a capital asset by the amalgamating company to the amalgamated company was also not be treated as a transfer for the purpose of capital gains, subject to compliance with certain conditions.
• The same section provided that, transfer of a capital asset by a holding company to its Indian subsidiary company or by a subsidiary company to its Indian holding company was not to be treated as a transfer for the purposes of capital gains.
The words ‘any transfer of a capital asset by a company to its subsidiary company’ would, as per the ordinary grammatical construction, contemplate only the immediate subsidiary company of the holding company as the holding company held the share capital only of its immediate subsidiary company.
If the Legislature, while enacting the Act, intended that the provisions of section 4 of the Companies Act should apply to a holding or a subsidiary company under section 47, there was nothing to prevent the Legislature from making such an express provision. The question was when that was not done, whether the provisions of section 4(1)(c) of the Companies Act were required to be read into section 47(iv) and (v) by necessary implication.
Section 4 of the Companies Act made it clear that the expanded definition of ‘holding company’ was applicable for the purposes of the Act. The Legislature gave an expanded definition of ‘holding company’ for the purposes of the Companies Act with the object to make the companies more accountable to the authorities, shareholders and creditors, With emphasis on ‘control’ of one company over another, the definition of ‘holding company’ under the Companies Act clearly indicated control over the composition of the Board of Directors or holding more than half in nominal value of equity share capital of the other company, which was sufficient to treat the two companies in question as a holding company and a subsidiary company.
On the other hand, the Legislature has provided different criteria for dealing with a holding company and a subsidiary company in the matter of tax in capital gains on transfer of assets between such companies. The Act has carved out a smaller number of holding and subsidiary companies for the purposes of section 47(iv) and (v). The wider definition of a ‘holding company’ with emphasis on ‘control’ as the guiding factor was not adopted in clauses (iv) and (v) of section 47. It was specifically provided that the parent company or its nominees must hold the whole of the share capital of the company.
The Legislature while enacting the Act, therefore, made a clear departure from the definition of ‘holding company’ as contained in the Act. In this view of the matter, there was no justification for invoking clause (c) of sub-section (1) of section 4 while interpreting the provisions of clauses (iv) and (v) of section 47, which laid down two specific conditions for applicability of the said clauses, and which were quite different from the criteria laid down in sub-section (1) of section 4 of the Companies Act, 1956, for giving a more expanded definition of a ‘holding company’ to subject more companies to regulatory control under the Companies Act. On the other hand, the object underlying section 47 was to lay down exceptions to the legal provision (section 45) for taxing gains on transfer of capital assets. The general rule was to construe the exceptions strictly and not to give them a wider meaning.

In this view of the findings, the Gujarat High Court had no hesitation in expressing the view that the Tribunal was not justified in law in treating Ambernath Investments (P.) Ltd. as a subsidiary company of the assessee-company for the purposes of clause (iv) of section 47 of the Income-tax Act.

OBSERVATIONS

The relevant provisions of the Income-tax Act are sections 2(17), 2(18), 2(26), 2(47), 45 and 47. Sections 47(iv) and (v) read as: “47. Transactions not regarded as transfer. –Nothing contained in section 45 shall apply to the following transfers:-

(i) …

(ii) …

(iii) …

(iv) any transfer of a capital asset by a company to its subsidiary company, if-

a. the parent company or its nominees hold the whole of the share capital of the subsidiary company, and

b. the subsidiary company is an Indian company;

(v) any transfer of a capital asset by a subsidiary company to the holding company, if-

a. the whole of the share capital of the subsidiary capital is held by the holding company, and

b. the holding company is an Indian company:”

The relevant provision of the Companies Act, 1956 is section 4(1) which reads as;

“Meaning of ‘holding company’ and ‘subsidiary’:

“4(1). For the purposes of this Act, a company shall, subject to the provisions of sub-section (3), be deemed to be subsidiary of another if, but only if,-

a. that the other controls the composition of its Board of Directors; or

b. that other-

(i) ******

(ii) . . . holds more than half in nominal value of its equity share capital; or

c. the first-mentioned company is a subsidiary of any company which is that other’s subsidiary.”

The Illustration below sub-section (1) of section 4 reads as under:

“Company B is a subsidiary of company A, and company C is a subsidiary of company B. Company C is a subsidiary of company A, by virtue of clause (c) above. If company D is a subsidiary of company C, company D will be a subsidiary of company B and consequently also of company A, by virtue of clause (c) above, and so on.”

The terms “subsidiary company” and “holding company”, as noted earlier, are not defined in the Income Tax Act. These terms are, however, defined under section 4(1)(c) of the Companies Act 1956, now sections 2(46) and 2(87) of the Companies Act, 2013. On a bare reading of the definitions provided by the Companies Act, it is clear that 100 per cent subsidiary company of a 100 per cent subsidiary company of a holding company is also regarded as a subsidiary of the holding company. In other words, a step-down subsidiary is treated as a subsidiary of the holding company for the purposes of the Companies Act.

The Gujarat High Court, while examining the issue in the context of section 47 has held that the meaning of the term “subsidiary” for the purposes of section 47 of the Income Tax Act should be gathered from the ordinary understanding of the term and the provisions of the Companies Act should not be imported for assigning the meaning to a subsidiary under the Income Tax Act. In view of the Gujarat High Court, the meaning provided by the Companies Act should not be relied upon in interpreting the provisions of Income Tax Act.

A subsidiary company and a holding company are companies incorporated and registered under the Companies Act and derive their existence from the Companies Act. In the circumstances, it is natural and logical to rely on the meaning supplied by the Companies Act, especially where the term subsidiary company is not defined under the Income Tax Act. It is a settled position in law, to gather the meaning of an undefined term used in the Income Tax Act from any other enactment where such term is defined, more so where the definition is under an enactment under which the entity is born, and is the principal enactment that governs and regulates such an entity. In modern days, it is usual for the legislature, while enacting a new law, to specifically clarify the situation, by providing for a clear right to refer to another enactment for gathering the meaning of an undefined term. The rule of harmonious construction also supports an interpretation that avoids absurdity of limiting the understanding of the term subsidiary company to the Income Tax Act alone. It would create an absurdity where a step-down subsidiary is treated as a subsidiary under the parent enactment governing the companies but is not treated so under the Income Tax Act. The provisions of the General Clauses Act also support such a view. In fact, the legislature was aware that the terms under consideration are not defined under the Income Tax Act and therefore intended that the meaning of such terms would be gathered from the Companies Act that regulates the functioning of such companies.

The Supreme Court in the case of Paresh Chandra Chatterjee vs. State of Assam, AIR 1962, SC 167 confirmed this Rule of Interpretation in the following words;

“Sections 23, 24 and 25 [of the Land Acquisition Act, 1894], lay down the principles for ascertaining the amount of compensation payable to a person whose land has been acquired. We do not see any difficulty in applying those principles for paying compensation in the matter of requisition of land. While in the case of land acquired, the market value of the land is ascertained, in the case of requisition of land, the compensation to the owner for depriving him of his possession for a stated period will be ascertained. It may be that appropriate changes in the phraseology used in the said provisions may have to be made to apply the principles underlying those provisions.” (p. 171).”

It was further observed: “If instead of the word ‘acquisition’ the word ‘requisition’ is read and instead of the words ‘the market value of the land’ the words ‘the market value of the interest in the land’ of which the owner has been deprived are read, the two sub-sections of the section can, without any difficulty, be applied to the determination of compensation for requisition of a land. So too, the other sections can be applied”. (p. 171)

In the case of Howrah Trading Co. Limited vs. CIT 36 ITR 215, the Supreme Court held that in gathering the meaning of the word ‘shareholder’ not defined u/s 18(5) of the Indian Income Tax Act 1992, a complete reliance should be placed on the definition of the term ‘shareholder’ under the Indian Companies Act 1913. It held that “no valid reason existed why “shareholder” as used in section 18(5) of the Act should mean a person other than the one denoted by the same expression in the Indian Companies Act 1913.

Again, the same court in the case of CIT vs. Shantilal (P.) Ltd., 144 ITR 57 (SC) held that “there is no reason why the sense conveyed by the law relating to contract should not be imported into the definition “speculative transaction” under Income Tax Act.”

No particular benefit is sought to be provided by adopting this Rule of Interpretation, which, in any event, cuts either way, as has happened in some of the cases where the loss arising on transfer of capital asset to the subsidiary company was not allowed for set-off, in as much as the income, if any, on such a transfer would have been exempt from tax.

Recently, in the case of Emami Infrastructure Ltd vs. ITO, 91 taxmann.com 62 (Kolkata), the ITAT held that a transfer to a step-down subsidiary by a holding company was a case of a transfer not regarded as a transfer u/s 2(47) of the Act.

The better view, therefore, is that the meaning of the terms ‘subsidiary’ and ‘holding’ companies should be gathered from the Companies Act, as long as they are not defined under the Income Tax Act, more so where the meaning supplied is contextual.

BCAJ Admin

Glimpses of Supreme Court Rulings

12. Shriram Investments vs. The Commissioner of Income Tax III, Chennai (Civil Appeal No. 6274 of 2013 dated 4^th October, 2024- SC)

Revised return of income — The Assessing Officer has no jurisdiction to consider the claim made by the Assessee in the revised return filed after the time prescribed by Section 139(5) for filing a revised return had already expired.

The Appellant-Assessee filed a return of income on 19^th November, 1989 under the Income Tax Act, 1961 (‘IT Act’) for the assessment year 1989–90. On 31^st October 1990, the Appellant filed a revised return.

As per intimation issued under Section 143(1)(a) of the IT Act on 27^th August 1991, the Appellant paid the necessary tax amount.

On 29^th October, 1991, the Appellant filed another revised return. The Assessing Officer did not take cognizance of the said revised return.

The Appellant, therefore, preferred an appeal before the Commissioner of Income Tax (Appeals) (‘CIT (Appeals)’). By the order dated 21^st July, 1993, the CIT (Appeals) dismissed the appeal on the ground that in view of Section 139(5) of the IT Act, the revised return filed on 29^th October, 1991 was barred by limitation.

Being aggrieved, the Appellant-Assessee preferred an appeal before the Income Tax Appellate Tribunal (for short, ‘the Tribunal).

The Tribunal partly allowed the appeal by remanding the case back to the file of the Assessing Officer. The Assessing Officer was directed to consider the Assessee’s claim regarding the deduction of deferred revenue expenditure.

The Respondent Department preferred an appeal before the High Court of Judicature at Madras. By the impugned judgment, the High Court proceeded to set aside the order of the Tribunal on the ground that after the revised return was barred by time, there was no provision to consider the claim made by the Appellant.

Before the Supreme Court, the Appellant relied upon a decision in the case of Wipro Finance Ltd. vs. Commissioner of Income Tax (2022) 137 taxmann.com 230 (SC). It was contended that the Tribunal did not direct consideration of the revised return but the Tribunal was rightly of the view that the assessing officer can consider claim made by the Appellant regarding deduction of deferred revenue expenditure in accordance with law. It was submitted that the Appellant was entitled to make a claim during the course of the assessment proceedings which otherwise was omitted to be specifically claimed in the return.

Revenue relied upon decisions in the case of Goetze (India) Ltd. vs. Commissioner of Income Tax (2006) 157 Taxman 1 (SC) and Principal Commissioner of Income Tax &Anr. vs. Wipro Limited (2022) 446 ITR 1. It was submitted that after the revised return was barred by limitation, there was no question of considering the claim for deduction made by the Appellant in the 2 revised returns. It was submitted that the High Court was absolutely correct in concluding that after the revised return was barred by limitation, the Assessing Officer had no jurisdiction to consider the case of the Appellant.

According to the Supreme Court, the issue which arose before the Supreme Court in Wipro Finance Ltd 2022 (137) taxmann.com 230 (SC) was not regarding the power of the Assessing Officer to consider the claim after the revised return was barred by time. In that case, the Court considered the appellate powers of the Tribunal under Section 254 of the IT Act. Moreover, it was a case where the department gave no objection for enabling the Assessee to set up a fresh claim.

The Supreme Court noted that in the case of Goetze (India) Ltd (2006) 157 Taxman 1 (SC), it had held that the Assessing Officer cannot entertain any claim made by the Assessee otherwise than by following the provisions ofthe IT Act.

The Supreme Court noted that in the present case, there was no dispute that when a revised return dated 29^th October, 1991 was filed, it was barred by limitation in terms of section 139(5) of the IT Act.

The Supreme Court after noting the provisions of section 139(5) of the IT Act and the decision in Wipro Limited (2022) 446 ITR 1, held that the Tribunal had not exercised its power under Section 254 of the IT Act to consider the claim. Instead, the Tribunal directed the Assessing Officer to consider the Appellant’s claim. The Assessing Officer had no jurisdiction to consider the claim made by the Assessee in the revised return filed after the time prescribed by Section 139(5) for filing a revised return had already expired. Therefore, according to the Supreme Court, there was no reason to interfere with the impugned judgment of the High Court. The appeal was, accordingly, dismissed.

BCAJ Admin

Section 119(2): Condonation of delay — delay of two days in filing the Return of Income for Assessment Year 2021–22 — Allowed.

18. M/s. Neumec Builders Pvt. Ltd. vs. The Central Board of Direct Taxes, New Delhi & Others

WP(L) No. 30260 OF 2024

Dated: 8^th October, 2024. (Bom) (HC)

Assessment Years: 2021–22

Section 119(2): Condonation of delay — delay of two days in filing the Return of Income for Assessment Year 2021–22 — Allowed.

The Petitioner had made an application for condonation of delay on 13^th August, 2022, for condoning the delay of two days in filing the Return of Income for Assessment Year 2021–22. Despite repeated reminders, the same had not been decided by the Assessing Officer/Respondent.

The period for filing the Return of Income for the Assessment Year in question was extended up to 15^th March, 2022. It was submitted that the Return of Income was filed on 17^th March, 2022, i.e., there was a delay of two days due to various reasons which were beyond the control of the Petitioner as also its Chartered Accountant. It was stated that Form 10-IC was filed on 24^th March, 2022, also in respect of which delay is required to be condoned, considering the facts of the present case.

In so far as the reason for the delay, as contended by the Petitioner, it was submitted that the Chartered Accountant had made efforts to file a Return of Income and Form 10-IC within the prescribed time limit, however, due to technical difficulties on the Income Tax Portal, the same could not be filed. A screenshot of the technical issues faced by the Chartered Accountant in the filing of Form 10-IC was placed for consideration by the Assessing Officer along with the delay condonation application. It was contended that the Chartered Accountant had made a grievance setting out that sufficient efforts were made to file Form 10-IC, however, despite best efforts, the Form could not be uploaded. Such grievance application was filed by the Chartered Accountant on behalf of the Petitioner on 22^nd March, 2022. Further in the office premises of the Chartered Accountant, an incident of fire took place leading to the stoppage of electricity supply to the entire building. It was submitted that the Chartered Accountant has a database, and due to a sudden electricity stoppage, the entire computer system, including the server, was required to be shut-down. It was submitted that after the computer system was restarted, the Chartered Accountant tried to operate his computer system, however, the problems faced by the server led to further delay. The Chartered Accountant could resume the work only after the computer server was fully repaired. A copy of the Affidavit of the Chartered Accountant was also submitted to the Assessing Officer along with the delay condonation application. It was in these circumstances the Petitioner, by its Application dated 13^th August, 2022, sought condonation of delay of two days in filing the Return of Income and Form 10-IC.

In support, the Petitioner has also relied on the Circular No.19 of 2023 (F No.173/32/2022-ITA-I) dated 23^rd October, 2023 issued under Section 119, read with Section 115 BAA of the Income Tax Act, 1961 and Rule 21AE of the Income Tax Rules, 1962, which issues instructions to the subordinate authorities on condonation of delay in filing Form 10-IC for the AY 2021– 2022, and, more particularly, to Clause 3 thereof. Clause 3 (iii) provides that the delay in filing Form 10-IC be condoned where Form 10-IC is filed electronically on or before 31^st January, 2024 or 3 months from the end of the month in which the Circular is issued, whichever is later. It was submitted that, although in the present case, the delay is of two days in filing of the Return, however, since the Petitioner had filed its Form 10 IC on 22^nd February, 2022, the Petitioner was entitled to the benefit of Clause 3 (iii) of the said Circular in condoning the delay for filing Form 10-IC.

BCAJ Admin

Section 68: Bogus Purchase — the onus of bringing the purchases by the Assessee under the cloud was on the Revenue.

17. Ashok Kumar Rungta vs. Pr. Income Tax Officer 24(1)(1) &Ors.

ITXA No. 1753, 1759 & 2780 of 2028

Dated: 15^th October, 2024 (Bom) (HC)

Income Tax Appellate Tribunal order dated 9^th August, 2017

Assessment Years 2009–10 to 2011–12

Section 68: Bogus Purchase — the onus of bringing the purchases by the Assessee under the cloud was on the Revenue.

Originally, the Assessing Officer had passed an order dated 21^st March, 2014 (“AO Order”) on reassessment of returns for three Assessment Years, disallowing all the expenses incurred towards purchase from certain entities, and thereby adding such expenses to the income of the Appellant-Assessee. The CIT(A) restricted the disallowance @ 10 per cent of certain suspect purchases on the premise that they are bogus purchases. The ITAT upheld the findings of the CIT(A), by disallowing 10 per cent of the total purchases alleged to have been bogus and adding such sum to the income of the Appellant-Assessee for the relevant Assessment Years.

The Appellant-Assessee challenged the order of the ITAT and contended that all the purchases were genuine and must be allowed as legitimate expenses. The Respondent-Revenue wanted the Court to hold that all the expenses ought to have been treated as bogus and that the ITAT was wrong in disallowing only 10 per cent of such expenses vide Income Tax Appeal No. 1349 of 2018, filed by the Revenue against the very same Impugned Order, which was not entertained by a Division Bench of the Court by an order dated 24^th April, 2024.

The Hon. Court observed that the grievances of the Revenue being different from the grievances of the Assessee, the dismissal of the Revenue’s appeal is not conclusively determinative of the status of the Assessee’s grievances.

The Hon. Court observed that the ITAT has returned firm findings that the Respondent-Revenue had accepted the sales effected by the Appellant. The ITAT has also returned a finding that the sales are backed by compliance with indirect tax requirements such as sales tax returns and VAT audit reports. The ITAT has also held that it cannot be said that goods have not been sold by the Assessee. Most importantly, the ITAT has returned a firm finding that the adverse findings contained in the AO Order were not based on any cogent and convincing evidence. The court observed that once such a view has been arrived at by the ITAT, which is the last forum for finding of fact, the AO Order disallowing 100 per cent of the purchases under a cloud, is not based on any cogent and convincing evidence, it would follow that the AO Order has been judicially found to be untenable. Therefore, the foundation on which these proceedings were based stands completely undermined. However, the ITAT went on to state that the Appellant-Assessee has also failed to produce the parties from whom the alleged purchases were made and documents to prove the movement of goods (such as lorry receipts). The ITAT came to the view that goods would have indeed been purchased in the grey market. On this basis, it appears that the ITAT took an easy way out by simply upholding the order of the CIT(A) — by disallowing only 10 per cent of the purchases and adding that amount to the income of the Appellant-Assessee.

The Hon. Court examined the judgment of a Division Bench of this Court in the case of The Commissioner of Income Tax-1, Mumbai vs. M/s. NikunjEximp Enterprises Pvt. Ltd. wherein the Court ruled that merely because the suppliers had not appeared before the Assessing Officer or the CIT(A), one cannot conclude that the purchases in question had never been made and that they are bogus. In the case at hand, indeed, the sales are not under a cloud. The only ground for suspecting the purchases is that they were from suspect persons on the basis of input from the investigation wing and sales tax authorities. The ground in the instant case too is that the persons from whom the purchases were made had not been produced before the Assessing Officer. The ITAT has endorsed the CIT(A)’s acceptance of the sales tax returns and the VAT audit report. The ITAT has returned a firm finding that there is no cogent or convincing evidence in the AO Order. Against such a backdrop, the ITAT believed that the factual pattern of the matter at hand is similar to the factual context of Nikunj. That being the case, the outcome too ought to have been similar to Nikunj, where the disallowance was entirely rejected by the ITAT. In the instant case, the ITAT appears to have found it convenient that the CIT(A) had chosen to disallow 10 per cent of the expenses and it appears to be an acceptable consolation to strike a balance. However, the Court observed that once there is a quasi-judicial finding that there is no cogent and convincing evidence at all on the part of the Revenue in leveling an allegation, it would be wrong to expect that the Assessee would still have to prove its innocence. The ITAT ought to have gone into this facet of the matter and dealt with why the 10 per cent disallowance was plausible, reasonable, and necessary in the context of the facts of the case. Such an analysis is totally absent in the Impugned Order.

The Court observed that ad hoc rejection of 10 per cent of the expenses, found in the order of the CIT(A), appears to have been convenient via media that has been endorsed by the ITAT. In the instant case, the onus of bringing the purchases by the Appellant-Assessee under the cloud was on the Respondent-Revenue, which has not discharged this burden in the first place. Apart from the inputs being received from the investigation wing, there is nothing concrete in the material on record that was used to confront the Appellant-Assessee. If the counterparties in these purchases could not be produced years later, simply adopting a 10 per cent margin for disallowance, without any cogent or convincing evidence, would be unreasonable and arbitrary. It is repugnant for the ITAT to uphold such an addition of 10 per cent of the allegedly bogus purchases to the income of the Appellant-Assessee, despite returning a firm finding that the AO Order was untenable and not being backed by cogent and convincing evidence.

Therefore, the ITAT Order was set aside and the assessee’s appeals were allowed.

BCAJ Admin

TDS — Rent — Transit rent — Payment made by developer or landlord to a tenant who suffered hardship due to dispossession — Transit rent not taxable as revenue receipt — No liability to deduct tax at source.

59. Sarfaraz S. Furniturewalla vs. AfshanSharfali Ashok Kumar

[2024] 467 ITR 293(Bom):

Date of order 15^th April, 2024:

S.194-Iof the ITA 1961

TDS — Rent — Transit rent — Payment made by developer or landlord to a tenant who suffered hardship due to dispossession — Transit rent not taxable as revenue receipt — No liability to deduct tax at source.

On the question of whether there should be a deduction of tax at source u/s. 194-I of the Income-tax Act, 1961 on the amount paid by the assessee as “transit rent”, by the developer or builder, the Bombay High Court held as under:

“The ordinary meaning of rent would be an amount which the tenant or licensee pays to the landlord or licensor. The “transit rent”, which was commonly referred to as hardship allowance rehabilitation allowance, or displacement allowance, which was paid by the developer or landlord to the tenant who suffered hardship due to dispossession was not revenue receipt and therefore, not liable to tax. Hence there was no liability to deduct tax at source u/s. 194-I from the amount payable by the developer to the tenant.”

BCAJ Admin

Search and seizure — Survey — Assessment in search cases — Grant of approval by the competent authority — Approval to be granted for each assessment year — Single approval u/s. 153D granted by competent authority for multiple assessment years — Grant of approval cannot be merely ritualistic formality or rubber stamping by authority — Tribunal not erroneous in setting aside assessment order.

58. Principal CIT vs. Shiv Kumar Nayyar

[2024] 467 ITR 186 (Del)

A. Y. 2015–16: Date of order 15^th May, 2024

Ss. 132, 133A, 143(3), 153A and 153D of ITA 1961

Search and seizure — Survey — Assessment in search cases — Grant of approval by the competent authority — Approval to be granted for each assessment year — Single approval u/s. 153D granted by competent authority for multiple assessment years — Grant of approval cannot be merely ritualistic formality or rubber stamping by authority — Tribunal not erroneous in setting aside assessment order.

The Tribunal set aside the assessment order passed u/s. 153A of the Income-tax Act, 1961 read with section 143(3) as invalid and bad in law on the ground that the approval granted by the Range’s head under section 153D was void since it was granted in a mechanical manner without application of mind.

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

“i) The approval, for assessment in cases of search or requisition u/s. 153D of the Income-tax Act, 1961 has to be granted for “each assessment year” referred to in clause (b) of sub-section (1) of section 153A. Grant of approval u/s. 153D cannot be merely a ritualistic formality or rubber stamping by the authority. It must reflect an appropriate application of mind.

ii) The order of approval u/s. 153D for assessment u/s. 153A clearly signified that a single approval had been granted for the A. Ys. 2011–12 to 2017–18. The order also failed to make any mention of the fact that the draft assessment orders were perused, much less perusal with an independent application of mind. The concerned authority had granted approval for 43 cases in a single day which was evident from the findings of the Tribunal, succinctly encapsulated in the order. We are unable to find any substantial question of law which would merit our consideration.”

BCAJ Admin

Revision — Application for revision u/s. 264 — Power of Commissioner to condone delay — Power should be exercised in a liberal manner — Delay should be condoned where there is sufficient cause for it.

57. Jindal Worldwide Ltd. vs. Principal CIT

[2024] 466 ITR 472 (Guj)

A. Y. 2015–16: Date of order 29^th April, 2024

S. 264of ITA 1961

Revision — Application for revision u/s. 264 — Power of Commissioner to condone delay — Power should be exercised in a liberal manner — Delay should be condoned where there is sufficient cause for it.

The petitioner is a limited company incorporated under the provisions of the Companies Act, 1956, and is engaged in the business of weaving, manufacturing, and finishing textiles. The petitioner is also engaged in the business of manufacturing and dealing in denim and other textile activities. For the A. Y. 2015–16, the petitioner filed a return of income on 31^st October, 2015 declaring a total loss of ₹8,54,09,913 including the interest subsidy of ₹10,83,16,142 received by the petitioner under the Technology Upgradation Fund Scheme (TUFS) for textile and jute industries, a State interest subsidy of ₹2,27,09,183 and electricity subsidy of ₹1,71,06,082. According to the petitioner the aforesaid subsidies were erroneously treated as revenue receipts instead of capital receipts and the return of income was processed u/s. 143(1) of the Act on 17^th January, 2017 without framing any assessment u/s. 143(3) and intimation to that effect issued.

It is the case of the petitioner that for the A. Y. 2012–13, the petitioner had received similar subsidies, and the same was treated as revenue receipts instead of capital receipts during the appeal before the Income-tax Appellate Tribunal, the additional ground was taken by the petitioner and the same was allowed by the Tribunal while disposing of the appeal being I. T. A. No. 1843/Ahd/2016 by order dated 20^th February, 2019 (CIT vs. Jindal Worldwide Ltd.). Therefore, according to the petitioner, the issue of the nature of the subsidy was judicially decided that it would be capital receipts and not revenue receipts.

The petitioner therefore, on the basis of the aforesaid order passed by the Tribunal filed a revision application u/s. 264 of the Act on 1^st July, 2019, to revise the loss return for the A. Y. 2015–16 and treat the various subsidies as capital receipts instead of revenue receipts as erroneously offered in the return of income. The petitioner also requested the respondents to condone the delay in filing the revision application as per the provisions of section 264(3) of the Act. However, the respondent-Principal Commissioner of Income-tax by the impugned order dated 20^th March, 2020 rejected the revision application of the petitioner on the ground of limitation by not entertaining the application to condone the delay in preferring the revision application.

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

“i) Section 264 of the Income-tax Act, 1961, confers wide jurisdiction on the Commissioner. Proceedings u/s. 264 are intended to meet the situation faced by an aggrieved assessee who is unable to approach the appellate authority for relief and has no other alternate remedy available under the Act. The Commissioner has the power to condone the delay in filing an application for revision in case of sufficient cause while considering the question of condonation of delay u/s. 264 of the Act, the Commissioner should not take a pedantic approach but should be liberal. The words “sufficient cause” should be given a liberal construction so as to advance substantial justice when no negligence nor inaction nor want of bona fide is imputable to the assessee.

ii) The application for revision had been filed on the ground that certain subsidies received by the assessee were erroneously treated as revenue receipts instead of capital receipts. The judgment of the Supreme Court in the case of CIT vs. Chaphalkar Brothers [2018] 400 ITR 279 (SC); was pronounced on 7^th December, 2017 wherein the character of subsidies was decided. The Supreme Court in the case of CIT vs. Chaphalkar Brothers [2018] 400 ITR 279 (SC); held that the subsidies received by the assessee would be capital receipts and not revenue receipts. This aspect had been considered by the Tribunal in the case of the assessee while allowing the additional ground raised by the assessee for the A. Y. 2012–13. The order of the Tribunal was pronounced on 20^th February, 2019 and the assessee had filed the revision application on 1^st July, 2019, i. e., within five months from the date of receipt of the order of the Tribunal.

iii) Hence the order dated 20^th March, 2020 passed by the Commissioner u/s. 264 of the Act was liable to be quashed and set aside and the delay in preferring the revision application had to be condoned and the matter was remanded back to the respondent to decide the same on the merits after giving an opportunity of hearing to the petitioner.”

BCAJ Admin

Return of income — Charitable purpose — Revised return of income — Delay — Condonation of delay — Genuine hardship — Power to condone delay to be exercised judiciously — Plea that deficit inadvertently not claimed in original return — Excess expenditure incurred in earlier assessment year can be set off against income of subsequent years — Assessee would be entitled to refund if allowed to file revised return — Establishment of genuine hardship — Bona fide reasons to be understood in context of circumstances — Application for condonation of delay to be allowed — Directions accordingly.

56. Oneness Educational and Charitable Trust vs. CIT(Exemption)

[2024] 466 ITR 654 (Ori)

A. Y. 2021–22: Date of order 9^th March, 2024

Ss. 11(1), 119(2)(b) and 139(5)of ITA 1961

Return of income — Charitable purpose — Revised return of income — Delay — Condonation of delay — Genuine hardship — Power to condone delay to be exercised judiciously — Plea that deficit inadvertently not claimed in original return — Excess expenditure incurred in earlier assessment year can be set off against income of subsequent years — Assessee would be entitled to refund if allowed to file revised return — Establishment of genuine hardship — Bona fide reasons to be understood in context of circumstances — Application for condonation of delay to be allowed — Directions accordingly.

The assessee was an educational and charitable trust constituted for educational and charitable purposes registered u/s. 12A(1)(aa) of the Income-tax Act, 1961and was entitled to exemptions u/s. 10(23C), 11 and 12. For the A. Y. 2021–22, the assessee’s claim for exemption u/s. 11 was disallowed on the grounds of delay in filing the audit report in form 10B. The Assessing Officer in his order u/s. 143(1) raised a demand. At the beginning of the F. Y. 2020–21, the assessee had an accumulated deficit and there was a one-time settlement of the loan availed of from its bank. The assessee showed the amount sacrificed by the bank as income although it never claimed the loan principal amount as income or the repayment as application. The accumulated interest also remained unabsorbed and was duly reflected as a deficit in the balance sheet and the past accumulated deficit was not adjusted which resulted in excess of income over expenditure. According to the assessee, it inadvertently failed to claim the deficit in the return of income filed for the A. Y. 2021–22 and filed an appeal before the Commissioner (Appeals) challenging the intimation order u/s. 143(1). It also filed an application u/s. 154 for rectification of the order. Though the Assessing Officer rejected the rectification application, he did not dispute the claim of the assessee regarding the non-adjustment of accumulated deficit.

In the meantime, the Commissioner (Exemption) condoned the delay in filing form 10B and consequently, the Assessing Officer reduced the demand raised in the intimation under section 143(1). The assessee took additional grounds before the Commissioner (Appeals) regarding the rejection of the rectification application, disallowance of the set off of past deficit as the application of income, and its inadvertent mistake in claiming the past deficit in the A. Y. 2021–22 u/s. 11(1). The Commissioner (Appeals) observed that the claim of the assessee that in its return it had not set off the past year’s deficit on account of interest waiver under the one-time settlement by the bank, could only be considered in a revised return claiming such set-off and that if the time limit for filing the revised return had lapsed, the only remedy was to make an application u/s. 119(2)(b) for condonation of delay. The application filed by the assessee for condonation of delay in filing the revised return was rejected stating that the assessee having filed the original return of income after due consideration with an undertaking that the information therein was correct and in spite of enough time, no revised return of income having been filed, the genuine hardship for not filing the revised return of income was not justified.

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

“i) The assessee has made out a case of genuine hardship in its favor, rejection of the application filed for condonation of the delay u/s. 119(2)(b) in filing the revised return of income u/s. 139(5) had no justification. The authority had neither in the rejection order u/s. 119(2)(b) nor in the counter affidavit, denied the entitlement of the assessee to claim set off of past years’ deficit u/s. 11. Rather, the Commissioner (Appeals) in his order had acknowledged the entitlement of the assessee to such a claim. The assessee had established the requirement of “genuine hardship”, as enumerated u/s. 119(2)(b). Therefore, the finding of the Commissioner (Exemption) that the assessee had failed to demonstrate “genuine hardship”, was misconceived, and unsustainable. The assessee had filed its return for the A. Y. 2021–22 on the due date of 15^th March, 2022. The time limit for filing the revised return of income u/s. 139(5) was 31^st December, 2022. On the observation of the Commissioner (Appeals) and finding no other alternative, the assessee filed an application u/s. 119(2)(b). The assessee had clearly stated in its application filed u/s. 119(2)(b) that it had inadvertently erred in claiming the past years’ deficit. Its claim was genuine and unless the time limit for filing a revised return making such a claim was extended, the assessee would be in genuine hardship. The authority without taking into consideration the genuine hardship of the assessee had mechanically rejected the application which was unsustainable.

ii) In view of the provisions of section 119(2)(b) read with the circular dated 9^th June, 2015 ([2015] 374 ITR (St.) 25) issued by the Central Board of Direct Taxes, which stipulated that an application for claim of refund or loss was to be made within six years from the end of the relevant assessment year for which such application or claim was made, the last date for filing of revised return for the A. Y. 2021–22 was 31^st December, 2022 and the assessee had made the application u/s. 119(2)(b) on 16^th October, 2023 which was within six-year time limit, as stipulated in the circular for condonation of delay in filing the revised return u/s. 139(5). When the assessee had filed the application indicating its genuine hardship, it should have been considered in the proper perspective and not rejected. Accordingly, the order rejected the application for condonation of delay in filing the revised return u/s. 139(5) was quashed and set aside. The authority concerned was to take follow-up action in accordance with the law.

iii) That in view of the law laid down by the Supreme Court, the reasons which had been assigned by the concerned authority in the counter affidavit for rejection of the application for condonation of delay under section 119(2)(b) were contrary to the order in question and therefore, unsustainable.”

BCAJ Admin

Reassessment — Notice — New procedure — Limitation — Bar of limitation — Prescription of new procedure governing initiation of reassessment proceedings from 01-04-2021 — Notice issued beyond the period of limitation of six years in pre-amended provision unsustainable — Order and consequential notice set aside.

55. Manju Somani vs. ITO

[2024] 466 ITR 758 (Del.)

A. Y. 2016–17: Date of order 23^rd July, 2024

Ss. 147, 148 and 148A(d) of ITA 1961

Reassessment — Notice — New procedure — Limitation — Bar of limitation — Prescription of new procedure governing initiation of reassessment proceedings from 01-04-2021 — Notice issued beyond the period of limitation of six years in pre-amended provision unsustainable — Order and consequential notice set aside.

On a writ petition challenging the validity of the reassessment proceedings u/s. 147 of the A. Y. 2016–17, on the statutory prescription of limitation u/s. 149 (as amended by the Finance Act, 2021) by issuance of notice dated 29^th April, 2024 u/s. 148, pursuant to the Supreme Court decision in UOI vs. Ashish Agarwal [2022] 444 ITR 1 (SC); the Delhi High Court held as under:

“i) The proviso to section 149 of the Income-tax Act, 1961 embodies a negative command restraining the Revenue from issuing a notice u/s. 148 for reopening the assessment u/s. 147 in respect of an assessment year prior to 1^st April, 2021, if the period within which such a notice could have been issued in accordance with the provisions as they existed prior thereto had elapsed. This is manifest from the provision using the expression “no notice u/s. 148 shall be issued” if the time limit specified in the relevant provisions “. . . as they stood immediately prior to the commencement of the Finance Act, 2021” had expired. A reassessment which is sought to be commenced after 1^st April, 2021 would therefore, have to abide by the time limits prescribed by section 149(1)(b), 153A or 153B as may be applicable.

ii) Section 149(1)(b) as it stood prior to the introduction of the amendments by way of the Finance Act, 2021 prescribed that no notice u/s. 148 shall be issued if four years “but not more than six years” have elapsed from the end of the relevant assessment year. Thus the period of six years stood erected as the terminal point which when crossed would have rendered the initiation of reassessment u/s. 147 impermissible in law.

iii) The decision in Twylight Infrastructure Pvt. Ltd. vs. CIT [2024] 463 ITR 702 (Delhi); does not empower the Revenue to reopen assessments u/s. 147 contrary to the negative covenant which forms part of section 149.

iv) The notice issued u/s. 148 in order to be sustained when tested on the anvil of the pre-amendment to section 149(1)(b), would have to meet the prescription of six years period of limitation and that period in respect of the A. Y. 2016–17 had ended on 31^st March, 2023. Therefore, the reassessment proceedings which was commenced pursuant to the notice u/s. 148, dated 29^th April, 2024, was unsustainable. The Assessing Officer did not attempt to sustain the initiation of action on any other statutory provision which could be read as extending the time limit that applied. The order u/s. 148A(d) dated 29th April, 2024 and the consequential notice issued u/s. 148 dated 29^th April, 2024 were quashed and set aside.”

BCAJ Admin

Reassessment — Notice — Jurisdiction — Faceless assessment scheme — Issue of notices by jurisdictional AO — Procedure adopted by the department in contravention of statutorily prescribed procedure u/s. 151A — Office memorandum cannot override mandatory specifications in Scheme — Notices set aside — Department given liberty to proceed in accordance with amended provisions.

54. Jatinder Singh Bhangu and JyotiSareen vs. UOI

[2024] 466 ITR 474 (P&H)

A. Y. 2020–21: Date of order 19^th July, 2024

Ss. 147, 148 and 151A of ITA 1961

Reassessment — Notice — Jurisdiction — Faceless assessment scheme — Issue of notices by jurisdictional AO — Procedure adopted by the department in contravention of statutorily prescribed procedure u/s. 151A — Office memorandum cannot override mandatory specifications in Scheme — Notices set aside — Department given liberty to proceed in accordance with amended provisions.

For the A. Y. 2020–21, the jurisdictional Assessing Officer issued a notice u/s. 148 of the Income-tax Act, 1961 to reopen the assessment u/s. 147 on the ground that there was escapement of income on account of the compensation received by the assessees on the acquisition of their agricultural land.

The assesee filed a writ petition and challenged the notice contending that the procedure of faceless assessment prescribed u/s. 144B was not followed and section 151A required for issuance of notices by the Faceless Assessing Officer. The Punjab & Haryana High Court allowed the writ petition and held as under:

“i) The Central Government in the exercise of powers conferred by section 151A of the Income-tax Act, 1961 by Notification No. S. O. 1466(E), dated 29^th March, 2022 ([2022] 442 ITR (St.) 198) has introduced the e-Assessment of Income Escaping Assessment Scheme, 2022. Under section 151A, the scheme of faceless assessment is applicable from the stage of show-cause notice u/s. 148 as well as section 148A. A detailed procedure of faceless assessment has been prescribed u/s. 144B and section 151A require for issuance of notice and assessment by the Faceless Assessing Officer. Clause 3(b) of the notification clearly provides that the scheme would be applicable to notices u/s. 148. Even otherwise, it is a settled proposition of law that assessment proceedings commence from the stage of issuance of show-cause notice. It is axiomatic in tax jurisprudence that circulars, instructions and letters issued by the Central Board of Direct Taxes or any other authority cannot override statutory provisions. The circulars are binding upon authorities but courts are not bound by circulars. The mandate of sections 144B and 151A read with the notification dated 29^th March, 2022 ([2022] 442 ITR (St.) 198) issued thereunder is lucid. There is no ambiguity in the language of statutory provisions and therefore, the office memorandum or any other instruction issued by the Board or any other authority cannot be relied upon. Instructions or circulars can supplement but cannot supplant statutory provisions.

ii) In the wake of the above discussion and findings, we find it appropriate to subscribe to the view expressed by the Bombay, Telangana and Gauhati High Courts. The instant petitions deserve to be allowed and accordingly allowed.

iii) The notices issued by the jurisdictional Assessing Officer u/s. 148 are hereby quashed with liberty to the respondent to proceed in accordance with procedure prescribed by law.”

BCAJ Admin

Educational trust — Exemption — Corpus fund — Corpus donations whether for material gains or charitable purpose — Absence of material to establish that corpus donations given for securing admission – Cannot be treated as donations towards charitable purposes — Tribunal not justified in holding assessee ineligible for exemption on corpus fund.

53. N. H. Kapadia Education Trust vs. ACIT (Exemption)

[2024] 467 ITR 278 (Guj)

A. Y. 2013–14: Date of order 4^th March, 2024

S. 11(1)(d)of ITA 1961

Educational trust — Exemption — Corpus fund — Corpus donations whether for material gains or charitable purpose — Absence of material to establish that corpus donations given for securing admission – Cannot be treated as donations towards charitable purposes — Tribunal not justified in holding assessee ineligible for exemption on corpus fund.

The assessee was an educational trust. For the A. Y. 2013–14, the Assessing Officer found in the scrutiny assessment u/s. 143(3) of the Income-tax Act, 1961, the copies of the receipts issued to students for the payment of the one-time admission fees mentioned that the amount paid was for the one-time admission fees. The Assessing Officer held that such a fee was not a voluntary contribution given with a specific direction to treat it as corpus donation, which could be claimed as exempt u/s. 11(1)(d). Therefore, he disallowed the exemption claimed on the corpus donation and treated it as income of the assessee.

The Commissioner (Appeals) relied on the decision of the Tribunal in the assessee’s case for the A. Ys. 2004–05, 2005–06 and 2009–10 and deleted the addition made by the Assessing Officer. On appeal by the Revenue, the Tribunal held that the admission fee could not be treated as “corpus donation” and, that on the facts on record, neither the admission fee charged from the students qualified as a “voluntary” donation, nor there was a specific direction that the amount would be used only for the purpose of the corpus of the trust. The fees charged by the students were neither voluntary nor were directed to be used solely for the purpose of the corpus and therefore, the development fund amount could not be treated as corpus donation. Accordingly, the assessee was not eligible for the benefit of exemption u/s. 11(1)(d) on the corpus donation. However, if the amount was treated as the income of the assessee-trust, then the assessee was eligible for deduction or allowance of expenses incurred against those receipts towards objects of the trust.

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

“i) The amounts paid by the parents of the students admitted to the educational institution of the assessee-trust were payments towards corpus donation and were not collected by way of capitation fees. The Assessing Officer had not conducted any inquiry with regard to the examination of parents who had admitted the students in school as to whether the payment was made towards the corpus fund or capitation fee. Though it was true that the donation was bound to have been given for material gain in securing admission, it could not be characterized as a donation towards charitable purpose and the assessee would not be entitled to have the benefit, but in the absence of any material on record, such view could not be taken.

ii) Therefore, the Tribunal had committed an error by treating the admission fees charged from the students as not forming part of the corpus fund of the trust. Therefore, the Tribunal was not justified in confirming the addition of the corpus fund to the income of the assessee by holding that the receipts could not be treated as corpus donation and not eligible for exemption u/s. 11(1)(d).”

BCAJ Admin

Appeal to Commissioner (Appeals) — Discretion to admit additional evidence — Sufficient cause to accept additional evidence in appellate proceedings — Additional evidence admitted by Commissioner (Appeals) considering assessee’s illiteracy and unawareness of notices due to language problem — Appellate proceedings continuation of assessment proceedings — Commissioner (Appeals) rightly permitted assessee to produce additional evidence in consonance with Rule 46A.

52. Principal CIT vs. DineshbhaiJashabhai Patel

[2024] 467 ITR 238 (Guj)

A. Y. 2014–15: Date of order 16^th January, 2024

Ss. 246A and 251(1)(a) of the ITA 1961; 46A of ITR 1962

Appeal to Commissioner (Appeals) — Discretion to admit additional evidence — Sufficient cause to accept additional evidence in appellate proceedings — Additional evidence admitted by Commissioner (Appeals) considering assessee’s illiteracy and unawareness of notices due to language problem — Appellate proceedings continuation of assessment proceedings — Commissioner (Appeals) rightly permitted assessee to produce additional evidence in consonance with Rule 46A.

The assessee was the proprietor of an enterprise in the waste craft paper business. Though the assessee was given various opportunities, he did not respond to the notices and the Assessing Officer could not verify the genuineness of the sundry creditors. The Assessing Officer treated the sundry creditors as bogus and accordingly made additions in his ex-parte order u/s. 143(3) read with section 144 of the Income-tax Act, 1961.

The assessee submitted before the Commissioner (Appeals) that he was an illiterate person and was not aware of the notices issued by the Assessing Officer and explained the increase in sales, debtors, closing stock, and creditors as per the balance sheet. The assessee contended that the Assessing Officer did not consider the increase in sales, and closing stock but only picked up the creditor’s amounts and made additions as bogus creditors without any justification. The assessee also furnished the copies of accounts of each creditor from his books of account and contra accounts with their addresses and permanent account numbers, which were duly reconciled by the Commissioner (Appeals) who admitted these documents to go to the root of the controversy involved and called for a remand report from the Assessing Officer. In the remand report the Assessing Officer objected to the acceptance of the additional evidence and also stated that the assessee failed to produce supporting bills or vouchers for the purchases made from the various parties and did not file bank details and proof of payments. In the rejoinder, the assessee furnished copies of audited accounts, sample purchase bills, and contra accounts with bank statements, and the Commissioner (Appeals) after considering this evidences deleted the addition. The Tribunal upheld the order of the Commissioner (Appeals).

On appeal, the Department contended that the Commissioner (Appeals) could not have admitted the additional evidence in terms of the provisions of rule 46A(2) of the Income-tax Rules, 1962 since the assessee did not furnish any sufficient cause for not submitting the evidence and had remained absent in the assessment proceedings though the sufficient opportunity was given.
The Gujarat High Court dismissed the appeal filed by the Revenue and held as under:

“i) The Commissioner (Appeals) had considered the aspect of additional evidence as objected to by the Assessing Officer after considering the explanation of the assessee that the assessee was an illiterate person and had studied up to fourth standard and he was not able to read in English, and therefore, the provisions of rule 46A(1) more particularly clause (b) thereof was complied with as the assessee was prevented by sufficient cause from producing the evidence which he was called upon to produce by the Assessing Officer.

ii) The Commissioner (Appeals) had stated in his order to the effect that the assessee had in his possession the report u/s. 44AB, a copy of the return of income filed by the creditors, the permanent account number and full addresses of the creditors, copies of accounts of creditors in his books of account, and the proof that the assessee had a continuous trading relationship with the creditors. All such evidence was corroborative and could not have been manipulated at that stage. The Assessing Officer had the opportunity to cross-verify any information during remand proceedings but he had sent the remand report in a very routine manner. The independent corroborative evidence placed on record during the remand proceedings could not be ignored. There was no discrepancy in the sundry creditor’s accounts that could be added to the income of the assessee and hence the addition was deleted.

iii) The assessee being an illiterate person could not appear before the Assessing Officer and the appellate proceedings being the continuation of the assessment proceedings, the Commissioner (Appeals) had rightly permitted the assessee to produce the additional evidence in consonance with rule 46A.”

BCAJ Admin

S. 12A — Where the assessee was granted registration under section 12AB during pendency of assessment proceedings and audit report in Form 10B was also available with CPC at the time of processing of the return of income, exemption under section 11 should not be denied to the assessee-trust vide intimation under section 143(1)(a).

56. SirurShikshanPrasarak Mandal vs. ACIT

(2024) 166 taxmann.com 525 (PuneTrib)

ITA No.: 609(Pun.) of 2024

A.Y.: 2021–22

Dated: 4^th September, 2024

S. 12A — Where the assessee was granted registration under section 12AB during pendency of assessment proceedings and audit report in Form 10B was also available with CPC at the time of processing of the return of income, exemption under section 11 should not be denied to the assessee-trust vide intimation under section 143(1)(a).

FACTS

The assessee was a charitable trust formed in 1946 and registered under Bombay Public Trusts Act, 1950 and was engaged in education activities by running various schools / colleges in and around Pune district. It was also holding registration under section 12A / 80G for past many years. For A.Y. 2021–22, the assessee filed its return of income along with audit report in Form 10B on 30^th March, 2022 claiming exemption under section 11. The assessee obtained provisional registration under section 12AB on 7^th April, 2022.

An intimation under section 143(1) dated 27^th October, 2022 was passed, disallowing exemption under section 11 on two grounds, namely, (i) the detail of registration under section 12AB was not mentioned in the return of income; and (ii) trust had not e-filed the audit report in Form 10B one month prior to the due date for furnishing of return under section 139.

While the appeal was pending before Addl. / JCIT(A), the assessee was also approved by CIT(E) under section 12AB for five assessment years, that is, from assessment year 2022–23 to 2026–27. Yet, Addl. / JCIT(A) dismissed the appeal of the assessee.

Aggrieved, the assessee filed an appeal before ITAT.

HELD

The Tribunal observed that:

(a) Where the delay of 43 days in filing audit report inForm 10B was due to the covid pandemic and such report was available at the time of processing of return by CPC, such delay should have been condoned, as held by co-ordinate bench in ITO vs. P.K. Krishnan Educational Trust, ITA No.3533/Mum/2023 (order dated 7^th May, 2024).

(b) Where provisional registration under section 12AB for three years was granted to the assessee on 7^th April, 2022 and the return of income was thereafter processed by CPC on 27^th October, 2022, in light of erstwhile second proviso to section 12A(2), the assessee was entitled to get the benefit of exemption under section 11.

(c) Following the decision of the co-ordinate bench in Shri Krishnabai Ghat Trust vs. ITO, ITA No.44/PUN2019 (order dated 3^rd May, 2019), since the assessee was also granted final registration under section 12AB while matter was pending before the CIT(A), it was entitled for exemption under section 11 for such previous assessment year also.

Thus, the Tribunal held that where on the date of intimation under section 143(1)(a), Form 10B was already filed and was available along with return of income and also the assessee had obtained provisional registration under section 12AB, exemption under section 11 should not have been denied to the assessee.

BCAJ Admin

S. 10(1) — Where the assessee submitted copies of sales bills for agricultural produce, provided justification for not claiming any expenses and consistently declared agricultural income over the years, his claim for exemption under section 10(1) could be regarded as genuine. S. 44AA — An agriculturist is not required to maintain books of accounts under section 44AA in respect of the agricultural activities carried on by him.

55. Ishwar Chander Pahuja vs. ACIT

(2024) 167 taxmann.com 41(Del Trib)

ITA No.: 2560(Del) of 2023

A.Y.: 2015–16

Date of Order: 6^th September, 2024

S. 10(1) — Where the assessee submitted copies of sales bills for agricultural produce, provided justification for not claiming any expenses and consistently declared agricultural income over the years, his claim for exemption under section 10(1) could be regarded as genuine.

S. 44AA — An agriculturist is not required to maintain books of accounts under section 44AA in respect of the agricultural activities carried on by him.

FACTS

The assessee was deriving salary income as a director, income from house property and income from other sources. He had claimed exemption on agricultural income under section 10(1).

During assessment proceedings, the Assessing Officer (AO) noticed that the assessee had not claimed any expenses for earning agricultural income. As required, the assessee filed submissions / evidence to support the claim of exemption under section 10(1). However, the AO rejected the submissions and disallowed the claim on the grounds that the assessee did not furnish any reasonable explanation and computation of agricultural income along with books of account maintained for the agricultural activities.

CIT(A) sustained the addition made by the AO.

Aggrieved, the assessee filed an appeal before ITAT.

HELD

The Tribunal observed that:

(a) The assessee was a graduate in agricultural science from Agricultural University, Ludhiana and had a vegetable seeds business. He was holding agricultural land in different places and the details of the sales were also
submitted before the AO. It was also submitted that the agricultural expenses were met out of sale of seedlings to farmers.

(b) Considering the regularity and consistency of declared income over the past years and subsequent assessment years, the income declared by the assessee appeared to be in order.

(c) Since the assessee was an agriculturist whose income fell under section 10(1), he was not required to maintain books of account under section 44AA.
Accordingly, the appeal of the assessee was allowed.

BCAJ Admin

Ss. 194-I, 194C — Where Common Area Maintenance (CAM) charges are for separate and distinguishable services, the applicable rate of TDS is 2 per cent under section 194 C, and not 10 per cent under section 194-I.

54. Benetton India (P.) Ltd. vs. JCIT

(2024) 167 taxmann.com 76 (DelTrib)

ITA No.:5774 (Del) of 2019

A.Y.: 2011–12

Date of Order: 28^th August, 2024

Ss. 194-I, 194C — Where Common Area Maintenance (CAM) charges are for separate and distinguishable services, the applicable rate of TDS is 2 per cent under section 194 C, and not 10 per cent under section 194-I.

FACTS

The assessee was in the business of manufacturing and trading of readymade garments. For the purpose of carrying out its business, it had taken on lease a unit / shop in a mall. During FY 2010–11, it had paid rent, Common Area Maintenance (CAM) and miscellaneous amenity charges to the payee. Value of the services for the aforesaid charges had been separately quantified under the different agreements, and the payment had been made pursuant to separate specific invoices raised by the payee. The assessee had deducted TDS on payments for (a) lease of business premises at the rate of 10 per cent under section 194-I; and (b) CAM services at the rate of 2 per cent under section 194C.

Vide an order under section 201(1) / (1A), the AO held that TDS should have been deducted on payment of CAM charges under section 194-I, treating the same as payment of rent.

CIT(A) confirmed the order of the AO.

Aggrieved, the assessee filed an appeal before ITAT.

HELD

Following a series of decisions given by co-ordinate benches of ITAT, the Tribunal held that CAM charges paid are for separate and distinguishable services and cannot be said to be for use of building, and therefore, such charges paid were not covered by section 194-I and TDS was deductible under section 194C only.

BCAJ Admin

Allotment letter issued by developer constitutes an agreement for the purpose of proviso to section 56(2)(vii)(b).

53. Tamojit Das vs. ITO

ITA No. 1200/Kol/2024

A.Y.: 2015–16

Date of Order: 3^rd October, 2024

Section:56(2)(vii)

Allotment letter issued by developer constitutes an agreement for the purpose of proviso to section 56(2)(vii)(b).

FACTS

The assessee has filed his return of income declaring total income of ₹7,27,020. In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee has purchased a residential flat jointly with his wife Smt. Gargi Das through Deed of Conveyance, which was registered on 28^th October, 2014 before District Sub-Registrar-II, South 24-Parganas. The value of the said transaction was declared by the assessee at ₹24,05,715 as against stamp duty valuation of ₹38,74,500.

When the assessee was confronted with, the assessee submitted that he had booked this flat with Greenfield City Project LLP and the first payment was made on 8^th June, 2010. In support of his contention, he filed (i) copy of receipt from Greenfield City Project LLP, (ii) letter of allotment by Greenfield City Project LLP dated 10th June, 2010, and (iii) copy of typical floor plan purported to be allotment of flat to the assessee.

The AO did not equate this allotment letter and payment of the instalment by the assessee through account payee cheque as an agreement contemplated in proviso appended to section 56(2)(vii)(b) of the Act. The AO made the addition of ₹14,68,785 being the difference of both these amounts (₹38,74,500 and ₹24,05,715) to the total income of the assessee u/s 56(2)(vii) of the Act.

Aggrieved, the assessee filed an application under section 154 of the Act and emphasised that the letter given by the developer demonstrating the booking of the flat amounts to an agreement. The AO rejected the application for rectification.

Aggrieved, the assessee has filed an appeal before the ld. CIT(A), which was dismissed.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that the dispute in the present case is whether the allotment letter by the developer is to be construed as an agreement or not. The Tribunal noted that several payments were made from 1^st June, 2010 onwards by various account payee cheques. The Tribunal held the interpretation of the revenue authorities to be an incorrect interpretation. It held that the allotment letter is be equated to an agreement to sale. The agreement is not required to be a registered document. The only requirement in the law is that the agreement should be followed by payments through a banking channel, so that its veracity cannot be doubted. In the present case, the assessee has established the genuineness of the allotment letter by showing that the payments were made through account payee cheques. Therefore, the valuation date for the purpose of any deemed gift is the date when first payment was made; in this case, it happened around June 2010. The Tribunal held that the AO erred in taking the valuation of the property as on 28^th October, 2014.

The Tribunal proceeded to mention that it would like to draw attention to the CBDT Circular No. 872 dated 16^th December, 1993. The issue under this Circular was whether allotment of flats / houses by cooperative societies and other institutions whose scheme of allotment and construction are similar to that of DDA should be treated as the cases of construction for the purpose of section 54 and 54F. Earlier, there was a Circular bearing No. 471 dated 15^th October, 1986, wherein it was provided that cases of allotment of flats under the self-financial scheme of the Delhi Development Authority should be treated as cases of construction for the purpose of section 54 & 54F of the Act. The scope of this Circular was enlarged to cover other institutions and cooperative societies, meaning thereby that allotment letter by the developer was always recognised as an agreement to purchase the house. Thus, these are also considered as a construction activity where benefit of set off of capital gain could be granted to the purchaser. Applying that very analogy in the present case, it would reveal that the allotment letter given by the developer to the assessee way back in 2010 would be construed as an agreement of purchase between the developer and the assessee.

The Tribunal held that benefit of proviso appended to section 56(2)(vii)(b) would be available in the present case. The AO has committed an error by ignoring this aspect. If this starts from June 2010 for which the assessee has made payments through account payee cheque is being construed as an agreement, then additions under section 56(2)(vii)(b)(ii) will not survive.

The Tribunal allowed this ground of appeal.

BCAJ Admin

Section 200A before its amendment by the Finance Act, 2015, w.e.f. 1st June, 2015 did not permit levy of fee under section 234E, for delay in filing quarterly statements, while processing the quarterly statements.

52. Dream Design and Display India Pvt. Ltd. vs. DCIT

TS-776-ITAT-2024(Delhi)

ITA Nos. 634 to 639/Del/2024

A.Y.:2013–14

Date of Order: 11^th October, 2024

Section: 234F

Section 200A before its amendment by the Finance Act, 2015, w.e.f. 1st June, 2015 did not permit levy of fee under section 234E, for delay in filing quarterly statements, while processing the quarterly statements.

FACTS

In this case, admittedly, the assessee filed quarterly TDS / TCS statements belatedly, i.e., beyond the time limit prescribed under sections 200(3) or 206C(3) as the case may be. The CPC while processing the TDS statements issued intimation / order to the assessee under section 200A of the Act and levied late fees of different amounts computed with reference to section 234E of the Act.

Aggrieved, by levy of late filing fees under section 234E, the assessee challenged the action of the Assessing Officer (AO) before the CIT(A) and contended that the demand by way of late fee under section 234E can be raised only by virtue of the amendment carried out in S. 200A by Finance Act 2015 w.e.f 1st June, 2015 and prior to the amendment, S. 200A of the Act does bear any reference to fee computed under S. 234E. The amendment seeking to levy fee under S. 234E is penal in nature and would thus apply prospectively for the quarters ending after 1^st June, 2015 and not to earlier quarters.

The CIT(A), however, dismissed the appeals on the grounds that the appeals filed before him are belated for which no sufficient cause has been shown for condonation. He, thus, dismissed all the appeals in limine without going into the merits of the case.

Aggrieved, the assesssee preferred an appeal to Tribunal.

HELD

The Tribunal noted that the late filing fee under section 234E has been imposed for delay in filing the relevant TDS statements but, however, all such Quarterly TDS statements relate to the period prior to amendment in S. 200A of the Act by Finance Act, 2015. S. 200A specifically provides for computing fee payable under Section 234E w.e.f. 1^st June, 2015. It is thus the case of the assessee that section 234E being a charging provision, creating a charge for levying fee for certain defaults in filing statements and fee prescribed under section 234E cannot be levied without a regulatory provision found in section 200A for computation of fee prior to 1^st June, 2015. The Tribunal stated that the question which arises is whether late fee can be imposed for default under Section 234E of the Act. It observed that there are many decisions covering the field. Some decisions are in favour of the assessee while others are against. Having noted that the CIT(A) has not adjudicated the issue on merits, the Tribunal, in the interest of justice, proceeded to adjudicate the issue on merits.

The pre-amended section 200A of the Act as of 31^st March, 2013, i.e., F.Y. 2012–13 relevant to A.Y. 2013–14 in question, did not permit processing of TDS statement for default in payment of late fee under section 234E of the Act. Hence, the late fee charged for the belated filing of TDS quarterly return could not be recovered by way of processing under section 200A of the Act. The Co-ordinate Bench of Tribunal in Karnataka Grameen Bank vs. ACIT (2022) 145 taxmann.com 192 (Bangalore) observed that the amendment under section 200A providing imposition of fee under section 234E could be computed at the time of processing of return and issue of intimation had come into effect only from 1^st June, 2015 and had only prospective effect and therefore, levy of late fee under section 234E would be illegal for statement of TDS in respect of the period prior to 1^st June, 2015. In light of the decision of the Coordinate Bench, the late fee for TDS quarterly statement under challenge in captioned appeals cannot be recovered by way of processing under section 200A of the Act.

The Tribunal held that the demand raised with reference to section 234E of the Act cannot be countenanced in terms of the pre-amended provision of S. 200A and hence, requires to be quashed. Consequential interest charges on fee levied under the provisions of the Act also requires to be quashed.

The Tribunal allowed the appeal filed by the assessee.

BCAJ Admin

The maximum marginal rate is to be computed by taking the maximum rate of income-tax and maximum rate of surcharge applicable in the case of an individual. It is this rate which applies to a private discretionary trust as well. The levy of maximum marginal rate on trust is thus specific anti avoidance rule and therefore, should be given a strict interpretation.

51. Aradhya Jain Trust vs. ITO

TS-741-ITAT-2024(Mum.)

ITA No. 2197/Mum./2024

A.Ys.: 2022–23

Date of Order: 7^th October, 2024

Sections: 2(29C), 167B

The maximum marginal rate is to be computed by taking the maximum rate of income-tax and maximum rate of surcharge applicable in the case of an individual. It is this rate which applies to a private discretionary trust as well.

The levy of maximum marginal rate on trust is thus specific anti avoidance rule and therefore, should be given a strict interpretation.

FACTS

The assessee, a private discretionary trust, filed its return of income declaring total income to be Nil. The return of income was revised to declare a total income of ₹55.75 lakh. In the revised return of income, the assessee computed the tax liability by applying surcharge @ 10 per cent being the rate applicable to the total income declared in the revised return of income.

The return of income was processed under section 143(1) of the Act. In the Intimation generated upon processing of return of income, the amount of total income returned as also the amount of tax computed thereon was accepted. However, surcharge was levied @ 37 per cent on the entire amount of tax of ₹16,72,710 computed by the assessee and accepted in the Intimation.

Aggrieved, the assessee preferred an appeal to the CIT(A) where it was contended that the assessee is liable to surcharge at the rate applicable to the total income of the assessee and not at the maximum rate of surcharge. Also that in an intimation under section 143(1), the Assessing Officer (AO) cannot recompute the rate of income-tax or the rate of surcharge thereon. For this proposition, the assessee placed reliance on the decision of Rajasthan High Court in JKS Employees Welfare Fund vs. ITO [199 ITR 765].

The CIT(A) upheld the computation and levy of surcharge @ 37 per cent.

Aggrieved, the assessee preferred an appeal to the Tribunal where the assessee contended that the rate of surcharge applicable to the assessee should be according to the income slab of the assessee and should not be at the highest rate of surcharge provided in the Finance Act. It was contended that the issue is covered squarely in favour of the assessee by the decisions of the co-ordinate bench in ITO vs. Tayal Sales Corporation [2003] 1 SOT 579 (Hyd.) and decision of ITAT, Hyderabad Bench in the case of Sriram Trust, Hyderabad vs. ITO in ITA No. 439/Hyd/2024 dated 19^th June, 2024.

HELD

The Tribunal noted that according to section 2(29C), when assessee is to be taxed at maximum marginal rate, same is to be arrived at by taking highest slab of tax and highest slab of surcharge applicable in case of an individual. This view is already expressed in the commentary on Income Tax by Chaturvedi and Pithisaria as well as of the book published by Vinod Singhania. The Tribunal observed that, even otherwise, language of law is clear that maximum marginal rate shall be maximum rate of tax and surcharge of the highest rate in case of an individual. It observed that if the surcharge was to be levied according to the slab rate of the assessee, it was not required to be mentioned in section 2(29C) of the Act that rate of income tax (including surcharge of income tax, if any) applicable in relation to the highest slab of income in case of an individual. According to the Tribunal, purpose of mentioning surcharge in that section is to compute maximum marginal rate as high rate of tax and also highest rate of surcharge and that if one reads the provisions as suggested on behalf of the assessee then the word surcharge becomes redundant.

The Tribunal held that:

i) the definition is not capable of any doubt and only meaning that it admits is that the rate on the maximum slab of income and maximum rate of surcharge is to be treated as the maximum marginal rate;

ii) the Finance Act for each year prescribes various slabs for each category of the assessee and the corresponding rates applicable. This view is also supported by the decision of the Hon’ble Kerala High Court in the case of CIT vs. C.V. Divakaran Family Trust [2002] 254 ITR 222 (Ker.);

iii) it is also true that the Policy of Law as suggested in section 2(29C) of the Act is to discourage discretionary trust by charging the income of such trust in the hands of the trustee at the maximum marginal rate except in certain specified situation. Thus, such a policy is defeated if we hold that the beneficiary of a trust is chargeable to tax and also surcharge at the highest slab, but the assessee trust is charged to tax at the highest slab but lower rate of surcharge. We also draw support from the decision of the Hon’ble Supreme Court in the case of Gosar Family Trust, Jamnagar etc vs. CIT dated 28^th April, 1994 (MANU/ SC/0316/1995);

iv) the levy of maximum marginal rate on trust is thus specific anti Avoidance rule and therefore should be given a strict interpretation. Law prescribes that tax shall be charged on income in respect of which such person is so liable at the maximum marginal rate. There is no provision in the law to charge specific discretionary trust bit lower than the rates of tax and surcharge applicable to a beneficiary individual. The Tribunal mentioned that it draws strength from the decision of the Hon’ble Bombay High Court in the case of CIT vs. JK Holdings [2003] 133 Taxman 443 (Bombay).

As regards the contention of the assessee that CPC does not have any power to vary the rate of surcharge by processing the return of income u/s. 143(1) of the Act, the Tribunal held that CPC has power to compute the correct amount of tax and sum payable by the assessee in terms of provisions of section 143(1)(b) and (c) of the Act. Therefore, on this ground also, the Tribunal did not find any reason to interfere with the order of the learned CIT(A).
The appeal filed by the assessee was dismissed.

BCAJ Admin

Chamber Research By The Judges Post Conclusion Of Hearing – Whether Justified?

Recently, it has been observed that some Judges undertake Chamber Research after the conclusion of the hearing but before the pronouncement of the final order. This may have an impact on the outcome of the case. Whilst it may be justified in some genuine cases, as highlighted in the conclusion, it may seriously vitiate the principle of natural justice, if the affected parties are not given an opportunity of being heard again. This article throws light on the tenability or otherwise, of such research and various aspects of this issue with the relevant judicial pronouncements.

When the hearing of a case has been concluded before a Tribunal or a Court, sometimes the parties to the dispute are shocked when they see in the final order that certain issues, factual or legal, including certain decisions, are contained in the order, which were neither discussed nor cited by any of the parties to the dispute nor were they put forward before the parties by the Judges during the course of hearing of the case. These factual or legal issues may have proven to be the turning point of the case heard by the Judges, causing serious prejudice to one of the parties to the dispute, who did not get an opportunity of being heard in respect of the said factual or legal issue, including any decision, coming to the mind of the Judges after the conclusion of the hearing.

In this article, an attempt is made to highlight the tenability and legality of chamber research conducted by the Judges after the conclusion of a hearing before the Tribunal or the Court before the final order is pronounced by them. Such chamber research by the Judges undoubtedly violates the principles of natural justice and is not a fair practice. Therefore, the principles of natural justice are discussed hereafter with special emphasis on case laws under the Income-tax Act, 1961, before arriving at the conclusion.

I. BACKGROUND

1. Principles of Natural Justice

While deciding a case by the Judges, if the principles of natural justice are not followed, one of the parties to the dispute against whom the case is decided will be adversely affected as severe prejudice and injustice will be caused to him. The said principles are briefly summarised as under citing the relevant case laws.

i. In Mukhtar Singh v/s. State of Uttar Pradesh, AIR 1957 All 297, the Allahabad High Court observed as under:

“The principles of natural justice are those rules which have been laid down by the courts as being the minimum protection of the rights of the individual against the arbitrary procedure that may be adopted by a judicial or quasi-judicial authority while making an order affecting those rights. These rules are intended to prevent such authority from doing injustice. These principles are now well-settled and are as under:

a. That every person whose civil rights are affected must have a reasonable notice of the case he has to meet.

b. That he must have reasonable opportunity of being heard in his defence.

c. That the hearing must be by an impartial tribunal, i.e. a person who is neither directly or indirectly a party to the case or who has an interest in the litigation, is already biased against the party concerned.

d. That the authority must act in good faith, and not arbitrarily but reasonably.”

The said principles of Natural Justice are discussed as under:

A. The First Principle is: “Nemo debet esse judex in propria causa”: This means that no person shall be a judge in his own cause or a judge should be impartial and without any bias.

The above principle lays down that the judge should be free from the following bias:

a. Pecuniary bias means that the judge should not have any financial interest in the matter in dispute.

b. Personal bias will disqualify the judge if it is a relative, friend or close associate of the Party.

c. Official bias means the bias with regard to the subject matter in dispute or the total absence of preconditioned mind of the judge or prejudice with regard to the subject matter in dispute.

B. The Second Principle is: “Audi alteram partem”: This means that no person shall be condemned unheard or both the parties to the dispute must be heard before deciding the case.

2. The Principles Of Natural Justice to be followed by whom?

In the case of Frome United Breweries Co. v/s. Bath Justice, 1926 App Cas 586, the following proposition was laid down:

“The rule of natural justice has been asserted, not only in the case of Courts of Justice and other Judicial Tribunals, but in the case of authorities which, though in no sense to be called Courts, have to act as judges of the rights of others.”

Thus, rules of natural justice are to be followed by all authorities who act as judges of deciding the rights of others.

3. No person shall be condemned unheard, presupposes sending him a show cause notice

The object of giving notice to the affected party is to give an opportunity to him to present his case and to apprise him of the charges levelled against him.

i. In the case of Swadeshi Cotton Mills v/s. Union of India (AIR 1981 SC 818 SC), the management of the company was taken over by the National Textiles Corporation by exercise of the power by the Government under section 18AA of the Industrial (Development and Regulation) Act, 1951 without any notice. The company challenged the said takeover by filing a Writ Petition in the Delhi High Court on the ground of not following the principle of audi alteram partem. The Delhi High Court held that prior notice and hearing were excluded by the statute. The Supreme Court however allowed the appeal and held that such takeover of management of the company without notice was bad in law and invalid, as the rules of natural justice had been violated.

ii. In the case of Institute of Chartered Accountants of India v/s. L. K. Ratna, (AIR 1987 71 SC), a member of the Institute was removed on the ground of misconduct without giving him any prior notice. The Supreme Court held that such removal of the member of the Institute was invalid as no opportunity of being heard was ever given to him.

iii. In Dhakeswari Cotton Mills v/s. CIT, West Bengal, AIR 1955 SC 65, the Court observed as under :
“In this case, we are of the opinion that the Tribunal violated certain fundamental principles of justice in reaching its conclusions. Firstly, it did not disclose to the assessee what information had been supplied to it by the departmental representative. Next, it did not give any opportunity to the company to rebut the material furnished to it by him, and lastly, it declined to take all the material that the assessee wanted to produce in support of its case. The result is that the assessee had not had a fair hearing. The estimate of the gross rate of profits on sales, both by the Income Tax Officer and the Tribunal seems to be based on surmises, suspicions and conjectures.”

iv. In Sangram Singh v/s. Election Tribunal, AIR 1955 SC 425, the Court observed as under:

“Next, there must be ever present to the mind that our laws or procedure are grounded on a principle of natural justice which requires that men should not be condemned unheard, that decisions should not be reached behind their backs, that proceedings that affect their lives and property should not continue in their absence and that they should not be precluded from participating in them. Of course, there must be exceptions and, where they are clearly defined, they must be given effect to. But taken by and large, and subject to that proviso, our laws of procedure should be construed, wherever that is reasonable possible, in the light of that principle.”

v. In the case of Kishinchand Chellaram v/s. CIT (125 ITR 713 SC), the employee of one office of the assessee, made a telegraphic transfer of a certain amount to his counterpart at another office. The Assessing Officer, on the basis of letters from the manager of the bank, without confronting the same to the assessee, treated the said amount remitted as undisclosed income. The Tribunal and the Bombay High Court confirmed the said addition. The Supreme Court reversed the decision of the Bombay High Court on the ground that there was a heavy burden of proof on the Department to inform the assessee that the amount remitted through telegraphic transfer belonged to the assessee by showing the letters from the manager of the bank to the assessee.

vi. The Supreme Court in the case of Uma Nath Pandey and Others V/s. State of Uttar Pradesh and another AIR 2009 SC 2375 held as under:

“The adherence to principles of natural justice as recognized by all civilised States is of supreme importance when a quasi-judicial body embarks on determining disputes between the parties, or any administrative action involving civil consequences is in issue. These principles are well settled. The first and foremost principle is what is commonly known as audi alteram partem rule. It says that no one should be condemned unheard. Notice is the first limb of this principle. It must be precise and unambiguous. It should apprise the party determinatively the case he has to meet. Time given for the purpose should be adequate so as to enable him to make his representation. In the absence of a notice of the kind and such reasonable opportunity, the order passed becomes wholly vitiated. Thus, it is but essential that a party should be put on notice of the case before any adverse order is passed against him. This is one of the most important principles of natural justice. It is after all an approved rule of fair play. The concept has gained significance and shades with time.”

vii. In the case of Biecco Lawrie Ltd. and another v/s. State of West Bengal and another AIR 2010 SC 142, the Supreme Court held as under:

“It is fundamental to fair procedure that both sides should be heard, audi alteram partem, i.e., hear the other side and it is often considered that it is broad enough to include the rule against bias since a fair hearing must be an unbiased hearing. One of the essential ingredients of fair hearing is that a person should be served with a proper notice, i.e., a person has a right to notice. Notice should be clear and precise so as to give the other party adequate information of the case he has to meet and make an effective defence. Denial of notice and opportunity to respond result in making the administrative decision as vitiated. The adequacy of notice is a relative term and must be decided with reference to each case. But generally, a notice to be adequate must contain the following:

a. time, place and nature of hearing;

b. legal authority under which hearing is to be held;

c. statement of specific charges which a person has
to meet.”

4. Rules of natural justice must be followed even though there is no specific provision in that regard in the enactment

i. In Ramnath v/s. Collector of Darbangha, AIR 1955 Patna 345, a case under the Excise Act, with regard to an issue of a license the Court held as under :

“Even if the statute is silent, there is an obvious implication that some sort of enquiry must be made for the section requires the Collector to satisfy himself that there has been a breach of the conditions of the license by the holder or any of his servants. The Collector is under a duty to hear the matter in a judicial spirit for the question at issue is a matter of proprietary or professional right of an individual.”

ii. In Vinayak Vishnu v/s. B. G. Gadre, AIR 1959 Bom 39, the Court held as under :

“It is true that the Arbitration Act does not provide for the procedure to be followed by the arbitrators. Even so, it is well settled that the arbitrators are bound to apply the principles of natural justice. One of these principles is that nothing prejudicial to a party shall be done behind its back or without notice to that party”.

iii. In the case of C. B. Gautam v/s. Union of India 1993 (1) SCC 78 it has been held by the Supreme Court that the Rule of Natural Justice must be read into the provisions of an enactment.

iv. In the case of Meneka Gandhi v/s. Union of India 1978 AIR 599 the Supreme Court held as under :

“It is well established that even where there is no specific provision in a statute or rules made thereunder for showing cause against action proposed to be taken against an individual, which affects the rights of that individual, the duty to give reasonable opportunity to be heard will be implied from the nature of the function to be performed by the authority which has the power to take punitive or damaging action.”

5. The rules of natural justice can not be dispensed with on the ground that notice and hearing will serve no useful purpose

In the case of Board of High School v/s. Kum. Chitra AIR 1970 SC 1039, the Supreme Court observed that the rules of natural justice cannot be dispensed with on the ground that notice and hearing will serve no useful purpose.

6. Rules of natural justice must be followed even though facts are admitted and there are no disputes about facts

The Supreme Court, in the case of S. L. Kapoor Jagmohan 1981 AIR 136, has held that the person against whom any action is proposed to be taken has furnished the information, and hence facts are admitted even then the principle of natural justice of giving notice must be followed.

II. CHAMBER RESEARCH BY THE JUDGES AFTER THE CONCLUSION OF HEARING OF A CASE

1. In the backdrop of the background described above highlighting the principles of natural justice, it is evident that after the conclusion of the hearing, either before the Tribunal or the Court, if the Judges resort to chamber research, whether factual or legal, with regard to the case heard by them, and then they pass the order based on such research, then the said research is vitiated on the following grounds:

i. The said research by the Judges after the conclusion of the hearing can raise a reasonable apprehension of official bias with regard to the subject matter in dispute, thereby preventing the affected party from putting up his defence.

ii. During the said research, if the Judges come across any decision or formulate an opinion with regard to the matter in dispute, such decision found by them or opinion formed by them during chamber research would vitiate the order passed by the Judges as the rules of “audi alteram partem” have been violated, i.e. a show cause notice has not been given as contemplated by this rule so as to given an opportunity to the affected party to put up his defence or counter-argument. In the catena of judgements referred to above, it has been held that the opportunity of hearing by show cause notice is a sine qua non of the rules of natural justice. In the judgements of the Supreme Court referred to above, the giving of notice to the affected party to put up its defence cannot be dispensed with even in cases where the Judges believe that the notice and hearing will not serve any useful purpose and even in cases where the facts are admitted and not disputed.
2. It needs to be appreciated that in the case of JCIT V/s. Saheli Leasing & Industries Ltd. 324 ITR 170 (SC), the Supreme Court has formulated the guidelines to be followed by the courts while writing orders and judgements. Clause (a) and Clause (f) of the said guidelines, which are relevant, are reproduced as under :

“(a) It should always be kept in mind that nothing should be written in the judgement / order which may not be germane to the facts of the case. It should have a co-relation with the applicable law and facts. The ratio decidendi should be clearly spelt out from the judgement/order.”

“(f) After arguments are concluded, an endeavour should be made to pronounce the judgement at the earliest and, in any case not beyond a period of three months. Keeping it pending for a long time, sends a wrong signal to the litigants and the society.”

From the aforesaid paras of the guidelines, it is clear that there is no scope for chamber research by the judges after the conclusion of the hearing, as the guidelines also do not provide for the same as para (f) of the said guidelines clearly state that after the arguments are concluded, an endeavour should be made to pronounce the judgement at the earliest.

3. The following case laws under the Income Tax Act, 1961 are worth mentioning.

a. In the case of Jain Trading Co. v/s. Union of India 282 ITR 640 (Bombay High Court), the Tribunal decided the appeal of the assessee, relying on certain factual aspects which were not put up before the assessee during the course of the appeal hearing. Against the said order of the Tribunal, the assessee filed a Miscellaneous Application challenging the order of the Tribunal on the ground that the Tribunal relied upon certain factual aspects of the matter and there were errors committed by the Tribunal while dealing with such factual aspects. The said Miscellaneous Application was dismissed by the Tribunal. Against the dismissal of the Miscellaneous Application, the assessee filed a Writ Petition before the Bombay High Court contending that as various factual errors were there in the Tribunal’s order, the Miscellaneous Application was filed and the dismissal of said Miscellaneous Application by the Tribunal was unjustified. The Bombay High Court held as under:

“After hearing both the sides and considering the facts and circumstances, we are clearly of the view, that the Tribunal ought to have heard the petitioner and also ought to have dealt with the specific contentions regarding factual errors, by giving proper findings. Hence, we do hereby, quash and set aside the said impugned order dated 28th August, 2003, and remand back the matter to the Tribunal to consider the said Miscellaneous Application for rectification of mistakes, to be decided strictly on its own merits in accordance with law after affording an opportunity of hearing to the Petitioner. Writ Petition stands disposed of accordingly, however, with no order as to costs”.

b. In the case of Naresh Pahuja v/s. ITAT (2009) 224 CTR 284 (Bombay High Court), while passing the order, the Tribunal relied on certain judgements, including that of the Supreme Court in the case of CIT v/s. P. Mohankala & Others 291 ITR 271 (SC). The Tribunal also upheld the addition of gifts without taking into consideration the donor’s statement. Against the said order of Tribunal, the assessee filed a Miscellaneous Application, contending that the reliance on the judgements by the Tribunal which were not cited by either party was not proper, and further that the addition of gifts without taking into consideration the donor’s statement was not tenable. The said Miscellaneous Application was dismissed by the Tribunal. The assessee filed a Writ Petition in the Bombay High Court challenging the dismissal of Miscellaneous Application by the Tribunal. The Bombay High Court set aside the order passed on the Miscellaneous Application and remanded the Miscellaneous Application to the Tribunal to decide the same afresh after hearing the parties in accordance with the law.

c. In the case of DCIT v/s. Manu P. Vyas (2013) 32 taxmann.com 176 (Gujarat High Court) the case of the assessee was that only one question discussed at the time of oral submissions before the Tribunal was as to whether the Tribunal had the power to consider the assessee’s challenge to the validity of search itself and therefore, the Tribunal should not have considered the issues of additions on merits. In the order of the Tribunal, it considered the controversy with regard to the validity of the search and ruled in favour of the revenue. The Tribunal also examined the merits of various additions made. Against the Tribunal’s order, the assessee filed a Miscellaneous Application, contending that the Tribunal should have decided the issue of validity of the search only and should not have decided additions on merits. The Tribunal allowed the Miscellaneous Application by recalling its earlier order. Thereafter, the Revenue challenged the order passed by the Tribunal allowing Miscellaneous Application by filing a Writ Petition before the Gujarat High Court. However, the Gujarat High Court dismissed the Writ Petition of the Revenue, holding that the Tribunal had rightly recalled its order when it proceeded to decide certain issues on merits without giving full opportunity to the assessee to make submissions thereon.

d. In the case of Inventure Growth & Securities Ltd. v/s. ITAT 324 ITR 319 (Bombay High Court), the issue before the Tribunal was as to whether the cost of a membership card of the Bombay Stock Exchange was a plant within the meaning of section 32 (1) of the Income Tax Act, 1961 and alternatively whether the same could be allowed as a deduction under section 37 (1) of the said Act.

The Tribunal held that membership card could not be considered as a plant for allowing depreciation. On the alternative contention of the assessee, the Tribunal, without giving any notice to the assessee, following another decision in the case of DCIT v/s. Khandwala Finance Ltd. (2009) 309 ITR (AT) 8 (Mumbai), held that expenditure incurred to acquire the membership card could not be allowed under section 37 (1) of the Act. The assessee filed a Miscellaneous Application before the Tribunal on the ground that the Tribunal, by relying upon the decision of a co-ordinate bench, had not furnished an opportunity to the assessee to deal with the same, as the said decision had not been cited by either side during the course of the hearing. The said Miscellaneous Application was dismissed by the Tribunal. The assessee filed a Writ Petition before the Bombay High Court challenging the dismissal of Miscellaneous Application, contending that there were distinguishing features in the case which came up before the Tribunal in the case of DCIT v/s. Khandwala Finance Ltd. (supra), and if an opportunity were granted to the assessee, the distinguishing features would have been brought to the notice of the Tribunal. Surprisingly, it was held by the Bombay High Court as under :

“We have adverted to this submission since we had called upon the counsel appearing on behalf of the assessee to at least prima facie indicate to this court as to whether there were grounds for urging that the decision in Khandwala Finance Limited is distinguishable. We do not propose to render any conclusive finding or even an opinion of this count on that aspect of the matter. However, it would be necessary to note that the distinguishing features in the case of Khandwala Finance Ltd., which have been pointed out during the course of submissions by counsel for the assessee, are sufficient for this Court to hold that an opportunity should be granted to the Petitioner to place its own case on the applicability or otherwise of the decision in Khandwala Finance Ltd. before the Tribunal.

It is in these circumstances that we are inclined to allow the Miscellaneous Application and to restore the appeal and the cross–objections for fresh consideration before the Tribunal. We clarify that it cannot be laid down as an inflexible proposition of law that an order of remand on a Miscellaneous Application under section 254 (2) would be warranted merely because the Tribunal has relied upon a judgment which was not cited by either party before it. In each case, it is for the Court to consider as to whether a prima facie or arguable distinction has been made and which should have been considered by the Tribunal. It is in this view of the matter that we had called upon Counsel appearing on behalf of the assessee to at least prima facie indicate before this Court the grounds on which the decision in Khandwala Finance Ltd.’s case was sought to be distinguished. If we were to be of the view that the decision in Khandwala Finance Ltd.’s case was squarely attracted to the facts of the present case, we may not have been inclined to remand the proceedings. An order of remand cannot be an exercise in futility. However, for the reasons which we have already indicated, we find prima facie that prejudice would be sustained by the petitioner by denying him an opportunity to deal with the distinguishing features in the case of Khandwala Finance Ltd.”

In the above case, even though prior notice of the co-ordinate decision of the Tribunal, which the Tribunal followed, was not given to the assessee, the High Court allowed the Writ Petition of the assessee only on the ground that the assessee was able to demonstrate before the High Court, the distinguishing features of the said case with the assessee’s case. In other words, had the co – ordinate bench decision of the Tribunal relied upon by the Tribunal applied to the facts of the assessee’s case, the High Court would not have intervened in the matter.

As the Tribunal had not confronted the decision of the co-ordinate bench in the case of Khandwala Finance Ltd. to the assessee, so that the assessee could explain the distinguishing features of the said case with the facts of the assessee’s case and justify that the said decision did not apply to the facts of the assessee’s case, the rules of natural justice were clearly violated. In spite of the fact that there was a clear violation of the principle of audi alteram partem, the High Court called upon the assessee’s counsel to satisfy itself that the facts in the case of Khandwala Finance Ltd. did not apply to the facts of the assessee’s case. Instead, the High Court could have simply restored the Miscellaneous Application to the file of the Tribunal, because it is the Tribunal which has to be satisfied about the distinguishing features of the decision in Khandwala Finance Ltd. with the facts of the assessee’s case. It is surprising that the High Court apparently ignored the principle of audi alteram partem.

e. In the case of Rama Industries Ltd. v/s. DCIT (2018) 92 taxmann.com 289 (Bombay) the Mumbai Tribunal allowed the Revenue’s appeal, following the Delhi High Court decision in the case of Logitronics (P.) Ltd. v/s. CIT 333 ITR 386 (Delhi), without the same being cited by any of the parties, nor the Tribunal making the reference to it during hearing before it. The assessee filed a Miscellaneous Application before the Tribunal, seeking to rectify the order passed by it, on the ground that the Tribunal relied on the aforesaid decision of the Delhi High Court after the conclusion of the hearing, as the same was not cited by any of the parties, nor did the Tribunal make reference to it during the course of hearing before it. The said Miscellaneous Application was rejected by the Tribunal. The assessee filed a Writ Petition in the Bombay High Court challenging the rejection of Miscellaneous Application by the Tribunal on the ground that, while passing the order, the Tribunal relied upon the Delhi High Court decision after the conclusion of the hearing. Again, surprisingly, the Bombay High Court held as under :

“We have considered rival submissions. From the extract of the order dated 19^th May, 2017 reproduced hereinabove, we note that having directed the restoration of the matter to the Assessing Officer, it goes on to extract certain observations of the Delhi High Court in Logitronics (P.) Ltd. and only thereafter i.e. considering the above decision, decides Ground No. 2 in the Appeal, in favour of the Revenue. In the aforesaid facts, we cannot with certainty state that the decision in Logitronics (P.) Ltd. had not even remotely influenced the decision taken. In this case, the manner in which the order dated 28^th March, 2016 is structured and in the final view / direction given after considering the decision of the Delhi High Court in Logitronics (P.) Ltd., it does prima facie appear to us, have been influenced by it. Therefore, in the present case, Tribunal while dealing with the rectification application, must deal with the Petitioner’s grievance that the Delhi High Court’s decision in Logitronics (P.) Ltd. does not apply to the present facts. We are satisfied that the above aspect has to be considered while disposing of the rectification application in the present facts.

In the above view, we set aside the common impugned order of the Tribunal dated 19^th May, 2017 and restore each of the Petitioner’s rectification application dated 6^th September, 2016 to the Tribunal for fresh consideration. This restoration is only to reconsider the Petitioner’s grievance in respect of reference / reliance upon the Delhi High Court decision in Logitronics (P.) Ltd. in the common impugned order dated 28^th March, 2016 and pass appropriate order on the rectification application.”

In the above case, even though prior notice of the decision of the Delhi High Court was not given to the assessee, the High Court restored the Miscellaneous Application of the assessee to the Tribunal for fresh consideration to give an opportunity to the assessee to distinguish the said case by observing that “we cannot with certainty state that the decision in Logitronics Pvt. Ltd. had not even remotely influenced the decision taken”. Had the decision of the Delhi High Court applied to the facts of the assessee’s case, the High Court would not have intervened in the matter.

As the decision of the Delhi High Court in the case of Logitronics (P.) Ltd. v/s. CIT 333 ITR 386 (Delhi) was relied upon by the Tribunal without any of the parties citing it nor the Tribunal making reference to it during the hearing before it, the rules of natural justice were clearly violated. In spite of the fact that there was a violation of the principle of audi alteram partem, the High Court went on to consider as to whether the above decision of the Delhi High Court in the case of Logitronics (P.) Ltd. (supra) had influenced the decision taken by the Tribunal. Instead, the High Court could have simply restored the Miscellaneous Application to the file of the Tribunal, as the assessee had no opportunity to distinguish the said Delhi High Court decision from the facts of his case. Here, too, it is surprising that the High Court apparently ignored the principle of audi alteram partem.

III. CONCLUSION

From the aforesaid discussion, it is clear that the chamber research by the judges, after the conclusion of the hearing before the Court or the Tribunal, clearly violates the above Principles of Natural Justice, i.e. Nemo debet esse judex in propria causa and Audi alteram partem. However, surprisingly in the case of Geofin Investment (P.) Ltd. v/s. CIT (2013) 30 taxmann.com 73 (Delhi High Court) the High Court observed as under :

“It is not unusual or abnormal for judges or adjudicators to refer and rely upon judgements / decisions after making their own research.”

In the said case, the Delhi Tribunal allowed Revenue’s Appeal relying on another decision of the Tribunal in the case of Macintosh Finance Estates Ltd. v/s. Addl. CIT (2007) 12 SOT 324 (Mumbai), which was noticed by the Bench after the conclusion of the hearing. The assessee filed a Miscellaneous Application against the order of the Tribunal, contending that the Tribunal relied upon another decision of the Tribunal, which was not cited by either party during the course of the hearing. The said Miscellaneous Application was dismissed by the Tribunal. Against the dismissal of the Miscellaneous Application, the assessee filed a Writ Petition before the Delhi High Court, which was also dismissed by the Delhi High Court, observing as above. It is surprising that even though the Tribunal had not confronted the decision of the co-ordinate bench of the Tribunal in the case of Macintosh Finance Estates Ltd. v/s. Addl. CIT to the assessee so that the assessee could explain the distinguishing features of the said case with the assessee’s case and justify that the said decision did not apply to the facts of the assessee’s case, the rules of natural justice were clearly violated. Instead, the High Court dismissed the Writ Petition filed by the assessee against the dismissal of Miscellaneous Application by holding that it is not unusual or abnormal for judges or adjudicators to refer and rely upon judgements/decisions after making their own research.

It is submitted that if the chamber research is made by the judges after the conclusion of the hearing of the case before them, the result would be alarming. For example, during the course of the hearing of a case, the assessee’s counsel cites case law X and Y before the Judges and the hearing gets completed by hearing the other side. Thereafter, the Judges embark upon chamber research and come to the conclusion that instead of case law X and Y cited by the assessee’s Counsel, case law Z is applicable to the facts of the case and decides the case against the party whose counsel cited case laws X and Y. According to the Delhi High Court, in the case of Geofin Investment (P.) Ltd. (supra), the chamber research by the Judges can be conducted. In the illustration given above, the parties whose counsel did not get an opportunity to express his view on the case law Z relied upon by the Judges, the party represented by him will be severely prejudiced and irreparable injustice will be caused to the said party.

If chamber research by the judges is permitted after the conclusion of the hearing, the above two principles of natural justice will not be followed, as also the catena of judgements of various High Courts and Supreme Courts, laying emphasis on the observance of these two principles of natural justice will be ignored, causing possible detriment to the faith of the public in the judicial system.

However, it is submitted that there may be genuine cases under which the chamber research brings to the notice of judges a particular decision, which, though was in the public domain, went unnoticed by both the parties or any decision pronounced subsequent to the conclusion of hearing which comes to light during conducting chamber research and therefore it is submitted that chamber research by the Judges after the conclusion of hearing is not cast in stone. In such cases, it is suggested that the matter be refixed to give a fair hearing to the affected party so that the principles of natural justice are not violated.

BCAJ Admin

Taxability of Compensation for Reduction in Value of ESOPs

ISSUE FOR CONSIDERATION

Employee stock options (ESOPs) are granted to employees by the employer company or its parent company as an incentive. These ESOPs so granted can be exercised only after they vest in the employee over the vesting period, after which the employee can choose to exercise the vested ESOPs by applying for shares of the issuer company (employer or its parent) and making payment of the exercise price to the company. The shares are then allotted to the employee by the company.

Such ESOPs are taxable at the time of exercise of the ESOPs by virtue of clause (vi) of section 17(2) as a perquisite under the head ‘Salaries’. This provides that:

“(2) ‘perquisite’ includes the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee.

Explanation: For the purposes of this sub-clause –

(a) ‘specified security’ means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and, where employees stock option has been granted under any plan or scheme therefore, includes the securities offered under such plan or scheme;

(b) …..

(c) Shall be the fair market value of the specified security or sweat equity shares, as the case may be, on the date on which the option is exercised by the assessee as reduced by the amount actually paid by or recovered from, the assessee in respect of such security or shares;

(d) ………….

(e) ‘Option’ means a right but not an obligation granted to an employee to apply for the specified security or sweat equity shares at a predetermined price;”

At times, it may so happen that the value of the shares for which ESOPs are granted is diminished before the vesting period and the employer may compensate an employee for the diminution in the value of his options, pending the exercise of the options. In such a case, even after the receipt of such compensation, the options continue to exist and can be exercised by the employee.

In one such case, a company compensated employees of its subsidiary for the diminution in the value of their vested but unexercised stock options. On rejection of an application by the employee to the AO, for lower deduction of tax at source, the Delhi High Court held that such compensation was not taxable as a perquisite under the head ‘Salaries’; the Madras High Court in the case of another employee of the same company held that such compensation was taxable as a perquisite and was therefore taxable under the head ‘Salaries’ and tax was deductible by the employer at source at the time of payment of such compensation. It is this controversy, fuelled by the conflicting decisions of the courts, that is sought to be addressed here on the question whether the receipt for compensating the diminution in value is a perquisite and is taxable under the head ‘Salaries’ and is therefore liable to tax deduction at source under s. 192 of the Act by the employer.

The Assessing Officer (AO) in the case before the Madras High Court had in fact conceded that the compensation received was not a perquisite that was taxable under the head ‘Salaries’, but had nonetheless proceeded to hold that the receipt was an income taxable under the head ’Capital Gains’. This issue was not before the Delhi High Court at all, and, therefore, obviously not examined by the court, and as such there is no conflict between the courts on the issue of taxation under the head ‘Capital Gains’. The issue, however, was extensively examined by the Madras High Court to hold that the receipt could not have been taxed as capital gains, though finally it held that receipt was a perquisite taxable under the head ‘Salaries’ and was liable to deduction of tax at source under s. 192 of the Act. For the sake of being comprehensive in reproducing the facts, the contentions and the counter contentions on the issue of capital gains and the findings in law of the Madras High Court are also reproduced for the benefit of the readers.

SANJAY BAWEJA’S CASE

The issue first came up before the Delhi High Court in the case of Sanjay Baweja vs. DCIT 299 Taxman 313.

In this case, the assessee was an ex-employee of Flipkart Internet Pvt Ltd (FIPL), an Indian company, which was a step-down subsidiary of Flipkart Pvt Ltd, Singapore (FPS), a Singapore company. FPS gave stock options (ESOPs) to its employees and the employees of its subsidiaries. The assessee had been granted ESOPs from November 2014 to November 2016 during the period of his employment with FIPL. Some of the ESOPs had vested in the assessee before he left the employment of FIPL, and the unvested ESOPs had been cancelled on account of termination of his employment with FIPL. Out of the vested ESOPs, some had been repurchased by Walmart when it acquired FPS, subsequent to the cessation of employment of the assessee with FIPL.

FPS divested another wholly owned subsidiary, PhonePe. Due to such divestment and subsequent distribution to the shareholders of FPS on account of dividend, buy-back, etc., the value of the ESOPs of FPS fell. The Board of Directors of FPS decided that while there was no legal or contractual right under the ESOP plan to provide compensation for loss in current value or any potential losses on account of future accretion to the ESOP holders, at its own discretion, it decided to pay USD 43.67 as compensation for each ESOP, subject to applicable withholding taxes and other tax rules in respective countries of various ESOP holders.

The assessee was, therefore, entitled to certain compensation from FPS for the diminution in the value of his remaining vested ESOPs. The assessee filed an application under section 197, seeking a nil declaration certificate on the deduction of TDS by FPS from such compensation.

The AO rejected the application of the assessee for nil deduction certificate on the following grounds:

While the assessee had contended that the amount receivable by him did not constitute income under section 2(24), this section provided an inclusive definition of “income”, which was not exhaustive. Therefore, even a receipt not specifically mentioned therein could still be includible in the taxable income of the assessee.
While the general rule was that every amount received by an assessee was taxable unless specifically exempt under any provision, the assessee had failed to quote any express provision under which this receipt was exempt from tax.
The assessee had stated that FPS intended to withhold full tax on the payment. If the amount receivable by the assessee was not an income and not taxable, then the question arose as to why the payer intended to withhold tax on it. This implied that the payer was satisfied that the payment was subject to withholding tax.
Since the assessee stated that he would be reporting this income as exempt in his tax return, and the quantum was quite substantial, there was a high probability that the tax return would be selected for scrutiny assessment, and the assessee’s claim will not be accepted by the AO, which would result in creation of tax demand. Issue of a nil TDS certificate would hence be detrimental to the interest of revenue and recovery of taxes.
The use of the phrase “directly or indirectly” in section 17(2)(vi) implies that the amount receivable by the assessee in this case would be covered under the purview of “perquisite”.
The compensation was linked to the vested ESOPs. ESOPs resulted in a taxable perquisite on the allotment of shares, equivalent to the fair market value less the exercise price of the shares so allotted, which was taxable under the head “Salaries” in the hands of the employee or ex-employee, as the case may be. Consequently, the compensation receivable on these ESOPs, even though from a former employer, on account of diminution in value of the underlying shares, should also have the same characterisation and tax treatment, and was hence taxable under the head “Salaries”.

The Delhi High Court noted that ,undisputedly, the assessee had not exercised his vested right with respect to the ESOPs till date, which showed that the right of holding the shares had not been exercised. It analysed the provisions of section 17(2)(vi). The Delhi High Court observed that the determination of whether a particular receipt tantamounted to a capital receipt or a revenue receipt was dependent upon the factual scenario of the case. It noted the decisions of the Supreme Court in the case of CIT vs. Saurashtra Cement Ltd 325 ITR 422 and Shrimant Padmaraje R Kadambande vs. CIT 195 ITR 877 in this regard. The Delhi High Court also took note of the decision of the Supreme Court in the case of Godrej & Co vs. CIT 37 ITR 381, where a one-time payment was given to the assessee in view of the change in contractual terms between the assessee and the management company. In that case, the Supreme Court held that the amount was received as compensation for the deterioration or injury to the managing agency by reason of the release of its rights to get higher termination, and was, therefore, a capital receipt.

As regards the AO’s argument that the amount was liable to be taxed since FPS intended to deduct TDS, the Delhi High Court observed that the manner or nature of payment, as comprehended by the deductor, would not determine the taxability of such transaction. It was the quality of payment that would determine its character and not the mode of payment. According to the Delhi High Court, unless the charging section of the Act elucidated any monetary receipt as chargeable to tax, the revenue could not proceed to charge such receipt as revenue receipt. The Delhi High Court referred to the Supreme Court decision in the case of Empire Jute Co Ltd vs. CIT 124 ITR 1 for the proposition that the perception of the payer would not determine the character of the payment in the hands of the recipient.

Referring to the provisions of section 17(2)(vi), the Delhi High Court noted that the most crucial ingredient of this provision was – determinable value of any specified security received by the employee by way of transfer / allotment, directly or indirectly, by the employer. As per explanation (c) to this provision, the value of the specified security could only be calculated once the option was exercised. In a literal reading of the provision, the value of specified securities or sweat equity shares was dependent upon the exercise of option. Therefore, for an income to be included as perquisite, it was essential that it was generated from the exercise of options by the employee.

On the facts of the case before it, the High Court noted that the assessee had not exercised options under the ESOP scheme till date but the options were merely held by the assessee. The Delhi High Court was, therefore, of the view that the options did not, therefore, constitute income chargeable to tax in the hands of the assessee, as none of the contingencies specified in section 17(2)(vi) had occurred.

Besides, the Delhi High Court noted that the compensation was a voluntary payment and not a transfer by way of any obligation. It was important that the management proceeded by noting that there was no legal or contractual right under the ESOP scheme to provide compensation for loss in current value or any potential losses on account of future accretion to the ESOP holders. FPS, on its own discretion, had estimated and decided to pay USD 43.67 as compensation for each stock option held on the record date.

According to the Delhi High Court, it was elementary to highlight that the payment in question was not linked to the employment or business of the assessee but was a one-time voluntary payment to all the option holders of ESOP, pursuant to the divestment of PhonePe business from FPS. In the case before it, even though the right to exercise the option was available to the assessee, the amount received by him did not arise out of any transfer of stock options. It was a one-time voluntary payment not arising out of any statutory or contractual obligation.

Therefore, the Delhi High Court held that treatment of the amount of compensation as a perquisite under section 17(2)(vi) could not be countenanced in law, as the stock options were not exercised by the assessee, and the amount in question was a one-time voluntary payment made by FPS to all the option holders in lieu of disinvestment of PhonePe business.

NISHITHKUMAR MUKESHKUMAR MEHTA’S CASE

The issue again came up before a single judge of the Madras High Court in the case of Nishithkumar Mukeshkumar Mehta vs. Dy CIT 165 taxmann.com 386.

In this case, the assessee was an employee of FIPL to whom stock options had been granted by FPS. Compensation was announced by FPS at USD 43.67 per ESOP on divestment of PhonePe business as described above, with former employees to receive the compensation only on vested ESOPs which were not exercised, while existing employees would receive the compensation on all unexercised outstanding ESOPs, whether vested or unvested. Such compensation was proposed to be treated as a perquisite taxable under the head ‘salaries’ by FIPL, with deduction of tax at source under section 192 on that basis. The assessee applied for a nil tax deduction certificate under section 197.

The assessee’s application was rejected by the AO on the basis of the following:

While the compensation to be received was not chargeable under the head ‘Salaries’, the contention that it was not taxable as capital gains was found to be an illogical contention;
The value of compensation to be received represented the surrender value of PhonePe shares held by the assessee while holding the FPS ESOPs. Therefore, the claim that no asset was transferred was found to lack credence;
The surrender or relinquishment of right to sue and litigate was the asset transferred so as to earn this compensation and therefore, the transaction squarely fell under the provisions of section 45.

Therefore, the AO was of the view that there was a capital gain arising out of the transfer of a capital asset, which was taxable under section 45,and therefore, rejected the application u/s 197. Against this rejection of application under section 197, the assessee filed a writ petition to the Madras High Court.

On behalf of the assessee (incidentally represented by the same counsel who had appeared before the Delhi High Court in Sanjay Baweja’s case), before the Madras High Court, it was pointed out that the ESOPs were rights in relation to shares of FPS which had issued such ESOPs. They were, therefore, capital assets. Since the assessee continued to hold the same number of ESOPs before and after receipt of the compensation, there was no transfer of capital assets, and in the absence of transfer of capital assets, capital gains tax could not be levied. Compensation paid to the assessee was a capital receipt, and such capital receipt was taxable as capital gains only if gains accrued from the transfer of capital assets. Since capital assets were not transferred by the assessee, capital gains tax could not be imposed.

It was further argued on behalf of the assessee that it was never held that the asset transferred by the assessee was the relinquishment of the right to sue or litigate. The assessee had no right to receive compensation for the divestment of the PhonePe business by FPS. In the absence of a right to receive compensation, the payment was a discretionary one-time payment by FPS. Even if such compensation had not been paid, the terms of the ESOP scheme did not confer any rights on the assessee, including the right to sue. Further, a right to sue was not transferable as per section 7 of the Transfer of Property Act, 1882. Therefore, the conclusion that the transaction fell within the scope of section 45 was untenable.

It was argued that since the receipt by the assessee was a capital receipt, the Income Tax Act did not provide for TDS thereon. While the Income Tax Act provides for machinery for the computation of capital gains, being the difference between the acquisition price and resale price, there was no machinery provision with regards to taxation of receipts such as compensation in relation to ESOPs. It was submitted that the order of rejection called for interference not only because the conclusion that there was a relinquishment of the right to sue was erroneous, but also because the order did not identify the provision of the Income Tax Act under which the assessee was liable to pay tax or under which tax was liable to be deducted at source.

Reliance was placed upon various judgments of the Supreme Court and High Courts to support the propositions that the compensation was in the nature of a capital receipt, that capital receipts which are not chargeable under section 45 cannot be taxed under any other head, that capital gains tax cannot be imposed in the absence of a computation mechanism, that a mere right to sue cannot be transferred and that tax cannot be deducted at source if the payment does not constitute income.

On behalf of the revenue, it was submitted that ESOPs are capital assets, and that the ESOPs had a higher value while FPS held an interest in PhonePe. Since the value of ESOPs held by the assessee declined on divestment of the PhonePe business by FPS, the assessee had a right to sue for diminution of value. Since the compensation was paid as consideration for relinquishment of the right to sue, such relinquishment qualified as the transfer of a capital asset.

Reliance was placed upon the decision of the Madras High Court in K R Srinath vs. ACIT,268 ITR 436, where the court held that the compensation received for relinquishment of a right to sue for specific performance of a contract relating to the purchase of immovable property was a capital receipt, which was liable to capital gains tax. It was, therefore, argued that the amount of compensation received by the assessee was a capital gain which was taxable, because it accrued from the transfer / relinquishment of the right to sue for compensation for diminution in the value of the ESOPs.

On behalf of the assessee, in rejoinder, it was pointed out that in contrast to the facts of the case in K R Srinath (supra), the ESOP scheme did not confer a contractual right on the assessee to sue for specific performance.

The Madras High Court analysed the provisions of the ESOP scheme and the facts pertaining to the compensation. It then went on to analyse whether the ESOPs were capital assets. It noted that while shares were indisputably capital assets because they qualified as movable goods under the Sale of Goods Act, 1930, and the Companies Act, 2013, ESOPs were rights in relation to capital assets, i.e., right to receive capital assets subject to the terms and conditions of the ESOP scheme. Analysing the definition of capital assets, it noted that explanation 1 to section 2(14), which clarifies that property includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever, was not attracted, since the assessee had no rights in the Indian company of which he was an employee.

It, thereafter, went on to analyse the judgments relied upon by the assessee for the proposition that compensation was a capital receipt which was not taxable because it did not accrue from the transfer of a capital asset.

In Kettlewell Bullen & Co Ltd vs. CIT 53 ITR 261 (SC) and Karam Chand Thapar & Bros Pvt Ltd vs. CIT 4 SCC 124, the compensation received for relinquishment of the managing agency was construed as a capital receipt because it was intended to compensate for the impairment of the source of revenue or profit-making apparatus.
In Vodafone India Services (P) Ltd vs. UOI 368 ITR 1 (Bom), receipt arising out of a capital account transaction was held to be not taxable as income in the absence of an express legislative mandate.
In Oberoi Hotel (P) Ltd vs. CIT 236 ITR 903 (SC), compensation received for relinquishment of rights of management of a hotel for a management fee calculated on the gross operating profits and right of first offer in the event of transfer / lease, was held to be for injury inflicted on the capital asset of the assessee, resulting in the loss of the source of the assessee’s income, and was, therefore, construed as a capital receipt.
On a similar basis, compensation for variation of the terms of the managing agency was held to be a capital receipt by the Supreme Court in Godrej & Co’s case (supra).
In Senairam Doongarmall vs. CIT 42 ITR 392 (SC), compensation received for acquisition of factory buildings adjoining a tea garden with consequential cessation of the production was held to be a capital receipt, while in CIT vs. Saurashtra Cement Ltd 325 ITR 422 (SC), liquidated damages received for failure to supply an additional cement plant was construed as a capital receipt.

According to the Madras High Court, the common thread running through all these cases was that the compensation was paid either for the loss of the profit-making apparatus or, at a minimum, for the sterilisation thereof. Hence, such compensation was held to be a capital receipt.

The Madras High Court observed that, at first blush, the ratio of these cases seems to apply to the case at hand because compensation was paid for the diminution in value of ESOPs and potential losses on account of future accretion to ESOP holders due to the divestment of the PhonePe business. It, however, noted the following significant differences on a closer examination. It noted that the ESOPs were contractual rights, and that the scheme included conditions regarding vesting, cancellation and transfer. In case of breach of the obligation by the insurer to allot shares upon exercise of the option in terms of the ESOP scheme, the assessee would have the right to claim compensation or sue for specific performance. Therefore, the ESOPs were contractual rights that may qualify as actionable claims (though not as defined in The Transfer of Property Act) or choses in action in certain circumstances.

Unlike in the case of managing agency or tea factory in the cited cases, ESOPs were not a source of revenue or profit-making apparatus for the holder because these actionable claims were intrinsically not capable of generating revenue (notional or actual) and could not be monetised, whether by transfer or otherwise, until shares were allotted. Even at the time of allotment,
there was a notional but not an actual benefit. Actual benefit accrued only upon transfer, provided there was a capital gain.

According to the Madras High Court, in all the cited cases, the compensation was received in relation to relinquishment of rights in revenue generating and subsisting capital assets, while in the case of ESOPs, the capital assets came into existence only upon allotment of shares, and revenue generation from the capital assets was possible only thereafter. Therefore, the compensation was not for the loss of or even sterilisation of a profit-making apparatus but by way of a discretionary payment towards potential (as regards unvested options) or actual (as regards vested options) diminution in value of contractual rights. This was supported by the FPS communication that referred to the compensation as being paid without legal or contractual obligation towards loss in value of ESOPs (and not shares).

The Madras High Court noted that the ESOP scheme did not contain any representation or warranty to ESOP holders that no action would be taken that could impair the value of the ESOPs, and therefore, there was no contractual right to compensation. It could, therefore, not be said that a non-existent right was relinquished.

The Madras High Court, therefore, concluded that ESOPs did not fall within the ambit of the expression “property of any kind held by an assessee” in section 2(14) and were consequently not capital assets. Therefore, the receipt was not a capital receipt.

Since the order of rejection by the AO concluded that a capital asset was transferred, the Court then went on to analyse the tenability of that conclusion. Since the ESOPs were not exercised, shares of FPS were not issued or allotted to the assessee, and therefore the assessee neither received nor transferred a capital asset. Since the ESOP scheme did not confer a right to receive compensation for impairment in the value of ESOPs, both the conclusion in the order of rejection the contention on behalf of the revenue, that compensation was paid towards relinquishment of the right to sue, by placing reliance on the decision in the case of K R Srinath, was untenable.

Given this conclusion, the matter could have been remanded by the Court to the AO. However, the counsel for the assessee confirmed to the Court that the relief claimed included a direction for issuance of a nil certificate, and therefore, it was not sufficient to remand the matter for reconsideration. The Madras High Court, therefore, went on to consider the manner in which the Income Tax Act dealt with receipts in relation to the holding of ESOPs. It noted that the definition of “salary” was inclusive and included perquisites, while the definition of “perquisite” was also inclusive and covered the value of a specified security. It analysed that the ESOPs granted to the assessee as an employee of a step-down subsidiary qualified as ESOPs under the Companies Act, 2013, and therefore, fell within the scope of explanation (a) to clause (vi) of section 17(2). It is in this light that the specific issue of whether the compensation paid to the assessee qualified as a perquisite had to be considered.

The Madras High Court noted the decision of the Delhi High Court in Sanjay Baweja’s case (supra), where the Delhi High Court had concluded that the one-time voluntary payment was a capital receipt, which was not liable to tax as a perquisite.

Analysing clause (vi) of section 17(2), the Madras High Court observed that since clause (vi) was illustrative of perquisite, it was not intended to tax the capital gains that may accrue if such specified security were to be sold by the allottee after capital appreciation. Instead, as the plain language indicated, clause (vi) took within its fold and treated as a perquisite the benefit extended to the employee or any other person from out of the grant of specified securities at concessional rates or free of cost. In the specific context of ESOPs, explanation (a) to clause (vi) explains the scope of “specified security” by using expression “includes the securities offered under such plan or scheme”, and not the phrase “includes the securities allotted under such plan or scheme”. Given that the assessee had not exercised the option in respect of the ESOPs held by him, shares of FPS were not issued or allotted to him. According to the court, the inference that followed was that “specified security” in the context of ESOPs was not confined to allotted shares but included securities offered to the holder of ESOPs. The use of “includes” instead of “means” also indicated that the phrase “securities offered under such plan or scheme” was not intended to be exhaustive.

The Madras High Court was of the view that the expression “value of any specified security… transferred directly or indirectly by the employer… free of cost or at concessional rate to the assessee” in clause (vi) was wide enough to encompass the discretionary compensation paid to ESOP holders to compensate for the potential or actual diminution in value thereof. Consequently, especially in view of the inclusive definition of perquisite, merely because the method of valuing the perquisite did not fit neatly into explanation (c) to clause (vi) of section 17(2), did not mean that it could not be taxed as a perquisite, provided the value of the perquisite could be determined. According to the High Court, to determine the value of the perquisite, the benefit that the employee or other person received from the specified security, though not by way of capital gains, should be determinable.

Addressing the issue of ascertainment of the benefit, the Madras High Court observed that ordinarily, the benefit would be the difference between the fair market value of the share and the price at which such share is offered to the ESOP holder. Since such monetary benefit would typically be realised, though notionally, only at the time of exercise of the option and remains a non-monetisable contractual right until then, the fair market price of the shares on the date of exercise of the option is reckoned and the price paid by the option holder is deducted therefrom to determine the value of the perquisite in the form of ESOP. Therefore, explanation (c) to clause (vi) prescribes that the value of the specified security is the difference between the fair market value of the shares on the date of exercise of the option and the price paid by the option holder. In the case before the court, the assessee received a substantial monetary benefit at the pre-exercise stage by way of discretionary compensation for diminution in the value of the stock options.

The Madras High Court referred to the decision of the Supreme Court in the case of CIT vs. Infosys Technologies Ltd 297 ITR 167, where the Supreme Court considered the question whether the issuer company was liable to deduct TDS under section 192 in respect of shares allotted under an ESOP scheme and subject to a lock-in for a period of five years. The relevant assessment year was 1999–2000, when clause (vi) was not applicable. After holding that the insertion of clause (vi) with effect from assessment year 2000–01 did not apply retrospectively, the Supreme Court held that the notional benefit that accrued from shares that were subject to a lock-in could not be treated as a perquisite because there was no cash inflow to the employees till the end of the lock-in period. The Madras High Court observed that while the principle that notional benefit cannot be taxed as a perquisite was formulated in a specific statutory context which no longer existed, the broader principle laid down therein to the effect that the benefit from the ESOP was to be determined for purposes of and as a prerequisite for taxation as a perquisite continued to apply.

The Madras High Court noted that in the case before it, actual monetary benefit was received at the pre-exercise stage by the assessee and other stakeholders. Such monetary benefit was paid to the assessee on account of being an ESOP holder, and ESOPs were granted to the assessee as an employee under the ESOP scheme. If payments had been made by the assessee in relation to the ESOPs, it would have been necessary to deduct the amount of such payment to arrive at the value of the perquisite. Since the assessee did not make any payments towards the ESOPs and continued to retain all the ESOPs even after the receipt of compensation, the Madras High Court was of the view that the entire receipt qualified as a perquisite liable to be taxed under the head “Salaries”.

Therefore, according to the Madras High Court, it was not necessary to consider whether it fell under any other head of income. Due to the conclusion that the compensation qualified as a perquisite and not as a capital receipt, as per the Madras High Court, the judgments cited in respect of capital gains, including those relating to the absence of the rate or computation mechanism or provision for TDS, lost relevance. For these reasons, the Madras High Court expressed its inability to endorse the view taken by the Delhi High Court in the case of Sanjay Baweja (supra).

OBSERVATIONS

The crucial aspect in this controversy is whether the compensation received for diminution in value of ESOPs is a perquisite under the head ‘Salaries’ and if yes, whether the payer was liable to deduct tax at source. The incidental issue is whether the receipt is a capital receipt and the right granted of ESOPs is a capital asset or not. The Madras High Court addressed the issue of capital gains to hold that the employee in question was not holding a capital asset that was transferred resulting into capital gains but proceeded further to hold that the receipt in question was a perquisite liable to taxation under the head ‘Salaries’ and the employer was required to deduct tax at source.

An important point that is required to be noted, at the outset, is that in the case before the Madras High court, the AO had conceded and held that the compensation was not a perquisite under the head ‘Salaries’. In view of the definitive conclusion of the AO on the issue of perquisite, there was no dispute before the High Court on this aspect of taxation under the head ‘Salaries’. It is, therefore, intriguing that the Madras High court proceeded to hold, though it was not asked to do so, that the receipt of compensation was a perquisite that was taxable under the head ‘Salaries’ and was liable to deduction of tax at source under s. 192 of the Act. Could it have done so in the writ jurisdiction, where the issue before the court was perhaps whether the AO was right in holding that the compensation received was a capital gain and was subjected to the deduction of tax at source, when there is no provision for such deduction in respect of the payment of capital gains?

The logic of the Madras High Court was that ESOPs were merely rights to receive capital assets (shares) and not capital assets themselves. In doing so, the definition of “specified security”, which referred to securities as defined in section 2(h) of the securities Contracts (Regulation) Act, 1956, was not considered in depth by the High Court.

Section 2(h) of the Securities Contracts (Regulation) Act, 1956 (SCRA) reads as under:

“securities” include—

(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature
in or of any incorporated company or other body
corporate;

(ia) derivative;

(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;

(ic) security receipt ………….;

(ii) Government securities;

(iia) such other instruments as may be declared by the Central Government to be securities; and

(iii) rights or interest in securities.

Therefore, derivative or rights or interest in securities are also securities. Further, “derivative” is defined in section 2(ac) of SCRA as under:

“derivative” includes —

(A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;

(B) a contract which derives its value from the prices, or index of prices, of underlying securities.

Further, section 2(d) of SCRA defines “option” as under:

“option in securities” means a contract for the purchase or sale of a right to buy or sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, a teji mandi, a galli, a put, a call or a put and call in securities.

An option is definitely a derivative, if not a right or interest in a security, and is, therefore, a security by itself. That being so, it would certainly be a capital asset. Therefore, the very basis of the distinction drawn by the Madras High Court in rejecting the decisions cited on behalf of the assessee, and in holding that such a right is merely a chose in action or only a right to receive a capital asset, does not seem to be justified. The fact that an ESOP is a capital asset is also supported by the well-settled view taken by the Bombay High Court in the case of CIT vs. Tata Services Ltd 122 ITR 594 and the Madras High Court in the case of K R Srinath (supra), where the High Courts had held that the right to acquire an immovable property or the right to specific performance under an agreement to purchase an immovable property was also a capital asset, the transfer or extinguishment of which was subject to capital gains tax. Besides, the Karnataka High Court in the case of Chittranjan A. Dassanacharya, 429 ITR 570 and the Bangalore bench of the Tribunal in the case of N.R. Ravikrishnan, 155 ITD 355 have held that the right to acquire shares under ESOP was a capital asset and the holding period commenced with the date of grant.

The other angle in the logic of the Madras High Court was that the ESOP scheme did not contain any representation or warranty to ESOP holders that no action would be taken that could impair the value of the ESOPs, and therefore, there was no contractual right to compensation, and therefore, it could not be regarded as a transfer of any rights. On the facts of the case, it was clear that the payment was a voluntary one, and that the assessee was not entitled to any such compensation. The assessee also did not have any right to make such a claim for any compensation under the ESOP scheme. In fact, the assessee’s claim was that since there was no transfer, the amount received could not be taxed as capital gains.

The third basis of the Madras High Court decision was that section 17(2)(vi) was an inclusive definition and, therefore, applied to the compensation received. In this connection, the Madras High Court failed to take note of certain findings of the Supreme Court in the case considered by it of Infosys Technologies (supra):

Unless a benefit /receipt is made taxable, it cannot be regarded as ‘income’. This is an important principle of taxation under the Act.
…..
Be that as it may, proceeding on the basis that there was ‘benefit’, the question is whether every benefit received by the person is taxable as income? It is not so. Unless the benefit is made taxable, it cannot be regarded as income. During the relevant assessment years, there was no provision in law which made such benefit taxable as income. Further, as stated, the benefit was prospective. Unless a benefit is in the nature of income or specifically included by the Legislature as part of income, the same is not taxable.

As per the Supreme Court, unless an item is specifically included in the definition of “perquisite”, it would not be taxable as a perquisite. This is directly contrary to the view taken by the Madras High Court that even if the compensation did not fall strictly within the definition of perquisite, it would still be taxable as a perquisite since the definition was an inclusive one. Clause (vi) clearly provides for both the date of taxation as well as the computation mechanism — if neither applies, the compensation received would not be taxable as a perquisite.

On the other hand, the various decisions cited on behalf of the assessee before the Madras High Court clearly point out that if a receipt is relatable to a capital asset, it is a capital receipt. Such capital receipt is chargeable to tax as capital gains only if there is transfer of a capital asset. If there is no transfer of a capital asset in connection with which the amount is received, in the absence of a specific charging provision, it is not subject to tax at all. In this case, there was no transfer of a capital asset at all by the assessee.

Therefore, the view taken by the Delhi High Court in Sanjay Baweja’s case that such compensation was not a perquisite, not liable to be taxed under the head ‘Salaries’, and not subject to tax deduction at source, seems to be the better view of the matter.

BCAJ Admin

Glimpses of Supreme Court Rulings

9 C I T (E), Pune vs. Lata Mangeshkar Medical Foundation

(2024) 464 ITR 706 (SC)

Charitable Purpose — Exemption — Principle of consistency — High Court upheld the order of the lower authorities which allowed the exemption based on earlier appellate orders which had become final — Special Leave Petition dismissed

The Assessee Trust was running a hospital by the name “Deenanath Mangeshkar Hospital” in Pune. During the assessment proceeding for Assessment Year 2010–2011, the Assessing Officer (“AO”) denied the exemption under Section 11 of the Income Tax Act, 1961 (“the Act”) and then vide assessment order under Section 143(3) of the Act, computed the total income at ₹18,16,02,520. The exemption under section 11 of the Act was denied because —

(i) The Assessee-Trust had not furnished proper information to the Charity Commissioner and there was a shortfall in making provisionsfor the Indigent Patients Fund (“IPF”). According to AO, Assessee should have credited an amount of ₹2.14 crores to the IPF as against ₹75.96 lakhs only.

(ii) The Assessee Trust had generated a huge surplus and therefore, the intention of the trust was
profit-making. AO was of the opinion that the hospital of Assessee did not provide services to the poor and underprivileged class of the society.

(iii) The Assessee-Trust was running a canteen in the hospital with a profit motive and was not providing free meals.

(iv) There was a violation of provisions of Section 13(1)(c) of the Act by Assessee-Trust as remuneration was paid to two individuals, viz., Mrs. Bharati Mangeshkar, who is a trustee with no significant qualification and Mrs. Meena Kelkar, mother of the trustee Dr. Dhananjay Kelkar, who also did not possess any qualification and was beyond 65 years of age.

Being aggrieved by this assessment order dated 22^nd March, 2013, Assessee Trust preferred an Appeal before the Commissioner of Income Tax (Appeal) (“CIT(A)”). The CIT(A) granted relief to Assessee-Trust by restoring the exemption under Section 11 of the Act.

Revenue challenged the said order before the Income Tax Appellate Tribunal (“ITAT”). The ITAT was pleased to dismiss the Appeal by an order dated 23^rd June, 2017.

The order of the ITAT was challenged by the Revenue before the High Court. The High Court noted that CIT(A) while deciding the issue in favour of the Assessee noted that the facts in the year under Appeal, i.e., for Assessment Year 2010–2011 were identical to those of Assessment Years 2008–2009 and 2009–2010. The CIT(A) followed the orders of his predecessor for Assessment Years 2008–2009 and 2009–2010 and decided the issue in favour of the Assessee.

Revenue had challenged those orders of CIT(A) and filed an Appeal before the ITAT for Assessment Years 2008–2009 and 2009–2010. The co-ordinate Bench of the ITAT by an order dated 15th April, 2016 upheld the order of CIT(A).

According to the High Court, The ITAT for the assessment year 2010–11 had merely followed what its co-ordinate Bench held in its order dated 15^th April, 2016 for Assessment Years 2008–2009 and 2009–2010. Since there was nothing on record that the order of ITAT dated 15^th April, 2016 had been set aside or overruled in any manner by the High Court, the ITAT found no reason to interfere with the order of CIT(A). The High Court noted that the Appeals for those years were filed before the High Court for the earlier years had been dismissed on the ground of delay. In the circumstances, the High Court found no reason to interfere with the order of ITAT.

Revenue challenged the said order before the Supreme Court by way of a special leave petition. The Supreme Court dismissed the special leave petition holding that no case for its interference was made out by the Appellant.

10 PCIT vs. Trigent Software Ltd.

(2024) 464 ITR 770 (SC)

Business Expenditure — Capital or Revenue — Software company abandoned a new software that it was developing — High Court holding that the amount spent was deductible as revenue expenditure — Special Leave Petition dismissed.

The assessee was engaged in the business of software development solutions and management. The assessment for the assessment year 2007–08 was completed u/s. 143(3) r.w.s 147. The Assessing Officer disallowed the claim of expenditure of ₹7.09 crores in respect of the development of software that was abandoned.

The Commissioner of Income-tax (Appeals) allowed the claim of deduction holding that the expenditure for the development of a new product by the assessee was in the assessee’s existing line of business. The CIT(A) further held that though the assessee had shown the expenditure as capital work-in-progress for the earlier assessment years, the deduction had to be allowed as a revenue expenditure in the year in which the project in question was abandoned.

The Income Tax Appellate Tribunal upheld the view expressed by the Commissioner of Income-tax (Appeals).

The High Court held that the appellant was admittedly in the business of development of software solutions and management, and therefore its endeavour to develop a new software was nothing but an endeavour in its existing line of business of developing software solutions. Admittedly, the product that was sought to be developed never came into existence, and the same was abandoned. No new asset came into existence which would be of enduring benefit to the assessee, and, therefore the expenditure could only be said to be revenue in nature.

The Supreme Court dismissed the special leave petition of the Revenue holding that no case for interference was made out so as to exercise its jurisdiction under Article 136 of the Constitution of India.

11 Jt. CIT vs. Clix Capital Services Pvt. Ltd.

(2024) 464 ITR 768 (SC)

Penalty notice — Assessment order passed on 28^th October, 2011 — Show cause notice u/s. 274 for imposition of penalty issued on 9th November, 2017 — High Court holding that the notice is barred by limitation — SLP dismissed

On 31^st October, 2007, the assessee filed its return of income for the assessment year 2007–08 declaring a total income of ₹47,39,42,143.

A revised return of income was filed on 31^st March, 2009 declaring the total income of ₹47,14,28,736. In the revised return the assessee inter alia added back certain expenses amounting to ₹84,62,03,987 by way of abundant caution, having regard to the provision of section 40(a)(ia) of the Act. In the succeeding assessment year, that is, the assessment year 2008–09, the assessee claimed the said expense of ₹84,62,03,987 as a deduction, as the said amount had been actually expended.

The assessment order for the assessment year 2007–08 was passed u/s. 143(3) of the Act on 28^th October, 2011 determining total income at ₹102,06,71,340.

The Assessing Officer, in an internal communication dated 9^th September, 2013 addressed to the Additional Commissioner of Income-tax wrote that a penalty should be imposed on the assesee for failure to deduct tax at source qua assessment year 2007–08. A reminder was sent on 11^th July, 2014. A notice u/s. 274 of the Act was issued on 9^th November, 2017 calling upon the assessee to show cause as to why penalty should not be imposed u/d. 271C of the Act for the assessment year 2007–08.

The assessee filed a response on 19^th December, 2017, inter alia raising a preliminary objection, namely, that the notice was barred by limitation.

The assessee filed a writ petition before the Hon’ble Delhi High Court which directed that an order be passed on the objection of the assessee.

This led to the passing of the order dated 14^th June, 2018 which was followed by a second show-cause notice on 27^th June, 2018.

The assessee once again approached the court and filed a writ petition challenging both the show cause notices.

The High Court observed that section 275 of the Act has two limbs. The first limb concerns the fixation of a period of limitation when the penalty is sought to be imposed as fallout of action taken in another proceeding. On the other hand, the second limb of clause (c) of sub-section (i) of section 275 of the Act fixes the period of limitation, where initiation of action of imposition of penalty is taken on a standalone basis, that is, not as a consequence of action taken in another proceeding.

For the second limb, the legislature has provided a limitation of six months from the end of the month in which action for imposition of penalty is initiated. But there is no indication, as to when the period of six months ought to commence. The High Court agreed with the assessee that the proceedings should be commenced within a reasonable period.

The High Court was of the view that the show cause notice dated 9^th November, 2017 was delayed and therefore quashed the same.

On a special leave petition being filed by the Revenue, the Supreme Court dismissed the same holding that no case for interference was made out for it to exercise its jurisdiction under Article 136 of the Constitution of India.

BCAJ Admin

Section148: Reassessment — Notice — against company that has been successfully resolved under a Corporate Insolvency Resolution Process (“CIRP”) under the Insolvency and Bankruptcy Code, 2016 (“IBC”)— effect of resolution of a corporate debtor is that the terms of resolution bind tax authorities and their enforcement actions.

16 Uttam Galva Metallics Ltd. and Mr. SubodhKarmarkar vs. Asst. CIT

WP(L) No. 9421 OF 2022

A. Y.: 2016-17

Dated: 28^th August, 2024 (Bom) (HC)

Section148: Reassessment — Notice — against company that has been successfully resolved under a Corporate Insolvency Resolution Process (“CIRP”) under the Insolvency and Bankruptcy Code, 2016 (“IBC”)— effect of resolution of a corporate debtor is that the terms of resolution bind tax authorities and their enforcement actions.

The Petitioner-Assessee was admitted into a CIRP by an order dated 11^th July, 2018 passed by the National Company Law Tribunal, New Delhi (“NCLT”). Various processes under the IBC were undertaken. Eventually, the company came to be resolved pursuant to a resolution plan finalised by the Committee of Creditors, and approved by the NCLT under Section 31 of the IBC by an order dated 6^th May, 2021. The resolution plan, as approved by the NCLT, entails a full waiver of all tax and tax-related interest dues pertaining to the period prior to commencement of the CIRP.

On 27^th March, 2021 i.e., well after the resolution plan was approved, the Revenue issued a notice under Section 148 of the Act seeking to initiate reassessment of the Petitioner-Assessee’s income for AY 2016-17, on the premise that income chargeable to tax had escaped assessment. On 26^th October, 2021, the Revenue issued a communication containing reasons for initiating the said reassessment. It was stated that the original assessment of the Petitioner-Assessee had been completed on December 28, 2018 in terms of the loss of ₹220.25 crores as returned by the Petitioner-Assessee. Thereafter, the Revenue had conducted survey proceedings against some companies and had reason to believe that dealings by the Petitioner-Assessee with those companies could have led to income in the sum of ₹111.28 crores escaping assessment.

On 19^th November, 2021, the Petitioner-Assessee submitted its objections, specifically asserting that after approval of a resolution plan under Section 31 of the IBC, the Petitioner-Assessee had begun on a new slate with all past claims and dues being extinguished in terms of the resolution plan. The Petitioner-Assessee made submissions on the import of Section 31 of the IBC and various case law interpreting the IBC. The Petitioner-Assessee also called upon the Revenue to share the documents and material relating to the sanction of reassessment proceedings, under Section 151 of the Act.

Thereafter, on 15^th February, 2022 the Petitioner-Assessee called for a speaking order on the objections raised by it. On 18^th February, 2022, the Revenue passed an order, rejecting all the objections raised by the Petitioner-Assessee and asserted that while recovery may be impermissible, prosecution of the erstwhile management and recovery from other persons would still be permissible. On such premise, the Revenue refused to drop reassessment proceedings against the Petitioner-Assessee. Pursuant to such rejection of the objections, the Revenue issued a notice dated 12^th March, 2022 calling upon the Petitioner-Assessee to furnish various details by 21^st March, 2022.

Being aggrieved by the Revenue persisting with the reassessment proceedings despite the successful resolution of the Petitioner-Assessee, the Petitioner-Assessee, invoked the writ jurisdiction under Article 226 of the Constitution of India, for quashing and setting aside of the impugned proceedings including all notices and communications received from the Revenue.

The Petitioner contended that Section 31 of the IBC explicitly makes the resolution plan binding on the Revenue. The Petitioner-Assessee has also submitted that the law declared by the Supreme Court, interpreting Section 31 of the IBC fully covers the position that the Petitioner-Assessee is in, namely, that a corporate debtor after being resolved, starts with a clean slate and cannot be pursued for past tax claims.

The Revenue opposing the Petition contended that once the CIRP came to an end (with the approval of the resolution plan), the moratorium on initiating and continuing proceedings against the Petitioner-Assessee too came to an end. Therefore, according to the Revenue, the power of the Revenue to continue proceedings against the Petitioner-Assessee would revive. The Revenue quoted from orders of the Supreme Court passed during the course pending CIRP proceedings, when dealing with the import of the moratorium under Section 14 of the IBC, to argue that the approval of the resolution plan can have no bearing on the power of the Revenue to pursue proceedings in relation to past tax claims. The Revenue also argued that there is nothing inconsistent between the IBC and the Act for the non-obstinate provisions in the IBC to have any relevance.

Section 31(1) of IBC and its import:

They are extracted below:

“31. (1) If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in the resolution plan.”

[Emphasis Supplied]

The court observed that even a plain reading of the foregoing would show that once the Adjudicating Authority (the NCLT) approves the resolution plan, it would be binding on, among others, the Central Government and its agencies in respect of payment of any statutory dues arising under any law for the time being in force. It is now trite law that the effect of resolution of a corporate debtor is that the terms of resolution bind tax authorities and their enforcement actions — a position in law declared in numerous judgments of the Supreme Court. The judgment in Ghanshyam Mishra and Sons Private Limited vs.. Edelweiss Asset Reconstruction Company Limited [(2021) 9 SCC 657](Ghanshyam Mishra) comprehensively summarises the import of various judgments on the point.

The court held that, it is crystal clear that once a resolution plan is duly approved under Section 31(1) of the IBC, the debts as provided for in the resolution plan alone shall remain payable and such position shall be binding on, among others, the Central Government and various authorities, including tax authorities. All dues which are not part of the resolution plan would stand extinguished and no person would be entitled to initiate or continue any proceedings in respect of any claim for any such due. No proceedings in respect of any dues relating to the period prior to the approval of the resolution plan can be continued or initiated.

Thus, there can be no manner of doubt that the Impugned Proceedings and their continuation against the Petitioner-Assessee are wholly misconceived and untenable. The Impugned Proceedings are essentially reassessment proceedings, and that too of AY 2016-17. Evidently, such proceedings pertain to the period prior to the approval of the resolution plan. The outcome of such proceedings, particularly if adverse to the Petitioner-Assessee, would clearly be in relation to tax claims for the period prior to the approval of the resolution plan. The resolution plan came to be approved on 6^th May, 2020. Any attempt to re-agitate the assessment for AY 2016-17, evidently and squarely, constitutes pursuit of claims for the period prior to even the initiation of the CIRP. The conduct of such proceedings would be directly in conflict with the law declared in Ghanshyam Mishra, which makes it clear that continuation of existing proceedings and initiation of new proceedings that relate to operations prior to the CIRP are totally prohibited after the approval of the resolution plan. Consequently, nothing in the Impugned Proceedings can legitimately survive.

Evidently and admittedly, the reassessment proceedings pre-date the CIRP. They would relate to the period prior to the approval of the resolution plan of the Petitioner-Assessee, and therefore stand extinguished. Upon completion of the CIRP, the Petitioner-Assessee has completely changed hands and has begun on a clean slate under new ownership and management.

Consequently, all the notices and communications issued by the Revenue in connection with the Impugned Proceedings, and the consequential actions as impugned in the Writ Petition were quashed and set aside.

BCAJ Admin

Section 119(2): CBDT — Condonation of delay in filing the return of income — the Chartered Accountant of assessee was in a situation of distress due to the ill-health of his wife — genuine human problems may prevent a person from achieving such compliances — sufficient cause for condonation of delay.

15 Jyotsna M. Mehta vs. Pr. CIT – 19

WP(L) No. 17939 of 2024

Dated: 4^th September, 2024 (Bom) (HC).

Section 119(2): CBDT — Condonation of delay in filing the return of income — the Chartered Accountant of assessee was in a situation of distress due to the ill-health of his wife — genuine human problems may prevent a person from achieving such compliances — sufficient cause for condonation of delay.

The application filed by the Assessees / Petitioners under section 119(2)(b) of the Income-tax Act, 1961 praying for condonation of delay in filing the return of income. The Petitioners are members of one family. Their accounts and all issues in relation to their income-tax returns were handled by a Chartered Accountant, who could not take timely steps on account of ill health of his spouse. For such reason, the returns of the Petitioners could not be filed within the stipulated time.

The Petitioners contended that they were fully dependent on the Chartered Accountant in all respects from the finalisation of the accounts as also in taking steps to file their respective returns. They contend that there was a genuine reason on the delay caused to the petitioners to file returns, as the Chartered Accountant was in a situation of distress due to the ill-health of his wife, keeping him away from the Petitioners professional work.

In such circumstances, the petitioners filed an application under section 119(2)(b) of the Act praying for condonation of delay in filing of their returns; setting out such reason, which according to the petitioner, was bonafide and a legitimate cause, requiring the delay to be condoned in the filing of the petitioners’ returns. The petitioners also submitted all the medical papers in support of their contentions that the case as made for condonation of delay was bonafide / genuine as reflected from the medical papers. The PCIT disbelieved the petitioners’ case and observed that the reasons are not genuine reasons preventing the petitioners from filing Income-tax returns. In recording such observations, the PCIT has not recorded any reasons as to why the documents as submitted by the petitioner were disbelieved by him, and / or the case of the petitioners was not genuine. Also, there is no contrary material on record, that the petitioner’s case on such ground was required to be rejected.

The Hon Court observed that the approach of PCIT appears to be quite mechanical, who ought to have been more sensitive to the cause which was brought before him when the petitioner prayed for condonation of delay.

The Hon Court further observed that it can never be that technicalities and rigidity of rules of law would not recognise genuine human problems of such nature, which may prevent a person from achieving such compliances. It is to cater to such situations the legislature has made a provision conferring a power to condone delay. These are all human issues and which may prevent the assessee who is otherwise diligent in filing returns, within the prescribed time. The PCIT is not consistent in the reasons when the cause which the petitioners has urged in their application for condonation of delay was common.

The Court further observed that it would have been quite different if there were reasons available on record of the PCIT that the case on delay in filing returns as urged by the petitioners was false, and / or totally unacceptable. It needs no elaboration that in matters of maintaining accounts and filing of returns, the assessees are most likely to depend on the professional services of their Chartered Accountants. Once a Chartered Accountant is engaged and there is a genuine dependence on his services, such as in the present case, whose personal difficulties had caused a delay in filing of the petitioners returns, was certainly a cause beyond the control of the petitioners / assessees. In these circumstances, the assessee, being at no fault, should have been the primary consideration of the PCIT. It also cannot be overlooked that any professional, for reasons which are not within the confines of human control, by sheer necessity of the situation can be kept away from the professional work and despite his best efforts, it may not be possible for him to attend the same. The reasons can be manifold like illness either of himself or his family members, as a result of which he was unable to timely discharge his professional obligation. There could also be a likelihood that for such reasons, of impossibility of any services being provided / performed for his clients when tested on acceptable materials. Such human factors necessarily require a due consideration when it comes to compliances of the time limits even under the Income-tax Act. The situation in hand is akin to what a Court would consider in legal proceedings before it, in condoning delay in filing of proceedings. In dealing with such situations, the Courts would not discard an empathetic /humane view of the matter in condoning the delay in filing legal proceedings, when law confers powers to condone the delay in the litigant pursuing Court proceedings. Such principles which are quite paramount and jurisprudentially accepted are certainly applicable, when the assessee seeks condonation of delay in filing income tax returns, so as to remove the prejudice being caused to him, so as to regularise his returns. In fact, in this situation, to not permit an assessee to file his returns, is quite counter-productive to the very object and purpose, the tax laws intend to achieve. In this view of the matter, the Hon court held that the delay was sufficiently explained and to be condoned.

BCAJ Admin

Revision — Powers of Commissioner — Assessee inadvertently filing data of next assessment year instead of relevant assessment year — Intimation u/s. 143(1) — Application for revision rejected only on the ground that intimation is not an order — Inadvertance of the Assessee not with a malafide intention to evade tax — Orders, intimation and communication set aside — Matter remanded to Principal Commissioner for de novo enquiry and fresh consideration.

51 DiwakerTripathi vs. PCIT

[2024] 466 ITR 371 (Bom)

A. Y. 2013-14

Date of order: 29^th August, 2023

S. 143(1), 154 and 264 of ITA 1961

Revision — Powers of Commissioner — Assessee inadvertently filing data of next assessment year instead of relevant assessment year — Intimation u/s. 143(1) — Application for revision rejected only on the ground that intimation is not an order — Inadvertance of the Assessee not with a malafide intention to evade tax — Orders, intimation and communication set aside — Matter remanded to Principal Commissioner for de novo enquiry and fresh consideration.

The Assessee, an individual, filed his return of income for A.Y. 2013-14 on 28^th March, 2015 declaring total income at ₹12,48,160. While filing the return of income, the Assessee mistook the assessment year to be the financial year and filled in all the details of income for the A. Y. 2014-15 in the return of income for the A. Y. 2013-14. In the intimation u/s. 143(1), the AO did not grant credit for tax deducted at source by one of his two employers but granted credit of the
tax deducted at source by the employer for the A. Y. 2013-14 though not claimed by the Assessee in his return. Thereafter, the Assessee filed his return of income for the A. Y. 2014-15 showing the correct income.

The Assessee filed a revised return of income u/s. 139(4) instead of u/s. 139(5) and filed an application u/s. 264 for the A. Y. 2013-14. The application u/s. 264 was rejected only on the ground that the intimation u/s. 143(1) was not an order. According to the Principal Commissioner, the income of an assessee was dependent on the sources he had, the head under which it was assessed, special rate and applicable if any and that determination of income of any assessee was an exercise which involved deep scrutiny and could not be merely substituted by acceptance of the income claimed by the assessee and determination of total income of the assessee could not be the mandate of section 264. The Assessee filed an application u/s. 154 for rectification of the order passed u/s. 264 which was also rejected.

The Bombay High Court allowed the writ petition filed by the assessee challenging the orders and held as follows:

“i) The power conferred u/s. 264 of the Income-tax Act, 1961 is wide and the Commissioner is duty bound to apply his mind to the application filed by the assessee and pass such order thereon. Section 264 also empowers the Principal Commissioner or Commissioner to call for the record of any proceedings under the Act in which any order has been passed and make such inquiry or cause such inquiry to be made and pass such order as he thinks fit. Therefore, if he is of the opinion that a detailed inquiry is necessary and he will be hard pressed for time, he may cause such inquiry made by the Assessing Officer and direct the Assessing Officer to file a report.

ii) The assessee’s inadvertence in filling the details of the A. Y. 2014-15 in his return of income for the A. Y. 2013-14 was not a deliberate mistake or an attempt to gain some unfair advantage or to evade tax. Therefore, the orders passed u/s. 264 and section 154 and the intimation issued u/s. 143(1) were quashed and set aside and the matter was remanded for de novo consideration to the Principal Commissioner to dispose of the assessee’s application u/s. 264 on the merits. He could make any inquiry as he deemed fit or cause any inquiry to be made by the Assessing Officer after giving personal hearing to the assessee for clarification or explanation and thereafter pass a speaking order considering every submission of the assessee.”

BCAJ Admin

Refund — Interest on refund — Refund of TDS — Scope of Article 265 — Tax deducted at source and deposited by assessee in anticipation of contract with non-resident — Cancellation of contract — No authority of law in department to retain remittance to non-resident — Assessee entitled to refund with interest.

50 Tupperware India Pvt. Ltd. vs. CIT(IT)

[2024] 465 ITR 777(Del.)

A. Y. 2012-13

Date of order: 1^st February, 2024

Ss. 195 and 237of the ITA 1961; Articles 226, 227 and 265 of the Constitution of India

Refund — Interest on refund — Refund of TDS — Scope of Article 265 — Tax deducted at source and deposited by assessee in anticipation of contract with non-resident — Cancellation of contract — No authority of law in department to retain remittance to non-resident — Assessee entitled to refund with interest.

The assesse company imported molds during the assessment year under consideration from a company in USA and the payment was made according to the rental agreement between the assessee and the USA Company. As per the agreement, the Assessee had to pay lease rent for mold on the basis of actual production days.

Due to a change in the method of charging mold lease rent, deliberations were made between the Assessee and the USA Company to increase the rent. However, before the negotiations were finalised, the Assessee made a provision for higher rent in the books of account as the estimated lease rent came out to be ₹7,19,96,529. Pursuant to the revised estimate, the Assessee deducted TDS of ₹71,99,653 on the higher side and deposited the same. However, subsequently, the increase in mold lease rent did not happen and the rent was recognised to be only ₹45,80,337 which resulted in excess deposit of TDS of ₹67,41,620 as the actual TDS amounted to only ₹4,58,035.

Accordingly, the Assessee made an application to the AO for refund of higher TDS in accordance with the procedure prescribed under the CBDT Circular dated 23^rd October, 2007. However, no action was taken by the AO on the said application. Thereafter, the Assessee filed second application dated 16^th January, 2017 which was rejected without providing any opportunity of hearing to the Assessee. Thereafter, on 21^st March, 2017, the Assessee filed an application before the senior authority, i.e. Respondent No. 2, but to no avail.

The Assessee, therefore filed writ petition before the High Court challenging the orders rejecting the Assessee’s claim for refund of TDS. The Assessee, inter alia, contended that since the negotiations between the petitioner and Dart USA never culminated into a transaction or any agreement, the Assessee is rightfully entitled for claiming the benefit envisaged in the said circular. Further, if any amount credited to the Government does not fall in the category of tax, the said amount cannot be unjustifiably retained by the Government.

On the other hand, the contention of the Department was that under the provisions of the Act, the deductor is not entitled to the refund of excess tax deducted at source deposited by it and only the payee will get the refund.

The Delhi High Court allowed the petition of the Assessee and held as follows:

“i) The cardinal duty of imposition or collection of taxes which flows from article 265 of the Constitution of India is that it can only be exercised by the authority of law and not otherwise

ii) The Department was not entitled to withhold the excess tax deducted at source deposited by the Assessee in lieu of the anticipated liability for the assessment year 2012-13 since it would amount to collection of tax without any authority of law. Regarding the enhanced mold lease rent, the Assessee while anticipating tax liability had made a bona fide payment and had deposited the tax deducted at source at the rate of 10 per cent. Those deliberations did not materialise into a transaction or a contract and thus no income had accrued qua the excess tax deducted at source paid by the Assessee. Consequently, the Department had no right to retain the deducted tax deposited. The orders denying the refund of the excess tax deducted at source deposited by the Assessee on the ground that it did not fall within the gamut of cases mentioned in the Central Board of Direct Taxes circular dated 23^rd October, 2007 ([2007] 294 ITR (St.) 32) was set aside. The assessee was entitled to refund of excess tax deducted at source with interest at the applicable rate.”

BCAJ Admin

Reassessment — Notice —Limitation — Amendment in law — Effect of amendment with effect from 1st April, 2021 — Notices dated 31st March, 2021 but dispatched on 1st April, 2021 or thereafter from Income-tax Business Application Portal — Notices barred by limitation.

49 KalyanChillara vs. DCIT

[2024] 465 ITR 729(Telangana)

Date of order: 14^th June, 2024

Ss.147, 148, 149 and 151 of the ITA 1961

Reassessment — Notice —Limitation — Amendment in law — Effect of amendment with effect from 1^st April, 2021 — Notices dated 31^st March, 2021 but dispatched on 1^st April, 2021 or thereafter from Income-tax Business Application Portal — Notices barred by limitation.

This judgment deals with a batch of petitions which were before the Hon’ble Telangana High Court challenging the notices issued u/s. 148 of the Act.

In all these writ petitions, the last date of service of notice and initiating proceedings for re-opening of assessment was coming to an end on 31^st March, 2021. In majority of the cases, the notice issued u/s. 148 was dated 31^st March, 2021. However, the notices have been issued from the office of the Department either on 1^st April, 2021 or on subsequent dates. The Assessee’s main contention for challenge was that since in all the cases the notices were issued on or after 1^st April, 2021, the notices were hit on the ground of limitation.

It was contended on behalf of the Assessees that under the unamended provisions, a notice u/s. 148 had to be issued and served on or before 31-03-2021 and in case the notices have been served on or after 1^st April, 2021 then in view of the decision of the Hon’ble Supreme Court in the case of UOI vs. Ashish Agarwal, the amended provisions would be applicable and the notices in the writ petitions before it would not be sustainable. It was contended that the documents maintained by the Department would indicate the date of actual dispatch and the actual date of service of the notice. Further, since the notices are mostly sent by email, the date of dispatch and the date of delivery are reflected. Even the page on the income tax portal would reflect the date and time at the originator’s place and the date and time at the recipient’s end.

On the other hand, it was the contention of the Department that there are large number of notices in the pipeline with the Income-tax Business Application Department by which the email is sent and since there is too much pressure upon the said Department, the notices are normally delayed more because of the network problem and not for any lapse or lacking on the part of officer. Therefore, probably technically, it has to be presumed that the dispatch has been made but for technicalities that arise because of the system and not because of the fault or lacking on the part of the authorities.

The Hon’ble High Court allowed the batch of petitions filed by the Assessees and held as follows:

“i) All the notices u/s. 148 had been issued (not served) on 1^st April, 2021 or on a later date. The question of service of these notices and the date of service of notices upon the assessees was of no relevance or consequence since the notices had been dispatched from the Department on or after 1^st April, 2021 which itself was beyond the period of limitation. All the notices issued u/s. 148, dated 31^st March, 2021, were barred by limitation u/s. 148 and 149, since these notices had left the Income-tax Business Application portal on or after 1^st April, 2021 and therefore, were unsustainable.

ii) The objection raised by the learned counsel for the petitioners that the impugned notices under challenge are barred by limitation is sustained. Therefore, the impugned notices in all these writ petitions are as a con sequence set aside / quashed on the ground of it being barred by limitation.”

BCAJ Admin

Reassessment —Search and seizure —Assessment in search cases — Jurisdiction — Assessment of third person — Reassessment based on incriminating material and information collected prior to and post search — Permissible only u/s. 153C — Failure to assess within time limit for assessment u/s. 153C — Reassessment cannot be made u/s. 147 — Notices and orders set aside.

48 Tirupati Construction Co. vs. ITO

[2024] 465 ITR 611 (Raj)

A. Ys. 2016-17, 2017-18

Date of order: 21^st March, 2024

Ss. 132, 147, 148, 148A, 148A(b), 153A, 153B and 153C of ITA 1961

Reassessment —Search and seizure —Assessment in search cases — Jurisdiction — Assessment of third person — Reassessment based on incriminating material and information collected prior to and post search — Permissible only u/s. 153C — Failure to assess within time limit for assessment u/s. 153C — Reassessment cannot be made u/s. 147 — Notices and orders set aside.

The assessee was a firm. The Delhi High Court allowed the writ petitions filed by the assesse against the notices for reassessment u/s. 148A and section 148 of the Income-tax Act, 1961 and held as under:

“i) Where the basis for reassessment u/s. 147 of the Income-tax Act, 1961 is incriminating material and information collected during the search and seizure operation u/s. 132, the only legally permissible course of action is the one provided u/s. 153C and not u/s. 147.

ii) The information as contained in the annexure to the notice and the order passed in exercise of powers u/s. 148A(d) of the Act made it clear that the entire basis for reopening the assessment was nothing but the material and information collected during search conducted in the premises of another assessee. Collection of details relating to search would not mean collection of new incriminating material and information, independent of the incriminating material and information collected during search proceedings. The earlier notice, dated 31^st March, 2021, issued u/s. 148 merely stated that the Assessing Officer had reasons to believe that the income chargeable to tax for the A. Y. 2016-17 had escaped assessment u/s. 147. The later notice, dated June 2, 2022, issued u/s. 148A(b) pursuant to the decision in UOI v. Ashish Agarwal [2022] 444 ITR 1 (SC), it was stated that there was information pertaining to the assessee which suggested that income chargeable to tax for the A. Y. 2016-17 had escaped assessment u/s. 147. The notice clearly showed that incriminating material and information was found during the search proceedings and not beyond that and to assume jurisdiction u/s. 148A such information was made a basis to draw inferences which were described as pre search and post search investigations. It had been assumed that the incriminating material and information collected during search followed by collection of details which were intrinsically related to such material and information would confer jurisdiction u/s. 147.

iii) The Department had the authority to reopen the assessment by invoking the powers u/s. 153C and draw reassessment proceedings u/s. 153A. That was not done within the period of limitation prescribed u/s. 153B. The Department was fully aware of the fact that proceedings u/s. 153C would be barred by limitation, and therefore, recourse was taken to the provisions u/s. 148 and section 148A which had no application in the assessee’s case. The orders passed for the A. Ys. 2016-17 and 2017-18 were unsustainable and accordingly, quashed and set aside.”

BCAJ Admin

Reassessment — Notice — Sanction of prescribed authority — Sanction accorded by competent authority by merely stating “yes” — Non-application of mind — Notice and reassessment proceedings invalid.

47 Principal CIT vs. Pioneer Town Planners Pvt. Ltd.

[2024] 465 ITR 356(Del.)

A. Y. 2009-10

Date of order: 20^th February, 2024

Ss. 147, 148 and 151 of ITA 1961

Reassessment — Notice — Sanction of prescribed authority — Sanction accorded by competent authority by merely stating “yes” — Non-application of mind — Notice and reassessment proceedings invalid.

Subsequent to search operations u/s. 132 of the Income-tax Act,1961 in the premises of certain group entities, of which the assessee was one, reassessment proceedings u/s. 147 were initiated against the assessee. The assessee requested the Assessing Officer to treat the original return as filed in response to the notice u/s. 148. The Assessing Officer, in his order u/s. 143(3) read with section 147, made additions on account of unexplained share premium and expenditure of commission for accommodation entries.

The Tribunal allowed the Assessees appeal and held that the Assessing Officer had initiated the reassessment proceedings on the basis of borrowed satisfaction and without any application of mind and that the prescribed authority had granted approval u/s. 151 in a mechanical manner.

On appeal by the Department the Delhi High Court upheld the decision and held as under:

“i) Section 151 of the Income-tax Act, 1961 stipulates that the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner must be “satisfied”, on the reasons recorded by the Assessing Officer, that it is a fit case for the issuance of notice u/s. 148 to reopen the assessment u/s. 147. Thus, the satisfaction of the prescribed authority is a “sine qua non” for a valid approval. The satisfaction arrived at by the prescribed authority u/s. 151 must be clearly discernible from the expression used at the time of affixing the signature while according approval for reassessment u/s. 147. Such approval cannot be granted in a mechanical manner as it acts as a link between the facts considered and conclusion reached. Merely appending the phrase “Yes” does not appropriately align with the mandate of section 151 as it fails to set out any degree of satisfaction, much less an unassailable satisfaction, for the purpose.

ii) The Principal Commissioner had failed to satisfactorily record his concurrence. Mere penning down the expression “yes” could not be considered to be valid approval. Though the Assistant Commissioner had appended his signature by writing in his hand “Yes, I am satisfied”, the Principal Commissioner had merely written “Yes” without specifically noting his approval, while recording the satisfaction for issuance of notice u/s. 148 for reopening the assessment u/s. 147.

iii) Therefore, the order of the Tribunal holding that the Assessing Officer had initiated the reassessment proceedings on the basis of borrowed satisfaction and that the prescribed authority had granted approval u/s. 151 in a mechanical manner need not be interfered with.”

BCAJ Admin

Assessment — Faceless assessment — Validity — Effect of section 144B, circulars and instructions of CBDT — Notice must be given for proposed additions to income or disallowance along with necessary evidence.

46 Inox Wind Energy Ltd. vs. ACIT

[2024] 466 ITR 463 (Guj)

A. Y. 2021-22

Date of order: 19^th March, 2024

S. 144Bof ITA 1961

Assessment — Faceless assessment — Validity — Effect of section 144B, circulars and instructions of CBDT — Notice must be given for proposed additions to income or disallowance along with necessary evidence.

By this petition under articles 226 and 227 of the Constitution of India, the petitioner has prayed for quashing and setting the assessment order under section 143(3) dated 29^th December, 2022 passed by the respondent-Assessing Officer for the A. Y. 2021-22. It is the case of the petitioner that after the aforesaid notices and replies exchanged between the petitioner and the respondent-Assessing Officer, no further show-cause notice was issued to the petitioner on the proposed addition indicating the reasons along with necessary evidence / reasons forming the basis for such additions by the respondent-Assessing Officer and accordingly the petitioner is deprived of opportunity of personal hearing as the impugned assessment order was passed on 29^th December, 2022 by assessing the income at ₹71,06,57,281 raising a demand of ₹24,30,03,540 along with a notice for penalty under section 274 read with section 271A of the Act.

The Gujarat High Court allowed the Petition and held as under:

“i) U/s. 144B of the Income-tax Act, 1961, which provides for faceless assessment, the Assessing Officer is required to frame the assessment notwithstanding anything contained in sub-section (1) or sub-section (2) of section 144B with prior approval of the Board. On a harmonious reading of the circulars, instructions and letters of the Board, it appears that since 2015 as per the desire of the Board, the Assessing Officer is mandatorily required to issue an appropriate show-cause notice duly indicating the reasons for the proposed additions and disallowances along with necessary evidence and reasons forming basis thereof before passing the final order. As a matter of fact, such position will continue even when the case is transferred to the Assessing Officer u/s. 144B(8) of the Act as per Circular No. 27 of 2019 ([2019] 417 ITR (St.) 68).

ii) The Assessing Officer had committed flagrant breach of the principles of natural justice by not issuing a show-cause notice indicating the reasons for the proposed addition or disallowance along with the necessary evidence forming the basis thereof and, therefore, the assessment order had to be quashed and set aside.

iii) The matter is remanded back to the stage of issuance of show-cause notice by the Assessing Officer to the petitioner duly indicating the reasons for the proposed addition/disallowance along with necessary evidence / reasons forming the basis of the same so as to enable the petitioner-assessee to request for personal hearing if any required in compliance of Circular No. 27 of 2019 ([2019] 417 ITR (St.) 68) read with circular dated September 6, 2021 applicable in the facts of the case. Such exercise shall be completed within a period of 12 weeks from the date of receipt of a copy of this order.”

BCAJ Admin

Assessment — Eligible assessee — Procedure to be followed — Objections filed by assessee against draft assessment order before DRP but factum not intimated to AO — Final assessment order passed by AO without directions of DRP — Assessment set aside and to be framed afresh in accordance with directions of DRP.

45 DiwakerTripathi vs. PCIT

[2024] 465 ITR 622 (Del)

A. Y. 2020-21

Date of order: 1^st December, 2023

S. 144Cof ITA 1961

Assessment — Eligible assessee — Procedure to be followed — Objections filed by assessee against draft assessment order before DRP but factum not intimated to AO — Final assessment order passed by AO without directions of DRP — Assessment set aside and to be framed afresh in accordance with directions of DRP.

Though the assessee had preferred its objections against the draft assessment order before the Dispute Resolution Panel(DRP) within limitation as provided u/s. 144C(2)(b)(i) read with section 144B(1)(xxiv)(b)(I) of the Income-tax Act, 1961, it inadvertently failed to intimate the Assessing Officer regarding the objections in terms of section 144C(2)(b)(ii) of the Act. The Assessing Officer passed the final assessment order in the absence of the directions of the DRP.

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

“Once the objections have been filed by the assessee against a draft assessment order within the time limit prescribed u/s. 144C(2)(b) of the Income-tax Act, 1961, the rest of the procedure should be followed as prescribed and the final assessment order ought to be passed by the Assessing Officer in accordance with the directions issued by the DRP. No prejudice would be caused to the Department if the assessment order was set aside as the Department would be well within its rights to pass a fresh assessment order post the receipt of directions from the DRP.”

Sulzer Pumps India Pvt. Ltd. vs. DY. CIT [2024] 465 ITR 619 (Bom) followed.

BCAJ Admin

Assessment — Eligible assessee — Draft assessment order — Assessee filing its objections thereto before DRP but failing to communicate this to AO — AO unaware of pending application before DRP — Final assessment order passed during pendency of assessee’s objections to draft assessment order — Order set aside and AO directed to pass fresh order in accordance with directions of DRP.

44 Sulzer Pumps India Pvt. Ltd. vs. Dy. CIT

[2024] 465 ITR 619 (Bom)

A.Y.: 2017-18

Date of order: 27^th October, 2021

Ss. 143(3), 144B, 144C(2), 144C(3), 144C(4), 156 and 270A of ITA 1961

Assessment — Eligible assessee — Draft assessment order — Assessee filing its objections thereto before DRP but failing to communicate this to AO — AO unaware of pending application before DRP — Final assessment order passed during pendency of assessee’s objections to draft assessment order — Order set aside and AO directed to pass fresh order in accordance with directions of DRP.

The assessee, under the belief that with the assessments being faceless and completely electronic, the application filed by it u/s. 144C(2) of the Income-tax Act, 1961 against the draft assessment order for the A. Y. 2017-18 before the Dispute Resolution Panel(DRP) would automatically be communicated to the Assessing Officer by the DRP, failed to directly communicate to the Assessing Officer. While the application was pending the Assessing Officer passed an order u/s. 143(3) read with sections 144C(3) and 144B of the Income-tax Act, 1961, issued a demand notice u/s. 156 and a penalty notice u/s. 270A.

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

“The Assessing Officer could not be faulted for passing the order in question. However, since the assessee had already filed application raising its objections before the Dispute Resolution Panel and section 144C(4) required the Assessing Officer to pass the final order according to the directions that would be issued by the Dispute Resolution Panel, the order passed u/s. 143(3) read with sections 144C(3) and 144B, the notice of demand u/s. 156 and the notice of penalty u/s. 270A were set aside. The Assessing Officer could pass a fresh order in accordance with the directions of the Dispute Resolution Panel in the pending application.”

BCAJ Admin

Long-term capital loss arising from sale of quoted equity shares with STT paid was eligible to be set-off against long-term capital gain earned from sale of unquoted shares, in view of specific provisions of sections 2(14), 10(38), 45, 47 and 48.

50 Riya Gupta vs. DCIT

[2024] 113 ITR(T) 1 (Kol – Trib.)

ITA NO. 46 (KOL.) OF 2024

A.Y.: 2014-15

DATED: 6^th June, 2024

Sec. 70

Long-term capital loss arising from sale of quoted equity shares with STT paid was eligible to be set-off against long-term capital gain earned from sale of unquoted shares, in view of specific provisions of sections 2(14), 10(38), 45, 47 and 48.

FACTS

The assessee filed return of income on 31^st July, 2014 declaring total income of ₹18,31,980/. -During the assessment proceedings, the AO called for various information from the assessee which were supplied and replied by the assessee. The AO passed the order making various additions including the addition of ₹47,90,616/- resulting on non-allowance of set off of loss from sale of equity shares on recognised stock exchange with STT paid against the profit on sale of unquoted equity shares. The AO rejected the said action on the ground that the long-term capital gain on sale of quoted shares is exempt u/s 10(38) of the Act and similarly the loss incurred was also not liable to be set off against the other taxable income.

Aggrieved by the assessment order, the assessee filed an appeal before CIT(A). The CIT(A) dismissed the appeal of the assessee by upholding the order of the AO on this issue on the same reasoning. Aggrieved by the order, the assessee filed an appeal before the ITAT.

HELD

The undisputed facts were that during the year, the assessee had earned long term capital gain of ₹50,00,000/- from sale of unquoted shares of M/s IRC Infra and Reality Pvt. Ltd. and also incurred long term capital loss of ₹47,90,616/- from sale of quoted equity shares which was executed on the recognized stock exchange and STT was duly paid. The issue for adjudication was whether the long term capital loss suffered on sale of equity shares can be set off against the long term capital gain earned by the assessee on sale of unquoted equity shares or not.

The ITAT, after perusing provisions of section 2(14), 45, 47 and 48, observed that nowhere any exclusion or exception has been provided to the long-term capital gain resulting from sale of equity shares. The ITAT observed that it’s only the long term capital gain resulting from sale of shares / securities which was granted exemption u/s 10(38) subject to the fulfillment of certain conditions and not the entire source which was excluded from the aforesaid sections.
The ITAT relied on the following Judgments –

Hon’ble Kolkata High Court in the case of Royal Calcutta Turf Club vs. CIT [1983] 144 ITR 709/12 Taxman 133
United Investments vs. ACIT TS-379-ITAT- 2019 —Kolkata Tribunal
Raptakos Brett & Co. Ltd. vs. DCIT (69 SOT 383) —Kolkata Tribunal

In the result, the appeal of the assessee was allowed for the above-mentioned issue.

EDITORIAL COMMENT

The decision of Hon’ble Apex Court in the case of CIT vs. Harprasad& Co. (P.) Ltd.[1975] 99 ITR 118 is distinguished on the ground that the principle laid down by the Hon’ble Apex Court that income includes negative income can be applied only when the entire source of income falls within the charging provision of Act but where the source of income is otherwise chargeable to tax but only a specific kind of income derived from such source is granted exemption, then in such case, the proposition that the term income includes loss would not be applicable. In other words, where only one of the streams of income from a source is granted exemption by the legislature upon fulfillment of specified conditions then the concept of income includes loss would not be applicable.

BCAJ Admin

Commissioner (Appeals) has to decide appeal on merits by passing a speaking order and does not have any power to dismiss appeal for non-prosecution.

49 Meda Raja KishorRaghuramy Reddy

[2024] 113ITR(T)258 (Panaji – Trib.)

ITA NO. 127 (PANJ.) OF 2022

A.Y.: 2014-14

DATE: 28^th February, 2024

Commissioner (Appeals) has to decide appeal on merits by passing a speaking order and does not have any power to dismiss appeal for non-prosecution.

FACTS

The assessee had filed return of income electronically on 29^th November, 2014 declaring total income of ₹37,60,840/-.The assessee’s case was selected for scrutiny proceedings. The assessee had failed to comply with the notices issued by the AO. The AO passed an ex-parte assessment order making the following additions:

₹6,22,72,638/- under section 68 of the Act as unproved creditors
₹39,62,472/- under section 69 of the Act
₹5,78,850/- on account of difference in Form 26AS and return of income.

On appeal before CIT(A), the CIT(A) in a cryptic manner dismissed the appeal of the assessee.

Aggrieved by the Order, the assessee preferred an appeal before the ITAT.

HELD

DELAY IN FILING APPEAL

There was a delay of 1330 days in filing the appeal which included the period of Covid Pandemic.

Considering the principle of substantial justice, respectfully following the Hon’ble Supreme Court in the case of Gupta Emerald Mines (P.) Ltd. vs. Pr. CIT [2023] 156 taxmann.com 198 (SC) [25-09-2023] and Hon’ble Jurisdictional High Court in the case of Hindalco Industries Ltd vs. Pr. CIT Writ Petition No. 569 of 2023/ [2024] 158 taxmann.com 485, the ITAT condoned the delay in filling the appeal.

MERITS OF THE CASE

The ITAT observed that the assessee had filed written submission dated 14^th August, 2017 containing following documents — Copy of confirmation of Accounts, Copy of Ledgers, Identity and Address proof of Creditors, cash books, bills, vouchers, bank statements, affidavits etc. The ITAT further observed that Form 35 which is form of appeal for filing appeal before CIT(A) was enclosed with application for admission of additional evidence under rule 46A.

The ITAT further observed the following fall outs in the assessment proceedings —

It was possible for AO to collect information directly from renowned companies — Jaypee cement Bangalore & JSW Steel [Sundry creditors of the assessee] u/s 133(6) or 131 of the Act.
Some of the creditors appeared in the balance sheet from earlier years – under section 68 the amount which was credited during the year only can be added.
Assessee had shown Interest income on FD of ₹1,98,487/- and the AO had merely added ₹40,063/- without discussing what was total interest as per Form 26AS statement
Fixed Deposit in Ratnakar Bank Account Number 3158 appeared in the balance sheet of the Assessee — the AO had worked out corresponding FD in the Ratnakar Bank at ₹507,087/- without actually calling the details from the Ratnakar Bank.
The AO made an addition of ₹31,700/- as receipt from Gammon India Ltd based on 26AS statement — exact amount and exact name appeared in the Balance Sheet – the AO could have called for information u/s 133(6) of the Act from Gammon India Ltd.

The ITAT held that though the assessee had failed to comply with the notices issued by AO, the AO also failed to carry out necessary investigations and to understand the facts in totality.

The ITAT held that the CIT(A) has discretion to admit the Additional evidence, if there was sufficient cause which prevented the assessee from filling the documents during the assessment proceedings. The discretion had to be used in judicious manner and one must be able to reason out. In this case the CIT(A) had not passed a speaking order for rejecting the additional evidence. The CIT(A) had failed to follow the procedure laid down in Rule 46A.

The ITAT also held that the CIT(A) had not adjudicated each and every ground raised by the Assessee on merits. The ITAT followed the Hon’ble Jurisdictional High Court in the case of Pr. CIT (Central) vs. Premkumar Arjundas Luthra (HUF) [2016] 69 taxmann.com 407 wherein it was held that CIT(A) has to decide the appeal on merits and CIT(A) does not have any power to dismiss appeal for non-prosecution.

The ITAT set aside the order of the CIT(A) for de novo adjudication after giving opportunity to the assessee. In the result, the appeal of the assessee was allowed for statistical purpose.

BCAJ Admin

Where the view taken by the AO that the assessee was eligible for deduction under section 80G for CSR expenses was approved by various decisions of Tribunal, PCIT could not invoke revisional jurisdiction under section 263 on the ground that the order of AO was erroneous.

48 American Express (India) P. Ltd. vs. PCIT

(2024) 165 taxmann.com 91 (Del Trib)

ITA No.: 2468(Delhi) of 2023

A.Y.: 2016-17

Dated: 30^th August, 2024

Ss. 263, 80G

Where the view taken by the AO that the assessee was eligible for deduction under section 80G for CSR expenses was approved by various decisions of Tribunal, PCIT could not invoke revisional jurisdiction under section 263 on the ground that the order of AO was erroneous.

FACTS

The assessee had incurred expenditure amounting to ₹5,20,00,000 under section 135 of the Companies Act 2013 dealing with Corporate Social Responsibility (CSR). It voluntarily disallowed the same in the computation of income; however, it claimed benefit of deduction under section 80G to the extent of ₹3,21,43,427.

During the assessment proceedings, after examining the assessee’s claim of deduction under section 80G, the Assessing Officer allowed the said deduction. PCIT initiated revision proceedings under section 263 on the ground that claim of deduction under section 80G for CSR expenses was not allowable to the assessee.

Aggrieved by order of PCIT, the assessee filed an appeal before ITAT.

HELD

The Tribunal observed that:

(a) In the past, the Tribunal has considered this issue in various cases and consistently held that though CSR expenses which are mandatory under section 135 of the Companies Act are not allowable as deduction under section 37(1), if any part of CSR contribution is otherwise eligible for deduction under Chapter VI-A, there is no bar on the companies to claim the same as deduction under section 80G.

(b) Merely because the PCIT does not agree with the view taken by the AO, the assessment order does not become erroneous. The view taken by the AO in allowing deduction under section 80G for CSR expenses was approved by various decisions of the Tribunal.

(c) The satisfaction of twin conditions set out in section 263, namely, the order is (i) erroneous; and (ii) prejudicial to the interest of Revenue is sine qua non for exercising revisional jurisdiction. If any of the said conditions are not satisfied, the revisional jurisdictional under section 263 cannot be invoked.

It noted that this view was also supported by coordinate bench in JMS Mining P Ltd. v. PCIT, (2021) 130 taxmann.com 118 (KolTrib).

Accordingly, the Tribunal allowed the appeal of the assessee and quashed the revisional order passed by PCIT.

BCAJ Admin

S. 12AB –Registration under section 12AB could be denied to a trust if it had not complied with the applicable State public trusts law.

47 Gurukul Shikshan Sansthan vs. CIT

(2024) 165 taxmann.com 369(JaipurTrib)

ITA No.: 482(Jpr) of 2024

A.Ys.: 2022-23 to 2024-25

Dated: 3^rd July, 2024

S. 12AB –Registration under section 12AB could be denied to a trust if it had not complied with the applicable State public trusts law.

FACTS

CIT(E) rejected the assessee-trust’s application for registration under section 12AB dated 26^th September, 2023 on the ground that it was not registered under the Rajasthan Public Trusts Act, 1959, genuineness of the activities of the assessee could not be verified due to non-compliance, and that the assessee had filed incomplete Form No. 10AB.

Aggrieved, the assessee filed an appeal before ITAT.

HELD

Before the Tribunal, the assessee filed a request for adjournment stating that the assessee-trust had applied for a certificate under the Rajasthan Public Trusts Act, 1959 and was awaiting such certificate.

Rejecting the adjournment request, the Tribunal, vide an ex-parte order, observed that:

(a) As admitted in the adjournment request, as on the date of application for registration, that is, 26^th September, 2023, the assessee was not registered under the Rajasthan Public Trusts Act although such registration was mandated under section 17 of the said Act.

(b) Section 12AB(1) mandates that all the applicable laws shall be followed and if any applicable law is not followed by the assessee, then it is not eligible for registration.

Following the decision of Supreme Court in New Noble Educational Society vs. CCIT, (2022) 448 ITR 594 (SC), the Tribunal held that since the assessee had not followed provisions of Rajasthan Public Trusts Act, it was not eligible for registration under section 12AB.

Additionally, the Tribunal observed that since the assessee had neither submitted the details called by CIT nor filed any document before the Tribunal to prove genuineness of its activities, it was not eligible for registration under section 12AB also on this ground.

BCAJ Admin

A determinate trust with sole beneficiary was liable to be taxed at same rate as applicable to its beneficiary.

46 ITO vs. Petroleum Trust

(2024) 165 taxmann.com 504 (MumTrib)

ITA No.: 2694(Mum) of 2024; C.O. No. 133 (Mum) of 2024

A.Y.: 2021-22

Dated: 2^nd August, 2024

S. 161

A determinate trust with sole beneficiary was liable to be taxed at same rate as applicable to its beneficiary.

FACTS

The assessee was a discretionary trust, which held investments mainly for its beneficiary, RIIHL. RIIHL, being a limited company, opted to be taxed under the new tax regime under section 115BAA by filing Form 10-IC claiming to be taxed @ 22 per cent (+surcharge / cess). The assessee-trust, being a representative assessee under section 161, claimed to be taxed at same rate applicable to its beneficiary in its return of income. The tax department disagreed with this position.

CIT(A) accepted the status of the assessee as a representative assessee under section 161 and held that since the assessee is a determinate trust with RIIHL as its sole and 100 per cent beneficiary and settlor and since RIIHL has opted to be taxed under the new tax regime @22 per cent, the assessee-trust was also liable to be taxed at the same rate.

Aggrieved, the tax department filed an appeal before the ITAT. The assessee also filed cross objections in support of order of CIT(A).

HELD

Noting language of section 161(1) and following the decision of Bombay High Court in Mrs. Amy F. Cama vs. CIT,(1999) 237 ITR 82 (Bom), the Tribunal held that the tax shall be levied upon and recovered from a representative assessee in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him, which meant that the assessee-trust will be subject to same rate of tax as applicable to the person represented by it, that is, RIIHL which was taxed @ 22 per cent under section 115BAA.

BCAJ Admin

I : Capital gains is taxable in the year in which possession of constructed premises was received by the assessee and not in the earlier year when occupancy certificate was granted. II : The cost of construction given by the developer which is not supported by any particulars cannot be taken as full value of consideration. Section 50D of the Act, would be applicable and accordingly, the full value of consideration should be computed on the basis of guideline value of land or building that is transferred / received on development.

45 AlagappaMuthiah HUF vs. DCIT

ITA No. 775/Bang./2024&954/Bang./2024

AY: 2017-18

Date of Order: 12^th August, 2024

Sections: 45, 48

I : Capital gains is taxable in the year in which possession of constructed premises was received by the assessee and not in the earlier year when occupancy certificate was granted.

II : The cost of construction given by the developer which is not supported by any particulars cannot be taken as full value of consideration. Section 50D of the Act, would be applicable and accordingly, the full value of consideration should be computed on the basis of guideline value of land or building that is transferred / received on development.

FACTS I

The assessee HUF along with Alagappa Annamalai HUF were co-owners of land in respect of which they entered into two development agreements dated 10^th February, 2011. Under these Development agreements the properties belonging to these two persons were being developed into both residential as well as commercial units. These two persons were allotted the entire commercial unit and 6 apartment units in the residential units.

In the course of a search conducted in the case of Sri Alagappa Annamalai on 4^th July, 2019, a sworn statement was recorded from Sri Alagappa Annamalai as to why the capital gain in respect of transaction of entering into development agreement has not been offered for tax in AY 2017-18. In response, it was submitted that capital gain has been offered in the year in which possession of constructed premises has been received. This was done in absence of information about occupancy certificate and cost of construction. Similar statement was recorded in the case of assessee on 5^th July, 2019 under section 131. Thereafter, both the assessee and Alagappa Annamalai retracted their respective statements and stated that the possession of the properties was received by them after development on 8^th May, 2017 and accordingly the liability to capital gains arose for the assessment year 2018-19 and not for the assessment year 2017-18 as admitted in their earlier statements. Accordingly, they stated that they would be offering capital gains for the assessment year 2018-19 on the above basis in course of assessment proceedings after receipt of notice.

The assessee, accordingly, filed returns in response to notice u/s.153C of the Act offering capital gains by adopting the value determined by the registered valuer. In the assessment proceedings, the A.O. held that the liability to capital gains arises for the assessment year 2017-18 as occupancy certificate was received on 1^st February, 2017 for commercial portion and 17^th March, 2017 for residential portion. On the other-hand both these persons contended that the liability to capital gains arose for the assessment year 2018-19 on receipt of possession vide letter dated 8^th May, 2017 when simultaneous with receiving possession they have returned the deposits. The AO was of the view that the letter of possession was manipulated in collusion with the builder.

HELD I

The Tribunal observed that reason for taxing the capital gain as income of assessment year 2017-18 is that the occupancy certificate was received on 17^th March, 2017. On behalf of the assessee,it was contended that section 45(5A) has been introduced w.e.f. 1.4.2018 and therefore the same does not apply to the present case. Section 45(5A) applies w.e.f. AY 2018-19 and not AY 2017-18. The Tribunal noted that section 45(5A) cannot be applied retrospectively and also that the possession has been received vide letter dated 8^th May, 2017. It held that the parties to the transfer of impugned property mutually agreed to hand over the delivery of the possession vide the said letter and it is to be accepted as true unless it is proved otherwise.There is no basis for the allegation made by the AO that the letter of possession is manipulated in collusion with the builder.The Tribunal, relying upon the decision of the co-ordinate bench in the case of N A Haris in ITA No.988/Bang/2018 dated 15^th February, 2021 held that the capital gain arising pursuant to development agreement dated 10^th February, 2011 is to be taxed in AY 2018-19 and not AY 2017-18 as held by the AO.

FACTS II

The assessee in the retraction letter had informed the AO that it had engaged a registered Valuer to determine the value of the property received by it after development and the said value was –

Commercial portion: ₹82,26,36,541

Residential portion: ₹6,89,11,624

—————————————————————————

Total: ₹89,15,48,165

===========================================

The assessee computed the capital gains by adopting the above stated value. In the assessment order, the A.O. varied the computation of capital gains by adopting the full value of consideration at ₹120,03,46,357/- based on the details furnished by the Developer vide letter dated 7^th January, 2022. While doing so the A.O. has taken the cost of construction reported by the Developer of ₹4,597 per sft for the commercial portion and ₹3,750 per sft. for the residential portion.

The assessee disputed the cost of construction before the CIT(A). The CIT(A) observed that except for one unsigned sheet, the Developer had not furnished any bills or documents in support of the cost claimed to be incurred by the Developer. The DVO had without giving any reasons stated that the valuation as done by the Registered Valuer is understated.

Before CIT(A), reliance was placed on the decision of the Hon’ble Karnataka High Court in the case of Shankar Vittal Motor Company in ITA 653/2016 dated 1^st December, 2021 as well as the decision of the jurisdictional High Court in the case of Smt. Sarojini M. Kushe in ITA 475/2016 dated 1st December, 2021. In the aforesaid cases it has been held that the cost of construction given by the developer which is not supported by any particulars cannot be taken as full value of consideration. The Hon’ble High Court has held that section 50D of the Act, would be applicable and accordingly, the full value of consideration should be computed on the basis of guideline value of land or building that is transferred / received on development.

The CIT(A) determined the full value of consideration for transfer of the undivided interest land to the developer at ₹93,80,19,968/- as against ₹120,03,46,357/- taken by the Assessing Officer. The CIT [A] has noticed that the appellant has transferred 1,94,368sft. of land to the developer. The said land has been valued at ₹4,826 per sft. after deriving the same by reducing the guideline value of the building from the guideline value of the super built-up area. This is because the super built-up area includes both undivided interest in land as well as the built-up area. In this manner the learned CIT[A] has held that the deemed value of consideration for the transfer of the undivided share of land in the project pertaining to the developer share was ₹93,80,19,968/-

HELD II

The method adopted by AO for determining the consideration of the impugned transfer of property is not correct. There is no basis for inclusion of cost of land, finance cost and administrative cost for determining the consideration received by the landlord. The Tribunal held that the most appropriate judgment to be followed is the decision of Karnataka High Court in Shankar Vittal Motor Company in ITA 653/2016 dated 1^st December, 2021. It held that no fault can be found with the decision of the CIT(A) which has been rendered by following the ratio of the decision of the Karnataka High Court Shankar Vittal Motor Company in ITA 653/2016 dated 1^st December, 2021 as also the decision of the Smt. Sarojini M. Kushe in ITA No.475 of 2016 dated 15^th December, 2021. The Tribunal dismissed this ground of appeal of the revenue.

BCAJ Admin

Section 143(1) mandates only processing the return of income to vouch for the arithmetical error, detect the incorrect claim of expenses, losses, verify and cross check the claim made in the audit report, claim of deductions, cross verify the income declared in form 26AS or form 16A etc. and the Revenue is not allowed to go beyond that. Claim not made in the return of income, which has been processed, and time for filing revised return has expired can be made only before the administrative officers or the Board and not in an appeal.

44 PasupatiAcrylon Ltd. vs. ACIT

TS-696-ITAT-2024(DEL)

ITA No. 1773/Delhi/2024

AY: 2019-20

Date of Order: 19^th September, 2024

Sections: 37, 143(1)

Section 143(1) mandates only processing the return of income to vouch for the arithmetical error, detect the incorrect claim of expenses, losses, verify and cross check the claim made in the audit report, claim of deductions, cross verify the income declared in form 26AS or form 16A etc. and the Revenue is not allowed to go beyond that.

Claim not made in the return of income, which has been processed, and time for filing revised return has expired can be made only before the administrative officers or the Board and not in an appeal.

FACTS

For the year under consideration, the assessee filed its return of income declaring therein a total income of ₹28,98,24,424. The CPC processed the return of income and passed an intimation accepting the return of income as filed by the assessee.

Assessee filed an appeal to the CIT(A) raising a ground that the assessee failed to make a claim of certain business expenditures in the return filed by it, which was duly processed u/s 143(1) of the Act. The CIT(A) held that the claim of business expenses u/s 37 after processing the return of income seems an afterthought. He opined that the assessee can easily file the revised return of income if there is any discrepancy in the original return of income before the due date, which the assessee failed to do so. The due date for filing the revised return of income was 30^th November, 2020. The contention of the assessee cannot be accepted by simply writing a letter to the concerned authority for allowing the business expenses which was not claimed in the return of income. The CIT(A) relied on the decision of Supreme Court in the case of Goetze (India) Ltd, wherein the issue was well-settled, any deduction stating that the assessee can revise the return of income within due date for raising any new claim which was not claimed in the original return of income. Accordingly, he dismissed the appeal.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

All the case law relied by the assessee are relating the fresh claim made by the assessee in the regular assessment proceedings, not in the case of preliminary assessment u/s 143(1) of the Act. The mandate of the preliminary assessment u/s 143(1) of the Act is different, it is only to process the return of income to vouch for the arithmetical error, detect the incorrect claim of expenses, losses, verify and cross check the claim made in the audit report, claim of deductions, cross verify the income declared in form 26AS or form 16A etc. The AO is not allowed to go beyond the above mandate given under section 143(1) of the Act.

The Tribunal noted that the asssessee filed the return of income in which it did not make certain claims which, according to the assessee, are genuine. The return was processed accepting the return of income as filed. The time allowed for filing revised return of income having elapsed the assessee found filing an appeal to be an easy option.

The Tribunal considered the possibilities available to make the fresh claim in case the assessee fails to make the claim in the original return of income. These, according to the Tribunal, are:

i. By filing revised return of income (not possible in this case as the limitation period already elapsed);

ii. Claim in the regular assessment, in case the return is selected for scrutiny. (in this case, not selected, the avenue to go in appeal also ruled out);

iii. The assessee can proceed by filing revision application u/s 264 of the Act before the jurisdictional commissioner. The application has to be filed within one year from the date of passing of the relevant impugned order;

iv. The assessee may file an application u/s 119(2)(b) of the Act before the Board. The board may find it desirable or expedient so to do for avoiding genuine hardship to admit an application or claim for any exemption, deduction, refund or any other relief under the Act. The important thing is that there is no limitation period attached to it. The assessee can approach any time when it has genuine claim.

The Tribunal was of the view that the assessee filed the present appeal before it without there being any grievance in preliminary or intimation order in which the Assessing Officer accepted the return of income filed by the assessee. It held that, the assessee may have two types of fresh claim, which may be genuine claim which is traceable from the return filed by the assessee, which can be claimed by the assessee, the other type is debatable issues which may be claimed only upon making proper verification and assessment, this will lead to discretion of the relevant authorities including the Board. It held that the remedy for the fresh claim is not with any appellate authority and the remedy lies only with the administrative officers or with the board. In case the board rejects the application, the remedy available only in the writ proceedings. The Tribunal dismissed the appeal filed by the assessee.

BCAJ Admin

For failure on the part of the payer to deduct TDS, the assessee cannot be penalised by levy of interest under section 234C.

43 Standard Chartered Bank (Singapore) Limited vs. DCIT

TS-615-ITAT-2024(Mum)

Assessment Year: 2021-22

Date of Order: 14^th August, 2024

Sections: 234B, 234C

For failure on the part of the payer to deduct TDS, the assessee cannot be penalised by levy of interest under section 234C.

FACTS

The assessee, a company incorporated in Singapore, registered as a Category I Foreign Portfolio Investor (FPI) with SEBI made investments in debt securities and equity shares in India. The assessee filed return of income for the year under consideration on 15^th March, declaring a total income of ₹75,66,62,391. The return of income filed by the assessee was processed under section 143(1) and a demand of ₹47,13,33,940 was raised as a result of TDS credit not been granted and interest under section 234B and 234C being levied.

During the year under consideration, the assessee had received interest on commercial papers and non-convertible debentures amounting to ₹62,10,11,200 and ₹13,68,16,712 respectively which was subject to deduction of tax at source @ 20 per cent. The Assessee had also received interest on government securities which was subject to deduction of tax at source @ 5 per cent. On some part of income received from commercial papers, non-convertible debentures and government securities the payers did not deduct tax at source, though they were liable to deduct tax at source under section 196D and 194LD of the Act. Pursuant to the failure of the payer to deduct tax at source the assessee was required to discharge tax liability by way of advance tax at the time of receipt of such interest income from commercial papers, NCDs and government securities. The assessee did pay the full tax on interest receipts as advance tax.

Levy of interest under section 234B was subsequently rectified but the levy of interest under section 234C at ₹51,75,514 stood.

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

Aggrieved, the assessee preferred an appeal to the Tribunal where, on behalf of the assessee, reliance was placed on following decisions –

i) Goldman Sachs Investment (Mauritius) Ltd. vs. DCIT [(2021) 187 ITD 184 (Mum.-Trib.)];

ii) CIT vs. Madras Fertilisers Ltd. [149 ITR 703 (Mad. HC)].

HELD

The Tribunal observed that it is an undisputed fact that on some part of interest received by the assessee on commercial papers, NCDs and Government Securities, payers have faulted in not deducting tax at source. It was observed that for the fault of the payer, the assessee cannot be held responsible. The Tribunal held that in its understanding of the law, for failure on the part of the assessee to deduct tax at source under sections 196D and 194LD of the Act, the assessee cannot be penalised by levy of interest under section 234C. The Tribunal observed that the assessee has diligently discharged its full tax liability by paying entire advance tax on interest income.

Having examined the provisions of section 234C of the Act, the Tribunal held that it can be seen that advance tax is reduced by any tax deductible or collectible which means that the legislators have taken care of liability of the payer to deduct tax at source on payments and to that extent, assessee is not required to pay any advance tax. In the present case, since the payers faulted in deducting tax at source and assessee discharged its liability by paying full tax, the assessee cannot be levied with interest under section 234C of the Act for the fault of the payers. For this proposition, the Tribunal drew support from the decision of the Bombay High Court in Director of Income-tax (International Tax) v. Ngc Network Asia LLC [(2009) 313 ITR 187 (Bom. HC)] where the court held that when a duty is cast on the payer to deduct and pay tax at source, on payer’s default to do so, no interest under section 234B can be imposed on the payee assessee.

The Tribunal held that it is not a case of deferment of advance tax on income as envisaged in section 234C of the Act. The Tribunal directed the AO to delete the interest levied under section 234C.

The Tribunal allowed the appeal filed by the assessee.

BCAJ Admin

Deduction under Sections 54 and 54F can be claimed simultaneously qua investment in the same new asset. The covenants in the sale deed executed and registered are conclusive in the absence of any evidence to the contrary. The crucial date for the purpose of determination of date of purchase for the purpose of section 54 is the date when the possession and control of the property is given to the purchaser’s hands.

42 RamdasSitaramPatil vs. ACIT

TS-618-ITAT-2024(PUN)

ITA No. 621/Pune/2022

AY: 2016-17

Date of Order: 7^th August, 2024

Sections: 54 and 54F

Deduction under Sections 54 and 54F can be claimed simultaneously qua investment in the same new asset.

The covenants in the sale deed executed and registered are conclusive in the absence of any evidence to the contrary.

The crucial date for the purpose of determination of date of purchase for the purpose of section 54 is the date when the possession and control of the property is given to the purchaser’s hands.

FACTS

The appellant, an individual, filed his Return of Income for the A.Y. 2016-17 on 7^th March, 2017 declaring a total income of ₹96,55,810/-. The assessment was completed by the Assessing Officer (AO) vide order dated 28^th December, 2018 passed u/s.143(3) of the Act at a total income of ₹2,59,13,610/-. While doing so, the AO disallowed the claim for deduction of income u/s.54F of ₹98,97,654/- and deduction u/s.54 of ₹63,60,146/-.

During the year under consideration, on 9^th February, 2016, the assessee entered into a joint development agreement for a consideration of ₹25,00,000 and 7 constructed flats. On 1^st November, 2015, he entered into an unregistered agreement to sell a residential flat in Kolhapur for a consideration of ₹80,00,000. The assessee purchased a bungalow at Kolhapur, whose possession was taken on 31st March, 2015, for a consideration of ₹3,06,00,000, of which ₹1,30,00,000 was paid during the period from 20^th May, 2014 to 2^nd December, 2014 and ₹90,00,000 was paid in cash in 2014 as per MOU dated 19^th May, 2014.

In view of the fact that the possession of the bungalow purchased was received on 31^st March, 2015, the assessee claimed deduction under sections 54 and 54F against the long term capital gains arising on two transfers effected by him. The said claim was denied by the AO by holding that (1) deduction u/s.54/54F cannot be claimed simultaneously in respect of the same asset; and (2) payment for purchase of new house was made prior to one year before the sale of the original asset.

Aggrieved, the assessee preferred an appeal to the CIT(A) who vide impugned order confirmed the action of the AO in disallowing the claim for deduction u/s.54/54F by holding that the possession agreement dated 31^st March, 2015 is a fabricated document in view of the statement made by him u/s.132(4) of the Act on 19^th December, 2014 that the new residential property is in his possession.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that the solitary issue in the present appeal revolves around the entitlement of assessee for deduction u/s.54/54F of the Act. It noted that admittedly, the sale consideration was paid prior to the one year before the sale of original asset. The Tribunal held that there is no bar under law to claim deduction simultaneously u/s. 54 and u/s.54F in respect of the same asset. It observed that the crucial fact which needs to be determined in the present case is the date of purchase of the new residential property.

The Tribunal held that it is settled position of law that the crucial date for the purpose of determination is when the property is purchased for the purpose of section 54 and the date when the possession and control of the property is given to the purchaser’s hands.

The Tribunal applying the principle laid down by the Andhra Pradesh High Court in case of CIT vs. Shahzada Begum [(1988) 173 ITR 397] and also the decision of Hon’ble Bombay High Court in the case of CIT vs. Dr. Laxmichand Narpal Nagda (deceased) [211 ITR 804] and observing that in the present case, the recital of the sale deed clearly says that possession of the property was taken on 31^st March, 2015 which is within the period of one year before the date of sale of the original asset. The Tribunal held that the covenants in the sale deed executed and registered are conclusive in the absence of any evidence to the contrary; the finding of the CIT(A) that it is a fabricated document is a mere bald allegation and cannot be sustained in the eyes of law; the appellant is entitled for deduction us/.54/54F as claimed.

BCAJ Admin

Important Amendments By The Finance (No. 2) Act, 2024 – Other Important Amendments

The Hon’ble Finance Minister, during the Union Budget presentation, repeatedly emphasised the government’s endeavour to simplify taxation. This series of articles on the Finance (No. 2) Act of 2024 has thoroughly analysed various amendments to the Income-tax Act, 1961 (“the Act”) in five earlier parts, bringing out various nuances of these amendments and helping readers assess whether this promise of simplification has been realised.

In this Article, we continue this analysis, examining a few other significant amendments made to the Act.

(A) AMENDMENTS RELATING TO TDS AND TCS:

Reduction in TDS rates:

A series of welcome amendments in the following sections of the Act has been made, reducing the rates of TDS w.e.f. 1st October, 2024 as under:

It may be pointed out that in addition to the above, the Memorandum explaining the provisions of the Finance Bill (“Memorandum”) also contained a proposal to reduce the rate of TDS applicable to payments of insurance commissions u/s 194D of the Act from 5 per cent to 2 per cent in case of a person other than company. However, this proposal did not find place in the actual Finance Bill and consequently, this amendment has not been made in the Finance Act, 2024.

Accordingly, the rate of TDS u/s 194D applicable to payments of insurance commission, continues to be 5 per cent in case of persons other than a company.

TDS on payment to contractors – Section 194C

Section 194C of the Act provides for withholding of tax on payments made to contractors for carrying out “work” as defined therein.

For the purpose of section 194C, “work” has been defined as under:

“work” shall include:

(a) advertising;

(b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting;

(d) catering;

(e) manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer or its associate, being a person placed similarly in relation to such customer as is the person placed in relation to the assessee under the provisions contained in clause (b) of sub-section (2) of section 40A

But does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer or associate of such customer.
The above exclusion is now expanded w.e.f. 1st October, 2024 to cover:

a. Manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer or associate of such customer; or

b. any sum referred to in sub-section (1) of section 194J.

The reason for specifically excluding sums referred to u/s 194J(1) from the definition of “work”, as stated in the Memorandum, is that some deductors have been deducting tax under section 194C of the Act when in fact they should be deducting tax under section 194J of the Act.

Therefore, w.e.f. 1st October, 2024, if any sum paid or payable falls within the scope of “fees for professional services”, “fees for technical services” or others sums specified under section 194J of the Act, tax would have to be deducted under section 194J and not under section 194C even if the same are paid in pursuance of a work contract.

Interpretation of the terms “fees for technical services”, “royalty” and “fees for professional services” as used in section 194J(1) r.w.s. 44AA r.w. CBDT notification pertaining to professional services, itself has been a subject matter of extensive litigation over the years. Now the amendment in section 194C is likely to complicate the issues even further.

An interesting point to note in this context is that the definition of “work”, as per the Explanation to section 194C of the Act specifically includes “advertising”. The proviso to the said Explanation however excludes the sums referred to in section 194J(1) of the Act. Section 194J(1) includes “professional services”, which, as defined in the Explanation to section 194J, covers within its ambit, inter alia, “advertising”. Therefore, the amendment results in a contradiction whereby, “advertising” is specifically included in the definition of “work” but is again excluded by virtue of the carve out to the said definition. This contradiction could likely trigger litigation in regard to payments made under contracts for “advertising.”

One may wonder as to when, on one hand, TDS rates have been reduced for certain categories of payments for the sake of promoting simplification as seen in the foregoing section, whether such amendment in section 194C, which is likely to result in unsettling of accepted propositions, was necessary at all.

Insertion of new section 194T requiring TDS on payment of salary, remuneration etc. to partners of a firm

Section 194T has been inserted w.e.f. 1st April, 2025 which provides that tax shall be deducted at source by a firm on payment to its partners of any sum in the nature of salary, remuneration, commission, bonus or interest. The rate of TDS prescribed is 10% of these sums, deductible at the time of credit or payment, whichever is earlier.

A threshold limit of ₹20,000 has been provided and no tax is required to be deducted if, aggregate of the above sums likely to be credited or paid to a partner does not exceed ₹20,000.

The provision is applicable to sums in the nature of salary, remuneration, commission, bonus or interest only and therefore, it may be concluded that credit or payment of share of profit to a partner is not covered within the ambit of this provision. Further, though no clarity has been provided in the Memorandum in this regard, it would be reasonable to take a view that withdrawals out of opening balance of the capital account of a partner as on 1st April, 2025 would not require deduction of tax at source under section 194T of the Act.

This amendment is likely to result in various practical issues for the firms, as often the bifurcation between allowable remuneration and profit share can only be determined at the end of the year when firm’s books of accounts have been finalized and “book profit” is determined. Further, whether a particular payment has been made to a partner during the year is out of the opening balance as on 1st April, 2025 or out of the sums credited to capital account during the year, can also be an issue for deliberation and maintaining a track of such payments may become a task in itself.

Again, when the partners of a firm would normally be required to pay advance tax, the intention behind this amendment is not clear and would seem contrary to the object of ‘simplification’ of TDS regime.

TDS on sale of immovable property – section 194-IA

Under section 194-IA(1), any person being a transferee, paying any sum by way of consideration for transfer of any immovable property, is required to deduct tax at source at the rate of 1 percent of such sum (or Stamp duty value-SDV, whichever is higher) at the time of credit or payment thereof, whichever is earlier.

Section 194-IA(2) provides that tax is not required to be deducted if the “consideration” for transfer of immovable property and SDV, both, are less than ₹50 lakhs.

Some taxpayers were taking a view that “consideration” for the purpose of the threshold limit as above is qua-buyer rather than qua-property.

Therefore, to clarify the position, a proviso to section 194-IA(2) has been enacted to provide that where there are multiple transferors or transferees, the consideration shall be the aggregate of amounts payable by all transferees to all transferors for transfer of the immovable property, i.e., aggregate consideration has to be considered for the purpose of determining the limit of R50 lakhs under sub-section (2).

Though this provision is made applicable with effect from 1st October, 2024, since it is only a clarificatory amendment, even for the period prior to the said date, it would be prudent to take the same view considering the legislative intent.

TDS on Floating Rate Savings (Taxable) Bonds (FRSB) 2020 under section 193

Presently, under section 193, tax is required to be deducted by the payer at the time of credit or payment of any income to a resident by way of interest on securities.

However, the TDS provision does not apply to any interest payable on any security of the central or state government except interest in excess of ₹10,000 payable on 8 per cent Savings (Taxable) Bonds 2003 or 7.75 per cent Savings (Taxable) Bonds 2018.

W.e.f. 1st October, 2024, interest in excess of ₹10,000 payable on Floating Rate Savings Bonds 2020 (Taxable) (FRSB) or any other security of the central or state government, as may be notified, will also be covered in this exclusion. Consequently, tax shall be required to be deducted from interest in excess of ₹10,000 on FRSB or any other notified security of central or state government.

TCS on notified goods – section 206C(1F)

Presently, tax at the rate of 1 per cent is required to be collected by a seller on consideration for sale of a motor vehicle exceeding in value of ₹10 lakhs.

W.e.f. 1st January 2025, section 206C(1F) of the Act shall also include within its ambit, any amount of consideration for sale of any other goods as may be notified, exceeding in value of ₹10 lakhs.

As clarified by the Memorandum, this amendment is intended to facilitate tracking of expenditure of luxury goods, as there has been an increase in expenditure on luxury goods by high-net-worth persons and accordingly, the goods to be notified under the section would be in the nature of “luxury goods”.

Therefore, one will have to wait and see as to which goods are notified by the CBDT as “luxury goods” requiring collection of tax at source under this provision.

As practically witnessed by the tax professionals and taxpayers so far, often the tax authorities lose sight of the intent behind the TDS/TCS provisions and adopt a hyper technical approach to make additions to income on the basis of TDS/TCS without verifying correctness of such deduction/collection of tax. While TCS provisions are an acknowledged tool for gathering information aimed at reducing revenue leakage, the continuous expansion of their scope raises concerns about the government’s commitment to simplifying the tax system.

Time limit to file correction statements in respect of TDS/ TCS returns

So far, there was no time limit to file correction statements in respect of TDS/TCS statements, to rectify any mistake or to add, delete or update the information furnished in TDS / TCS statements. Section 200(3) and Section 206C(3) of the Act are now amended w.e.f. 1st April, 2025 to provide that correction statements cannot be filed after the expiry of 6 years from the end of the financial year in which TDS/TCS were required to filed under those sections.

Extending the scope for lower deduction / collection certificate of tax at source

Section 194Q of the Act requires a buyer to deduct tax at source at the rate of 0.1 per cent from consideration payable to a resident seller, if aggregate consideration for purchase of goods is in excess of R50 lakhs in a previous year. Corresponding provisions are there in section 206C(1H) of the Act to require the seller to collect tax at source on purchase of goods as specified.

Recognising the grievance of the taxpayers that in case of lower margins or losses, funds get blocked on account of TDS/TCS which are ultimately required to be refunded, Section 197 is amended w.e.f. 1st October, 2024 to include section 194Q within its scope to enable granting of a lower deduction certificate. Corresponding amendments have been made in section 206C(9) as well to enable granting of a lower deduction certificate in respect of tax collectible under section 206C(1H) of the Act.

Tax deducted outside India deemed to be income received

Section 198 provides that tax deducted in accordance with the provisions of Chapter XVII-B i.e., shall be deemed to be income received.

As stated in the memorandum, some taxpayers were not including the taxes deducted outside India declaring only net income in India but were claiming credit for taxes deducted outside India which resulted in double deduction.

Section 198 is amended with effect from 1st April, 2025 to provide that in addition to TDS under Chapter XVII-B, income tax paid outside India by way of deduction, in respect of which an assessee is allowed a credit against the tax payable under the Act, will also be deemed to be income of the assessee in India.

Alignment of interest rates for late payment of TCS

Section 206C(7) of the Act has been amended w.e.f. 1st April, 2025 to provide that where a person responsible for collecting tax does not collect the tax or after collecting the tax fails to pay it, interest at the rate of 1 per cent p.m. or part thereof is chargeable on the amount of tax from the date on which such tax was collectible to the date on which the tax is collected. Interest shall be chargeable at the rate of 1.5 per cent p.m. or part thereof on the amount of such tax from the date on which such tax was collected to the date on which the tax is actually paid.

Before the amendment, a flat rate of 1 per cent per month or part of the month was applicable on the amount of tax from the date on which it was collectible till the date on which it was paid to the government. To bring parity between TDS and TCS provisions, a differential rate of 1.5 per cent has been made applicable for the period from collection of tax till it is actually paid to the government.

Reduction in extended period allowed for furnishing TDS / TCS statements to avoid penalty

Section 271H of the Act imposes penalty for failure to file TDS / TCS statements within prescribed time. A relief is available presently, that no penalty shall be levied if, after paying TDS / TCS along with fees and interest thereon, TDS / TCS statements are filed before the expiry of one year from the time prescribed for furnishing such statements. This period of one year is now reduced to one month, w.e.f.
1st April, 2025.

It may be pointed out that even if the TDS/TCS returns are filed beyond a period of one month on account of a “reasonable cause” within the meaning of section 273B of the Act, no penalty shall be leviable.

Claim of TDS/TCS by salaried employees

While deducting tax from salaries, any income under the other heads of income (excluding loss) and loss under the head of income from house property along with tax deducted thereon can be considered by the employer under section 192(2B).

However, credit for TCS was not being considered by the employers in absence of a specific provision to that effect. Maximum rate of TCS being as high as 20 per cent in certain cases, non-consideration of TCS by the employers while deducting tax from salary resulted in cashflow issues for the employee.

To address this issue, section 192(2B) is amended w.e.f. 1st October, 2024 to provide that TCS shall also be considered by the employer while deducting tax from salaries.

This is a welcome amendment providing much needed relief to the salaried taxpayers.

(B) INCREASED LIMITS OF ALLOWABLE REMUNERATION TO PARTNERS

Presently, as per section 40(b) of the Act, the maximum allowable remuneration to any working partner of a firm is restricted to the following limits:

(a) On first ₹3,00,000 of the book-profit or in case of a loss

₹1,50,000 or at the rate of 90 per cent of the book-profit, whichever is more

(b) On the balance of the book-profit

At the rate of 60 per cent

The above limits were last revised in A.Y. 2010–11 vide Finance Act (No. 2) of 2009.

Now these limits of allowable remuneration to a working partner under section 40(b)(v) are revised w.e.f. A.Y. 2025–26 as under:

(c) On first ₹6,00,000 of the book-profit or in case of a loss	₹3,00,000 or at the rate of 90 per cent of the book-profit, whichever is more
(d) On the balance of the book-profit	At the rate of 60 per cent

However, after a lapse of 15 years, this revision still seems inadequate, and not in line with the effort directed towards granting reduced individual tax rates to small taxpayers. This limit needs to be significantly increased, if any real benefit is intended out of it.

It is important to note in this context that remuneration clause in partnership deeds is often drafted on the basis of the limits prescribed under section 40(b) of the Act. Therefore, it needs to be examined by persons concerned whether any amendments are required to be made in existing partnership deeds, on account of the above change.

(C) ANGEL TAX ABOLISHMENT

Though often referred to as “Angel Tax”, section 56(2)(viib) is, in fact, not just applicable to angel investors but the provision is applicable to all companies in which the public are not substantially interested. As per the pre-amendment provision, where a company (other than a company in which public are substantially interested) received any consideration for issue of shares in excess of fair market value (FMV) of shares, the excess premium was deemed as income in hands of the company.
Section 56(2) (viib) of the Act was inserted vide Finance Act, 2012 “to prevent generation and circulation of unaccounted money” through share premium received from resident investors in a closely held company in excess of its fair market value.

This provision resulted in extensive litigation as the valuation of shares was a crucial factor and the tax officers often disregarded the valuation made by the companies.

Up-to 31st March, 2024, the provision was restricted to consideration received from a “resident” person. W.e.f. 1st April, 2024, it was made applicable to consideration received from non-residents as well.

After having caused significant controversy and litigation for a long period of time, and specifically after having the scope of the provision expanded in immediately preceding year vide Finance Act 2023, now the provision has been abruptly abolished w.e.f. 1st April, 2025. There is no explanation in the Memorandum to help the taxpayers understand the rationale behind such abrupt abolishment of the provision. The lack of a detailed explanation in the Memorandum only adds to the speculation that the provision could be reinstated in future, creating uncertainty in the mind of a taxpayer.

(D) EXPANSION OF POWERS OF CIT(A)

Over the past two-three years, tax professionals have been experiencing significant delays in disposal of appeals at the first appellate level. Particularly, where the issue is decided by the assessing officer ex-parte and requires calling for a remand report for adjudication by the Commissioner of Income Tax (Appeals) [CIT(A)], delays in such cases are excessive and often unreasonable.

Existing powers of CIT(A) did not contain a power to set aside the matter to the file of the assessing officer. During the pendency of the appeal, the taxpayers are required to pay at least a partial outstanding demand, thereby blocking the funds for a long period of time till disposal of the appeal.

Considering the huge pendency of appeals and disputed tax demands at CIT(A) stage, in cases where assessment order was passed as best judgement case under section 144 of the Act, CIT(A) has now been empowered w.e.f. 1st October, 2024 to set aside the assessment and refer the case back to the Assessing Officer for making a fresh assessment.

This would mean that the demand raised in the ex-parte assessments would be quashed and would no longer be enforceable.

In the present faceless regime, it is commonly observed that often the notices issued by the assessing officer are sent to an incorrect email address even after the correct address has been notified by the taxpayer. In such cases, on account of the notices remaining un-responded, orders are passed ex-parte and additions made are often deleted subsequently in appeal. However, during the pendency of appeal, taxpayer is unnecessarily required to pay a part of the demand. Practically, obtaining a refund from the department of this payment after disposal of appeal is often a task in itself.

Therefore, this amendment would grant a huge relief in cases of best judgement assessments.

(E) TAX CLEARANCE CERTIFICATE

Section 230(1A) of the Act presently provides that no person who is domiciled in India, shall leave India, unless he obtains a certificate from the income-tax authorities stating that he has no liabilities under Income-tax Act, 1961, or the Wealth-tax Act, 1957, or the Gift-tax Act, 1958, or the Expenditure-tax Act, 1987; or he makes satisfactory arrangements for the payment of all or any of such taxes, which are or may become payable by that person. Such certificate is required to be obtained where circumstances exist which, in the opinion of an income-tax authority render it necessary for such person to obtain the same.
However, we do not see this provision being actually enforced by the income tax authorities.

Now, w.e.f. 1st October, 2024, a reference to the liabilities under Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (BMA) is also included in section 230(1A) in addition to the liabilities under other laws as stated therein.

As section 230(1A), was rarely enforced even pre-amendment, one can safely assume that the practical implication of the amendment would be restricted to a very limited extent. The CBDT has already addressed the fears of taxpayers.

A corresponding amendment has also been made in section 132B of the Act, to insert a reference to BMA to allow recovery of existing liabilities under BMA out of the seized assets under section 132.

CONCLUSION

Overall, while some of the amendments in this budget are a step in the right direction, others seem to diverge from the promise of simplifying the tax system. These changes could potentially introduce additional complexities rather than streamlining the process.

In light of the Hon’ble Finance Minister’s information that a holistic review of the Income-tax Act is underway, let us hope that the goal of genuine simplification of tax system would guide future reforms!

BCAJ Admin

Important Amendments by The Finance (No. 2) Act, 2024 – Block Assessment

INTRODUCTION

Chapter XIV-B of the Act was earlier inserted in 1995 to provide for the special procedure for assessment of search cases which was commonly referred to as the ‘block assessment’. Under this erstwhile scheme of block assessment, in addition to the assessments which were to be conducted in a regular manner, a special assessment was required to be made assessing only the ‘undisclosed income’ relating to the block period in a case where the search has been conducted.

The Finance Act, 2003 made these provisions dealing with block assessment in search cases inapplicable to the searches initiated after 31st May, 2003 for the reason that the scheme of block assessment had failed in its objective of early resolution of search assessments. It had provided for two parallel assessments, i.e., one regular assessment and the other block assessment covering the same period, i.e., the block period which had resulted into several controversies centering around the treatment of a particular income as ‘undisclosed’ and whether it is relatable to the material found during the course of search etc. Therefore, the new Sections 153A, 153B and 153C were introduced wherein it was provided that the assessments pending as on the date of initiation of search would abate and only one assessment would be made wherein the total income of the assessee was required to be assessed. Further, separate assessment was required to be made for every year involved unlike the single assessment for the entire block period as provided under Chapter XIV-B.

The Finance Act, 2021 further altered the procedure for making the assessment in search cases on the ground that the provisions of Section 153A, 153B & 153C have also resulted in a number of litigations and the experience with the revised procedure of assessment had been the same as the earlier one. On that basis, the provisions of Sections 153A, 153B & 153C were made inapplicable to the search initiated after 31st March, 2021. No special provisions were made to deal with the assessment in search cases. Instead, the provisions dealing with the reassessment i.e., Section 147, 148, etc. which were also altered substantially by the Finance Act, 2021 were made applicable also to the cases in which search has been conducted with suitable modifications.

Now, the Finance Act (No.2), 2024 has once again restored the scheme of ‘block assessment’ as provided in Chapter XIV-B but in a revised form. Unlike the erstwhile scheme of block assessment which had provided for making parallel assessment of only undisclosed income of the block period, the revised scheme of block assessment provides for making only one assessment of the block period including the undisclosed income as well as the other incomes.

The objective of making this amendment as stated in the Memorandum explaining the provisions of the Finance Bill is that, under the existing provisions not providing for consolidated assessment, every year only the time-barring year was reopened in the case of the searched assessee. It has resulted in staggered search assessments for the same search and consequentially, the search assessment process takes time for almost up to ten years. Therefore, with the objective of making the search assessment procedure cost-effective, efficient and meaningful, the provisions of block assessment have been reintroduced.

THE CASES IN WHICH THE BLOCK ASSESSMENT CAN BE MADE

The new procedure for making the block assessment is applicable in a case where a search is initiated under Section 132 or requisition is made under Section 132A (referred to as search cases in this article) on or after 1st September, 2024. In respect of the search initiated or requisition made prior to 1st September, 2024, the provisions of Section 147 to 151 shall apply as they were in existence prior to their amendments by the Finance (No. 2) Act, 2024.

Section 158BA provides for the assessment in the case in which search has been conducted or requisition has been made. Section 158BD provides for the assessment of the other person other than the one in whose case the search was conducted if any undisclosed income belonging to or pertaining to or relating to that other person is found as a result of search.

BLOCK PERIOD

For the purpose of the assessment under these provisions, the block period is defined as consisting of the following periods:

Six years preceding the year in which the search was initiated; and
Period starting from 1st April of the previous year in which the search was initiated and ending on the date of the execution of the last of the authorisation for such search.

There is no provision allowing the Assessing Officer to make the assessment of income pertaining to any year beyond the period of six years prior to the year of search. Further, the part of the year in which the search is conducted till the conclusion of the search has also been included in the block period.

However, Section 158BA(6) provides that the total income other than undisclosed income of the year in which the last of the authorisation for the search was executed shall be assessed separately in accordance with the other provisions of the Act dealing with the assessment.

ISSUING NOTICE UNDER SECTION 158BC(1)

For the purpose of making the assessment, the Assessing Officer is required to issue a notice to the assessee under Section 158BC(1) requiring him to furnish his return of income within the time specified in the notice which cannot be more than 60 days. The assessee is required to declare his total income, including the undisclosed income in respect of the entire block period.

The return so required to be submitted shall be considered as if it was a return furnished under Section 139 and the Assessing Officer is required to issue the notice under Section 143(2) thereafter. However, if the assessee furnishes his return of income beyond the time period allowed in the notice, then such return shall not be deemed to be a return under Section 139.

The return of income filed in response to the notice issued under Section 158BC(1) is not allowed to be revised thereafter.

SCOPE OF ASSESSMENT

As mentioned earlier, the Assessing Officer is required to make an assessment of the total income and not just the undisclosed income relating to the block period under the new block assessment procedure. Further, the period which is required to be covered is the entire block period and, therefore, there would be only one order of assessment covering the entire block period.

The total income of the block period assessable under this Chater shall be the aggregate of the followings:

i. total income disclosed in the return furnished under section 158BC;

ii. total income assessed under section 143(3) or 144 or 147 or 153A or 153C prior to the date of initiation of search;

iii. total income declared in the return of income filed under section 139 or in response to a notice under section 142(1) or 148 and not covered by (i) or (ii) above;

iv. total income determined where the previous year has not ended, on the basis of entries relating to such income or transactions as recorded in the books of account and other documents maintained in the normal course on or before the date of last of the authorisations for the search or requisition relating to such previous year;

v. undisclosed income determined by the Assessing Officer under section 158BB(2).

Here, it may be noted that Section 158BC(1) requires the assessee to declare his total income, including the undisclosed income, for the block period. Therefore, the total income required to be declared should be inclusive of the total income which has otherwise been declared individually for all the years comprising within the block period while filing the return of income under the other provisions. There is no provision allowing the assessee to exclude the total income which has been already included in the returns filed earlier. Therefore, it is not clear as to when does the case envisaged by clause (iii) above can arise i.e., the total income declared in the return filed under Section 139 etc. but not included in the return filed in response to the notice issued under Section 158BC(1).

Further, a similar issue arises where the income has already been assessed under any of the provisions dealing with the assessment (other than search assessment) prior to the date of initiation of the search. The income so assessed should ideally be included in the total income of the block period which the assessee needs to declare in the return to be filed in response to the notice under Section 158BC(1). Therefore, this component of income gets included twice in the above computation; first under clause (i) if it has been included in the total income declared in the return filed under Section 158BC and second under clause (ii). Similarly, in respect of the previous year, which did not end as on the date on which the search was initiated, the income pertaining to that period would also get included twice; first under clause (i) and second under clause (iv). Had the requirement under Section 158BC been to include only the undisclosed income which the assessee wants to declare voluntarily in the return of income, then the manner of computing the total income of the block period would have worked properly.

The ‘undisclosed income’ includes any money, bullion, jewellery or other valuable article or thing or any expenditure or any income based on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act, or any exemption, expense, deduction or allowance claimed under this Act which is found to be incorrect, in respect of the block period.

Such undisclosed income shall be computed in accordance with the provisions of the Act on the basis of evidence found as a result of search or survey or requisition of books of account or other documents and any other materials or information as are either available with the Assessing Officer or come to his notice during the course of proceedings under this Chapter.

It can be observed that the power of the Assessing Officer to make the addition to the total income is limited only to the ‘undisclosed income’ which is defined for this purpose. Therefore, the issues might arise as they have arisen in past as to whether the Assessing Officer is permitted to make the additions which are unconnected with the incriminating materials found during the course of the search. This would be more relevant in the cases in which the assessment under the other provisions of the Act were pending and they have abated as discussed below.

If the income as mentioned at (i), (ii), (iii) or (iv) above is a loss then it shall be ignored. Further, the losses brought forward or unabsorbed depreciation of any earlier years (prior to the first year of block period) is not allowed to be set off against the undisclosed income but may be carried forward further for the remaining period left after taking into consideration the block period.

ABATEMENT OF ASSESSMENT

Since the Assessing Officer is required to assess the ‘total income’ of the block period, it has been provided that any assessment in respect of any assessment year falling in the said block period pending on the date of initiation of search or making the requisition shall abate. Further, if a reference has been made under section 92CA(1) or an order has been passed under section 92CA(3), then also such assessment along with such reference or the order as the case may be, shall abate.

If the proceeding initiated under this Chapter or the consequential assessment order passed has been annulled in appeal or any other legal proceeding, then such abated assessment shall get revived. However, such revival shall cease to have effect if the order of annulment is set aside.

Further, assessment pending under this Chapter itself (consequent to search earlier conducted in the same case) shall not abate and it shall be duly completed before initiating the assessment in respect of the subsequent search or requisition.

LEVY OF TAX, INTEREST AND PENALTY

The total income relating to the block period shall be charged to tax at the rate of 60 per cent as specified in section 113 irrespective of the previous year or years to which such income relates. Such tax shall be charged on the total income determined as above and reduced by the total income referred to in (ii), (iii) and (iv) as listed above. Further, the tax so charged shall be increased by a surcharge, if any, levied by any Central Act. However, presently, no surcharge has been provided for income chargeable to tax for the block period.

There is no specific provision dealing with the rate of tax at which the total income referred to in (ii), (iii) and (iv) will get charged. However, Section 158BH provides that all other provisions of the Act shall apply to assessment made under this Chapter unless otherwise provided.

The interest under section 234A, 234B or 234C or penalty under section 270A shall not be levied in respect of the undisclosed income assessed or reassessed for the block period.

The assessee shall be charged the interest at the rate of 1.5 per cent of the tax on undisclosed income if he has not furnished the return of income within the time specified in the notice issued under section 158BC or he has not furnished the return of income at all. The interest shall be charged for the period commencing from the expiry of the time specified in the notice and ending on the date of completion of assessment.

The Assessing Officer or the CIT(A) may levy the penalty equivalent to fifty per cent of tax leviable in respect of the undisclosed income. No such penalty or penalty under section 271AAD or 271D or 271DA shall be imposed for the block period if the following conditions are satisfied:

i. The assessee has filed a return in response to the notice issued under section 158BC.

ii. The tax payable on the basis of such return has been paid or if the assets seized consist of money, the assessee offers the money so seized to be adjusted against the tax payable.

iii. No appeal has been filed against the assessment of that part of income which is shown in the return.

If the undisclosed income determined by the Assessing Officer is higher than the income shown in the return, then the penalty shall be imposed on that portion of undisclosed income determined which is in excess of the amount of income shown in the return.

TIME LIMIT TO COMPLETE THE ASSESSMENT

The assessment order is required to be passed within twelve months from the end of the month in which the last authorisation for search was executed or requisition was made. If any reference has been made under section 92CA(1), then period available for making the assessment shall be extended by 12 months.

The provisions of section 144C have been made inapplicable to the assessment to be made under this Chapter. Therefore, the Assessing Officer is not required to provide the draft order to the eligible assessee so as to enable him to file the objections before the DRP if he wishes.

The period commencing from the date on which the search was initiated and ending on the date on which the books of account or documents or money or bullion or jewellery or other valuable article or thing seized are handed over to the Assessing Officer having jurisdiction over the assessee is required to be excluded from the period of limitation.

Several other periods are also required to be excluded from the period of limitation which are similar to the exclusions which have assessment in Section 153 providing for the time limit to complete the other types of the assessment.

ASSESSMENT OF OTHER PERSONS

If the Assessing Officer is satisfied that any undisclosed income belongs to any person other than the person in whose case the search was conducted or requisition was made, then the money, bullion, jewellery or other valuable article or thing, or assets, or expenditure, or books of account, other documents, or any information contained therein, seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person. Thereafter, that Assessing Officer shall proceed under section 158BC against such other person for the purpose of making his assessment under this Chapter. For this purpose, the block period shall be the same as that determined in respect of the person in whose case the search was conducted, or requisition was made. The time limit for completing the assessment of such person is twelve months from the end of the month in which the notice under section 158BC was issued to him. Further, this time period shall be extended by twelve months if any reference has been made under section 92CA(1).

BCAJ Admin

Important Amendments by The Finance (No. 2) Act, 2024 – Re-Assessment Procedures

1 This Article deals with the amendments made by the Finance (No. 2) Act, 2024 to the provisions of the Income-tax Act, 1961 dealing with reassessment provisions. The Finance (No. 2) Act, 2024 is referred to as “the Amending Act”, the Income-tax Act, 1961 is referred to as “the Act”. The provisions of the Act as they stood immediately before their amendment by the Amending Act are referred to as “the erstwhile provisions”, the amended provisions are referred to as “the amended provisions” / “the present provisions” and the provisions as they stood immediately before their amendment by the Finance Act, 2021 are referred to as “the old provisions”. In this Article, the effect of the amendments carried out by the Amending Act to the provisions of sections 148, 148A, 149, 151 and 152 of the Act have been analysed.

2 Introduction / Background: The Finance Act, 2021 amended the procedure for assessment or reassessment of income escaping assessment w.e.f. 1st April, 2021. The Finance Act, 2021 modified inter alia the provisions of sections 147, 148, 149 and also introduced section 148A. These provisions led to widespread litigation. The Explanatory Memorandum to the Finance (No. 2) Bill, 2024 recognises this and states that “multiple suggestions have been received regarding the considerable litigation at various fora arising from the multiple interpretations of the provisions of aforementioned sections. Further, representations have been received to reduce the time-limit for issuance of notice for the relevant assessment year in proceedings of assessment, reassessment or recomputation.” The Amending Act has amended the reassessment provisions with a view to rationalise the reassessment provisions and with an expectation that the new system would provide ease of doing business to the taxpayers since there is a reduction in time limit by which a notice for assessment or reassessment can be issued.

3 Provisions of the Act dealing with reassessment which have been amended and the effective date from which the amended provisions apply: The Amending Act has amended the provisions of Sections 148, 148A, 149, 151 and 152. Sections 148, 148A, 149 and 151 have been substituted and amendments have been carried out to Section 152. The substituted provisions as also the amendments are effective from 1.9.2024. Section-wise amendments carried out and their impact is explained in subsequent paragraphs.

4 Amendments to Section 148: The Amending Act has substituted a new Section 148 in place of the erstwhile Section 148. The effect of the amended Section 148 is as follows:

4.1 Section 148 requires “issuance of notice” as against “service of notice” earlier: The amended section 148 now provides that the Assessing Officer (AO) shall before making the assessment, reassessment or recomputation under section 147 “issue” a notice to the assessee. The erstwhile section 148 provided for “service” of a notice. Therefore, now the limitation period to file the return of income under section 147 will be with reference to date of “issue” of notice as against the date of “service” of notice under the erstwhile provision. While it is true that in the electronic era, since the notices are generated online the same are dispatched instantly and therefore there would normally be no significant difference between the date of issue of the notice and service thereof. However, at times, it is noticed that due to notices being sent to an incorrect email address, there could be a significant difference between the date of issue of notice and service thereof. In such cases, the time available to the assessee to file return of income will be lower to the extent of time period between the date of issuance of notice and the date of service thereof. To illustrate, if the notice is issued on 25th March, 2025 and it provides that the return be furnished by 30th April, 2025, if such a notice is served on 5th April, 2025, then the time available with the assessee to furnish the return of income is shortened by 10 days, since the assessee will come to know of the notice having been issued only when it is served upon him.

4.2 While Section 148 now provides for “issuance” of notice instead of “service” thereof, the service of notice will still be relevant since, as has been mentioned above, unless the notice is served upon the assessee, the assessee will not be in a position to know about its issuance and comply with the same. Also, since section 153(2) has not been amended the limitation period mentioned in section 153(2) for passing of order of assessment, the time limit for reassessment or re-computation made under section 147 continues to be with reference to date of service of notice under section 148.

4.3 When can notice be said to have been “issued”? Since section 148 provides for issuance of notice by Assessing Officer who is an income-tax authority, in terms of section 282A, it will need to be signed in terms of sub-section (1) of section 282A. Such notice has to be signed and issued in paper form or communicated in electronic form by that authority in accordance with procedure prescribed. Rule 127A prescribes procedure for this purpose.

The Allahabad High Court has, in Daujee Abhushan Bhandar (P.) Ltd. vs. Union of India [(2022) 136 taxmann.com 246 (All. HC)], after considering the various provisions, dictionary meanings and the case laws on the subject, held that the words `issue’ or `issuance of notice’ have not been defined in the Act. However, the point of time of issuance of notice may be gathered from the provisions of the 1961 Act, Income-tax Rules, 1962 and the Information Technology Act, 2000. Similar would be the position if the meaning of the word `issue’ may be gathered in common parlance or as per dictionary meaning. Merely digitally signing the notice is not issuance of notice. Issuance of notice will take place when the email is issued from the designated email address of the concerned income-tax authority.

4.4 Notice under section 148 to be accompanied by copy of order passed under section 148A(3) : Section 148 as amended by the Amending Act provides that the notice shall be issued along with a copy of the order passed under section 148A(3) of the Act. The erstwhile provision required that the notice shall be served along with a copy of the order passed, if required, under section 148A(d). The absence of the words “if required” in the amended provisions makes it mandatory for the notice to be accompanied by an order under section 148A(3). This mandate will not be possible to be complied with in a case where information has been received by the AO under the scheme notified under section 135A. This is because section 148A(4) provides that the provisions of section 148A shall not apply to a case where the AO has received information under the scheme notified under section 135A. If the assessee challenges a notice which has been issued pursuant to information received under the scheme notified under section 135A of the Act on the ground that it is not accompanied by an order under section 148A(3), the court will hold that the provisions of section 148 are subject to the provisions of section 148A and therefore since an order u/s 148A(3) is not required to be passed in a case where information is pursuant to a scheme notified u/s 148 being accompanied by an order u/s 148A(3) would not apply to such a case. Also, the court may invoke the doctrines explained by the maxims Impossibilium Nulla Obligato Est; Lex Non Cogitad Impossiblia; Impossibiliumnulla Obligatio Est and hold that the revenue is not expected to perform the impossible. These maxims have been followed by the courts in several cases e.g. Standard Chartered Bank vs. Directorate of Enforcement [(2005) 275 ITR 81 (SC)]; IFCI vs. The Cannanore Spinning & Weaving Mills Ltd. [(2002) 5 SCC 54 (SC)]; Poona Electric Supply Co. Ltd. vs. State [AIR 1967 Bom 27]; Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT [(2021(3) TMI 138 – SC] and Dalmia Power Ltd. vs. ACIT [(2012) 112 taxmann.com 252 (SC)]. However, it would have certainly been advisable that the words “if required” were retained in the amended provisions.

4.5 Time limit for filing return of income now at the discretion of the AO subject to outer limit provided in Section 148: Section 148, as amended by the Amending Act, provides that the notice issued shall specify the period within which the assessee is to furnish a return of income. It is also, however, provided that the time period specified in the notice cannot exceed 3 months from the end of the month in which the notice is issued. The erstwhile provisions of section 148 provided that the notice shall call upon the assessee to furnish a return of income within a period of three months from the end of the month in which such notice is issued or such further period as may be allowed by the AO on the basis of an application made in this regard by the assessee.

The time limit available to furnish the return of income will now be at the discretion of the AO. Failure to furnish the return of income within the period specified in the notice will mean that the return of income so furnished will not be regarded as a return furnished under section 139 and all the consequences thereof will follow e.g. the assessee will not be able to file an updated return under section 139(8A); in terms of the decision of the Supreme Court in Auto & Metal Engineers vs. Union of India [(1998) 229 ITR 399 (SC)] there will be no requirement to issue a notice under section 143(2) and the assessment would commence once return of income is filed.

Earlier, under the erstwhile provisions, when the time period of three months from the end of the month in which the notice is served was provided, an assessee could, if the facts of the case so demanded, file a writ petition and the outcome of the Writ Petition could be known before the date by which the return of income was required to be furnished. Now, possibly, pending the decision in the Writ Petition, an assessee will be required to furnish the return of income, unless a stay is granted by the High Court.

4.6 Express power to the AO to grant extension of time to file return of income on the basis of an application made by the assessee now not there: The erstwhile section 148 empowered the AO to grant, on the basis of an application made by an assessee, an extension of time to furnish return of income in response to notice under section 148. Such a power is not there in section 148 as has been introduced by the Amending Act. Further, in view of the outer limit of the period which may be granted to furnish return of income, it is quite possible to take a view that the AO does not have power to grant an extension of time to furnish the return of income. This view can be supported by the contention that there was an express power to grant extension in the erstwhile provisions, which has not been conferred under the amended provisions. Therefore, legislative intent is not to confer such a power on the AO. Non-furnishing of the return of income by the period specified in the return would render such a return to be a return which has not been furnished under section 139 and all consequences thereof will follow.

4.7 Definition of the expression “the information with the Assessing Officer which suggests that income chargeable to tax has escaped assessment” expanded: A notice under section 148 can be issued only if the AO has information which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the relevant assessment year. The expression “the information with the Assessing Officer which suggests that income chargeable to tax has escaped assessment” was exhaustively defined in the erstwhile regime in Explanation 1 to the erstwhile section 148 whereas, under the amended provisions, this expression is defined exhaustively in Section 148(3).
On a comparison of the definition of this expression under the erstwhile provisions and under the amended provisions, one finds that earlier the definition had five clauses whereas now it has six clauses. The five clauses which were there in the erstwhile regime and which continue in the present provisions are:

(i) information received in accordance with risk management strategy;

(ii) any audit objection to the effect that assessment has not been made in accordance with the provisions of the Act;

(iii) any information received under agreements referred to in section 90 or 90A;

(iv) any information made available pursuant to a scheme notified under section 135A;

(v) any information which requires action in consequence of the order of a Tribunal or a Court.

Clause (vi) which has now been added in the definition of the said expression reads “any information in the case of an assessee emanating from survey conducted under section 133A, other than under sub-section (2A) of the said section, on or after the 1st day of September, 2024”.

The scope of the expression prima facie appears to have been widened whereas actually it is not so, since the information pursuant to survey conducted on assessee constituted deemed information under the erstwhile regime.

Earlier, under the erstwhile regime, if a survey was conducted under section 133A [other than under section 133A(2A)] and if such a survey was conducted on or after 1.4.2021 and it was conducted on the assessee, then it was deemed that AO had information which suggests that income chargeable to tax has escaped assessment. Therefore, an action of survey on the assessee which, under the erstwhile regime, constituted deemed information, now results into an information suggesting that income chargeable to tax has escaped assessment, with the difference being that the present provisions could even cover a case where information has emanated from a survey under section 133A conducted on some other person and not necessarily on the assessee.

Under the provisions as amended by the Amending Act, what is necessary is that the information in the case of an assessee should emanate from a survey conducted under section 133A [other than under section 133A(2A)]. Based on the language, it is possible to take a view that the survey need not be on the assessee, but the information should emanate as a result of the survey under section 133A [other than under section 133A(2A)].

4.8 Amended provisions do not provide for any situation / circumstance in which the AO shall be deemed to have information with the Assessing Officer which suggests that income chargeable to tax has escaped assessment:

Explanation 2 to erstwhile Section 148 provided for situations / circumstances in which the AO was deemed to have information which suggests that income chargeable to tax has escaped assessment. These were cases related to search initiated / books of accounts or documents pertaining to the assessee found in the course of search on some other person / any money, bullion, jewellery or other valuable article or thing belonging to the assessee and seized in the course of search of any other person / survey being conducted in the case of an assessee under section 133(A).

Now, under the provisions as amended by the Amending Act, since the assessment in search cases is covered by Chapter XIV-B, this provision is not necessary and therefore is not there. As regards information emanating from survey under section 133A, the same has been included in the definition of the expression “information which suggests that income chargeable to tax has escaped assessment”. This has been analysed in earlier paragraph.

4.9 Requirement to obtain prior approval of Specified Authority before issuing notice under section 148 done away with, except in cases where information is pursuant to scheme notified under section 135A: Under the erstwhile Section 148, up to 31st March, 2022 the AO was required to obtain prior approval of Specified Authority before issuing notice under section 148. This approval was in addition to the approval to be obtained by him for passing an order under section 148A(d) of the Act. The Finance Act, 2022 has w.e.f. 1st April, 2022 done away with this requirement in cases where an order under section 148A(d) was passed with prior approval of Specified Authority that it is a fit case for issuance of notice under section 148.

Under the provisions of Section 148 as amended by the Amending Act, there is no requirement of obtaining prior approval of Specified Authority before issuance of notice under section 148, except in a case where the AO has received information pursuant to a scheme notified under section 135A of the Act [second proviso to section 148].

4.9 Change in Specified Authority: For the purpose of section 148 and 148A, the Specified Authority is as defined in Section 151. Section 151 has been substituted w.e.f. 1st September, 2024. The Specified Authority as defined in present provisions of section 151 is stated hereafter in para 6.2.

4.10 Role of Specified Authority in case information is received pursuant to scheme notified under section 135A: In a case where information is received by the AO pursuant to the scheme notified under section 135A, then the provisions of Section 148A do not apply and a notice under section 148 can be issued by the AO after obtaining prior approval of Specified Authority. In such a case a question arises as to what is the role of Specified Authority? Is the information received under a scheme notified sacrosanct so that no further inquiry / response is to be called for even in a case where assessee challenges the correctness of the information received by the AO? If the information so received is to be regarded as sacrosanct, then the legislature would not have provided the requirement for obtaining prior approval of Specified Authority before issuing a notice under section 148, as that would then be a mere empty formality.

Under the erstwhile provisions as well, the provisions of section 148A did not apply to information received pursuant to scheme notified under section 135A. In that context, in Benaifer Vispi Patel vs. ITO [(2024) 165 taxmann.com 5 (Bombay)], an assessee in whose case there was a discrepancy in the information received pursuant to the scheme notified under section 135A, challenged the notice issued to her under section 148 before the Bombay High Court. The court held:

i) it cannot be conceived that at all material times, the information available in the electronic mechanism / system, would be free from errors and defects, in as much as the basic information which is being fed into the system would certainly be filed by the manual method and thereafter such information is converted and disseminated as an electronic data.

ii) since assessee had informed Assessing Officer that interest income disclosed in return was correct, such remarks or explanation as offered by assessee necessarily was required to be considered before Assessing Officer could proceed with issuance of notice under section 148.

Amendments to Section 148A: The Amending Act has substituted a new Section 148A in place of the erstwhile Section 148A. The effect of the amended Section 148A is as follows:

4.10 Conducting an enquiry before issuance of notice under section 148A done away with: Section 148A(a) of the erstwhile provisions empowered the AO to conduct an enquiry, if required, with respect to the information which suggests that income chargeable to tax has escaped assessment. This enquiry could be conducted with prior approval of Specified Authority. Results of the enquiry were to be shared with the assessee. As a result of this power, the AO was reasonably assured of the correctness of the information before he could issue a show cause notice under section 148A(b) of the Act.

Under the amended section 148A, there is no express power to the AO to conduct an enquiry before issuance of show cause notice. This will result in notices being issued without verification of the correctness of the information, and in cases where enquiry is conducted after issuance of the show cause notice under section 148A(1), to verify the correctness of the contentions of the assessee, then the AO will be under pressure of time to pass an order under section 148A(4).

4.11 Prior approval of Specified Authority not required for issuing notice under section 148A(1): Section 148A(1) of the amended provisions is akin to section 148A(b) of the erstwhile provisions. Like in the erstwhile regime, there is no requirement to obtain prior approval of Specified Authority for issuing notice under section 148A(1). Where AO has information suggesting that income chargeable to tax has escaped assessment, the AO is mandated to serve upon the assessee a notice under section 148A(1), before issuing a notice under section 148, asking him to show cause why a notice under section 148 should not be issued in his case for the relevant assessment year. An opportunity of hearing has to be provided to the assessee.

4.12 Statutory mandate to provide information which suggests that income chargeable to tax has escaped assessment along with the notice under section 148A: Under the amended provisions of section 148A(2), it is mandatory for the AO to give information which suggests that income chargeable to tax has escaped assessment in his case for the relevant assessment year along with the show cause notice. It is the entire information and material which the AO has, which should accompany the notice issued under section 148A(2). Not giving information along with the notice will be a jurisdictional defect rendering the notice bad in law and liable to be quashed. Furnishing the information subsequently upon the assessee asking for the same, may not meet the requirements of the provision. Opportunity of being heard has to be necessarily provided to the assessee. Not granting opportunity of being heard, apart from being a violation of the principles of natural justice, will be contrary to the statutory mandate of section 148A(1) of the Act. Furnishing / giving partial information or portions of information considered relevant by the AO will not be compliance of the mandate of this provision.

It is not necessary that the AO must merely have information but the ‘information’ must prima facie, satisfy the requirement of enabling a suggestion of escapement from tax – Divya Capital One (P) LTD. vs. Assistant Commissioner of Income Tax & Anr [(2022) 445 ITR 436 (Del)]; Dr. Mathew Cherian & Ors. vs. ACIT [(2022) 329 CTR 809 (Mad.)] and Excel Commodity & Derivative (P) Ltd. vs. UOI [(2022) 328 CTR 710 (Cal.)].

4.13 No statutory time limit for furnishing response to show cause notice issued under section 148A(1): Section 148A(2) of the amended provisions provides that an assessee, on receiving the notice under section148A(1), may furnish his reply within such period as is mentioned in the notice.

Under the erstwhile provisions, it was provided that the AO had to grant a minimum time period of seven days and a maximum time period of 30 days to the assessee to furnish his reply. Also, it was provided that the AO may, on an application made by the assessee, extend the time granted for furnishing a reply. However, the amended provisions do not provide for any minimum or maximum period which needs to be granted. Therefore, the time to be granted to furnish a response to the show cause notice will now be at the discretion of the AO. However, principles of natural justice will demand that a reasonable time be granted to the assessee to furnish his response. There could be a debate as to what constitutes reasonable time. One may contend that a time period of two weeks would be reasonable time period and for this one may place reliance on the circulars of CBDT in the form of SOPs for Assessment Unit under Faceless Assessment Scheme, 2019 being Circular dated 19th November, 2020 and also SOP for Assessment Unit dated 3rd August, 2022, where for the purposes of furnishing response to notices under faceless assessment schemes it is stated that a time period of 15 days be granted. The courts in various contexts have held a time period of 15 days to be reasonable time period. At the worst, the time period of seven days provided in erstwhile provisions could be taken to be a reasonable yardstick.

4.14 Section 148A does not apply to cases where information is received pursuant to scheme notified under section 135A: Like in the erstwhile regime, even the amended provisions provide that where information is received pursuant to the scheme notified under section 135A of the Act, then the provisions of section 148A are not applicable to such information. In such a case, the AO can directly issue a notice under section 148 with prior approval of Specified Authority [Section 148A(4)]

4.15 Express power not available to grant extension of time for furnishing reply to the show cause notice issued under section 148A(1) : The erstwhile provisions of section 148A(b) clearly empowered the AO to grant on the basis of an application by the assessee, further time to furnish response to show cause notice issued by the AO. Such an express power is now missing in the amended provisions of section 148A(1) of the Act. Consequently, the AO having granted time (which he considers to be reasonable) mentioned in the notice issued by him, may refuse to grant extension of time on the ground that the section does not provide so. However, it is possible to contend that the AO has an inherent power to grant extension. In the event, the AO issues notice under section 148A(1) when the issuance of notice under section 148 is getting time barred soon, then the AO will be reluctant to grant extension of time and this may result in avoidable litigation.

4.16 Statutory obligation to provide opportunity of being heard continues: Like in the erstwhile regime, even the amended provisions provide for granting an opportunity of being heard. Opportunity of being heard would mean an opportunity of a personal hearing as well. Not granting an opportunity of being heard would be a fatal defect which may lead to the proceedings being quashed.

4.17 Order under section 148A(3) is to be passed on the basis of material available on record and taking into account reply of the assessee. Does material available on record mean only information available with the AO on the basis of which a notice under section 148A(1) has been issued? The amended provisions in Section 148A(3) provide that an order shall be passed by the AO determining whether or not it is a fit case to issue notice under section 148. This order shall be passed on the basis of material available on record and taking into account the reply of the assessee furnished under section 148A(2).

A question which arises for consideration is as to whether, when the provision refers to material available on record, is it merely the information which the AO has which suggests that income chargeable to tax has escaped assessment in the case of an assessee or is it any other material as well. The AO, on the basis of information which he has, issues a show cause notice, and the assessee furnishes the response thereto. To verify the correctness of the response furnished by the assessee, the AO may make enquiry by exercising powers vested in him under the Act and the results of such enquiry may also be the basis of determining whether or not it is a fit case for issuance of notice under section 148. However, the results of such enquiry will need to be shared with the assessee and the assessee granted an opportunity of furnishing his response thereto.

This view also gets support from the provisions of section 149, which provide that if three years but not more than five years have elapsed from the end of relevant assessment year, then a notice under section 148A can be issued only if, as per information with the AO, the income chargeable to tax which has escaped assessment amounts to or is likely to amount to ₹50 lakh or more. However, when it comes to issuance of notice under section 148, the requisite condition inter alia is that the AO has in his possession books of account or other documents or evidence related to any asset or expenditure or transaction or entries which show that the income chargeable to tax which has escaped assessment amounts to or is likely to amount to ₹50 lakh or more.

On a comparison of the two, it is clear that at the stage of issuance of notice under section 148A, what the legislature envisages is merely information with the AO whereas when it comes to issuance of notice under section 148, the requisite condition is AO having in his possession books of account, documents or evidence. It appears that these books of accounts, documents or evidence can come into possession of the AO in the course of proceedings under section 148A as a result of enquiries or otherwise.

4.18 Passing of an order under section 148A(3) requires prior approval of Specified Authority: The amended provisions of section 148A(3) provide that an order can be passed under section 148A(3), determining whether or not it is a fit case for issuance of notice under section 148, only with the prior approval of Specified Authority. For this purpose, Specified Authority is defined in section 151 to mean Additional Commissioner or Additional Director or Joint Commissioner or the Joint Director, as the case may be. Under the erstwhile provisions as well prior sanction of the Specified Authority was necessary. However, the Specified Authority under the erstwhile provisions was as stated in Para 6.2.

4.19 No outer time limit to pass an order under section 148A(3): Section 148A(d) of the erstwhile provisions provided that an order under section 148A(d) was required to be passed within one month from the end of the month in which the reply of the assessee was received and, where no reply was furnished, within one month from the end of the month in which the time or extended time allowed to furnish a reply expired.

Under the amended provisions, there is no outer limit for passing an order under section 148A(3), but the time limit provided in section 149 for issuance of notice under section 148 will indirectly work as an outer time limit for passing an order under section 148A. The AO will need to ensure that he has sufficient time to issue notice under section 148, which has to be accompanied by an order passed under section 148A(3).

5 Amendments to Section 149: The Amending Act, with effect from 1st September, 2024, has substituted a new Section 149 in place of the erstwhile Section 149. Section 149 provides for limitation period beyond which notice under section 148 / 148A cannot be issued.

5.1 Under the erstwhile provisions of section 149 it was only time limit for issuance of notice under section 148 which was provided. The amended provisions of section 149 provide for separate time limits for issuance of notice under section 148A and also for section 148. The time limits and the conditions for issuance of notice are as under:

Time which has elapsed from the end of the relevant assessment year	Conditions, if any / Observations
For issuance of notice under section 148A
Not more than three years [Section 149(2)(a)]	AO should have information which suggests that income chargeable to tax has escaped assessment. There is no de minimis as far as quantum of income which has escaped assessment is concerned. It could be a miniscule sum or it could be an amount in excess of ₹50 lakh or much more than that too.
More than three years but not more than five years [Section 149(2)(b)]	AO should have information which suggests that income chargeable to tax has escaped assessment; and Income chargeable to tax which has escaped assessment, as per the information with the AO, amounts to or is likely to amount to ₹50 lakh or more
For issuance of notice under section 148
Not more than three years and three months [Section 149(1)(a)]	AO should have information which suggests that income chargeable to tax has escaped assessment. There is no de minimis as far as quantum of income which has escaped assessment is concerned. It could be a miniscule sum or it could be an amount in excess of ₹50 lakh or much more than that too.
More than three years and three months but not more than five years and three months [Section 149(1)(b)]	AO should have information which suggests that income chargeable to tax has escaped assessment; and AO has in his possession books of account or other documents or evidence related to any asset or expenditure or transaction or entries which show that the income chargeable to tax, which has escaped assessment, amounts to or is likely to amount to ₹50 lakh or more.

Time which has elapsed from the end of the relevant assessment year

Conditions, if any / Observations

For issuance of notice under section 148A

Not more than three years

[Section 149(2)(a)]

AO should have information which suggests that income chargeable to tax has escaped assessment.

There is no de minimis as far as quantum of income which has escaped assessment is concerned. It could be a miniscule sum or it could be an amount in excess of ₹50 lakh or much more than that too.

More than three years but not more than five years

[Section 149(2)(b)]

AO should have information which suggests that income chargeable to tax has escaped assessment; and

Income chargeable to tax which has escaped assessment, as per the information with the AO, amounts to or is likely to amount to ₹50 lakh or more

For issuance of notice under section 148

Not more than three years and three months

[Section 149(1)(a)]

AO should have information which suggests that income chargeable to tax has escaped assessment.

There is no de minimis as far as quantum of income which has escaped assessment is concerned. It could be a miniscule sum or it could be an amount in excess of ₹50 lakh or much more than that too.

More than three years and three months but not more than five years and three months

[Section 149(1)(b)]

AO should have information which suggests that income chargeable to tax has escaped assessment; and

AO has in his possession books of account or other documents or evidence related to any asset or expenditure or transaction or entries which show that the income chargeable to tax, which has escaped assessment, amounts to or is likely to amount to ₹50 lakh or more.

The limitation under section 149 is for issuance of notice under section 148A and not for passing of an order under section 148A(3).

5.2 Illustrations:

i) For A.Y. 2023–24: A notice under section 148A for A.Y. 2023–24 can be issued at any time up to 31st March, 2027 and a notice under section 148 for A.Y. 2023–24 can be issued at any time up to 30th June, 2027, irrespective of the quantum of income which is alleged to have escaped assessment. After 31st March, 2027, notice under section 148A can be issued up to 31st March, 2029 only if the income escaping assessment as per the information with the AO amounts to or is likely to amount to ₹50 lakh or more. After 30th June, 2027, notice under section 148 can be issued up to 30th June, 2029 only if AO has in possession books of account or other documents or evidence related to any asset or expenditure or transaction or entries which show that the income chargeable to tax which has escaped assessment amounts to or is likely to amount to ₹50 lakh or more. After 30th June, 2029, notice under section 148 cannot be issued for A.Y. 2023–24.

ii) For A.Y. 2019–20: A notice under section 148A for A.Y. 2019–20 can be issued up to 31st March, 2025 only if income chargeable to tax which is alleged to have escaped assessment as per information with the AO is R50 lakh or more and a notice under section 148 can be issued up to 30th June, 2025 if the AO has in his possession books of account or other documents or evidence related to any asset or expenditure or transaction or entries which show that the income chargeable to tax, which has escaped assessment, amounts to or is likely to amount to ₹50 lakh or more.

5.3 Under the erstwhile provisions, Explanation to section 149 defined “asset”, whereas the amended provisions do not have definition of “asset”. Therefore, the term “asset” in section 149 would have to be understood in its normal sense as is explained by the dictionaries. The following are some of the meanings of “asset”:

(i) As per Black’s Law Dictionary (Eighth edition), the word “asset” means, an item that is owned and has value; the entries on a balance sheet showing the items of property owned, including cash, inventory, equipment, real estate, accounts receivable and goodwill; all the property of a person available for paying debts or for distribution;

(ii) In Velchand Chhaganlal vs. Mussan 14 Bom.L.R. 633, it was held that the word “assets” means, a man’s property of whatever kind which may be used to satisfy debts or demands existing against him;

(iii) In Funk & Wag-nail’s Standard Dictionary, “asset” has been defined as meaning, in accounting, the entries in a balance-sheet showing the properties or resources of a person or business as accounts receivable, inventory, deferred charges and plant as opposed to liability. The assets also signify everything which can be made available for the payment of debts. [UOI vs. Triveni Engg. Works Ltd., (1982) 52 Comp. Cas 109 (Del)];

(iv) “Asset” is a word of wide import. In its common acceptation the term means property, real and personal, property owned, property rights. It represents something over which a man has domain and can transfer with or without consideration, and which may be reached by execution process – Oudh Sugar Mills Ltd. vs. CIT [(1996) 222 ITR 726 (Bom)].

5.4 Under the erstwhile provision, the sum of ₹50 lakh alleged to be income chargeable to tax which has escaped assessment was to be computed with reference to aggregate of investment in asset or expenditure incurred in various years in which such investment was made or expenditure incurred, whereas under the amended provisions, the limit of ₹50 lakh is qua each assessment year.

5.5 The time limit for reopening the assessments has been reduced from ten years under the erstwhile provisions to five years under the amended provisions.

6 Amendments to Section 151: The Amending Act has, with effect from 1st September, 2024, substituted a new Section 151 in place of the erstwhile Section 151.

6.1 Under the erstwhile provisions, the Specified Authority for granting approval for the purposes of section 148 and 148A depended upon the time period which has elapsed after the end of the relevant assessment year till the date of issuance of the notice / passing of an order for which approval was being granted. Under the present provisions, irrespective of the number of years which have elapsed from the end of the relevant assessment year, the Specified Authority is the same.

6.2 The Specified Authority under the erstwhile provisions and under the amended provisions is as mentioned in the Table below:

Number of years which have elapsed from the end of the relevant assessment year	Specified Authority under the erstwhile provisions	Specified Authority under the amended provisions
Three years or less	PCIT or PDIT or CIT or DIT	The Additional Commissioner or the Additional Director or the Joint Commissioner or the Joint Director
More than three years	PCCIT or PDGIT or CC or CDG

6.3 The expression “Assessing Officer” is defined in section 2(7A) inter alia to mean Additional Commissioner or Additional Director or Joint Commissioner or Joint Director who is directed under 120(4)(b) to exercise or perform all or any of the powers and functions conferred on, or assigned to, an Assessing Officer under the Act. Therefore, if an Additional Commissioner or Joint Commissioner has done an assessment of income of the relevant assessment year which is sought to be reopened, can the very same authority be regarded as Specified Authority authorised to grant approval for the purposes of section 148 and 148A? It would be fallacious to contend that same authority which has framed assessment order can grant approval for issuance of notice for reassessment. It is understood that, presently, in practice, Additional Commissioner or Joint Commissioner does not frame assessments and therefore this question is academic.

7 Amendments to Section 152: The Amending Act has, with effect from 1st September, 2024, inserted sub-sections (3) and (4) in Section 152.

7.1 Sub-sections (3) and (4) of section 152 provide that the provisions of sections 147 to 151, as they stood prior to their amendment by the Amending Act shall continue to apply in the following cases:

(i) where on or after 1st April, 2021 but before
1st September, 2024:

(a) a search has been initiated under section 132; or

(b) requisition is made under section 132A; or

(ii) where a case is not covered by (i) above and prior to 1st September, 2024:

(a) a notice under section 148 has been issued; or

(b) an order has been passed under section 148A(d).

7.2 In view of the above, the erstwhile provisions of sections 147 to 151 shall continue to apply to all cases where, up to 31st August, 2024, a notice under section 148 is issued or an order is passed under section 148A(d) of the Act. It is relevant to note that issuance of notice under section 148 up to 31st August, 2024 or passing of an order (and not necessarily its service) under section 148A(d) is sufficient to have the case covered by the erstwhile provisions of sections 147 to 151.

7.3 In respect of a search which has been initiated up to 31st August, 2024, the provisions of erstwhile sections will apply to the assessee in whose case search is initiated. However, if in such a search, any money, bullion, jewellery or other valuable article or thing belonging to any other person is seized, then whether, to such other person, the provisions of erstwhile sections 147 to 151 will apply or will the provisions as amended by the Amending Act apply? It appears that it will be the provisions as amended by the Amending Act which will apply. However, the matter is not free from doubt.

8 Consequence of reduction in time limit for reopening from six years to five years:

8.1 As a result of reduction in time period for re-opening of assessments from six years to five years, on 1st September, 2024, i.e., upon the coming into force of the amended provisions, issuance of notice under section 148 / 148A for assessment year 2018–19 will be time barred. However, if for A.Y. 2018–19, a notice under section 148 is issued up to 31st August, 2024 or an order under section 148A(d) is passed up to 31st August, 2024, then the provisions of erstwhile sections 147 to 151 shall apply. The Department is presently trying to issue notices for A.Y. 2018–19, in all cases where the AO has information that suggests that income chargeable to tax has escaped assessment.

9 Sanctions to be obtained: Under the erstwhile provisions, as were in force immediately before their amendment by the Amending Act, subject to certain exceptions, approval was required for:

(i) conducting an enquiry before issuance of notice under section 148A(b);

(ii) passing of an order under section 148A(d) determining whether or not it is a fit case for issuance of notice under section 148;

(iii) up to 31st March, 2022, issuance of notice under section 148 in all cases;

(iv) from 1st April, 2022, for issuance of notice under section 148 in cases where an order under section 148A(d) was not required to be passed.

BCAJ Admin

Important Amendments by The Finance (No. 2) Act, 2024 – Buy-Back of Shares

BACKGROUND

The tax treatment of buy-back of shares has been a focal point of legislative intervention since the concept’s inception. In a buy-back, a company purchases its own shares for cancellation and pays consideration to the shareholders. From a shareholder’s perspective, this transaction resembles the sale of shares, with the company itself acting as the buyer. However, from the standpoint of the Companies Act, a company purchasing its own shares cannot hold them as treasury stock, and the quantum of the buy-back is partially linked to reserves, aligning its treatment more closely with dividends. This distinction has significantly influenced the legislative framework governing the taxation of buy-backs.

Prior to the Finance Act of 2013, the law provided that any consideration received by a shareholder on a buy-back was not treated as ‘dividend’ due to a specific exemption under section 2(22)(iv). Such buy-back considerations were instead taxed as ‘capital gains’ under section 46A in the hands of shareholders. In the case of shareholders residing in Mauritius or Singapore, India did not have the right to tax capital gains, allowing the entire buy-back proceeds to be repatriated tax-free. Consequently, companies increasingly used buy-backs as an alternative to dividend payments, thereby avoiding the Dividend Distribution Tax (DDT).

This tax arbitrage was addressed by the Finance Act of 2013 through the introduction of section 115QA, which shifted the tax liability to the company executing the buy-back. The Memorandum to the Finance Bill 2013 highlighted the issue:

“Unlisted Companies, as part of tax avoidance schemes, are resorting to buy-backs of shares instead of paying dividends to avoid the payment of tax by way of DDT, particularly where the capital gains arising to the shareholders are either not chargeable to tax or are taxable at a lower rate.”

Following the amendment, the regime for buy-backs became analogous to that of dividends, with the company paying the tax, and the income being exempt in the hands of shareholders under section 10(34A). The Finance Act 2020 abolished DDT (i.e., section 115-O) and reverted to the classical method of taxation, wherein dividends are taxed in the hands of the shareholders. This change led to a shift from a flat DDT rate to variable tax rates for shareholders — 36 per cent for residents and 20 per cent for non-residents (potentially reduced under DTAA rates). However, section 115QA remained intact, with companies continuing to pay tax at a flat rate of 23.296 per cent (inclusive of surcharge and cess), while the shareholders’ income remained exempt under section 10(34A). This discrepancy once again created an opportunity for tax arbitrage. For resident individual shareholders, dividends were taxed at 36 per cent, whereas buy-backs were taxed at 23.296 per cent. Moreover, since the tax was borne by the company, a larger distributable amount remained with the shareholders, prompting unlisted companies to favour buy-backs over dividend declarations to exploit the tax advantage.

This practice was curtailed by the Finance Act (No. 2) of 2024, which introduced a classical, albeit unconventional, split in the tax treatment. The new law proposes to treat the consideration received on a buy-back as a dividend, while the extinguishment of shares by shareholders is treated as a capital gain. This hybrid treatment is the focus of the article’s analysis.

LAW PRIOR TO AMENDMENT

Section 115QA mandated a flat rate of taxation at 23.296 per cent on the company executing the buy-back, while the consideration received by the shareholder was exempt under section 10(34A). The law, as it stood, had several unique features:

Tax Liability on the Company: The obligation to pay tax was placed on the company, allowing it to distribute the entire amount computed under section 68 of the Companies Act, 2013, to shareholders. The tax paid on the buy-back did not count towards the limits set by the law, enabling a higher payout to shareholders. Consequently, the effective tax rate, on a derivative basis, reduced to 18.89 per cent (calculated as 23.296/123.926*100).
Tax on Distributed Income (DI): The tax was levied on the distributed income, which was defined as the amount received by the company upon the issuance of shares, minus the consideration paid on the buy-back. This definition excluded the cost to the shareholder in cases where shares were purchased through secondary transfers, resulting in tax being paid on a higher amount than the actual income generated.
Challenges for Non-Resident Shareholders: Since the tax was paid by the company in addition to the corporate tax, non-resident shareholders faced difficulties in claiming tax credits in their home countries. This scenario often led to the possibility of double taxation.
Exemption for Shareholders: With the income being exempt in the hands of shareholders and the tax borne by the company, listed companies frequently offered buy-back prices above market value to incentivize participation. Shareholders, seeing significant value appreciation, were thus motivated to tender their shares in the buy-back.

This tax arbitrage was addressed by the Finance Act (No. 2) of 2024, which introduced significant changes to the tax regime governing buy-backs.

AMENDMENT BY FINANCE (NO. 2) ACT 2024

Finance (No. 2) Act 2024 introduced series of amendment introducing novel method to tax buy back. Following are list of amendments:

i) Introduction of section 2(22)(f) in the ‘Act’ to state that any payment by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 68 of the Companies Act, 2013 is taxable as dividend. (Clause 3 of the Bill)

ii) Insertion of proviso to section 10(34A) of the Act to provide that this clause shall not apply with respect to any buy-back of shares by a company on or after the 1st October, 2024. (Clause 4 of the Bill).

iii) Insertion of a proviso to section 46A of the Act w.e.f. 1st October, 2024 to provide that where a shareholder receives any consideration of the nature referred to in sub-clause (f) of section 2(22) from any company, in respect of any buy-back of shares, then the value of consideration received by the shareholder shall be deemed to be “nil’. (Clause 18 of the Bill)

iv) Insertion of a new proviso to section 57 to provide that that no deduction shall be allowed in case of dividend income of the nature referred to in sub-clause (f) of clause (22) of section 2. (Clause 24 of the Bill)

v) Insertion of a further proviso to sub-section 115QA(1) of the Act whereby it would not apply in respect of any buy-back of shares that takes place on or after 1st October, 2024. (Clause 39 of the Bill)

vi) Amendment to section 194 of the Act on deduction of taxes at source @10 percent on payments of dividend, to make it applicable to sub-clause (f) of clause (22) of section 2. (Clause 52 of the Bill)

Provisions are effective from 1st October, 2024. In other words, buy back before cut-off date will be governed by section 115QA. It is advisable that buy back scheme is complete in all respects (including filing with ROC), to avoid transitionary issues.

IMPLICATIONS IN HANDS OF COMPANY

Previously, companies were required to pay buy-back tax under section 115QA. With the recent legislative changes, the law now treats the payment of consideration by the company as a dividend, making it taxable in the hands of the shareholder. Consequently, the company assumes the role of a tax deductor. It will be required to deduct tax under section 194 or section 195 of the Income Tax Act, depending on the specific circumstances. Following the deduction, the company must remit the tax and comply with the filing requirements for TDS (Tax Deducted at Source) and SFT (Statement of Financial Transactions) returns.

The treatment of buy-back proceeds as dividends remains consistent even in scenarios where the company does not have accumulated profits. The deliberate omission of the phrase “to the extent of accumulated profits,” which is present in other provisions of Section 2(22), underscores the intent to classify buy-back transactions as dividends irrespective of the company’s profit status. This is particularly relevant in cases where the buy-back is funded from the securities premium account. However, from an equity perspective, securities premium fundamentally represents a repayment of capital, and therefore, its characterization as a dividend raises questions. The underlying principle is that securities premium should not be treated as a dividend, as it does not constitute income in the traditional sense but rather a return of capital to shareholders.

An intriguing question arises regarding buy-backs conducted under sections 230 to 232 of the Companies Act, which require approval from the National Company Law Tribunal (NCLT). The query is whether such buy-backs will be treated as dividends. This ambiguity exists because section 2(22)(f) of the Income Tax Act specifically refers to the purchase of shares in accordance with the provisions of section 68 of the Companies Act, 2013. A similar situation emerged concerning section 115QA, where the definition of buy-back initially referred only to section 77A of the Companies Act, 1956. This definition was subsequently broadened by the Finance Act of 2016 to include the purchase of shares in accordance with the provisions of any law in force relating to companies. However, this amendment was applied prospectively.

In the absence of a similar broadening of the language in the current context, it can be argued that only buy-backs conducted in accordance with section 68 of the Companies Act, 2013, fall within the scope of the new definition of dividend. At the same time, care and caution needs to be exercised as Court / Tribunal in undernoted decision1 have recharacterised buy back as dividend.

On similar lines, redemption of preference shares is governed by section 55 of Companies Act 2013 and should be outside the purview of provisions.

TAX IMPLICATIONS IN THE HANDS OF RESIDENT SHAREHOLDERS

CHARACTERISATION OF BUY-BACK CONSIDERATION

Section 2(22) of the Income-tax Act defines “dividend,” and clause (f) within this section specifically includes payments made by a company for purchasing its own shares as dividends. This definition of dividend is applied consistently across the entire Act, meaning that the consideration received by shareholders during a buy-back transaction will be treated as dividend income. Consequently, this income must be reported under the head “Income from Other Sources” and taxed accordingly.

1 Cognizant Technology-Solutions India Pvt. Ltd., vs. ACIT [2023] 154 taxmann.com 309 (Chennai - Trib.); Capgemini India (P.) Ltd., In re [2016] 67 taxmann.com 1 (Bombay HC)

Section 57 of the Act prohibits any deductions against this income, implying that the entire buy-back consideration will be taxed on a gross basis, without allowing any deduction for the original cost of the shares. Shareholders must also account for this dividend income when calculating their advance tax obligations. However, interest obligations under Section 234C will only commence from the quarter in which the dividend is actually received.

The Act allows this dividend income to be set off only against losses under the heads “House Property” or “Business Loss.” The fiction of treating buy-back consideration as dividend is intended to be applied uniformly throughout the provisions of the Act. For shareholders that are domestic companies, the benefit of Section 80M should be available. In essence, buy-back consideration deemed as dividend can be considered by the company if it further declares dividends to its shareholders or engages in additional buy-backs, allowing the company to claim a deduction under Section 80M. As a result, tax will only be paid on the income exceeding the relief available under Section 80M. Additionally, an Indian company can claim a capital loss for the shares bought back and set it off against future capital gains, effectively allowing for a double benefit under the new regime.

TAX RATE ON DIVIDEND INCOME

Dividend income, classified as “Income from Other Sources,” is taxed according to the applicable income tax slab rates. The highest tax rate for a resident individual taxpayer is 36 per cent. It’s important to note that the surcharge on Buy-Back Tax (BBT) is capped at 12 per cent, compared to a 15 per cent surcharge on dividend income, potentially resulting in a higher overall tax burden on dividend income. On the other hand, if a shareholder’s income falls below the taxable slab limits, the entire dividend income may be tax-free, allowing the shareholder to carry forward the cost of acquisition as a capital loss.

SHARES HELD AS STOCK IN TRADE

The new scheme of taxation primarily addresses cases where shares are held as capital assets. However, an important issue arises when shares are held as stock-in-trade, which is particularly relevant because dividend income is generally required to be offered for tax under the head “Income from Other Sources” without any deductions.

In the author’s view, since these shares are held as business assets, the appropriate head of income for dividend income should be “Business Income” under Section 28 of the Income-tax Act². This approach would allow for a more accurate reflection of the economic reality of holding shares as part of the business inventory. Accordingly, the cost of shares should be allowed as a deduction when computing the business income, ensuring that the income is taxed in a manner consistent with its treatment as part of the business operations³. This interpretation aligns with the principle of matching income with related expenses, thereby providing a fair and logical tax outcome for shares held as stock-in-trade.

2 Refer CIT v Coconada Radhaswami Bank Ltd (1965) 57 ITR 306 (SC)
3 Badridas Daga v CIT (1958) 34 ITR 10 (SC); Dr TA Quereshi v CIT (2006) 287 ITR 547 (SC)

COST OF ACQUISITION OF SHARES

From the shareholder’s perspective, the buy-back results in the extinguishment of shares. Under the law, the cost of acquisition of these shares is treated as a capital loss, which can then be set off against other capital gains. This treatment is facilitated by an amendment to Section 46A, a special provision introduced by the Finance Act of 1999. This section states that, subject to the provisions of Section 48, the difference between the consideration received on buy-back and the cost of acquisition is deemed to be capital gains for the shareholder.

The Finance Act (No. 2) 2024 adds a proviso to Section 46A, deeming the value of the consideration received by the shareholder as Nil. Since the consideration is deemed Nil, the cost of acquisition becomes a capital loss, which can be carried forward according to the provisions of the capital gains chapter. The law’s intention is to allow shareholders to offset this loss against future gains, thereby economically maintaining the status quo. The Memorandum to the Finance Bill provides detailed numerical examples illustrating this tax neutrality.

Because the consideration is deemed Nil, this treatment applies uniformly across all provisions of the Act. Notably, the provisions of Section 50D or Section 50CA cannot be used to notionally increase the consideration. This fiction of Nil consideration will also hold true in the context of transfer pricing provisions involving non-resident Associated Enterprises (AEs).

An interesting question arises regarding the determination of the cost of acquisition for the purposes of Section 46A. Shareholders may acquire shares through direct purchase, various modes specified in Section 47 read with Section 49, or by acquiring shares before 31st January, 2018, which would qualify for the grandfathering benefit under Section 55(2)(ac). Section 46A references the cost of acquisition and explicitly makes its provisions subject to Section 48, which outlines the mode of computation but does not define the cost of acquisition itself.

While Section 49 provides the cost of acquisition for specific modes of acquisition, Section 46A does not directly reference this section, nor does it explicitly refer to Section 55, which defines the cost of acquisition for the purposes of Sections 48 and 49. This creates ambiguity, as Section 46A does not provide a clear fallback to Sections 49 and 55 for determining the cost of acquisition.

There are two possible interpretations of this issue:

1. Strict Interpretation (Recourse Not Permissible): Some may argue that Section 46A, being a special provision, is intended to override the general provisions of Sections 45 and 47. If this interpretation is followed, it would imply that recourse to other provisions, such as those allowing for a step-up in cost under Sections 49 and 55, may not be permissible. This view treats Section 46A as a self-contained code, limiting the ability to refer to other sections for determining the cost of acquisition.

2. Contextual Interpretation (Recourse Permissible): On the other hand, it can be argued that this interpretation is too extreme. Section 46A is explicitly made subject to Section 48, and Section 55 provides the cost of acquisition for the purposes of Section 48. Therefore, it stands to reason that the cost step-up provisions, including those under the grandfathering rules in Section 55(2)(ac), should be available to shareholders. Additionally, the headnotes of Section 49 state that it pertains to the “cost with reference to certain modes of acquisition,” which suggests that it should be interpreted in a manner similar to Section 55. This interpretation aligns with the legislative intent to preserve the cost base for shareholders, ensuring that they are not disadvantaged by the lack of explicit reference in Section 46A.

In conclusion, while there is room for debate, the contextual interpretation that allows recourse to Sections 49 and 55 seems more consistent with the broader legislative intent and the structure of the Income-tax Act. This approach ensures that shareholders can benefit from the cost step-up provisions, thereby maintaining their cost base and achieving a fairer tax outcome.

The grandfathering provisions under Section 55(2)(ac) require a comparison of three key values: the cost of acquisition, the fair market value of the asset as on 31st January, 2018, and the full value of consideration received or accruing as a result of the transfer. Among these, the lowest value must be adopted as the cost base for computing capital gains.

However, the proviso to Section 46A introduces a significant twist by deeming the third limb—the full value of consideration received — to be Nil in the context of buy-back transactions. As a result, the benefit of the grandfathering provisions effectively becomes unavailable in these cases. Since the deemed consideration is Nil, the computed capital gains could potentially be much higher, negating the protective intent of the grandfathering rules.

Given this scenario, shareholders might find themselves better off by selling their shares in the open market and paying tax on the resultant long-term capital gains, rather than opting for a buy-back. This approach would allow them to fully utilise the grandfathering benefit, thereby reducing their tax liability. Consequently, this provision makes buy-back transactions less attractive compared to a straightforward market sale, especially for shares that have appreciated significantly since 31st January, 2018.

TREATMENT OF CAPITAL LOSS

The cost of acquisition treated as a capital loss in the hands of the shareholder falls under the head “Capital Gains” and is governed by Section 74. A short-term capital loss can be set off against either short-term or long-term capital gains, while a long-term capital loss can only be set off against long-term gains. Overall, capital losses can be carried forward for a period of eight years.

Capital loss from a buy-back may arise from both listed and unlisted shares and can be set off against capital gains from the sale of shares, immovable property, or any other capital asset. This broad spectrum of gains available for set-off provides flexibility to shareholders. There may be instances where capital loss may not be available for set off:

If no future gains arise within the eight-year period, the capital loss becomes a dead cost.
In cases where the transfer is exempt under the Income-tax Act, such as transfers between a holding company and its subsidiary, the capital loss from a buy-back may not be allowable for set-off. Although the buy-back would be fully taxed, the exemption on the transfer prevents the recognition of the capital loss, leading to double jeopardy for the holding company, which faces taxation without the benefit of loss offset.
If shares were converted into stock-in-trade prior to 1st October, 2024, and the buy-back occurs after this date, the entire proceeds would be taxed as dividend income. Simultaneously, the suspended capital gains tax on the conversion would become taxable under Section 45(2) of the Income-tax Act. This situation again results in double jeopardy, as the shareholder faces dual taxation. However, in such cases, the fair market value of the stock-in-trade as on the date of conversion should be allowed as a business loss at the time of the buy-back, providing some relief to the tax payer. From an equity perspective, the consideration is taxed as a dividend at a rate of 36 per cent, while the set-off of capital loss is available against long-term gains taxed at 12.5 per cent or short-term gains at 20 per cent. This discrepancy results in higher taxable income, reducing the real gain in the hands of the shareholder. Additionally, shareholders must file a return of income to carry forward the loss in accordance with Section 80, even if they have no other income chargeable to tax.

For the company, capital loss is attached to the company itself. In cases of merger or demerger, there are no transitional provisions since Section 72A only addresses the transfer of business loss. Furthermore, shareholders of unlisted companies cannot carry forward and set off capital losses if there is a change in shareholding that triggers Section 79.

TAX IMPLICATIONS IN HANDS OF NON-RESIDENT SHAREHOLDER

TAX RATE

For non-resident shareholders, dividend income is taxed under Section 115A of the Income-tax Act at a flat rate of 20 per cent (plus applicable cess and surcharge). However, this rate can be reduced under the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and the shareholder’s country of residence. Depending on the specific treaty, the tax rate may be reduced to 5 per cent⁴ or 10 per cent⁵ or 15 per cent⁶, provided the non-resident shareholder meets the treaty eligibility criteria, such as the Principal Purpose Test (PPT) or the Limitation of Benefits (LOB) clause.

4 Hongkong, Malaysia, Mauritius if shareholding in India Company is at least 15%
5 UK, Norway, Ireland, France
6 USA, Singapore

Regarding the cost of shares, it will be treated as a capital loss, which can be set off in the manner prescribed earlier. However, this brings into focus a potential tax disadvantage for Foreign Direct Investment (FDI) shareholders who do not have any other investments in India. The capital loss arising from the buy-back of shares can typically only be set off against capital gains from the sale of shares in the FDI company. In such cases, the conventional route of declaring dividends might be more tax-efficient for the non-resident shareholder, as it would allow for a more immediate and potentially beneficial tax treatment compared to the deferral and potential loss of the capital loss offset in the buy-back scenario.

DIVIDEND CHARACTERISATION UNDER DTAA

Shareholders have the option to choose between the provisions of the Double Taxation Avoidance Agreement (DTAA) and domestic law, depending on which is more beneficial to them. The Dividend Article under most DTAAs offers a concessional rate of taxation. However, an important consideration is whether the dividend defined under Section 2(22)(f) of the Income-tax Act qualifies as a dividend under the DTAA.

One approach is the “pick and choose” method, where the shareholder adopts the domestic law definition of “dividend” for characterisation purposes and then opts for the concessional DTAA rate. This approach has been supported by courts and tribunals in various cases⁷, allowing shareholders to leverage the more favourable aspects of both the domestic and treaty provisions.

7 ACIT vs. J. P. Morgan India Investment Company Mauritius Ltd [2022] 143 taxmann.com 82 (Mumbai - Trib.)

Alternatively, one might argue that the dividend under Section 2(22)(f) does not fall within the Dividend Article of the DTAA. If successful, this argument would imply that the consideration received during the buy-back is not taxable as a dividend under the DTAA. Instead, it would fall under the Capital Gains Article, with its computation governed by domestic law. Under Section 46A, the consideration is deemed to be Nil, and this fiction remains absolute, irrespective of the taxability of the consideration in the hands of the shareholder. The “Other Income” Article in the DTAA would only apply if the income is not addressed by any other specific Article.

For this discussion, let’s consider the Dividend Article as defined in the OECD Model Convention (MC) and the UN Model Convention (MC). The definition of “dividend” under these conventions comprises three parts:

1. Income from shares;

2. Income from other rights, not being debt-claims, participating in profits; and

3. Income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the Contracting State of which the company making the distribution is a resident.

These parts are interconnected, particularly through the use of “other” in the second and third parts, which serves as a linking element. While the first two parts are intended to be autonomous, the third part is complementary, including income from other corporate rights, provided it is subject to the same tax treatment as income from shares under the laws of the source State. However, this does not automatically imply that all income treated domestically as dividend would fall within this definition.

Arguments Supporting that Dividend under Section 2(22)(f) Does Not Fall Within the Definition of Dividend under the DTAA:

For income to fall under any of the three limbs of the Dividend definition, it must originate “from” shares, other rights, participation in profits, or corporate rights. The term “from” implies a direct relationship between the income and the asset. The asset must exist at the time the income arises, which is a crucial aspect of the definition.
All three limbs require the asset to continue existing after the income is realised. This is consistent with the Supreme Court’s decision in Vania Silk Mills, where it was held that the charge under the capital gains article fails if the asset no longer exists after the transaction.
The Dividend Article should be interpreted from the shareholder’s perspective, not the company’s. Section 2(22)(f) is specific to the company, as indicated by the words “any payment by a company on purchase of its own shares from a shareholder.” From the shareholder’s perspective, this payment is the consideration received for selling shares, and the tax consequences should not differ merely because the shares are purchased by the company itself.
In cases involving buy-backs, there is a conflict between the Capital Gains Article and the Dividend Article. From the shareholder’s perspective, the transaction results in the extinguishment of rights in the company. This is acknowledged by the Memorandum to the Finance Bill, and the amendment to Section 46A, which deems the consideration to be Nil, indicates that the transaction is governed by capital gains provisions. The characterization of the transaction under the treaty should remain consistent, even if domestic law prescribes a different method of taxing the consideration.
The first limb of the Dividend definition deals with “income from shares.” If this were interpreted to include income from the alienation of shares, it would render the Capital Gains Article redundant.
The references to “other rights” or “other corporate rights” should be understood as rights arising from shareholding, not from the sale of shares. Klaus Vogel supports this interpretation, noting that “corporate rights” are meant to distinguish from “contractual rights” and should stem from a member’s rights within the company, not from a creditor’s right based on a contract or statute.

““With respect to the second element, income will stem from ‘corporate rights’ if it flows to the recipient because of a right held in the company, rather than against the company which implies a direct deviation from a member right as opposed to the right of a creditor based on any other contractual or statutory relationship.”

The OECD Commentary on Articles 10 also suggests that payments reducing membership rights, such as buy-backs, do not fall within the definition of dividends. Following are relevant extracts:

“The reliefs provided in the Article apply so long as the State of which the paying company is a resident taxes such benefits as dividends. It is immaterial whether any such benefits are paid out of current profits made by the company or are derived, for example, from reserves, i.e., profits of previous financial years. Normally, distributions by a company which have the effect of reducing the membership rights, for instance, payments constituting a reimbursement of capital in any form whatever, are not regarded as dividends.”

Arguments Supporting that Dividend under Section 2(22)(f) Does Fall Within the Definition of Dividend under the DTAA:

The DTAA does not exhaustively define “dividend,” leaving it to the contracting states to provide definitions. As such, Section 2(22)(f) could fall within the scope of the DTAA’s definition.
Characterising capital gains transactions as dividends is not unprecedented. For instance, Section 2(22)(c), which deals with capital reduction, treats payments as deemed dividends to the extent of accumulated profits.
The Mumbai Tribunal in KIIC Investment Company vs. DCIT⁸ sdealt with whether deemed dividends under Section 2(22)(e) fall within the Dividend Article of the India-Mauritius DTAA. The Tribunal held that, given the explicit reference to domestic law in the third limb of the definition, deemed dividends under Section 2(22)(e) should be considered dividends under the DTAA. Following are relevant extract:

“We have considered the aforesaid plea of the assessee, but do not find it acceptable. The India-Mauritius Tax Treaty prescribes that dividend paid by a company which is resident of a contracting state to a resident of other contracting state may be taxed in that other state. Article 10(4) of the Treaty explains the term “dividend” as used in the Article. Essentially, the expression ‘dividend’ seeks to cover three different facets of income; firstly, income from shares, i.e., dividend per se; secondly, income from other rights, not being debt claims, participating in profits; and, thirdly, income from corporate rights which is subjected to same taxation treatment as income from shares by the laws of contracting state of which the company making the distribution is a resident. In the context of the controversy before us, i.e., ‘deemed dividend’ under Section 2(22)(e) of the Act, obviously the same is not covered by the first two facets of the expression ‘dividend’ in Article 10(4) of the Treaty. So, however, the third facet stated in Article 10(4) of the Treaty, in our view, clearly suggests that even ‘deemed dividend’ as per Sec. 2(22)(e) of the Act is to be understood to be a ‘dividend’ for the purpose of the Treaty. The presence of the expression “same taxation treatment as income from shares” in the country of distributor of dividend in Article 10(4) of the Treaty in the context of the third facet clearly leads to the inference that so long as the Indian tax laws consider ‘deemed dividend’ also as ‘dividend’, then the same is also to be understood as ‘dividend’ for the purpose of the Treaty.”

8 [2019] 101 taxmann.com 19 (Mumbai - Trib.)

The OECD Commentary on Article 13 supports the idea that domestic law treatment can be decisive in determining whether a transaction falls within the Dividend Article, even when the transaction involves the alienation of shares.

“If shares are alienated by a shareholder in connection with the liquidation of the issuing company or the redemption of shares or reduction of paid-up capital of that company, the difference between the proceeds obtained by the shareholder and the par value of the shares may be treated in the State of which the company is a resident as a distribution of accumulated profits and not as a capital gain. The Article does not prevent the State of residence of the company from taxing such distributions at the rates provided for in Article 10: such taxation is permitted because such difference is covered by the definition of the term “dividends” contained in paragraph 3 of Article 10 and interpreted in paragraph 28 of the Commentary relating thereto, to the extent that the domestic law of that State treats that difference as income from shares.”

Klaus Vogel’s Commentary (5th Edition, Page 939) also emphasises that domestic law treatment should prevail when determining whether a payment is considered a dividend, thereby supporting the inclusion of Section 2(22)(f) within the DTAA’s Dividend Article.

“Sale proceeds of shares and other corporate rights generally fall under Article 13 and not under Article 10 ODCD and UN MC, as such income is not derived from shares within the meaning of the OECD MC but stems from the alienation of shares. If one considered sale proceeds to come within the meaning of ‘income from shares’, Article 13 OECD and UN MC would still prevail, however, by virtue of its more specialised nature regarding such transactions. Problems may arise, however, in either case, to the extent that such proceeds may represent undistributed profits of the paying company, as it would open up an easy way to avoid source taxation, in particularly by way of share repurchase in lieu of dividend distribution. Thus, the OECD MC Comm. Acknowledges that Article 13(5) does not prevent source State from taxing ‘the difference between the selling price and the par value of the shares’ as dividend in accordance with Article 10 OECD and UN MC where the shares are sold to the issuing company.
……… (Page 981)

Moreover, nothing in the provision requires income to be derived from an ‘equity investment’: a mere recharacterisation of the income (rather than the underlying right) under domestic law is sufficient to trigger the application of Article 10.”

In the author’s view, the reference to domestic law is broad enough to encompass payments falling within the scope of Section 2(22)(f), allowing them to be treated as dividends under the DTAA. This interpretation aligns with the intention to provide clarity and consistency in the application of tax treaties.

TRANSFER PRICING IMPLICATIONS

Under the Buy-Back Tax (BBT) regime, it was possible to argue that in cases involving Associated Enterprises (AEs), the amount of consideration paid by the company needed to be benchmarked against the Arm’s Length Price (ALP) criteria. Shareholders were largely indifferent to this aspect since the income from the buy-back was exempt in their hands. However, the new taxation regime introduces an intriguing dimension to this issue.

Transfer pricing regulations focus on the substance of the transaction. While the transaction is still treated as a dividend in the hands of the company, it will now require benchmarking as if the buy-back were a transfer, meaning the company must determine the ALP of the consideration paid. Theoretically, there should not be any adverse implications if the consideration paid does not align with the ALP, since buy-back payments are not deductible expenses for the company. The company’s primary responsibility remains the withholding of tax.

A plausible interpretation is that the withholding tax obligation applies to the transaction value rather than the ALP value. In hands of shareholder Section 46A deems the consideration to be Nil for tax purposes. This fiction is absolute and is not affected by the ALP price. Thus, benchmarking needs to be done for compliance purposes without any impact on tax computation.

INTERPLAY WITH SECTION 56(2)(X)

Buybacks often involve a company using its free cash flow to purchase its own shares, leading to an increase in the remaining shareholders’ stakes without them having to dip into their own cash reserves. This tactic has become a popular method for realigning shareholding structures, particularly in the context of family arrangements or the elimination of cross holdings. However, when buy-backs are executed at prices below the Rule 11UA value, questions inevitably arise regarding the applicability of Section 56(2)(x).

At first glance, Section 56(2)(x) applies to the “receipt” of property, a term that has been interpreted to mean the receipt that benefits the recipient. In the case of a buy-back, the shares are technically received by the company solely for the purpose of cancellation, with no economic enrichment resulting from this transaction. This lack of enrichment leads to the failure of the charge under Section 56(2)(x). This line of reasoning has found favour in various judicial decisions⁹.

9. Vora Financial Services (P.) Ltd. v ACIT [2018] 96 taxmann.com 88 (Mumbai); DCIT v Venture Lighting India Ltd [2023] 150 taxmann.com 523 (Chennai - Trib.); VITP (P.) Ltd v DCIT [2022] 143 taxmann.com 304 (Hyderabad - Trib.);

Section 115QA adds another layer of defence. By shifting the liability to pay Buy-Back Tax (BBT) onto the company, Section 115QA acts as a special provision and a self-contained code. According to the principles of statutory interpretation, a special provision like Section 115QA should override more general provisions such as Section 56(2)(x).

However, the new taxation regime introduces a fresh angle to the interplay with Section 56(2)(x). Section 2(22)(f) deems the payment by a company on the purchase of its own shares as a dividend. Sections 194 and 195 impose an obligation on the company to withhold tax on such payments. Following the fiction created by Section 2(22)(f) to its logical conclusion, this payment should be treated as a dividend for all purposes under the Act, effectively preventing the application of Section 56(2)(x) from the outset.

In the absence of any anti-abuse provision requiring the company to pay dividends at fair market value, it is arguable that considerations below the Rule 11UA value should not be taxed under Section 56(2)(x).

COMPARISON WITH CAPITAL GAIN

Under the new regime, long-term capital gains are taxed at a rate of 12.5 per cent, and short-term capital gains are taxed at 20 per cent on net gains (i.e., consideration minus the cost of acquisition). For non-resident shareholders, dividend income is taxed according to the provisions of the applicable DTAA, with most DTAAs providing a concessional rate of 10 per cent for dividend taxation.

Shareholders, particularly those holding stakes in startups or joint ventures, will need to carefully evaluate buy-back as an alternative to conventional exit strategies. In cases where shares have significantly appreciated, opting for buy-back could result in the gains being taxed as dividends, potentially reducing the overall cash tax outflow. Additionally, the cost of acquisition can be offset against other capital gains, thereby improving overall tax efficiency.

This scenario presents an opportunity to structure transactions more efficiently. Instead of providing an exit through secondary sales, shareholders might consider infusing equity into the company, followed by a buy-back. This approach could optimize the tax implications and enhance the financial outcome of the transaction.

BUY-BACK AND INDIRECT TRANSFER

Explanation 5 to Section 9(1)(i) of the Income-tax Act provides that the shares of a company are deemed to be situated in India if they derive their value substantially from assets located in India. Circular No. 4 of 2015, dated 26th March, 2015, clarified that the declaration of dividends by a foreign company does not trigger the provisions of indirect transfer under Indian tax law. The term “dividend” in this context, as stated in the Circular, derives its meaning from Section 2(22)(f) of the Income-tax Act, which includes payments made by a company on the purchase of its own shares from a shareholder in accordance with the provisions of Section 68 of the Companies Act, 2013.

A pertinent issue arises when considering buy-backs by foreign companies, which are not conducted in accordance with Section 68 of the Companies Act, 2013. This raises the question of whether a buy-back under the corporate law of a foreign jurisdiction falls within the scope of the indirect transfer provisions.

Non-resident shareholders may consider invoking the Non-Discrimination Article under the applicable DTAA to address this issue. Article 24(1) of many DTAAs provides that nationals of one contracting state shall not be subjected in the other contracting state to any taxation or related requirements that are more burdensome than those imposed on nationals of the other state under similar circumstances.

An argument can be made that the reference to Section 68 should be interpreted as indicative of a buy-back governed by corporate law in general, rather than being limited to Indian law. Non-resident shareholders should not be expected to comply with Section 68 of the Companies Act, 2013, as it applies exclusively to Indian companies. The argument of discrimination has been accepted by the Tribunal in the context of Section 79 in the case of Daimler Chrysler India (P.) Ltd. vs. DCIT¹⁰, where similar principles were considered.

10 [2009] 29 SOT 202 (Pune)

CONCLUDING REMARKS

There’s no denying that Income Tax is fundamentally a tax on real income — at least, that’s the theory. However, with the numerous fictions introduced over the years — each one merrily overriding the last —the Income-tax Act has started to resemble a novel with more plot twists than logic. It’s like watching a thriller where the protagonist, just when you think you understand the story, wakes up to find themselves in an entirely different movie.

As we navigate these convolutions, it’s worth remembering that all of this complexity is supposed to bring us closer to fairness and clarity. But in reality, it’s a bit like trying to assemble flat-pack furniture without the instructions — there’s always one piece that doesn’t seem to fit, and you’re never quite sure if that extra screw was supposed to go somewhere.

With the introduction of a new Income-tax Act on the horizon, one can’t help but feel a mix of hope and trepidation. Will this new Act finally streamline these fictions, or will it just add a few new chapters to the saga? Either way, as tax professionals, we’ll be here — armed with our calculators and a good sense of humour — ready to decipher the next instalment of this ever-evolving tax code.

BCAJ Admin

Important Amendments by The Finance (No. 2) Act, 2024 – Capital Gains

The maiden Budget of the Government in their third innings promises simplification and rationalisation of Capital Gains tax regime under the Income-tax Act, 1961 (“the Act”). With the said purpose, the Finance (No. 2) Act, 2024 (“FA (No. 2) 2024”) provides for standardisation of tax rates for the majority of short-term and long-term capital gains tax as well as period of holding of the majority of listed and unlisted capital assets. However, simultaneously, the Capital Gains Chapter of the Act has been amended at various other places making those provisions more complex and litigious thereby clearly contradicting the intention propagated by the Government.

This Article discusses the various amendments brought in by the FA (No. 2) 2024 under the said Chapter1 and the issues arising therefrom.

PERIOD OF HOLDING

Section 2(42A) of the Act determines “Period of Holding” relevant for the purpose of classifying an asset as short-term or long-term. Earlier, there were three holding periods, namely, 12 months, 24 months and 36 months. The period of 12 months was applicable for selected assets such as listed shares, listed equity oriented funds and zero coupon bonds. Further, the period of 24 months was applicable to unlisted shares and immovable properties, being land or building or both.

The said section has now been amended with effect from 23rd July, 2024 so that now, all listed securities shall be regarded as long-term capital asset if held for more than twelve months and all other capital assets shall be regarded as long-term capital asset if held for more than 24 months.

The same is summarised as under:

Nature of Capital Asset	Short term	Long term
Listed securities	=< 12 months	> 12 months
Other Assets	=< 24 months	> 24 months

The said amendment shall apply to any “transfer” of capital asset undertaken on or after 23rd July, 2024. The word “transfer” would need to be understood as used under the Act in the context of capital assets. Hence, where a capital asset was converted before 23rd July, 2024, the same would be considered to be transferred prior to 23rd July, 2024 due to the specific provisions of section 45(2) and accordingly, the old period of holding shall apply even if the converted asset is sold on or after
23rd July, 2024.

Though the intention of the Legislature is to cover all assets within this purview, the said standard rule would still not apply in case of transfer of an undertaking by way of a slump sale which is governed by the provisions of section 50B of the Act. The proviso to sub-section (1) therein specifically provides that any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assessee for not more than thirty-six months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets. Hence, a case of slump sale shall be an exception to the general rule as provided through the FA (No. 2) 2024.

Further, listed securities for the purpose of section 2(42A) means the securities as listed on the recognised stock exchanges of India. Accordingly, for foreign listed securities, the relevant period of holding shall still be 24 months and not 12 months.

The impact of said amendment on various types of capital assets is tabulated in attached Annexure.

RATE OF TAX

Section 112 and section 112A of the Act provides for specific rates of income tax on long-term capital gains in respect of various categories of assets.

Further, section 111A of the Act provides for a specific rate of income tax on short-term capital gains arising from transfer of equity share in a company or a unit of an equity oriented fund or a unit of a business trust (REIT and InVit), subject to the conditions as provided therein.

The rate of tax under the said sections prior to the amendment are tabulated hereunder:

Section	Nature of Asset	Nature of Capital Gain	Rate of Tax
112A	Eligible Listed securities*	LT	10%
112	Any other long term Capital asset except those covered u/s. 50AA	LT	20%**
112(1)(c)(iii)	Unlisted securities transferred by a non-resident/foreign company	LT	10% without indexation
111A	Eligible Listed securities*	ST	15%

* i.e., equity shares, units of equity-oriented funds and business trusts, on which STT is paid at the time of transfer.

** In case of listed securities (other than units) and zero-coupon bonds, option of tax at 10% without indexation is available.

For cases not falling under these provisions, the capital gains are taxable as per the normal applicable rate as provided in the relevant Finance Act.

Further, an exemption up to ₹1 lakh is available from long term capital gain covered u/s. 112A.

Pursuant to various amendments vide FA (No. 2) 2024, the rate of tax applicable w.e.f. 23rd July, 2024 would be as under:

Long-term capital gains: FA (No. 2) 2024 provides a universal tax rate of 12.5 per cent without indexation for all types of long-term capital gains, irrespective of whether the asset is listed or unlisted, STT paid or not, Indian or foreign, held by resident or non-resident, subject to certain exceptions, which are as under:

Capital gains arising from assets covered u/s. 50AA is deemed to be short-term capital gains irrespective of period of holding;
Capital gains arising from transfer of depreciable assets also continue to be taxed as short-term capital gains u/s. 50A of the Act;
In case of immovable property acquired before 23rd July, 2024 by resident individuals or HUFs, the assessee shall have an option to adopt tax rate at 12.5 per cent without indexation or 20 per cent with indexation, whichever is lower. However, loss based on indexed cost would not be allowed to be set-off or carried forward.
For non-resident assessees, the benefit of adjustment of foreign exchange fluctuation under first proviso to section 48 on transfer of shares/debentures of Indian Companies continues.
Lastly, capital gains up to ₹1.25 Lakhs (aggregate) would not be subject to tax u/s. 112A of the Act. The said limit of ₹1.25 Lakhs would apply to the entire capital gains, whether relating to transfer before or after 23rd July, 2024. Hence, for AY 2025-26, Assessee may choose to set-off this limit against the eligible capital gains u/s. 112A earned pursuant to transfers before 23rd July, 2024, the same being more beneficial to them. For the said purpose, reliance may be placed on the CBDT Circular No. 26(LXXVI-3) [F. No. 4(53)-IT/54], dated 7th July, 1955, wherein the CBDT has clarified that in the absence of any indication on the manner of set-off, the general rule to be followed in all fiscal enactments is that where words used are neutral in import, a construction most beneficial to the assessee should be adopted. Further, it is also settled rule of interpretation that the interpretation, which is more favourable to the taxpayer should prevail, as has been held in the under-noted cases:
CIT vs. Vegetable Products Ltd. (88 ITR 192) (SC);
CIT vs. Kulu Valley Transport Co. Pvt. Ltd. (77 ITR 518, 530) (SC);
CIT vs. Madho Prasad Jatia (105 ITR 179) (SC);
CIT vs. Naga Hills Tea (89 ITR 236, 240) (SC);
CIT vs. Shahzada Nand (60 ITR 392, 400) (SC).

To give effect to the above, various sections viz. sections 112, 112A, Section 115AD, 115AB, 115AC, 115ACA, 115E, 196B and 196C have been amended to change the rate mentioned therein from 20 per cent to 12.5 per cent in case of long-term capital gains.

The said amendments would apply to transfers undertaken on or after 23rd July, 2024.

SHORT-TERM CAPITAL GAINS

In case of short-term capital gains arising from transfer of equity shares, units of equity-oriented funds and business trusts, on which STT is paid at the time of their transfer, the rate of tax has been increased from 15 per cent to 20 per cent for transfers affected on or after 23rd July, 2024.

Corresponding amendment is made in section 115AD of the Act, which provides rates of taxes for FIIs.

The rate of tax on short-term capital gains for other assets, shall continue to be governed by the rates as applicable to the assessee as per the relevant Finance Act.

These amendments will take effect from 23rd July, 2024 and will accordingly apply in relation to the transfer taking place on or after the said date.

The impact of said amendment on various types of capital assets is tabulated in attached Annexure.

DEEMED SHORT-TERM CAPITAL GAINS U/S. 50AA

FA, 2023 inserted a new provision, Section 50AA which provides for treating the capital gain arising from transfer, redemption or maturity of ‘Market Linked Debentures’ and unit of a ‘Specified Mutual Fund’ as short-term capital gain irrespective of the period of holding.

‘Specified Mutual Fund’ was defined to mean a ‘Mutual Fund by whatever name called, where not more than 35% of its total proceeds is invested in the equity shares of domestic companies’.

The said provision was not applicable to any gain arising from transfer of unlisted bonds and unlisted debentures and accordingly, the same was taxed at the rate of 20 per cent without indexation (in case of LTCG) or at applicable rates (in case of STCG).

Section 50AA has been amended vide FA (No. 2) 2024 redefining the term ‘Specified Mutual Fund’ with effect from AY 2026-27 as under:

a Mutual Fund by whatever name called, where more than 65 per centof its total proceeds is invested in debt and money market instruments.
a fund which invests at least 65 per cent of its total proceeds in units of a fund referred above (FOFs).

As would be observed, under the new definition, the language has been replaced from earlier negative condition of ‘not’ holding more than 35 per cent in equity shares to a positive condition of holding at least 65% of the total proceeds in debt and money market instruments. As a result, funds other than equity-oriented funds which were covered under the earlier definition, such as on the ETFs, Gold Mutual Fund, Gold ETFs, etc. now stand excluded as such funds do not invest 65 per cent or more of their proceeds in debt instruments.

The said amendment in the definition of ‘Specified Mutual Funds’ is effective only from AY 2026-27 i.e., AY 2026-27 applicable to FY 2025-26 and therefore, capital gain arising from transfer, redemption or maturity of unit of funds like ETFs, Gold Mutual Fund, Gold ETFs acquired after 1st April, 2023 and transferred till 31st March, 2025 will still be covered by the existing provisions of Section 50AA.

Further, the scope of section 50AA has been expanded to tax the capital gain arising from transfer, redemption or maturity of unlisted bonds and unlisted debentures as short-term capital gain irrespective of the holding period. The said amendment is effective from 23rd July, 2024 and will accordingly apply in relation to the transfer taking place on or after the said date.

The impact of said amendment on various types of capital assets is tabulated in attached Annexure.

INCREASE IN RATES OF STT (SECTION 98 (CHAPTER VII) OF FINANCE ACT (NO. 2), 2004)

Section 98 of the Finance Act, 2004 provides a list of various taxable securities along with STT levied on their sale and purchase transactions.

As per the said section, the rate of levy of STT on sale of an option in securities is 0.0625 per cent of the option premium and on sale of a future in securities is 0.0125 per cent of the price at which such futures are traded.

The FA (No. 2) 2024 has increased the said rates on sale of an option and a future in securities. The table below enumerates the same:-

Type of Transaction	Old rates	New rates
Sale of an option in securities	0.0625% of the option premium	0.1 % of the option premium
Sale of a future in securities	0.0125 % of the price at which such “futures” are traded.	0.02% of the price at which such “futures” are traded

The above amendments will take effect from 1st October, 2024.

As per the explanatory memorandum, the trading in derivatives (F&O) is now accounting for a large proportion of trading in stock exchanges. The said amendment has been made keeping in mind the exponential growth of derivative markets in recent times.

GRANDFATHERING OF CAPITAL GAINS IN CASE OF SHARES OFFERED FOR SALE UNDER AN IPO/FPO

Section 112A of the Act provides for a concessional rate of 12.5 per cent (w.e.f. 23rd July, 2024) on long-term capital gains on transfer of, inter alia, equity shares subject to payment of Securities Transaction Tax (STT) at the time of acquisition and on transfer.

Shares which are transferred under Offer for Sale (OFS) at the time of initial public offering are subject to STT as per S. 97(13)(aa) of Chapter VII of the Finance (No. 2) Act, 2004. Further, such shares are exempt from the requirement of STT at the time of acquisition to avail the benefit of section 112A as per CBDT Notification no. 60 of 2018. Hence, gains on transfer of such shares qualify for concessional tax rates u/s. 112A.

The gains chargeable under said section are allowed grandfathering of gains accrued till 31st January, 2018.

Accordingly, S. 55(2)(ac) of the Act provides that the cost of acquisition in case of long-term equity shares acquired before 1st February 2018 shall be grandfathered as under –

Higher of –

a. The cost of acquisition of such asset; and

b. Lower of:

i. The FMV of such asset as on 31st January, 2018; and

ii. The full value of consideration received

Explanation(a)(iii) to S. 55(2)(ac) defines what is FMV in case of an equity share in a company. The said section presently does not cover cases where unlisted shares are subject to STT and accordingly fall under the ambit of section 112A. As a consequence, there is ambiguity with respect to determining COA of the shares transferred under OFS.

With a view to clarify the ambiguity with regards to determining COA of the shares transferred under OFS, Explanation(a)(iii) to S. 55(2)(ac) has been amended with retrospective effect from AY 2018-19 so as to include within its ambit even transfers in respect of sale of unlisted equity shares under an OFS to the public included in an IPO.

In such cases, FMV shall be an amount which bears to the COA the same proportion as CII for the FY 2017-18 bears to the CII for the first year in which the asset was held by the assessee or for the year beginning on the first day of April, 2001, whichever is later.

This amendment is deemed to have been inserted with effect from the 1st day of April, 2018 and shall accordingly apply retrospectively from AY 2018-19 onwards.

CORPORATE GIFTING

Section 47 provides exclusions to certain transactions not regarded as “transfer” for the purposes of Section 45 of the Act. Clause (iii) of section 47 specifies that any transfer of a capital asset under gift, will or an irrevocable trust would not be regarded as transfer. The said provision hitherto applied to all assessees.

The FA (No. 2) 2024 has amended the said clause (iii) of Section 47 with retroactive effect from AY 2025-26 (i.e., for gifts effected on 1st April, 2024 and onwards) to restrict its application only in case of Individuals and HUFs.

As per the Memorandum Explaining the Provisions of the Finance (No. 2) Bill, 2024, even though the Act contains certain anti-avoidance provisions, such as sections 50D and 50CA, in multiple cases taxpayers have argued before judicial fora that transaction of gift of shares by company is not liable to capital gains tax in view of provisions of section 47(iii) of the Act, which has resulted in tax avoidance and erosion of tax base. However, as per the Memorandum, gift can be given only out of natural love and affection and therefore, provisions of section 47(iii) has been restricted to gifts given by individuals and HUFs.

Hence, apparently, the intention of the Legislature is to bring transactions of gift by assessees other than individuals and HUFs within the ambit of provisions such as section 50CA, 50D, etc. However, the question remains as to whether the said provisions can at all apply where there is no consideration involved, irrespective of whether the transaction itself is specifically exempted or not.

Now, the opening words of the provisions such as sections 50CA, 50C, 43CA as well as 50D are identical namely:

“Where the consideration received or accruing as a result of the transfer of ….”

As would be observed, the said provisions apply only where the transfer results in ‘receipt’ or ‘accrual’ of ‘any consideration’. Hence, the moot question which needs consideration is as to whether the said provisions can at all apply where a transfer does not result in receipt or accrual of any consideration.

Now, a transaction involving ‘gift’ essentially means a transaction where no consideration is contemplated at all. The said term is defined u/s. 122 of the Transfer of Property Act, 1882 as under:

“”Gift” is the transfer of certain existing movable or immovable property made voluntarily and without consideration, by one person, called the donor, to another, called the donee, and accepted by or on behalf of the donee.”

As is clear, a transaction of ‘gift’ is always without consideration. Now, as per the Explanatory Memorandum, section 47(iii) has been restricted only to Individuals and HUFs since as per the Legislature other entities such as corporate bodies cannot give a valid gift in absence of possibility of any natural love or affection.

However, as is clear from the foregoing definition of ‘gift’, there is no condition of natural gift or affection attached to a gift transaction.

In fact, considering the said definition, various Courts have held in the past that even corporate bodies can give a gift as long as the same is permitted in their charter documents such as memorandum of association since there is no requirement in the Transfer Of Property Act that a ‘gift’ can be made only between natural persons out of natural love and affection. See, for example:

PCIT vs. Redington (India) Ltd. [2020] 122 taxmann.com 136 (Madras)
Prakriya Pharmacem vs. ITO[2016](66 taxmann.com 149)(Guj)
DP World (P) Ltd. vs. DCIT (140 ITD 694)(MumT);
DCIT vs. KDA Enterprises Pvt. Ltd. (68 SOT 349) (MumT);
Deere & Co. Deere & Co. [2011] 337 ITR 277 (AAR).
Jayneer infrapower & Multiventures (P.) Ltd. vs. DCIT [2019] 103 taxmann.com 118 (Mumbai – Trib.)

In Redington’s case (supra), the Madras High Court laid down the essentials of a ‘gift’ as under:

(i) absence of consideration;

(ii) the donor;

(iii) the donee;

(iv) to be voluntary;

(v) the subject matter;

(vi) transfer; and

(vii) the acceptance.

The High Court accordingly held that even a corporate body can make a valid gift, however, on the facts of that case, it held the transaction to not be a valid gift.

Now, after the amendment in section 47(iii), the foregoing decisions may not be relevant for the purpose of applying the provisions of section 47(iii) to corporate gifting. However, the following ratios laid down in these decisions are still relevant, namely:

Corporate gifting which satisfies the foregoing essential components is a legally valid transaction, and
In such transactions, there can never be any element of consideration.

This brings us back to the question as to whether in absence of any ‘receipt’ or ‘accrual’ of ‘any consideration’ in case of a corporate gifting, can the provisions like section 50CA, 50D, etc. at all trigger even if there is no specific exemption for such gifting, considering that existence of ‘consideration’ is a sine qua non under these provisions.

Recently, the Bombay High Court in the case of Jai Trust vs. UOI [2024] 160 taxmann.com 690 (Bombay) had an occasion to examine taxability of shares gifted by a trust and in that context, also examined the provisions of sections 50CA and 50D. The High Court considering the language used in the said sections, held that, these provisions can apply only where any consideration is received or accruing as a result of the transfer. It held that these sections postulates receiving consideration and not a situation where admittedly no consideration has been received.

Hence, even after amendment in section 47(iii), it is possible to argue that unless any consideration can be demonstrated, the deeming provisions of sections 50D, 50CA and the like cannot be applied to a corporate gifting. Indeed, it is settled law the deeming provisions should be construed strictly2 and therefore, to expand the scope of such deeming provisions than what is specifically mentioned in these sections is not permissible. Besides, if all cases of corporate gifting becomes subject to capital gains, then even CSR donations by corporates would be impacted, which certainly cannot be the intention of the Legislature.

Nevertheless, considering the rationale for the amendment provided in the Memorandum, the tax department is likely to more rigorously scrutinise the transactions corporate gifting and try to apply the said deeming provisions to such transactions.

It is also important to note that such corporate gifting of ‘property’ could now be subject to double whammy, one at the end of the donor under the likes of sections 50CA, etc. and second at the end of the donee under the provisions of section 56(2)(x). This would lead to double taxation of same income, which should not be condoned.

From the magnitude of amendments brought in the capital gains taxation, it is clear that the issues thereunder are far from becoming simple and rationale. Amendments in provisions such as section 2(22)(f) and 47(iii) have raised various unanswered questions, which would be settled only in the due course of time as the law develops before the judicial forums.

Annexure

Name of Capital Asset	Nature of Capital Gain	Relevant provision	Period of Holding		Rate of Tax
Name of Capital Asset	Nature of Capital Gain	Relevant provision	Old provisions i.e., before 23^rd July, 2024	New provisions i.e., after 23^rd July, 2024	Old provisions i.e., before 23^rd July, 2024	New provisions i.e., after 23^rd July, 2024
Listed Equity Shares (STT paid)*	LT	112A	> 12 months	> 12 months	10% (without indexation)	12.5% (without indexation)
Listed Equity Shares (STT paid)*	ST	111A	≤ 12 months	≤ 12 months	15.00%	20.00%
Listed Equity Shares (STT not paid)	LT	112	> 12 months	> 12 months	10% (without indexation)	12.5% (without indexation)
	LT	112	> 12 months	> 12 months	20% (with indexation)	12.5% (without indexation)
	ST	Rates as per First Schedule of FA (No. 2) 2024	≤ 12 months	≤ 12 months	applicable rate	applicable rate
Unlisted Equity shares	LT	112	> 24 months	> 24 months	20% (with indexation)	12.5% (without indexation)
Unlisted Equity shares	ST	Rates as per First Schedule of FA (No. 2) 2024	≤ 24 months	≤ 24 months	applicable rate	applicable rate
Units of Equity Oriented MFs (Listed)*	LT	112A	> 12 months	> 12 months	10% (without indexation)	12.5% (without indexation)
Units of Equity Oriented MFs (Listed)*	ST	111A	≤ 12 months	≤ 12 months	15.00%	20.00%
Units of Debt Oriented MFs (> 65% in debt or fund of such funds)**	Always ST	50AA (Rates as per First Schedule of FA (No. 2) 2024)	> 36 months	> 24 months	applicable rate	applicable rate
Listed Bonds/Debentures (other than Capital index bonds and Sovereign Gold Bonds)	LT	112 (without indexation)	> 12 months	> 12 months	20%³ (without indexation)	12.5% (without indexation)
	ST	Rates as per First Schedule of FA (No. 2) 2024	≤ 12 months	≤ 12 months	applicable rate	applicable rate
Unlisted Bonds/Debentures/Debt-Oriented FOFs	LT	50AA (Rates as per First Schedule of FA (No. 2) 2024)	> 36 months	NA	20% (without indexation)	applicable rate
Unlisted Bonds/Debentures/Debt-Oriented FOFs	ST	50AA (Rates as per First Schedule of FA, (No. 2) 2024)	≤ 36 months	NA	applicable rate	applicable rate
Market Linked Debentures	ST	50AA (Rates as per First Schedule of FA, (No. 2) 2024)	NA	NA	applicable rate	applicable rate
Listed Capital Indexed Bonds and Sovereign Gold Bonds	LT	112	> 12 months	> 12 months	10% (without indexation)	12.5% (without indexation)
	LT	112	> 12 months	> 12 months	20% (with indexation)	12.5% (without indexation)
	ST	Rates as per First Schedule of FA (No. 2) 2024	≤ 12 months	≤ 12 months	applicable rate	applicable rate
Unlisted Capital Indexed Bonds	LT	112	> 36 months	> 24 months	20% (with indexation)	12.5% (without indexation)
Unlisted Capital Indexed Bonds	ST	Rates as per First Schedule of FA (No. 2) 2024	≤ 36 months	≤ 24 months	applicable rate	applicable rate
Zero Coupon Bonds	LT	112	> 12 months	> 12 months	10% (without indexation)	12.5% (without indexation)
	LT	112	> 12 months	> 12 months	20% (with indexation)	12.5% (without indexation)
	ST	Rates as per First Schedule of FA (No. 2) 2024	≤ 12 months	≤ 12 months	applicable rate	applicable rate
Listed Units of Business Trust (InVITs and REITs)*	LT	112A	> 36 months	> 12 months	10% (without indexation)	12.5% (without indexation)
Listed Units of Business Trust (InVITs and REITs)*	ST	111A	≤ 36 months	≤ 12 months	15.00%	20.00%
Listed Preference Shares	LT	112	> 12 months	> 12 months	10% (without indexation)	12.5% (without indexation)
	LT	112	> 12 months	> 12 months	20% (with indexation)	12.5% (without indexation)
	ST	Rates as per First Schedule of FA (No. 2) 2024	≤ 12 months	≤ 12 months	applicable rate	applicable rate
Unlisted Preference Shares	LT	112	> 24 months	> 24 months	20% (with indexation)	12.5% (without indexation)
Unlisted Preference Shares	ST	Rates as per First Schedule of FA (No. 2) 2024	≤ 24 months	≤ 24 months	applicable rate	applicable rate
Immovable Properties	LT	112	> 24 months	> 24 months	20% (with indexation)	12.5% (without indexation)
Immovable Properties	ST	Rates as per First Schedule of FA (No. 2)2024	≤ 24 months	≤ 24 months	applicable rate	applicable rate
Physical Gold	LT	112	> 36 months	> 24 months	20% (with indexation)	12.5% (without indexation)
Physical Gold	ST	Rates as per First Schedule of FA (No. 2)2024	≤ 36 months	≤ 24 months	applicable rate	applicable rate
Foreign Equity	LT	112	> 24 months	> 24 months	20% (with indexation)	12.5% (without indexation)
Foreign Equity	ST	Rates as per First Schedule of FA (No. 2) 2024	≤ 24 months	≤ 24 months	applicable rate	applicable rate

* The limit of exemption from long term capital gain covered u/s. 112A is proposed to be increased from ₹1 Lakh to ₹1.25 lakhs (aggregate).

** For funds purchased before 1st April, 2023, the gains will be LTCG or STCG depending upon its period of holding. Further, this covered even other non-equity funds such as Gold, ETF, Gold funds, etc. purchased on or after 1st April, 2023 and transferred before 1st April, 2025. From 1st April, 2025, these other non-equity bonds / MFs will be taxed as per normal provisions of CG.

BCAJ Admin

Important Amendments by The Finance (No. 2) Act, 2024 – Charitable Trusts

Important Amendments by the Finance (No.2) Act, 2024 are covered in six different Articles. It is not possible to cover all amendments at length and hence the focus is only on important amendments but with a detailed analysis of their impacts. These in-depth analysis will serve as a future guide to know the existing provisions, current amendments and their rationale, and the revised provisions. We hope the readers will enrich by the detailed analysis. – Editor

For the past several years, charitable institutions have awaited the Finance Bill of each year with dread and trepidation, as to what further compliance, burden and complexity would be imposed upon them. Since 2009, many new provisions for charitable institutions have been introduced, making the requirement of claiming exemption increasingly difficult.

Fortunately, some of this year’s amendments have sought to alleviate some of the difficulties being faced by charitable institutions. However, there have been no amendments in respect of many other complex and pressing problems faced by charitable institutions (such as the applicability of the proviso to section 2(15) as to what activity constitutes a business, applicability of tax on accreted income under certain circumstances, the low reporting requirement of a cumulative ₹50,000 for substantial contributors, etc).

The amendments made are analysed below:

MERGER OF SECTION 10(23C) EXEMPTION REGIME WITH SECTION 11 EXEMPTION REGIME

Currently, there are two major schemes of exemption for charitable institutions – one contained in various sub-clauses of section 10(23C) available for educational and medical institutions and certain other specific types of institutions. In particular, exemption under the following sub-clauses requires approval of the CIT – these are applicable to:

(iv) charitable institutions important throughout India or a State;

(v) public religious institutions;

(vi) university or other educational institution existing solely for educational purposes and not for purposes of profit, not wholly or substantially financed by the Government and whose gross receipts exceed ₹5 crore;

(vii) hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit, not wholly or substantially financed by the Government and whose gross receipts exceed ₹5 crore.

The conditions for exemption under these 4 sub-clauses of section 10(23C) are contained in the 23 provisos to section 10(23C), and by the Finance Act, 2022, these conditions were almost fully aligned with the requirements contained in section 11 for claim of exemption. Only a few minor differences remained, such as option to spend in subsequent year and exemption for capital gains on reinvestment in capital asset, which are available under section 11 but not available under section 10(23C). Given this alignment, it was expected that the exemption under these 4 sub-clauses would finally be merged with the exemption under section 11.

The Finance (No 2) Act 2024 now begins the process of merger of these two exemption regimes. The first and second provisos to section 10(23C) have now been amended to provide that application for approval or renewal of approval under sub-clauses (iv), (v), (vi) and (via) of section 10(23C) can only be made before 1st October, 2024, and that the Commissioner shall only process such applications made before 1st October, 2024. A 24th proviso has been added to section 10(23C) stating that no approvals shall be granted for applications made on or after 1st October, 2024. Simultaneously, amendments have been made to section 12A(1)(ac) with effect from 1st October 2024, requiring such charitable entities to make an application for registration under that section.

This effectively means that charitable entities whose approval expires on 31st March, 2025, can still apply for renewal up to 30th September 2024 since the application for renewal has to be made six months prior to the expiry of approval. Such applications would be processed, and approvals continued to be granted under section 10(23C). Given that the approval would normally be valid for 5 years, they can therefore continue to claim exemption under sub-clauses (iv), (v), (vi) or (via) till 31st March, 2030 (AY 2030-31). Thereafter, they will have to switch to registration under section 12A, and would then be entitled to exemption under section 11 post registration with effect from A.Y. 2031-32.

In case such entities are late in making an application for approval (beyond 30th September, 2024), they will then have to apply for registration under section 12A, and post registration which would be granted with effect from
1st April, 2025, their claim for exemption would then be under section 11 with effect from A.Y. 2026-27.

In case of other entities whose approval under any of the above 4 sub-clauses of section 10(23C) expires after 31st March 2025, if such approval is expiring shortly after March 2025, such entities may choose to make an application before 1st October, 2024 or thereafter, since there is only a minimum prior period for application (since the application has to be made at least 6 months prior to the expiry of approval), and there is no specification as to the maximum prior period within which one can make such an application. Depending on whether the application for renewal is made before 1st October, 2024 or thereafter, the application would have to be made either under any of the above 4 sub-clauses of section 10(23C) or under section 12A, respectively.

All entities whose approval under any of these 4 sub-clauses of section 10(23C) is in force can continue to claim exemption under section 10(23C) till the expiry of that approval.

Effectively therefore, over the next 5 years, all approvals under section 10(23C) will cease to have effect, and entities would migrate to registration under section 12A and consequent claim of exemption under section 11.

Further, exemption for charitable entities under the various other sub-clauses of section 10(23C) and other clauses of section 10 are not being phased out and would continue. These include:

Educational or medical institutions wholly or substantially financed by the Government or having gross receipts of less than ₹5 crore – 10(23C)(iiiab), (iiiac),(iiiad) and (iiiae),
Research associations – 10(21),
Professional regulatory bodies – 10(23A),
Khadi and village industries development institutions – 10(23B),
Regulatory bodies for charitable or religious trusts – 10(23BBA),
Investor Protection Funds of stock exchanges, commodity exchanges and depositories – 10(23EA), 10(23EC) and 10(23ED),
Core Settlement Guarantee Fund of clearing corporation – 10(23EE),
Notified bodies set up by the Government – 10(46),
Housing Boards, Planning & Development Authorities, and other regulatory bodies set up under a State or Central Act – 10(46A), etc.

While no amendment is made to section 11(5) regarding permitted investments, the provisions of section 13(1)(d) have been amended, by adding one more exception in the proviso to section 13(1)(d). The following assets have now been also excluded from the purview of section 13(1)(d):

a. Any asset held as part of the corpus of the trust as on 1st June, 1973;

b. Equity shares of a public company held by the trust as part of the corpus as on 1st June, 1998;

c. Any accretion to such shares held as part of corpus (bonus shares, etc);

d. Debentures issued by a company/corporation acquired by the trust before 1st March, 1983;

e. Jewellery, furniture or other notified article received by way of voluntary contribution. No other article seems to have been notified so far.

AMENDMENT OF SECTION 11(7)

Section 11(7) of the Income Tax Act provides that a trust granted registration under section 12AB cannot claim exemption under section 10, except under certain clauses of section 10. These clauses were:

agricultural income – clause (1),
educational, medical and other institutions – clause (23C),
Investor Protection Fund of Commodity Exchanges – clause (23EC),
notified bodies set up by the Government – clause (46), and
Housing Boards, Planning & Development Authorities, and other regulatory bodies set up under a State or Central Act – clause (46A).

In some of these cases, once they are approved or notified under the respective clauses, their section 12AB registration becomes inoperative, and can be made operative only by making an application to the Commissioner for doing so. Once section 12AB registration becomes operative, the approval or notification under the respective clause ceases to have effect, and thereafter no claim for exemption can be made under those respective clauses of section 10.

The Finance (No 2) Act, 2024 has added clauses (23EA) – Investor Protection Fund of a stock exchange, (23ED) – Investor Protection Fund of a depository, and (46B) – National Credit Guarantee Trustee Company and trusts managed by it, to these alternative clauses of exemption.

CONDONATION OF DELAY IN MAKING APPLICATION FOR REGISTRATION/RENEWAL OF REGISTRATION U/S 12A

Section 12A(1)(ac) of the Income Tax Act provides that a trust would be entitled to exemption under sections 11 and 12 if it makes an application for registration to the Commissioner/Principal Commissioner and application for renewal within the specified timelines. Given the complex provisions specifying the timelines, with six alternative clauses, many charitable organisations mistakenly filed applications for registration/renewal of registration late. Their applications for registration/renewal of registration were rejected by the Commissioner on the ground that the application was made beyond the prescribed time.

Given the fact that such rejection had severe consequences of applicability of the provisions of tax on accreted income under section 115TD, such trusts filed appeals to the Tribunal against such rejection as well as made applications to the CBDT seeking condonation of delay in filing such applications. Almost all the appeals to the tribunal were decided in favour of the trusts, with the matters being sent back to the Commissioner for processing the application on the merits of each case. The CBDT granted condonations from time to time, the latest condonation being vide CBDT circular No. 7/2024 dated 25th April, 2024, whereunder belated/rectified applications could be made till 30th June, 2024.

The Finance (No. 2) Act, 2024 has now inserted a proviso to section 12A(1)(ac) with effect from 1st October, 2024, giving powers to the Commissioner/Principal Commissioner to condone any delay in making of such applications if he considers that there is a reasonable cause for delay in filing the application. On condonation of delay, the application shall be deemed to have been filed within time.

By this amendment, on or after 1st October, 2024 the Commissioner can consider condonation of any genuine delays in making of such applications which may be noticed during the course of processing such applications, irrespective of whether the delay was before or after 1st October, 2024. This is a much-needed amendment, so that trusts now need not have their applications rejected merely on account of delay in filing the application due to the Commissioner not having the powers to condone any delay.

MODIFICATION OF TIME LIMITS FOR PROCESSING APPLICATIONS UNDER SECTION 12A(1)(ac)

The applications for registration/renewal of registration under section 12A(1)(ac) are required to be processed by the Commissioner/Principal Commissioner within the timelines specified in section 12AB(3), which requires the order under section 12AB(1) to be passed within such timelines. These timelines have now been amended as under with effect from 1st October 2024:

Sub-clause of s.12A(1)(ac)	Type of Application	Earlier Time Limit	Amended Time Limit
(i)	Trusts registered u/s 12A/12AA on 31^st March, 2021 for registration u/s 12AB to be made by 30^th June, 2021	3 months from the end of the month in which the application was received	3 months from the end of the month in which the application was received
(ii)	Trusts registered u/s 12AB for renewal	6 months from the end of the month in which the application was received	6 months from the end of the quarter in which the application was received
(iii)	Trusts provisionally registered u/s 12AB for renewal
(iv)	Trusts whose registration has become inoperative u/s 11(7) to make operative
(v)	Trusts which have modified objects not conforming to conditions of registration
(vi)(B)	Trusts which have commenced their activities and not claimed exemption u/s 11 and 12 for any year ending before the date of application
(vi)(A)	Trusts which have not commenced their activities for provisional registration	1 month from the end of the month in which the application was received	1 month from the end of the month in which the application was received

This amendment is stated to be for better processing and monitoring.

This being a procedural amendment, the revised timeline of 6 months from the end of the quarter may apply even to applications made prior to 1st October, 2024, where the original timeline for processing has not lapsed before 1st October, 2024. Therefore, in case of applications received in April 2024, where the orders could have been passed till October 2024, the orders can now be passed till December 2024.

APPROVAL U/S 80G

A trust which had commenced its activities could have applied for approval under section 80G only if it had not claimed exemption under clause (iv), (v), (vi) or (via) of section 10(23C) or exemption under section 11 for any year ending prior to the date of its application. Therefore, an existing trust having activities for many years claiming exemption under section 11 but not having opted to obtain approval under section 80G earlier, could never have applied for approval. This restriction of not having claimed exemption earlier, has been deleted with effect from 1st October 2024, permitting such existing trusts to seek approval.

Just as in the case of processing of applications under section 12AB, in case of applications for renewal of approval under section 80G or for fresh application under section 80G where activities of the trust have commenced, the timeline for passing the order granting approval or rejecting the application has been amended to a period of 6 months of the end of the quarter in which the application was made, from the period of 6 months from the end of the month in which the application was made.

No amendment has been made to delegate powers to the Commissioner to condone delays in filing applications for approval under section 80G. Perhaps this is on account of the fact that a trust can now make an application at any time after the commencement of its activities. Therefore, even if its earlier application was rejected on account of delay in filing the application, it can make a fresh application again subsequently. However, this will result in it not being approved for the interim period. It would have been better had the power been delegated to the Commissioner in such cases as well.

MERGER OF TRUSTS — SECTION 12AC

A new section, section 12AC, has been inserted with effect from 1st April, 2025. This provides that if a trust approved under clauses (iv), (v), (vi) or (via) of section 10(23C) or registered under section 12AB merges with another trust, the provisions of Chapter XII-EB (Tax on Accreted Income) shall not apply if:

(a) The other trust has similar objects;

(b) The other trust is registered u/s 12AB or under clause (iv), (v), (vi) or (via) of section 10(23C); and

The Explanatory Memorandum to the Finance Bill explains the rationale behind this amendment as under:

“Merger of trusts under the exemption regime with other trusts

1. When a trust or institution which is approved / registered under the first or second regime, as the case may be merges with another approved / registered entity under either regime, it may attract the provisions of Chapter XII-EB, relating to tax on accreted income in certain circumstances.

2. It is proposed that conditions under which the said merger shall not attract provisions of Chapter XII-EB, may be prescribed, to provide greater clarity and certainty to taxpayers. A new section 12AC is proposed to be inserted for this purpose.

3. These amendments will take effect from the 1st day of April, 2025.”

While one understands the need to provide clarity on various exemption provisions in the event of merger of an approved/registered trust with another approved/registered trust (e.g., treatment of accumulation, spending out of corpus, loans, etc), the language of the amendment as well as the Explanatory Memorandum explaining the amendment are a little baffling. This is on account of the fact that as the law stands today, tax on accreted income under section 115TD applies to a merger only when an approved/registered trust merges with a trust which is not approved / registered, or which does not have similar objects. Section 115TD(1)(b) does not apply at all when both the trusts involved in the merger are registered trusts having similar objects. There was therefore no need for such a provision at all.

The further interesting aspect is that since section 115TD has not been amended at all, even if conditions are prescribed for the purposes of section 12AC, these conditions cannot create a charge under section 115TD, which excludes a case where both trusts are approved/registered and have similar objects.

One will have to await the rules that will be prescribed, to fully understand the impact of this amendment.

BCAJ Admin

Whether the Order Passed Under Section 139(9) Invalidating the Return Is Appealable?

ISSUE FOR CONSIDERATION

Quite often the income tax returns filed by the taxpayers are considered to be defective and the defect notices are being sent by the Centralised Processing Centre. If the defects pointed out have not been resolved, then such a defective return filed is considered to be an invalid return, by virtue of the provisions of section 139(9). Under such circumstances, it is considered that the assessee has not filed his return of income at all for the relevant year. As a result, the assessee does not get the benefits like getting the refund of excess tax paid or carry forward of unabsorbed losses etc. which he was entitled to get otherwise had the return been considered to be a valid return.

Section 246A provides for the dispute resolution mechanism whereby, if the assessee is aggrieved by the order passed by the income-tax authorities, then he can challenge that order by filing an appeal against it before the Commissioner (Appeals). However, the list of orders against which the appeal can be so filed are listed in sub- section (1) of section 246A. Therefore, the appeal can be filed before the Commissioner (Appeals) against a particular order, only if that order is included in the list of orders which are appealable under section 246A.

The order passed under section 139(9), considering the return of income as invalid return due to non-removal of the defects, is not specifically included in the list of orders which are appealable under section 246A. Therefore, the issue arises as to whether the assessee can file the appeal before the Commissioner (Appeals) against such an order considering the return as a defective return or not. The Pune bench of the tribunal had earlier taken a view that such an order is appealable and the assessee can file the appeal challenging it before the CIT (A). However, in a later case, the Pune bench took a contrary view disagreeing with its earlier decision and held that no appeal can be filed before the CIT (A) against such an order.

DEERE & COMPANY’S CASE

The issue had come up for consideration of the Pune bench of the tribunal in the case of Deere & Company vs. DCIT [2022] 138 taxmann.com 46.

In this case, the assessee was a foreign company and it had filed its return of income for assessment year 2016- 17 declaring the income of ₹474.37 crore and claiming a refund of ₹1.34 crore. The return was processed by the Centralized Processing Centre (CPC), Bengaluru, and a notice dated 15-11-2017 was issued under Explanation (a) to section 139(9) highlighting the difference between the income shown in the return at ₹474.37 crore and as shown in Form No. 26AS at ₹478.62 crore. The assessee responded to the same on 4th December, 2017 through e-portal elaborating the reasons for the difference in the two amounts by maintaining that correct income was reported in the return of income. It was explained that the difference was arising mainly due to two reasons as mentioned below –

1. The assessee had computed its income accruing in India as per Rule 115 whereby invoices raised in foreign currency were converted into Indian Rupees on the basis of SBI TT Buying Rate of such currency prevailing on the date of credit to the account of the payee or payment, whichever is earlier. As against this, the parties on the other hand have deducted tax at source by converting the foreign currency amount into Indian Rupees adopting some other exchange rates.

2. There were certain reimbursements and reversals on which tax had been deducted but they were not in the nature of income of the assessee company.

The DCIT (CPC), Bengaluru rejected the assessee’s contention and declared the return to be invalid by means of the order u/s 139(9) of the Act. The assessee filed an appeal against that order before the CIT(A) which came to be dismissed at the threshold on the ground that the order u/s 139(9) was not appealable under section 246A.

The assessee filed the further appeal before the tribunal against the said order of the CIT (A).

Firstly, the tribunal held that the DCIT (CPC), Bengaluru could not have acted u/s 139(9) in an attempt to correct the mismatch and in the process declared the return as invalid, thereby depriving the assessee from refund claimed in the return of income. The tribunal observed that the AO had activated clause (a) of an Explanation to section 139(9), which stated that: “the annexures, statements and columns in the return of income relating to computation of income chargeable under each head of income, computation of gross total income and total income have been duly filled in”. On this basis, it was held that if all the annexures, statements and columns etc. of the return have been duly filled in, there could be no defect as per clause (a). The defect referred to in clause
(a) was of only non-filling of the requisite columns of the return of income. If the relevant columns in the return of income were duly filled in but were not tallying with the figures reported in Form 26AS due to a valid difference of opinion then it was not covered by clause (a). Further, the tribunal also observed that the Finance Act, 2016 inserted sub-clause (vi) in section 143(1) providing that that if certain amount of income appearing in Form 26AS etc. is not fully or partly included in the total income returned by the assessee, then the AO will process the return u/s 143(1) and make adjustment by way of addition to the total income so computed by the assessee. Therefore, if the intention of the Legislature had been to treat the mismatch of income between Form 26AS and as shown in the return of income rendering the return defective, then there was no need to incorporate clause (vi) of section 143(1)(a) of the Act requiring the AO to carry out the adjustment during the processing of return of income on this score.

With respect to the effect of the return being considered as invalid under section 139(9), the tribunal observed that there were two possibilities. The first possibility was that the assessee could have again filed a fresh return. However, the AO, sticking to his earlier stand, would have held such return also as invalid on the same premise, throwing the proceedings in a vicious circle resulting in an impasse. The second possibility was that the AO, having knowledge of the assessee having taxable income, could have issued a notice u/s 142(1)(i) requiring the assessee to file a return of income. This would have resulted in the assessee filing its return and then the AO determining correct total income of the assessee as per law after making assessment u/s 143(3) of the Act. However, in the instant case, the AO did not issue any notice u/s 142(1) (i) and pushed the proceedings to a dead end, leaving the assessee without any apparent legal recourse. It was under such circumstances, left with no option, the assessee preferred an appeal before the ld. CIT(A) against the order u/s 139(9) of the Act, which has been dismissed as not maintainable on the ground that an order u/s 139(9) is not covered by the list of appealable orders given in section 246A.

In view of these facts, the tribunal held that the assessee could not have been left remediless. Every piece of legislation is ultimately aimed at the well-being of the society at large. No technicality could be allowed to operate as a speed breaker in the course of dispensation of justice. In the context of taxes, if a particular relief was legitimately due to an assessee, the authorities would not circumscribe it by creating such circumstances leading to its denial.

The tribunal held that the first look at different clauses of section 246A(1) transpired that an order u/s 139(9) was ex-facie not covered therein. However, there were two clauses of section 246A(1), namely, (a) and (i), which in the opinion of the tribunal could provide succor to the assessee. The clause (a) of section 246A provided for filing an appeal before CIT(A), inter alia, against “an order against the assessee where the assessee denies his liability to be assessed under this Act”. The word ‘order’ in the expression ‘an order against the assessee where the assessee denies his liability’ was not preceded or succeeded by the word ‘assessment’. Thus any order passed under the Act against the assessee, impliedly including an order u/s 139(9) as in the present case, having the effect of creating liability under the Act which he denies or jeopardizing refund, got covered within the ambit of clause (a) of section 246A(1).

Further, Clause (i) of section 246A(1) dealt with the filing of an appeal before the CIT(A) against an order u/s 237. Section 237 provided that ‘If any person satisfies the Assessing Officer that the amount of tax paid by him or on his behalf or treated as paid by him or on his behalf for any assessment year exceeds the amount with which he is properly chargeable under this Act for that year, he shall be entitled to a refund of the excess.’ Technically speaking, the AO has not passed an order u/s 237 but only u/s 139(9) of the Act. Firstly, the AO could not have treated the return as invalid u/s 139(9) because of mismatch between the figure of income shown in the return and that in Form 26AS and secondly, if at all he did so on a wrong footing, he ought to have issued notice u/s 142(1)(i) of the Act for enabling the assessee to file its return so that a regular assessment could take place determining the correct amount of income and the consequential tax/refund. Here was a case in which the assessee has been deprived by the DCIT (CPC), Bengaluru of any legal recourse to claim the refund. Considering the intent of section 237 in mind and the unusual circumstances of the case, the tribunal held that the order passed by the AO was also akin to an order refusing refund u/s 237 making it appealable u/s 246A(1)(i).

On this basis, the tribunal held that the appeal against the order passed under section 139(9) was maintainable before the CIT (A).

The Mumbai bench of the tribunal has followed this decision of the Pune bench in the case of V.K. Patel Securities Pvt. Ltd. v. ADIT (ITA No. 1009/Mum/2023).

AMRUT RAJENDRAKUMAR BORA’S CASE

The issue, thereafter, came up for consideration before the Pune bench of the tribunal again in the case of Amrut Rajendrakumar Bora [ITA No. 563/Pun/2023 – Order dated 4-8-2023].

In this case, the return of income filed by the assessee for assessment year 2018-19 was treated as invalid under section 139(9) on account non-removal of the defects which were pointed out to the assessee. The appeal filed by the assessee before the CIT (A) against the said order was dismissed on the same ground that it was not an appealable order as per the provisions of section 246A. Before the tribunal, the assessee primarily relied upon the decision in the case of Deere & Co. (supra). As against that, the revenue placed strong reliance on section 246A and contended that it did not contain any specific clause regarding the maintainability of appeal against an order passed under section 139(9) of the Act.

The tribunal held that section 246A was a self-exhaustive provision providing remedy of an appeal against the orders passed by lower authorities in various clauses from (a) to (r) followed by Explanation(s) and statutory proviso(s); as the case may be. The order passed under section 139(9) is not covered specifically under any of the clauses. The tribunal held that a stricter interpretation in such an instance has to be adopted in light of Hon’ble Apex Court’s landmark decision in Commissioner of Customs (Imports), Mumbai vs. M/s. Dilip Kumar And Co. & Ors. [2018] 9 SCC 1 (SC) (FB).

As far as clause (i) was concerned, the tribunal held that it could come into play only when the concerned taxpayer was denying his liability to be assessed under the Act which was not the case as the point involved was limited to the validity of the return of income filed by the assessee. The tribunal further held that section 246A envisaged an appellate remedy before the CIT(A) not based on various consequences faced by an assessee or by way of necessary implications but as per various orders passed by the field authorities under the specified statutory provisions only.

The decision of the co-ordinate bench in the case of Deere & Co. (supra) was held to be per inquirium for not adopting the stricter interpretation as was required. Accordingly, the tribunal upheld the order of the CIT (A) dismissing the appeal of the assessee as not maintainable.

OBSERVATIONS

It is a well-settled principle that the right to make an appeal is not an inherent right, but a statutory right. Therefore, an appeal can be filed against a particular order only if such order is made appealable under the Act. Hence, an appeal cannot be filed before CIT(A) against any order which is not included in the above list. The Supreme Court in the case of Gujarat Agro Industries Co Ltd. vs. Municipal Corporation of City of Ahmedabad (1999) 45 CC 468 (SC) has held that the right of appeal is the creature of a statute. Without a statutory provision creating such a right, the person aggrieved is not entitled to file an appeal. Similarly, in the case of National Insurance Co. Ltd. v. Nicolletta Rohtagi (2002) 7 SCC 456, the Supreme Court has held that the right of appeal is not an inherent right or common law right, but it is a statutory right. The appeal can be filed only if the law so provides.

In light of these principles, one needs to examine the provisions of section 246A for the purpose of determining whether the appeal can be filed against the order passed under section 139(9) considering the return as a defective return. The relevant provision of section 139(9) read as under –

“Where the Assessing Officer considers that the return of income furnished by the assessee is defective, he may intimate the defect to the assessee and give him an opportunity to rectify the defect within a period of fifteen days from the date of such intimation or within such further period which, on an application made in this behalf, the Assessing Officer may, in his discretion, allow; and if the defect is not rectified within the said period of fifteen days or, as the case may be, the further period so allowed, then, notwithstanding anything contained in any other provision of this Act, the return shall be treated as an invalid return and the provisions of this Act shall apply as if the assessee had failed to furnish the return”

As rightly noted by the tribunal in both the cases as discussed above, the order passed under section 139(9) is not included specifically in the list of orders which are made appealable under sub-section (1) of section 246A. On perusal of sub-section (1) of section 246A, it can be observed that it lists down several orders which have been passed under the specific provisions of the Act which does not include the order passed under section 139(9) of the Act. The only sub-clause which refers to the order in general without referring to any specific provision of the Act is sub-clause (a). It refers to the ‘order against the assessee where the assessee denies his liability to be assessed under this Act’. Therefore, one needs to examine as to whether the order passed under section 139(9) can be considered to be in the nature of an order against the assessee where the assessee denies his liability to be assessed under the Act.

When a person files his return of income taking a particular position, it results into a self-assessment of his liability under the Act. When such a return of income filed by the assessee is considered to be an invalid return of income for non-removal of defects as per the provisions of section 139(9), return of income becomes non-est in law i.e. as if it had never been filed. Consequentially, the self-assessment of the liability which had been declared through the return of income also becomes invalid. Thus, there is no assessment of the liability of the assessee under the Act till that point in time unless it is followed by the specific assessment being made in accordance with the relevant provisions of the Act, which may be either a regular assessment under section 144 or reassessment under section 147. Further, by passing an order under section 139(9), the Assessing Officer is not assessing the liability of the assessee under the Act. Therefore, strictly speaking, the order passed under section 139(9) does not result into assessment of the assessee’s liability in any manner which could have been denied by the assessee.

Alternatively, a view can be taken that the order passed invalidating the return also results in rejecting the self- assessment of the liability of the assessee as declared in the return of income. It might be possible that the assessee claims certain benefits while assessing his liability under the Act in the return of income which has been submitted. Such benefits can be in the nature of claim of loss, or claim of refund on account of excess tax paid in the form of advance tax or TDS. On account of the fact that the return is being considered as invalid return, the benefits so claimed also get rejected indirectly. Therefore, under such circumstance, it is possible to take a view that the liability of the assessee gets increased indirectly as a result of denial of the benefits, which had been claimed by the assessee through the return of income. Although such an increase in the liability of the assessee is not due to any order of assessment, there is an order passed under section 139(9) which is affecting the quantum of the liability of the assessee under the Act. If the claim of refund as made by the assessee in the return becomes invalid, then it results into overcharging of tax upon the assessee to that extent. Therefore, it may be considered as an order affecting the liability of the assessee as originally declared in the return of income and, hence, appealable under section 246A.

The question of applying strict interpretation as laid down by the Supreme Court in the case of Dilip Kumar & Co. (supra) does not arise here as we are not dealing with the exemption provision. The principles of strict interpretation were laid down by the Supreme Court in the context of the exemption provision as the exemption granted affects the exchequer which will then results in increase in tax liability of the other taxpayers. The provision of section like 246A providing for the remedy of filing an appeal against the order passed by the Assessing Officer is no way be compared with the case which was before the Supreme Court in which such a strict interpretation was required.

If a view is taken that the order passed under section 139(9) is not appealable under the provisions of section 139(9), then the only remedies available to the assessee would be to file the petition of revision under section 264 or to knock the doors of the high court by filing certiorari or mandamus writ against such orders. Therefore, a better view seems to be the one which was taken by the Pune bench of the tribunal in its earlier case of Deere & Co. However, the readers may explore the other alternatives as they would be left with no remedy if the appeal filed is not being entertained by following the contrary view.

The CBDT has been given the powers under sub- clause (r) of section 246A(1) to issue direction making any particular order passed by the Assessing Officer as appealable in the case of any person or class of persons having regard to the nature of the cases, the complexities involved and other relevant considerations.

This is a fit case where the CBDT should issue the necessary direction providing for the appeal against the order passed under section 139(9) treating the defective return of income as invalid return.

BCAJ Admin

Glimpses of Supreme Court Rulings

Excise Commissioner Karnataka and Another

vs. Mysore Sales International Ltd. and Ors.

(2024) 466 ITR 205 (SC)

8. Tax collection at source — The liquor vendors (contractors) who bought the vending rights on auction could not be termed as “buyer” under Section 206C of the Income-Tax Act because they were excluded from the definition of “buyer” as per Clause (iii) of Explanation (a) to Section 206C, in as much as the goods [arrack] were not obtained by him by way of auction (i.e., only licence to carry on the business was obtained) and that the sale price of such goods to be sold by the buyer was fixed under a state enactment. Merely because there is a price range providing for a minimum and a maximum under the State Act, it cannot be said that the sale price is not fixed.

Principles of natural justice — Even though the statute may be silent regarding notice and hearing, the court would read into such provision the inherent requirement of notice and hearing before a prejudicial order is passed — Before an order is passed under Section 206C of the Income-Tax Act, it is incumbent upon the assessing officer to put the person concerned to notice and afford him an adequate and a reasonable opportunity of hearing, including a personal hearing.

Prior to 1993, there were several private bottling units in the State of Karnataka, and they were manufacturing and selling arrack.

In the year 1993, the state government discontinued private bottling units from engaging in the manufacture or bottling of arrack and instead decided as a policy to restrict those operations in the hands of state government companies or undertakings, such as, Mysore Sales International Limited and Mysore Sugar Company Limited.

Mysore Sales was entrusted with the above task for the northern districts of the State of Karnataka, while for the rest of the state, Mysore Sugar was entrusted with the responsibility.

The Karnataka Excise Act, 1965 (“the Excise Act”) provides for a uniform law relating to production, manufacture, possession, import, export, transport, purchase and sale of liquor and intoxicating drugs and the levy of duties of excise thereon in the State of Karnataka and for certain matter related thereto. Under the Excise Act, several Rules have been framed for appropriate enforcement of the excise law.

Auctions are conducted periodically for the purpose of conferring lease right for retail vending of arrack. It was conducted with reference to designated areas. Successful bidders are entitled to procure arrack from Mysore Sales and Mysore Sugar depending upon the area allotted to them and then to sell it in retail trade within their respective allotted areas. The retail sale price is fixed by the state government in terms of the Rules.

Section 206C of the Income-tax Act, 1961 casts an obligation on the “seller” of alcoholic liquor, etc., of collecting tax at source at the specified time from the “buyer”. As per Explanation (a), certain persons were not included within, rather excluded from, the definition of “buyer”.

A circular came to be issued by the Excise Commissioner of Karnataka on 16th June, 1998 to which an addendum was also issued. The circular clarified that since arrack was not obtained through auction and since the selling price of arrack was fixed by the Excise Commissioner, there was no question of recovery of tax from the excise (liquor) vendors or contractors.

In view of the above, Mysore Sales and Mysore Sugar (Assesses) did not recover the tax from the liquor vendors.

Assessing Officer (AO) issued notices dated 26th October, 2000 calling upon the Assessee to show cause as to why it should not pay the requisite tax amount which it had failed to collect from the “buyers”, i.e., the excise contractors for the financial years relevant to the assessment years under consideration. The Assessee had submitted its reply to such notice. Thereafter, the AO passed orders dated 17th January, 2001 under Section 206C(6) of the Income-tax Act for the assessment years 2000–2001, 1999–2000, 1998–1999, 1997–1998, 1996–1997 and 1995–1996. The AO held that the Assessee is a “seller” and the liquor vendors are “buyers” in terms of Section 206C of the Income-tax Act and hence, the Assessee was under a legal obligation to collect income tax at source from the liquor vendors (contractors) for the financial years relevant to the aforesaid assessment years. By the aforesaid orders, the Assessee was directed to pay certain sums of money as tax, which it had failed to collect from the liquor vendors or contractors. Following such orders, consequential demand notices for the respective assessment years under Section 156 of the Income-tax Act were also issued to the Assessee by the AO.

Mysore Sales / Mysore Sugar filed writ petitions before the High Court. While the main contention was that Section 206C(6) of the Income-tax Act was not applicable to it, a corollary issue raised was that before passing the order under Section 206C(6) of the Income-tax Act, no opportunity of hearing was given to it. Therefore, there was violation of the principles of natural justice. Learned Single Judge vide the judgment and order dated 27th October, 2003 [(2004) 265 ITR 498] dismissed the writ petitions confirming the orders passed under Section 206C(6) of the Income-tax Act.

Thereafter, Mysore Sales and Ors. preferred writ appeals before the Division Bench. However, by the judgment and order dated 13th March, 2006 [(2006) 286 ITR 136], the writ appeals were dismissed by affirming the orders passed by the AO and also that of the learned Single Judge.

Aggrieved by the aforesaid, SLP(C) No. 12524 of 2006 was preferred by Mysore Sales. After leave was granted on 23rd April, 2007, the same came to be registered as Civil Appeal No. 2168 of 2007. Mysore Sugar also filed an SLP.

According to the Supreme Court, the short point for consideration in this appeal was whether provisions of Section 206C of the Income-Tax Act were applicable in respect of the Appellant and whether the liquor vendors (contractors) who bought the vending rights from the Appellant on auction could be termed as “buyer” within the meaning of Explanation (a) to Section 206C of the Income-tax Act or excluded from the said definition of “buyer” as per Clause (iii) of Explanation (a) to Section 206C of the said Act.

The Supreme Court noted that under Section 17 of the Excise Act, the state government grants lease of right to any person for manufacture, etc., of liquor, arrack in this case. The licencing authority, i.e., Excise Commissioner, may grant to the lessee a licence in terms of his lease. In supplement to the above provision, Rule 3(1) of the 1987 Rules provides that the Excise Commissioner shall grant a licence for any specified area or areas for the manufacture or bottling of arrack. From 1st July, 1993, sub-Rule (2) of Rule 3 has come into force as per which provision the licence under Rule 3 of the 1987 Rules shall be issued only to a company or agency owned or controlled by the state government or to a state government department. This is how Mysore Sales was granted licence for the manufacture and bottling of arrack. Through a process of auction, excise contractors are shortlisted who are thereafter granted licence or permits to vend arrack by retail in their respective area(s). They are required to procure the arrack from the warehouse or depot on payment of the issue price fixed by the Excise Commissioner as per Rule 5(1) of the 1967 Rules. Rule 2 makes it very clear that no arrack in retail vend shall be sold except in sealed bottles or in sealed polythene sachets obtained from either a warehouse or a depot. For such retail vending, Rule 3 of the 1967 Rules requires the excise contractor to construct a counter in the shop. The right to retail vend of liquor is granted either by tender or by auction or by a combined process of tender-cum- auction, etc. As per Rule 17 of the 1987 Rules, the price to be paid by the lessee for the right of retail vend of arrack to the government for the supply of bottled arrack shall be fixed by the Commissioner with prior approval of the government. In so far the retail price is concerned, Rule 4 of the 1967 Rules says that the excise contractor can sell the arrack at a price within the range of minimum floor price and maximum ceiling price that may be fixed by the Excise Commissioner.

The Supreme Court observed that Sub-section (1) of Section 206C provides that every person who is a seller shall collect from the buyer of the goods specified in the table a sum equal to the percentage specified in the corresponding entry of the table. The collection is to be made at the time of debiting of the amount payable by the buyer to the account of the buyer or at the time of the receipt of such amount from the said buyer, be it in cash or by way of cheque or by way of draft, etc. In so far alcoholic liquor for human consumption (other than India made foreign liquor, i.e., IMFL), the amount to be collected is 10 per cent. Sub-section (3) provides that any person collecting such amount under Sub-section (1) shall pay the said amount within seven days of the collection to the credit of the central government or as the Central Board of Direct Taxes (CBDT) directs. Sub- section (4) clarifies that any amount so collected under Section 206C(1) and paid under Sub-section (3) shall be deemed as payment of income tax on behalf of the person from whom the amount has been collected and credit shall be given to such person for the amount so collected and paid at the time of assessment proceeding for the relevant assessment year. Sub-section (5) says that every person collecting such tax shall issue a certificate to the buyer within 10 days of debit or receipt of the amount. Sub-section (5A) requires the person collecting tax to prepare half yearly returns for the periods ending on 30th September and 31st March for each financial year and submit the same in the prescribed form before the competent income tax authority. Sub-section (6) says that any person responsible for collecting the tax, fails to collect the same, shall notwithstanding such failure be liable to pay the tax which he ought to have collected to the credit of the central government in accordance with the provisions of Sub-section (3). Sub-section (7) deals with a situation where such tax is not collected in which event the seller is liable to pay interest at the prescribed rate. Sub-section (8) on the other hand deals with a situation where the seller does not deposit the amount even after collecting the tax. In such an event also, he would be liable to pay interest.

The Explanation defines “buyer” and “seller” for the purposes of Section 206C. While Explanation (a) defines “buyer”, (b) defines “seller”. As per Explanation (a), “buyer” means a person who obtains, in any sale by way of auction, tender or by any other mode, goods of the nature specified in the table in Sub-section (1) or the right to receive any such goods but “buyer” would not include:

(i) a public sector company;

(ii) a buyer in the further sale of such goods obtained in pursuance of such sale;

(iii) a buyer where the goods are not obtained by him by way of auction and where the sale price of such goods to be sold by the buyer is fixed by or under any State Act.

On the other hand, “seller” has been defined to mean the central government, a state government or any local authority or corporation or authority established by or under a central, state or provincial act or any company or firm or cooperative society.

According to the Supreme Court, as per Explanation (a) (iii), if the goods are not obtained by the buyer by way of auction and where the sale price of such goods to be sold by the buyer is fixed by or under any state enactment, then such a person would not come within the ambit of “buyer”. Explanation (a)(iii), thus, visualises two conditions for a person to be excluded from the meaning of “buyer” as per the definition in Explanation (a). The first condition is that the goods are not obtained by him by way of auction. The second condition is that the sale price of such goods to be sold by the buyer is fixed under a state enactment. These two conditions are joined by the word “and”. The word “and” is conjunctive to mean that both the conditions must be fulfilled; it is not either of the two. Therefore, to be excluded from the ambit of the definition of “buyer” as per Explanation (a)(iii), both the conditions must be satisfied.

In view of the above, the Supreme Court examined the position of an excise contractor. The Supreme Court noted that Mysore Sales was the licensee for the manufacture and bottling of arrack for specified area(s). By a process of auction or tender or auction- cum-tender, etc., excise contractors were shortlisted who are thereafter granted permits to vend arrack by retail in their respective area(s). These retail vendors, i.e., excise contractors had to procure the arrack from the warehouse or depot maintained by Mysore Sales on payment of the issue price fixed by the Excise Commissioner. The arrack was procured in sealed bottles or in sealed polythene sachets. Therefore, according to the Supreme Court, by the process of auction, etc., the excise contractors are only shortlisted and conferred the right to retail vend of arrack in their respective areas. It cannot be said that by virtue of the auction, certain quantities of arrack were purchased by the excise contractors. Thus, at this stage, there were two transactions, each distinct. The first transaction was shortlisting of excise contractors by a process of auction, etc., for the right to retail vend. The second transaction, which was contingent upon the first transaction, was obtaining of arrack for retail vending by the excise contractors on the strength of the permits issued to them post successful shortlisting following auction. Therefore, it was clear that arrack was not obtained by the excise contractors by way of auction. What was obtained by way of auction was the right to vend the arrack on retail on the strength of permits granted, following successful shortlisting on the basis of auction. Thus, the first condition under Clause (iii) was satisfied.

The Supreme Court observed that in Union of India vs. Om Parkash S.S. and Company (2001) 3 SCC 593, it had considered the issue of tax collection at source in respect of the liquor trade under Section 206C of the Income-tax Act and as to whether a licensee who is issued a licence by the government permitting him to carry on the liquor trade would be a “buyer” as defined in Explanation (a) to Section 206C of the Income-tax Act. It was held that “buyer” would mean a person who by virtue of the payment gets a right to receive specific goods and not where he is merely allowed / permitted to carry on business in that trade. On licences issued by the government permitting the licensee to carry on liquor trade, provisions of Section 206C are not attracted as the licensee does not fall within the concept of “buyer” referred to in that section. It was emphasised that a buyer has to be a buyer of goods and not merely a person who acquires a licence to carry on the business.

The requirement of the second condition under Explanation (a)(iii) is that the sale price of such goods to be sold by the buyer is fixed by or under any state statute. After the arrack is obtained in the above manner by the excise contractor, such person has to sell the same in the area(s) allotted to him at the sale price fixed as per Rule 4 of the 1967 Rules. Rule 4 of the 1967 Rules enables the excise contractor to sell the arrack in retail at a price within the range of minimum floor price and maximum ceiling price which is fixed by the Excise Commissioner. A minimum price and a maximum price are fixed within which range the arrack has to be sold by the excise contractor. Thus, according to the Supreme Court, the price of arrack to be sold in retail is not dependent on the market forces but pre-determined within a range. Therefore, though price range is provided for by the statute, it cannot be said that because there is a price range providing for a minimum and a maximum, the sale price is not fixed. The sale price is fixed by the statute but within a particular range beyond which price, either on the higher side or on the lower side, the arrack cannot be sold by the excise contractor in retail. Therefore, the arrack is sold at a price which is fixed statutorily under Rule 4 of the 1967 Rules and thus, the second condition stands satisfied.

The Supreme Court held that since both the conditions as mandated under Explanation (a)(iii) were satisfied, the excise contractors or the liquor vendors selling arrack would not come within the ambit of “buyer” as defined under Explanation (a) to Section 206C of the Income-tax Act.

The Supreme Court further held that though there is no express provision in Sub-section (6) or any other provision of Section 206C of the Income-tax Act regarding issuance of notice and affording hearing to such a person before passing an order thereunder, nonetheless, it is evident that an order passed under Section 206C(6) of the Income-tax Act, as in the present case, is prejudicial to the person concerned as such an order entails adverse civil consequences. It is trite law that when an order entails adverse civil consequences or is prejudicial to the person concerned, it is essential that principles of natural justice are followed. In the instant case, though show-cause notice was issued to the Assessee to which reply was also filed, the same would not be adequate having regard to the consequences that such an order passed under Section 206C(6) of the Income-tax Act would entail. Even though the statute may be silent regarding notice and hearing, the court would read into such provision the inherent requirement of notice and hearing before a prejudicial order is passed. We, therefore, hold that before an order is passed under Section 206C of the Income-tax Act, it is incumbent upon the AO to put the person concerned to notice and afford him an adequate and reasonable opportunity of hearing, including a personal hearing.

The Supreme Court allowed the appeals.

Notes:

1. Though the issue relates to TCS under the Income-tax Act, interestingly, the judgment is reported as Excise Commissioner, Karnataka & Anr [Appellant(s)] vs. Mysore Sales International Ltd & Ors [Respondent(s)]. From the facts, it appears that the Appellant was Mysore Sales International Ltd.

2. In the judgment, it seems inadvertently, in paras 4.5 to 4.8, reference is made to tax deduction at source [TDS] instead of tax collection at source [TCS]. In the above write-up, reference to TDS is avoided.

3. The provisions referred to in the judgment are those in force prior to amendments made by the Finance Act, 2003. It is worth noting that the definition of “buyer” has substantially undergone change as compared to the earlier one, and the current definition does not have the exclusion of the type from the scope of “buyer” under Section 206C which was considered in the above judgment.

BCAJ Admin

Article 13(4) of India-Mauritius DTAA — on facts, assessee was not a conduit company and hence, qualified for exemption of capital gains under Article 13(4) of India-Mauritius DTAA

[2024] 164 taxmann.com 440 (Delhi – Trib.)

India Property (Mauritius) Company-II vs. ACIT

ITA No:1020/Del/2023

A.Y.: 2018–19

Dated: 18th July, 2024

8. Article 13(4) of India-Mauritius DTAA — on facts, assessee was not a conduit company and hence, qualified for exemption of capital gains under Article 13(4) of India-Mauritius DTAA.

FACTS

The assessee is a company incorporated in Mauritius. It is engaged in the business of investment activities. The assessee company claimed to be holding valid tax residency certificate (‘TRC’) and Global Business License-I (‘GBL-I License’) issued by Mauritius Financial Services Commission. During the relevant year, the assessee had transferred shares of certain Indian companies and earned long-term capital gains. Having regard to provisions of section 90(2) of the Act, read with Article 13(4) of India-Mauritius DTAA, the assessee claimed the same as exempt and filed its return of income declaring NIL income.

Return of income of the assessee was selected for scrutiny and pursuant to the directions of DRP, the AO denied DTAA benefits. In reaching his conclusion, the AO had examined fund flow, structure, business operation and other aspects of the assessee. The AO observed that on the principle of doctrine of substance over form and principal purpose test, the assessee did not qualify for benefit under clause 13(4) of India-Mauritius DTAA because of following reasons.

(a) The assessee had acquired the shares through its group company and immediately upon receipt of sale consideration, the assessee transferred the funds to another group company.

(b) The assessee had not incurred any expense on wages or salaries.

(d) Though the assessee had 7 directors, no remuneration was paid to them during the relevant year. Further out of 7 directors, 4 directors were non-residents and 2 directors were executive directors of group company. One executive director of group company was attending board meetings by teleconference.

(e) The directors who were based in Mauritius did not have any effective say in management. The adviser company and sub-adviser company were both based outside Mauritius. Thus, the effective control and management of the assessee was outside Mauritius.

(f) The assessee has argued that it holds a valid TRC and as per Circular No.789 dated 13th April, 2000, and as per Supreme Court decision in UOI vs. Azadi Bachao Andolan [2003] 263 ITR 706 (SC) and other judicial precedents, DTAA benefits should be granted on the basis of TRC issued by Mauritius revenue authorities. However, subsequent judicial precedents and decisions have held that TRC is not conclusive in deciding tax residency and granting of benefit under DTAA.

HELD

ITAT held that the assessee is the beneficial owner of income on account of the following facts:

The assessee had made investments long time ago. Even after disinvestment from the said companies, it continued to hold substantial investments.
In its decision in Vodafone BV, Bombay High Court had made a conscious distinction between companies which were without any commercial substance and were established for investments, and those which were interposed as owner of shares in India at the time of disposal of shares to a third party, solely with a view to avoid tax.
The AO has nowhere alleged on the basis of any evidence that any investment flowing from India was received for creating the assessee. The assessee had held investments for over five years before it transferred them. The assessee had earlier also made investments and had sold them and even now held investments in various companies. The assessee was beneficially and legally holding the investments in its own name. On facts, it could not be called a fly-by-night operator created merely for purpose of tax avoidance.
The genuineness of the activities of assessee could not merely be questioned on the basis that Directors were not residents of Mauritius or that there were no operational expenses or no remuneration was paid to directors.
Revenue cannot question genuineness of business operations of an assessee without establishing that administrative activities were sham. The assessee had validly discharged its burden by establishing that the external service provider had been outsourced and it had paid for their services. It is the wisdom and discretion of the assessee as to how it should conduct its day-to-day activities.
The AO sought to establish that the assessee was a conduit company by alleging that investment funds were immediately transferred to the assessee before investment, and sale consideration received by the assessee was immediately transferred in the form of share buyback and dividend. However, since the assessee is an investment fund, such transactions are normal. What is material is how long the investments were held and whether the investments had commercial expediency. In his order the AO has reproduced the resolutions of the assessee indicating why the investments were being sold and how the sale proceeds were to be distributed to the investors. Conduit company could not be presumed merely because sale consideration was immediately transferred as the invested funds were to be returned to investors with gains made.
The commercial rationale for incorporating the assessee in Mauritius was not for tax avoidance but to attract funds from different jurisdictions for investment in India. In its decision in Azadi Bachao Andolan case, Supreme Court has mentioned that when endeavour of Government of India is to facilitate investment in joint venture and infrastructure projects for the benefit of economy, then attributing malice to investment funds like the assessee is not justified. The AO has not brought any evidence on record to rebut the statutory presumption of genuineness of business activity of the assessee on the basis of TRC.
Accordingly, the Tribunal allowed the appeal in favour of the assessee.

BCAJ Admin

S. 12A, 13 — CIT(E) cannot deny registration under section 12A by invoking section 13(1)(b) since section 13 can be invoked only at the time of framing assessment and not at the time of grant of registration

(2024) 165 taxmann.com 141 (Ahd Trib)

Bargahe Husaini Trust vs. CIT

ITA No.: 826(Ahd) of 2023

A.Y.: N.A.

Date of Order: 22nd July, 2024

41. S. 12A, 13 — CIT(E) cannot deny registration under section 12A by invoking section 13(1)(b) since section 13 can be invoked only at the time of framing assessment and not at the time of grant of registration.

FACTS

The assessee-trust was granted provisional registration under section 12A on 24th January, 2022. Thereafter, it filed application for grant of final registration in Form 10AB on 18th March, 2023.

On perusal of the application, the CIT(E) observed that the objects of the applicant were for the benefit of a particular community or caste, that is, Khoja Shia Ishna Ashari Samaj, and hence, covered by the disallowance under section 13(1)(b). He, therefore, rejected the application for final registration under section 12A.

Aggrieved, the assessee filed an appeal before ITAT.

HELD

Noting various judicial precedents including that of jurisdictional High Court / Tribunal, the Tribunal held that provisions of section 13 can be invoked only at the time of framing assessment by AO and not at the time of grant of registration under section 12A by CIT(E). Accordingly, the appeal of the assessee-trust was allowed and the matter was restored to the file of CIT(E) for de-novo consideration.

BCAJ Admin

S. 12A / 12AB — Where the show cause notice was issued on 6th October, 2022, CIT(E) could not have cancelled registration retrospectively with effect from 1st April, 2014 in so far as section 12AA /12AB do not provide for cancellation of registration with retrospective effect

(2024) 165 taxmann.com 39(Cuttack Trib)

Maa Jagat Janani Seva Trust vs. CIT

ITA No.: 248(Ctk) of 2023

Date of Order: 16th July, 2024

40. S. 12A / 12AB — Where the show cause notice was issued on 6th October, 2022, CIT(E) could not have cancelled registration retrospectively with effect from 1st April, 2014 in so far as section 12AA /12AB do not provide for cancellation of registration with retrospective effect.

FACTS

The assessee trust was granted registration under section 12A on 21st May, 2014, w.e.f. 1st April, 2013. It had also filed Form 10A to get re-registration under section 12A and Form 10AC was issued granting registration for the period from AY 2022-23 to AY 2026-27 vide an order dated 5th April, 2022.

Subsequently, a show cause notice was issued by CIT(E) to the assessee on 6th October, 2022 wherein the assessee was asked to explain as to why registration should not be cancelled. The assessee responded from time to time; however, CIT (E) held that the assessee had not submitted any categorical explanation or reply to the show cause notice and cancelled the registration under section 12AA with retrospective effect from 1st April, 2014.

Aggrieved, the assessee filed an appeal before ITAT.

HELD

The Tribunal observed that:

(a) A perusal of the order cancelling the registration showed that CIT(E) had not given any reason for rejecting various explanation given by the assessee to various show-cause notices issued.

(b) In any case, the show cause notice for cancellation of registration having been issued on 6th October, 2022, CIT (E) could not have cancelled registration retrospectively with effect from 1.4.2014 insofar as the provisions of section 12AA/12AB do not provide for the cancellation of registration with retrospective effect, as held by the Tribunal in Amala Jyothi Vidya Kendra Trust vs. PCIT, (2024) 206 ITD 601 (Bangalore Trib).

Accordingly, the Tribunal cancelled the order of CIT(E) and allowed the appeal of the assessee.

BCAJ Admin

S. 45 — Revaluation of asset held by partnership firm and crediting amount of said revaluation to partners’ capital account is transfer taxable section45(4) and the fair market value fixed by stamp authorities should be taken as deemed value of consideration for purpose of section 48

(2024) 165 taxmann.com 261 (Hyd. Trib)

Shree Estatesvs. ITO

ITA No.:469(Hyd) of 2023

A.Y.: 2018-19

Date of Order: 30th July, 2024

39. S. 45 — Revaluation of asset held by partnership firm and crediting amount of said revaluation to partners’ capital account is transfer taxable section45(4) and the fair market value fixed by stamp authorities should be taken as deemed value of consideration for purpose of section 48.

S. 251 — Where CIT(A) considered the same income considered by AO but taxed it under the correct provision, the power exercised by CIT(A) cannot be said to be beyond scope of section 251(1).

FACTS

The assessee was a partnership firm registered on 15th May, 2017 with three partners, formed with capital contribution of land parcels by two partners and ₹1 lakh by third partner. Subsequently, it was reconstituted on 8th November, 2017 with six partners. The firm also revalued the land held by it in its books of account upwards to the tune of ₹12,56,24,460, thereby increasing the value of the land. The said revaluation amount was credited to the capital account of the partners. Subsequently, three partners also converted their loans given to the firm into capital account for which the existing partners agreed.

The assessee filed its return of income declaring total income of ₹1. The case was selected for scrutiny to verify substantial increase in capital in a year. During the course of assessment proceedings, the AO called upon the assessee to furnish the necessary capital account of partners and explain the substantial increase in partners’ capital account. The AO was not satisfied with the explanation furnished by the assessee and therefore, treated the entire capital account as unexplained credit taxable under section 68.

CIT(A) deleted the addition made under section 68; however, he held that the revaluation reserve credited to the partners’ capital account was available for withdrawal by the partners and such credit was taxable under section 45(4).

Aggrieved, the assessee filed an appeal before the ITAT, inter alia, taking an additional legal ground challenging the jurisdiction of CIT (A) to tax a new source of income.

HELD

On the additional legal ground, the Tribunal observed that once the first appellate authority is having the coterminus powers with that of AO, then the powers of CIT (A) under section 251(1)(a) are wide enough to consider any other issues which come to his knowledge during the course of appellate proceedings. However, such issues should have emanated either from the assessment order or from the return of income filed by the assessee. In other words, CIT (A) can very well consider the issues which have been dealt by the AO as it is or he can deal with the issues under proper provisions of law, if facts so demand; but he cannot consider a new issue or new source of income which is either not considered by the AO or not emanated from the return of income filed by the assessee. In the present case, the issue considered by the AO was increase in capital account of partners on account of revaluation of the assets held by the firm and credited such revaluation amount to the capital account of the partners and said issues fall under section 45(4), but the AO considered the issue under section 68 as unexplained cash credit. CIT (A) having noticed this fact had rightly invoked section 45(4). Therefore, the powers exercised by CIT (A) cannot be said to be beyond the scope of section 251(1).

On the issue of taxability under section 45(4), the Tribunal observed –

(a) Following CIT vs. Mansukh Dyeing and Printing Mills, (2022) 449 ITR 439 (SC), the revaluation of the asset held by the firm and crediting the amount of said revaluation to the partners’ capital account is a transfer which falls under section 45(4) and any profit or gain arising from the transfer needs to be taxed in the hands of the appellant firm.

(b) Under section 45(4), the fair market value of the asset on the date of such transfer is deemed to be the full value of consideration for the purpose of section 48. The value recorded by the assessee in the books of account for the purpose of revaluation of asset cannot be a fair market value of the property because it is not ascertainable as what is the basis on which said value has been arrived at.

(c) The guideline value fixed by the stamp duty authorities reflects the correct fair market value of any property and it may be a yardstick to determine the fair market value of the property. Therefore, in absence of contrary evidence to that effect, the fair market value fixed by the stamp duty value authorities should be taken as deemed full value of the consideration for the purpose of section 48 read with section 45(4).

BCAJ Admin

Sec. 153D: Approval u/s 153D is a mandatory and not procedural requirement and mechanical approval without application of mind by the approving authority would vitiate assessment orders

[2024] 112 ITR (T) 224 (Pune – Trib.)

SMW Ispat (P.) Ltd. vs. ACIT

ITA NO. 56 TO 67 AND 72 & 73 (PUN.) OF 2022

A.Y.: 2009-10 TO 2014-15

Date of Order: 20th December, 2023

38. Sec. 153D: Approval u/s 153D is a mandatory and not procedural requirement and mechanical approval without application of mind by the approving authority would vitiate assessment orders.

FACTS

The assessee is a company engaged in the business of manufacturing of TMT Bars. A search and seizure action was conducted at different premises of the Mantri-Soni Group of Jalna / Bhilwara and their family members on 2nd May, 2013. A notice us 153A was issued upon the assessee on 13th February, 2014 requiring him to furnish the return of income from the date of receipt of notice.

The AO had added an amount of ₹2,00,00,000 which was taken from M/s. Sangam Infratech Limited, Bhilwara as unsecured loans on account of accommodation entry in the hands of the assessee. The AO further added unsecured loans of ₹85,00,000 taken from M/s. Swift Venture Pvt Ltd. and determined total income at ₹3,23,94,890 vide its order dated 30th March, 2016 passed us 143(3) r.w.s. 153A of the Act.

Aggrieved by the assessment order, the assessee filed an appeal before CIT(A). The CIT(A) in its order confirmed both the additions made by the AO. Aggrieved by the order, the assessee filed an appeal before the ITAT.

The assessee challenged the action of the AO of initiating the proceedings us 153A of the Act and passing the assessment order us 143(3) r.w.s. 153A of the Act.

HELD

The assessee argued that the Joint Commissioner of Income Tax, Central Range, Nashik granted approval u/s. 153D of the Act on mechanical basis without any independent application of mind, the said approval nowhere deals with the merits of case relating to the additions made in the draft assessment order, the said approval nowhere mentions any reason or justification as to why such approval is being granted and it amply proves beyond doubt that the same was given in mechanical manner with a biased approach without any independent application of mind.

The ITAT observed that there should be some indication that the approving authority examined relevant material in detail while granting the approval u/s 153D of the Act. The approval u/s. 153D is a mandatory requirement and such approval is not meant to be given mechanically. The ITAT observed that on an examination of the approval dated 21st March, 2016 which was placed on record, no reference whatsoever was made by the JCIT or no indication was given for examination of evidences, documents, statements of various persons, etc.

The ITAT also observed that the AO sought approval u/s 153D of the Act on 18th March, 2016, the JCIT granted approval on 21st March, 2016 and the final assessment order u/s 143(3) r.w.s. 153A of the Act was passed on 30.03.2016 which clearly indicates that the approving authority granted approval in one day [19th March, 2016 & 20th March, 2016 was a Saturday & Sunday] mechanically without examining the relevant material.

The ITAT followed the decision of Hon’ble High Court of Orissa in the case of M/s. Serajuddin & Co. in ITA Nos. 39, 40, 41, 42, 43, 44 of 2022 and held that the approval granted u/s. 153D of the Act mechanically without application of mind which resulted in vitiating the final assessment order dated 30th March, 2016 u/s. 143(3) r.w.s. 153A of the Act.

In the result, the appeal of the assessee was allowed for the above-mentioned issue.

EDITORIAL COMMENT

The decision of Hon’ble High Court of Orissa in the case of M/s. Serajuddin & Co. in ITA Nos. 39, 40, 41, 42, 43, 44 of 2022 was confirmed by the Hon’ble Supreme Court vide order dated 28th November, 2023 in SLP(C) No. 026338/2023.

BCAJ Admin

Sec. 68 r.w.s. 148: Where nothing was brought on record by the Assessing Officer to substantiate that assessee had taken accommodation entry, reopening notice was to be quashed

[2024] 112 ITR (T) 158 (Kol – Trib.)

R. S. Darshan Singh Motor Car Finance (P.) Ltd. vs. ITO

ITA NO. 265(KOL) OF 2024

A.Y.: 2013-14

Date of Order: 2nd May, 2024

37. Sec. 68 r.w.s. 148: Where nothing was brought on record by the Assessing Officer to substantiate that assessee had taken accommodation entry, reopening notice was to be quashed.

FACTS

The assessee is a non-banking financial company [NBFC]. The AO had received information from Asst. Director of Income Tax (Investigation) (OSD), Unit-4, Kolkata that the assessee is one of the beneficiaries of the accommodation entries and had received total amount of ₹35,00,000 from M/s. Brahma Tradelinks Pvt. Ltd. during the FY 2012-13. A notice u/s 148 was issued on 19th March, 2020 on perusal of the said information. The assessee had objected the reopening of the assessment proceedings. The AO disposed of the objections without assigning any reasons and enhanced the income of the assessee by ₹35,00,000 as unexplained cash credit u/s 68 of the Act. On appeal before CIT(A), the CIT(A) confirmed the impugned addition of ₹35,00,000 and upheld the assessment order.

Aggrieved by the Order, the assessee preferred an appeal before the ITAT on several grounds and filed an application for additional ground of appeal – “That the impugned order passed u/s 147 of the Act making an addition of ₹35,00,000 is not based on any information leading to escapement of ₹35,00,000 and therefore the entire proceeding is without jurisdiction and hence bad in law”

HELD

The ITAT observed that evidently the assessee had received sum of ₹20,00,000 from M/s. Brahma Tradelinks Pvt. Ltd. during the FY 2012-13. The AO had not brought on record anything to substantiate the alleged receipt of ₹35,00,000 except for the fact that he had received credible information.

Assessee had relied on the following judgments:

CIT(Exemptions) vs. B. P. Poddar Foundation for Education [2023] 448 ITR 695 (Cal. HC)
CIT vs. Lakshmangarh Estate & trading Co. [2013] 220 Taxman 122 (Cal.)
Peerless General Finance and Investment Co. Ltd. vs. DCIT [2005] 273 ITR 16 (Cal. HC)

Relying on the above judgments, the ITAT opined that the burden lies with the AO to verify the genuineness of the credible information and that the information as alleged to be received by AO cannot be said to be a credible information. The ITAT also observed that in the preceding AY 2012-13, reopening was initiated by the then AO against the assessee on the same issue i.e. on the basis of transaction with M/s. Brahma Tradelinks Pvt. Ltd. but no addition was made.

The ITAT held that the AO did not apply his own mind to the information and examine the basis and material of the information, he accepted the plea in a mechanical manner and thus, the issuance of notice u/s 148 of the Act was illegal, wrong and quashed the notice.

In the result, the appeal of the assessee was allowed.

BCAJ Admin

Section 250(6) of the Act obligates the CIT(A) to state points for determination in appeal before him, the decision thereon and the reasons for determination. CIT(A) has no power to dismiss appeal of assessee on account of non-prosecution and without deciding on the merits of the case

Maa Chintpurni Mining Pvt. Ltd. vs. ITO
ITA No. 28/Ranchi/2024
A.Y.: 2015-16
Date of Order: 13th August, 2024
Section: 250

36. Section 250(6) of the Act obligates the CIT(A) to state points for determination in appeal before him, the decision thereon and the reasons for determination. CIT(A) has no power to dismiss appeal of assessee on account of non-prosecution and without deciding on the merits of the case.

FACTS

The assessee, engaged in the business of mining, filed its return of income electronically on 29th October, 2015 declaring total income at ₹21,960. The case of the assessee was selected under limited scrutiny under CASS for the reason ‘large share premium received during the year’. During the assessment proceedings, the assessee failed to substantiate the nature of amount received to the tune of ₹68,11,000 whether it was share premium or otherwise to the satisfaction of the AO.

The assessment order stated that the assessee did not make due compliance to notices issued from time to time. Thus, the Assessing Officer (AO) framed the assessment u/s.144 of the Act assessing total income at ₹68,32,955 after making addition of ₹68,11,000 on account of unexplained cash credit u/s.68 of the Act.

Against the assessment order, the assessee preferred appeal before the ld. CIT(A). Before him, vide three grounds of appeal, the assessee contested the addition made on the ground that the AO erred in making the addition of the amount credited in the bank account as cash credit u/s 68 of the Act. Besides, he erred in making the addition which was not the subject matter of Limited scrutiny. The CIT(A) in his order narrated the non-compliant attitude of the assessee stating that despite number of notices sent through ITBA portal on several occasions, there was no response from the assessee. Therefore, he proceeded to dispose of the appeal based on materials on record. The CIT(A) dismissed the appeal of the assessee upholding the addition made by the AO.

Aggrieved, the assessee filed an appeal to the Tribunal where written submissions were filed on behalf of the assessee.

HELD

The Tribunal observed that while the CIT(A) has claimed that despite several notices issued allowing opportunity of hearing to the assessee during appellate proceedings, there was no compliance, the AR on the other hand, has inter alia claimed vide written submission above (which have been reproduced by the Tribunal in its order) that the CIT(A) ignored the written submission made on e-filing portal within the due date of time allowed. Copies of e-proceeding acknowledgements were enclosed with the written submissions which the Tribunal found to be self-speaking.

The Tribunal held that evidently, it appeared to the Bench that the compliance made by the assessee through e-portal was not in the knowledge of the CIT(A) for some technical issue. Since the appellate proceedings were taken up by NFAC in a faceless manner, such lack of communication cannot be ruled out due to technical glitches. It held that it would be in the fitness of things that the matter be adjudicated de novo on the grounds of appeal before the CIT(A)/NFAC after taking account the reply and other supporting material as claimed by the assessee to have been filed on e-portal.

The Tribunal held that the appeal has not been decided on merits due to miscommunication between the department and the assessee. Referring to provisions of Section 250(6) of the 1961 Act the Tribunal held that CIT(A) is obligated to state points for determination in appeal before him, the decision thereon and the reasons for determination. He has no power to dismiss appeal of assessee on account of non-prosecution and without deciding on the merits of the case.

Thus, in the in the interest of justice, the Tribunal restored the matter to CIT(A) emphasising the need for a thorough and compliant adjudication process.

The appeal filed by the assessee was allowed for statistical purposes.

BCAJ Admin

It is not necessary that the consideration of the original asset be invested in new residential house. Construction of new house can commence before the date of transfer of original asset. Where return of income is filed under section 139(4), investment in new residential house till the date of filing of such return qualifies for deduction under section 54

Jignesh Jaysukhlal Ghiya vs. DCIT

ITA No. 324/Ahd./2020 A.Y.: 2013-14

Date of Order: 7th August, 2024

Sections: 54, 139(4)

35. It is not necessary that the consideration of the original asset be invested in new residential house. Construction of new house can commence before the date of transfer of original asset. Where return of income is filed under section 139(4), investment in new residential house till the date of filing of such return qualifies for deduction under section 54.

FACTS

For the assessment year under consideration the assessee filed his return of income declaring total income of ₹31,71,420. The Assessing Officer (AO) assessed the total income by making an addition of ₹23,17,183 as long-term capital gains.

The assessee sold a residential house on 9th January, 2013 for a consideration of ₹45,00,000 and purchased an unfinished flat on 17th February, 2014 and sale consideration was paid between 4th August, 2011 to 8th December, 2011 (much before sale of original house). The assessee also entered into a Construction Agreement on 25th February, 2014 to complete the construction of unfinished flat for a total consideration of ₹51,65,000. This consideration was paid during 8th December, 2011 to 16th February, 2014. Thereafter, the assessee filed his belated Return of Income u/s. 139(4) of the Act and claimed exemption u/s. 54 (restricted to ₹23,17,183). The Assessing Officer (AO) denied the benefit of section 54 as the assessee failed to deposit unutilised amount of capital gain in separate account and also did not file the Return of Income as prescribed u/s. 139(1) of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who partly allowed the appeal and directed the AO to recompute the deduction under section 54 by considering only that part of the investment made in new property which was made after the date of sale of the original house and before the due date of filing of return of income under section 139(1) of the Act.

Aggrieved, the assessee preferred an appeal to the Tribunal where on behalf of the assessee it was submitted that construction of the new flat has been completed within three years (25th February, 2014) from the date of transfer of original asset (9th January, 2013). Thus, assessee is eligible for exemption u/s. 54 even in respect of investment made prior to the date of transfer of original asset. The date of commencement of construction is irrelevant for the purpose of claim of exemption u/s. 54 of the Act, so long as construction is completed within three years from the date of “transfer of original asset”. Further, the assessee is eligible for exemption u/s. 54 of the Act even in respect of amount of investment in construction made prior to the date of “transfer of original asset”. Reliance was placed on the following decisions:

i) Bhailalbhai N. Patel vs. DCITITA 37/Ahd/2014;

ii) ACIT vs. Subhash S. Bhavnani – (2012) 23 taxmann. com 94 (Ahd);

iii) Kapil Kumar Agarwal vs. DCIT-(2019) 178 ITD 255 (Del);

iv) CIT vs. J. R. Subramanya Bhat (1987) 165 ITR 571 (Karnataka);

v) CIT vs. H. K. Kapoor-(1998) 234 ITR 753 (Allahabad);

vi) CIT vs. Bharti Mishra-(2014) 41 taxmann.com 50 (Del);

HELD

The Tribunal found that both the lower authorities have taken a common view that the sale consideration of the old residential house should form part of construction in the residential house for claiming deduction 54 of the Act. It held that that the assessee is eligible to claim deduction under this section, even if a new residential house is purchased within one year before the date of transfer of original asset, which means that assessee has to make use of funds other than the sale consideration of original asset for investing in a new residential house and it is not mandatory that only the sale consideration of original asset be utilised for purchasing or constructing a new residential house. Since the assessee, in the present case, has utilized other funds (apart from sale consideration) for constructing new residential house, for this reason only he cannot be denied deduction u/s 54 of the Act.

The Tribunal having quoted the provisions of section 54 held that there is no mention about the date of start of construction of residential house, but it only refers to a construction of a residential house, which is the date of completion of the constructed residential house habitable for the purpose of residence.

As regards the question as to whether the assessee is entitled for claiming exemption u/s. 54 where the return is filed belatedly u/s. 139(4) of the Act it noted that this issue is considered by the Co-ordinate Bench of this Tribunal in the case of Manilal Dasbhai Makwana vs. ITO [(2018) 96 Taxmann.com 219] where the Tribunal has held that “when an assessee furnishes return subsequent to due date of filing return under s.139(1) but within the extended time limit under s.139(4), the benefit of investment made up to the date of furnishing of return of income prior to filing return under s.139(4) cannot be denied on such beneficial construction.”

It also noted that the Madras High Court in the case of C. Aryama Sundaram vs. CIT [(2018) 97 taxmann.com 74] has on identical facts decided the issue in favour of the assessee and held that “It is not a requisite condition of section 54 that the construction could not have commenced prior to the date of transfer of asset resulting in capital gain.”

The Tribunal following the above judicial precedents held that the assessee is eligible for deduction u/s. 54 of the Act and directed the AO to grant deduction and delete the addition made by him.

The Tribunal allowed the appeal filed by the assessee.

BCAJ Admin

Mistake in tax calculation whereby tax was calculated at slab rate instead of rate mentioned in section 115BBE is a mistake which can be rectified under section 154 and therefore provisions of section 263 cannot be invoked in such a scenario

Dhashrathsinh Ghanshyamsinh vs. PCIT

ITA No. 223/Ahd./2021

A.Y.: 2015-16

Date of Order: 8th August, 2024

Sections: 115BBE, 154, 263

34. Mistake in tax calculation whereby tax was calculated at slab rate instead of rate mentioned in section 115BBE is a mistake which can be rectified under section 154 and therefore provisions of section 263 cannot be invoked in such a scenario.

FACTS

The assessee filed return of income for AY 2015-16 declaring total income to be a loss of ₹31,52,060. The case was selected for limited scrutiny. The Assessing Officer (AO) passed an order under section 143(3) assessing the total income to be ₹1,89,07,363. The additions made by the AO comprised of addition in respect of interest free advance amounting to ₹3,60,000, addition in respect of cash gift amounting to ₹34,00,000, addition in respect of unsecured loan amounting to ₹19,50,000 and addition in respect of cash deposit in Bank amounting to ₹1,63,49,423. The PCIT issued show cause notice under Section 263 of the Act dated 28th February, 2020 in respect of the observation that during the assessment proceedings, the assessee failed to submit any documentary evidence regarding the source of cash deposit in the Bank and gift received in cash and, therefore, the addition made under section 68 should have been taxed at 30 per cent and not as per the slab rates. Thus, the PCIT passed order under Section 263 on 30th April, 2020 directing the AO to calculate tax as per Section 115BBE of the Act.

Aggrieved, assessee preferred an appeal to the Tribunal.

HELD

The PCIT has not pointed out the aspect of assessment order being erroneous and prejudicial to the interest of the revenue. The Tribunal observed that all the additions made by the AO are in consonance with the Income-tax statute. The calculation of tax as per Section 115BBE of the Act is a mistake which can be rectified under Section 154 of the Act and, therefore, the provisions of Section 263 of the Act cannot be invoked in this scenario as it is not derived from Section 263 of the Act where the mistake in the assessment order carried out by the AO can be rectified. Thus, invocation of Section 263 of the Act itself was held to be not justifiable in the assessee’s case.

BCAJ Admin

Section 69C — Bogus Purchase — Genuineness of purchase transaction

Pr. CIT – 1 Mumbai vs. SVD Resins & Plastics Pvt. Ltd

ITXA No. 1662 & 1664 of 2018

A.Ys.: 2009–2010 and 2010–2011

Dated: 7th August, 2024, (Bom) (HC)

14. Section 69C — Bogus Purchase — Genuineness of purchase transaction.

Briefly, the facts are that the assessee was engaged in the business of trading in resins and chemicals on wholesale basis. On information received from the DGIT (Investigation), Mumbai, the Assessing Officer (AO) invoked Section 147 of the Income-tax Act, 1961 to reopen the completed assessment by issuing notice under Section 148 dated 12th March, 2013. In response thereto, the assessee filed a revised return on 20th March, 2013, as also sought the reasons as recorded by the AO. The AO was of the opinion that the assessee had made purchases amounting to ₹1,34,25,500 from six parties who were declared by the Sales Tax Department as ingenuine dealers. It is not in dispute that during the assessment proceedings, the assessee filed ledger accounts, confirmation of suppliers, purchase bills, delivery bank statements and other documentary evidences to justify the genuineness of the purchases. The AO nonetheless was of the opinion that the disputed purchases did not have nexus with the corresponding sales. Accordingly, he made an addition of the said amount under Section 69C of the Act on the grounds of there being unexplained payments qua the disputed purchases.

Before the Commissioner of Income Tax (Appeals), the assessee contended that the AO has not rejected the books of accounts by invoking the provisions of Section 145(3); hence, the AO was not justified in invoking the provisions of Section 69C. It was also the assessee’s case that during the hearing in question as well as the preceding two years, the assessee had declared gross profit for the AY 2007–2008 at 4.23 per cent and for the AY 2008–2009 at 4.28 per cent. It was also contended that for the subsequent AY 2009–2010, a gross profit of 4.74 per cent was declared in respect of the disputed purchase; the disclosed gross profit was 0.27 per cent which was lower by 4.47 per cent than the normal gross profit margin of 4.74 per cent in respect of other accepted genuine transactions. It was also contended that if the disallowance is sustained, there will be an abnormal increase in the gross profit at 17.81 per cent which was almost impossible in trading activity of chemicals, and hence, it was urged before the CIT(A) that an alternate to estimate the total income at 5 per cent on the purchases needs to be accepted. Considering the rival contentions, the CIT(A) estimated the profit at 12.5 per cent on the purchases made by the assessee. The CIT(A) reduced the declared GP from 12.5 per cent and confirmed the addition to the extent of 7.76 per cent.

The Tribunal considering the proceeding and the respective contentions as urged on behalf of the revenue passed the impugned order in which it was observed that the CIT(A) has rightly estimated the profit in regard to the purchases at 12.5 per cent; however, the Tribunal observed that CIT(A) was not correct in reducing the gross profit already returned by the assessee at 4.74 per cent out of the 12 per cent, for the reason that the gross profit returned by the assessee related to the sales made by the assessee and did not have link to the purchases for which assessee might have procured bills by making savings in VAT, etc. For such reason, the Tribunal partly allowed the grounds as raised by the revenue and directed the AO to estimate the income at 12.5 per cent in each of the assessment years, on the purchases so made. The Tribunal rejected the assessee’s challenge to the orders passed by the CIT(A) while partly allowing the revenue’s appeals and dismissing the assessee’s appeal.

The appellant’s / revenue’s primary submission that the approach of the CIT(A) as also the part acceptance of such approach by the tribunal in the impugned order needs interference of this Court on the question of law as raised by the revenue. It is submitted that entire purchases of ₹1,34,25,500 were required to be discarded as bogus purchases, and the relevant amounts brought to tax by making additions to the assessee’s income, as rightly undertaken by the AO. However, the revenue was not in a position to dispute that the assessee had furnished all the relevant documents in so far as the purchases are concerned, namely, the ledger accounts, confirmation of suppliers, purchase bills, delivery statements and other documentary evidence, despite which the AO on the basis of information received from the Sales Tax Department had decided to make additions of the said amounts on the grounds that the purchases were presumed to be doubtful. The revenue further stated that the suppliers were not independently examined nor was their evidence recorded.

The assessee submitted that all these are factual issues which are being raised by the revenue and no question of law rises for consideration of the Court. Reliance was placed on the decision of a co-ordinate bench of this Court in the case of Pr. Commissioner of Income Tax-17 vs. Mohammad Haji Adam & Company, [2019] 103 taxmann.com 459 (Bombay) to contend that in similar circumstances, the Court had not entertained the revenue’s appeal and the same was dismissed, with observations that no question of law had arisen for consideration of the Court in similar facts.

The Honourable Court observed that the basic premise on the part of the AO so as to form an opinion that the disputed purchases were not having nexus with the corresponding sales, appears to be not correct. It was seen that what was available with the department was merely information received by it in pursuance of notices issued under Section 133(6) of the Act, as responded by some of the suppliers. However, an unimpeachable situation that such suppliers could be labelled to be not genuine qua the assessee or qua the transaction entered with the assessee by such suppliers was not available on the record of the assessment proceedings. It was an admitted position that during the assessment proceedings, the assessee filed all necessary documents in support of the returns on which the ledger accounts were prepared, including confirmation of the supplies by the suppliers, purchase bills, delivery bank statements, etc., to justify the genuineness of the purchases; however, such documents were doubted by the AO on the basis of general information received by the AO from the Sales Tax Department. The Honourable Court held that to wholly reject these documents merely on a general information received from the Sales Tax Department would not be a proper approach on the part of the AO, in the absence of strong documentary evidence, including a statement of the Sales Tax Department that qua the actual purchases as undertaken by the assessee from such suppliers, the transactions are bogus. Such information, if available, was required to be supplied to the assessee to invite the response on the same and thereafter take an appropriate decision. Unless such specific information was available on record, it is difficult to accept that the AO was correct in his approach to question such purchases, on such general information as may be available from the Sales Tax Department, in making the impugned additions. This for the reason that the same supplier could have acted differently so as to generate bogus purchases qua some parties, whereas this may not be the position qua the others. Thus, unless there is a case to case verification, it would be difficult to paint all transactions of such supplier to all the parties as bogus transactions. Thus a full addition could be made only on the basis of proper proof of bogus purchases being available as the law would recognise before the AO, of a nature which would unequivocally indicate that the transactions were wholly bogus. In the absence of such proof, by no stretch of imagination, a conclusion could be arrived, that the entire expenditure claimed by the petitioner qua such transactions need to be added, to be taxed in the hands of the assessee.

The Honourable Court observed that in a situation as this, the AO would be required to carefully consider all such materials to conclude that the transactions are found to be bogus. Such investigation or enquiry by the AO also cannot be an enquiry which would be contrary to the assessments already undertaken by the Sales Tax Authorities on the same transactions. This would create an anomalous situation on the sale-purchase transactions. Hence, wherever relevant, any conclusion in regards to the transactions being bogus needs to be arrived only after the AO consults the Sales Tax Department and a thorough enquiry in regards to such specific transactions being bogus is also the conclusion of the Sales Tax Department. In a given case, in the absence of a cohesive and coordinated approach of the AO with the Sales Tax Authorities, it would be difficult to come to a concrete conclusion in regard to such purchase / sales transactions being bogus merely on the basis of general information so as to discard such expenditure and add the same to the assessee’s income. Any halfhearted approach on the part of the AO to make additions on the issue of bogus purchases would not be conducive. It also cannot be on the basis of superficial inquiry being conducted in a manner not known to law in its attempt to weed out any evasion of tax on bogus transactions. The bogus transactions are in the nature of a camouflage and /or a dishonest attempt on the part of the assessee to avoid tax, resulting in addition to the assessee’s income. It is for such reason, the approach of the AO is required to be a well-considered approach and in making such additions, he is expected to adhere to the lawful norms and well-settled principles. After such scrutiny, the transactions are found to be bogus as the law would understand, in that event, they are required to be discarded by making an appropriate permissible addition.

The Honourable Court further observed that the Tribunal directed the AO to assess the income from such disputed transaction at 12.5 per cent in each of the assessment years, on the purchases so made by the assessee. However, in a given case if the Income Tax Authorities are of the view that there are questionable and / or bogus purchases, in that event, it is the solemn obligation and duty of the Income Tax Authorities and more particularly of the AO to undertake all necessary enquiry including to procure all the information on such transactions from the other departments / authorities so as to ascertain the correct facts and bring such transactions to tax. If such approach is not adopted, it may also lead to the assessee getting away with a bonanza of tax evasion and the real income would remain to be taxed on account of a defective approach being followed by the department.

The Honourable Court further observed that the decision in Mohammad Haji Adam & Company [2019] 103 taxmann.com 459 (Bombay) as relied on behalf of assessee is also quite opposite in the context in hand. In this decision, the Court observed that the findings which were arrived by the CIT(A) as also by the tribunal would suggest that the department did not dispute the assessee’s sales, as there was no discrepancy between the purchases as shown by the assessee and the sales declared. This was held to be an acceptable position, in dismissing the revenue’s appeal on the grounds that no substantial question of law had arisen for consideration of the Court.

In view of the same the appeals are accordingly dismissed.

BCAJ Admin

Section 22 vis-à-vis 28 — Income from house property” or “business income” — Rule of consistency — Applicable to tax proceeding

Pr. CIT – 3 Mumbai vs. Banzai Estates P. Ltd.

ITXA No. 1703, 1727 & 1900 of 2018

A.Ys.: 2008–09, 2009–10 and 2010–11.

Dated: 9th July, 2024, (Bom) (HC).

13. Section 22 vis-à-vis 28 — Income from house property” or “business income” — Rule of consistency — Applicable to tax proceeding.

The issue before the Tribunal was as to whether the income received by the Respondent-Assessee from the property owned by it be accepted as “income from house property” or as contended by the Revenue, it should be treated as “business income”.

The Assessee is engaged in the business of hiring and leasing of properties. The Assessee declared an income from a self-owned property situated at MBC Tower, TTK Road, Chennai (for short, “MBC Tower property”) as income from house property. Apart from such income, the Assessee also declared rental income received from sub-letting of four other properties not owned by the Assessee, as income from business. The Assessing Officer did not accept the income earned from the MBC Tower property as “income from house property” and held such income necessarily to be a “business income”.

The CIT-A confirmed the view taken by the Assessing Officer in assessing the income earned by the Assessee from the self-owned property, as income from business (“profits and gains from business”).

Before the Tribunal, the Assessee contended that in the past, the Assessee was consistently treating rental income from the MBC Tower property as income from house property, which was accepted by the Revenue. The Tribunal was of the view that the Revenue was consistent in accepting Assessee’s income derived from MBC Tower property as “income from house property”; it was observed that the Assessing Officer however had taken a reverse position, for the assessment years in question, by treating its income from MBC Tower property to be “income from business”, without a valid reason. The Tribunal, referring to the decision of the Supreme Court in Raj Dadarkar & Associates vs. Assistant Commissioner of Income-tax [2017] 394 ITR 592 (SC) held that in the present case, Section 22 of the Act was clearly applicable as the property in question was owned by the Assessee. The Tribunal also observed that the Supreme Court in the case of Commissioner of Income-tax vs. Shambhu Investment (P.) Ltd. [2003] 263 ITR 143 (SC) confirmed the decision of the Calcutta High Court in Shambhu Investment P. Ltd. vs. Commissioner of Income-Tax [2001] 249 ITR 47 (Calcutta), wherein the High Court had taken a view that when the Assessee was the owner of certain premises, then the income derived from such property would be income from house property. The Tribunal also considered other relevant decisions to come to a conclusion that the Appeal filed by the Assessee must be allowed.

The revenue submitted that this was a clear case where the income earned by the Assessee from letting out the MBC Tower property was required to be assessed as income, under the head “business income”, and not under the head of “income from house property” for the reason that the primary business of the Assessee was a business of letting out properties and deriving income therefrom. It was submitted that for such reason, the rental income received by the Assessee from MBC Tower property could not be categorised under the head “income from house property”. The Revenue placed reliance on the decision of the Supreme Court in Chennai Properties & Investment Ltd. vs. Commissioner of Income-tax, Central-III, Tamil Nadu [2015] 277 CTR 185 (SC). Thus, the primary contention as urged on behalf of the Revenue is that in the context of Section 22 read with Section 24 of the Act, the provisions would permit a distinction in categorising income under different heads, in the facts and circumstances in hand. It is her contention that such a position stands approved by the Supreme Court in the case of Chennai Properties & Investment Ltd (supra).

The Assessee submitted that Section 22 of the Act makes no distinction on the basis of the Assessee’s business, and in fact, it was appropriate in the facts of the present case for the Assessee to treat the rental income from the MBC Tower property as an income from house property. It was submitted that there was nothing improper much less illegal for the benefit being conferred under Section 24 of the Act, to be availed by the Assessee. It was submitted that in fact in the previous three Assessment Years, i.e., in 2005–06, 2006–07 and 2007–08, the Revenue had accepted that this very income be taken to be income from house property and without any material change in the circumstances, much less in law, the Revenue has taken a position contrary to what had prevailed in the earlier assessment years. Hence, it was not appropriate for the Assessing Officer to take a different position for the Assessment Years in question. It was therefore submitted that the questions of law as raised by the Revenue do not arise for consideration on the principles of consistency which need to be accepted, and as applied by the Tribunal.

The Honourable Court held that it is not possible to accept the contentions as urged on behalf of the Revenue, so as to hold that the present proceedings give rise to any substantial question of law raised by the Revenue in the present Appeals. Section 22 of the Act, making a provision for “income from house property” ordains that the “annual value” of property consisting of any buildings or lands appurtenant thereto of which the Assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried out by him, the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head “income from house property”. Section 23 provides the manner in which “annual value” would be determined. Section 24 provides for deductions from income from house property.

In the present case, the Assessee has availed of deduction under Section 24, which appears to be one of the reasons that the Assessing Officer thought it appropriate to disallow what was accepted in the earlier three Assessment Years: 2005–06, 2006–07 and 2007–08. On a bare reading of Section 22, we find that in the present case, the basic requirements for the Assessee to consider the income as received from MBC Tower property as “income from house property” stands clearly satisfied, as the Assessee derives income from house property “owned by it”. Even if the Assessee is to be in the business of letting or subletting of properties and deriving income therefrom, there is no embargo on the Assessee from accounting the income received by it, from the property “owned by Assessee” (MBC Tower) as “income from house property” and at the same time, categorising the rental income from other properties not of Assessee’s ownership under the head “income from business”. The Revenue’s reading of Section 22 differently to those who are in the business of letting out properties as in the present case namely in combination of a property of Assessee’s ownership and also to have income from properties which are not of Assessee’s ownership from which rental income is derived would amount to reading something into Section 22 than what the provision actually ordains. The legislature does not carve out any such categorisation / exception. Thus, the Revenue is not correct in its contention that in the circumstances in hand, a straightjacket formula is required to be applied, namely, that section 22 is unavailable to an Assessee, who is in the business of letting out properties.

In the prior Assessment Years, the Assessing Officer had accepted the Assessee’s treatment of such income as an income from house property, which is one of the factors which has weighed with the Tribunal to allow the Appeals filed by the Assessee, on the principle of consistency. The Court was of the opinion that such principles are appropriately applied by the Tribunal. The Supreme Court has held it to be a settled principle of law that although strictly speaking res judicata does not apply to income tax proceedings, and as such, what is decided in one year may not apply in the following year. Thus, when a fundamental aspect permeating through different Assessment Years has been treated in one way or the other and that has been allowed to continue, such position ought not be changed without any new fact requiring such a direction. (See M/s. Radhasoami Satsang, Saomi Bagh, Agra vs. Commissioner of Income Tax [1992] 193 ITR 321 (SC). The decision of the Supreme Court in M/s. Radhasoami Satsang (supra) has been referred in a decision of a recent origin in Godrej & Boyce Manufacturing Company Ltd. vs. Dy. Commissioner of Income Tax, Mumbai, &Anr (2017) 7 SCC 421.

The further refer to a decision of this Court in the case of Principal Commissioner of Income-tax vs. Quest Investment Advisors (P.) Ltd [2018] 409 ITR 545 (Bombay), in which this Court referring to the decision of the Supreme Court in Bharat Sanchar Nigam Ltd. Anr. vs. Union of India Ors [2006] 282 ITR 273 (SC) which followed the decision in Radhasoami Satsang Sabha (supra) accepted the rule of consistency.

The Honourable Court further observed that the Revenue’s reliance on the decision in Chennai Properties (supra) was not well founded for the reason that in such case, the assessee itself had chosen to account such income derived by the assessee, as an income under the head “income from business”. This was a case where the Revenue was of the contrary view, namely, that such income ought not to be allowed as an income from business and must be treated as income from house property. The Supreme Court thus held that the income was rightly disclosed by the Assessee under the head “gains from business”, and it was not correct for the High Court to hold that it needs to be treated as income from house property. The situation being quite different in the said case, the same would not be applicable in the present facts. This is not a case where the Assessee itself had taken a position that such income be treated as income from business.

Accordingly the Appeals were dismissed.

BCAJ Admin

Section 37: Payments under a Memorandum of Settlement with the trade union — Expenditure not covered by Section 30 to Section 36, and expenditure made for purposes of business shall be allowed under Section 37(1) of the Act.: Section 40A(9) of the Act.

CIT vs. M/s. Tata Engineering & Locomotive

Company Ltd.

[ITXA NO. 321 of 2008 & 2070 of 2009

A.Ys.: 1987–88 and 1988–89

Dated: 30th July, 2024, (Delhi) (HC)].

12. Section 37: Payments under a Memorandum of Settlement with the trade union — Expenditure not covered by Section 30 to Section 36, and expenditure made for purposes of business shall be allowed under Section 37(1) of the Act.: Section 40A(9) of the Act.

The two Appeals arise from common order dated 26th October, 2004 passed by the Income-tax Appellate Tribunal, and involve identical questions of law, extracted below:

“(A) Whether the ITAT was justified in law in upholding the action of the CIT(A) in deleting the disallowance of R1,96,71,842/- made under section 40A(9) of the Act ?

(B) Whether a payment made under a memorandum of settlement under the Industrial Disputes Act can be said to be a payment required by or under any law ?”

The short point that arose for consideration was whether the payments made under a Memorandum of Settlement dated 31st March, 1986 between the Respondent-Assessee and the trade union could be allowed as revenue expenditure under Section 37(1) of the Act; the disallowance canvassed by the Appellant-Revenue was based on the purported applicability of Section 40A(9) of the Act.

The payments were envisaged under a Memorandum of Settlement dated 31st March, 1986 between the Respondent-Assessee and the trade union, namely, TELCO-Workers’ Union, Jamshedpur (“Workmen’s Union”) of the workers employed by the Respondent-Assessee. The expenses were primarily defended as being revenue expenditure as expenses towards development and welfare of the local population in the vicinity of the factory with benefits flowing the business. Such expenditure was claimed to have helped the Respondent-Assessee get the benefit of goodwill and local harmony in the conduct of its business operations in the local ecosystem, thereby justifying the claim that such expenditure should be allowed as revenue expenditure. Apart from these submissions, the Respondent-Assessee also claimed that such expenditure, having been envisaged in the Memorandum of Settlement entered into with the Workmen’s Union of the employees, the expenditure could also be defended as payments made under the law in terms of the settlement reached with the employees.

The Honourable Court observed that from a plain reading of the Memorandum of settlement, it would become clear that the Respondent-Assessee had been expending various amounts towards “Community Services” and “Social Welfare”, and this was recited in the Memorandum of Settlement, with a statement that such measures would continue. There is no commitment of any specific amount that would be spent under these heads of expenses. Owing to the linkage of the expenses with the settlement entered into with the Workmen’s Union, the Appellant-Revenue has argued that Section 40A(9) would disallow deduction of such expenditure in the computation of income under the Act.

Both, the lower authorities gave a concurrent findings to state the nature of these expenses do not fall within the jurisdiction of Section 40A(9) and that they ought to be allowed under Section 37(1) of the Act.

The Honourable Court observed that it was apparent that the expenditure on community services and social welfare, in the context of the Respondent-Assessee’s business in that region, was being undertaken even before the execution of the Memorandum of Settlement. The document merely recited that the Company would continue to spend on such measures. Indeed, employees and their extended families would have benefited from such expenditure, which is why it finds mention in the Memorandum of Settlement. However, the expenses were not aimed at employee welfare alone but formed part of the Company making its presence felt by discharging a wider range of social responsibilities in the area of its operation.

The Court noted that plain reading of the Section 40A(9) would show that the subject matter of what is positively disallowed under the provision is payments made by an assessee “as an employer”. The very core ingredient to attract the jurisdiction of the provision is that the payment ought to have been made by the assessee in the capacity of an employer. The payments that are disallowed under Section 40A are payments made towards setting up, forming or contributing to any fund, trust, company, association of persons, body of individuals, society or other institution for any purpose, but in every case, in the capacity as an employer. Even for such payments, there is an exception in relation to payments that positively fall within the scope of clauses (iv), (iva) and (v) of Section 36(1), which are essentially payments towards contribution to provident fund, pension scheme and gratuity fund. These are specifically legislated as allowable expenses and have therefore been kept out of the mischief of Section 40A(9). Yet, it cannot be overlooked that for any payment to first fall within the mischief of what has to be positively disallowed under Section 40A(9), the payment ought to have been made by the assessee “as an employer”.

The Honourable Court observed that the payments could not be regarded as payments made by the Respondent- Assessee in its exclusive capacity as an employer. The payments in question are made towards wider local welfare measures that would boost its presence in the local ecosystem and enable harmonious conduct of its factory and business operations in the vicinity. Merely because a commitment to continue such welfare measures is recited in the Memorandum of Settlement with the Workmen’s Union, these payments would not partake the character of payments made under the Memorandum of Settlement or payment required to be made under labour law, or for that matter, payment that is made “as an employer”.

The expenditure not covered by Section 30 to Section 36, and expenditure made for purposes of business shall be allowed under Section 37(1) of the Act. At all times, relevant to these appeals, as Section 37 then stood, such expenses were not disallowed under Section 37.

The Court observed that in the instant case, the payments made by the Respondent- Assessee were for public causes in the locality of the business operations and benefits flowed from it to the business of the Assessee. If at all the Memorandum of Settlement is relevant, it would be to show that there was a nexus between such social welfare activity undertaken by the Respondent-Assessee and the business of the Respondent-Assessee. The local harmony and goodwill that the social welfare and community expenses generated, benefited the Respondent-Assessee’s conduct of business. That such expenses were being incurred was acknowledged and recited as a continuing commitment. Thus, merely because such expenditure finds a place in the Memorandum of Settlement, the nature and character of such expenditure would not be altered, so as to fall under Section 37(1), or to attract Section 40A(9). Therefore, the two concurrent views expressed by the CIT-A and the Tribunal need not be faulted.

The Honourable court further observed that the Court, in appellate jurisdiction on substantial questions of law, should not substitute an alternate view merely because another view is possible, unless the views expressed in the concurrent findings are not at all a plausible view.

The Honourable Court held that Section 40A(9) has no application to the facts of the case. The Tribunal was indeed justified in law in upholding the view of the CIT-A in deleting the disallowance made by the Assessing Officer. Insofar as question (B) is concerned, the payments made in the facts of this case were not payments required to be made under the Industrial Disputes Act or payment required by or under any other law, but the same is irrelevant for the matter at hand since Section 40A(9) was not at all attracted. Unless it was attracted, there was no necessity to rely on the exception in that section in relation to payments required to be made or under any law.

Consequently, the two questions of law the Appeals were answered against the Revenue and in favour of the Assessee.

BCAJ Admin

Reassessment — Notice after three years — Limitation — Extension of limitation period under 2020 Act — Notice for A.Y. 2016–17 issued after April 2021 — Alleged escapement of income less than R50 lakhs — Notice barred by limitation

SevenseaVincom Pvt. Ltd. vs. Principal CIT

[2024] 465 ITR 331(Jhar)

A.Y.: 2016–17

Date of order: 11th December, 2023

Ss. 147, 148, 149, 156 of the ITA 1961

43. Reassessment — Notice after three years — Limitation — Extension of limitation period under 2020 Act — Notice for A.Y. 2016–17 issued after April 2021 — Alleged escapement of income less than R50 lakhs — Notice barred by limitation.

The petitioner is a private limited company registered under the Companies Act, 2013. A notice dated 30th June, 2021 u/s. 148 of the Income-tax Act, 1961 for the A.Y. 2016–17 was issued to the petitioner. Thereafter, the Revenue issued a letter on 30th May, 2022 deemed to be a notice u/s. 148A(b) of the Act. However, no information and material relied upon by the respondent-Department were provided to the petitioner. Department passed the order on 21st July, 2022 u/s. 148A(d) of the Act and on the same date, i.e., 21st July, 2022 notice u/s. 148 of the Act was also issued for reassessment for the A.Y. 2016–17 and finally a reassessment order was passed on 31st May, 2023 against this petitioner and consequential notice of demand was also issued. The income claimed to have escaped assessment was less than ₹50 lakhs.

The petitioner wrote a writ petition and challenged the notices and the orders. The Jharkhand High Court allowed the writ petition and held as under:

“i) According to section 149 of the Income-tax Act, 1961 the limitation for issuance of notice u/s. 148 is three years from the end of the relevant assessment year and extendable beyond three years till ten years, provided the income which has escaped assessment is ₹50,00,000 or more and the permission of the prescribed sanction authority is taken u/s. 151.

ii) The notice dated July 21, 2022, issued u/s. 148, for the A. Y. 2016-17 was barred by the limitation period prescribed u/s. 149 since the three-year time period had ended on March 31, 2020. Further, the notice was for alleged escaped income which was less than ₹50 lakhs and therefore, the benefit of the extended period of limitation beyond three years till ten years was not available.

iii) The initiation of reassessment proceedings u/s. 147 was without jurisdiction. If the foundation of any proceeding was illegal and unsustainable, all consequential proceedings or orders were also bad in law. Accordingly, since the notice dated July 21, 2022, issued u/s. 148, was barred by limitation and was illegal, unsustainable and void ab initio and set aside, the subsequent reassessment order u/s. 147 and notice of demand u/s. 156 were also quashed and set aside.”

BCAJ Admin

Reassessment — New procedure — Notice — Reason to believe — Necessity of live link between belief and material available — Information from “insight” portal that assessee had transacted with mutual fund found to be involved in scam — No nexus between belief and material — AO not clear whether assessee had claimed loss or dividend in mutual fund — Non-application of mind — Notices and order set aside.

Karan Maheshwari vs. ACIT

[2024] 465 ITR 232 (Bom)

A.Y.: 2016–17

Date of order: 8th March, 2024

Ss. 147, 148, 148A(b) and 148A(d) of the ITA 1961

42. Reassessment — New procedure — Notice — Reason to believe — Necessity of live link between belief and material available — Information from “insight” portal that assessee had transacted with mutual fund found to be involved in scam — No nexus between belief and material — AO not clear whether assessee had claimed loss or dividend in mutual fund — Non-application of mind — Notices and order set aside.

For the A.Y. 2016–17, the Assessing Officer issued an initial notice u/s. 148A(b), an order u/s. 148A(d) and notices u/s. 148 of the Income-tax Act, 1961, based on the information from the “insight” portal, that the assessee was a beneficiary of dividend income from a mutual fund alleged to have been involved in a scam.

On a writ petition contending that without providing any information as requested, the Department had proceeded to pass the order u/s. 148A(d) and the notices u/s. 148 for reopening the assessment u/s. 147, the Bombay High Court held as under:

“i) The reasons for the formation of the belief that there has been escapement of income u/s. 147 of the Income-tax Act, 1961 must have a rational connection with or relevant bearing on the information. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Assessing Officer and his view that there has been escapement of income in the particular year. It is not any and every material, howsoever vague and indefinite or distant, remote and far-fetched which would suggest escapement of the income. The powers of the Assessing Officer to reopen an assessment, though wide, are not plenary. The Act contemplates the reopening of the assessment if grounds exist for believing that income has escaped assessment. The live link or close nexus should be there between the information before the Assessing Officer and the belief which he has to prima facie form an opinion regarding the escapement of the income u/s. 147.

ii) The assessee was himself a victim of the alleged fraud of the mutual fund and was again being victimised by the Assessing Officer. Even in the order u/s. 148A(d) wherein it was mentioned that statement of the key management personnel of the mutual fund was recorded, there was nothing to indicate that the assessee was part of the alleged sham mutual fund. The assessee was not a distributor and was only a client. The allegation in the initial notice issued u/s. 148A(b) that the assessee was one of the persons who had claimed fictitious short-term capital loss was without any basis. The assessee had, based on public announcement, invested in the mutual fund. The receipt of tax free dividend fund and the fact that the assessee had suffered a loss could not be held against the assessee. Even assuming that the transaction was preplanned, there was nothing to impeach the genuineness of the transaction. The assessee was free to carry on his business which he did within the four corners of the law. Mere tax planning without any motive to evade taxes through colourable devices was not frowned upon even in Mcdowelland Co. Ltd. v. CTO [1985] 154 ITR 148;

iii) That the Assessing Officer’s allegations in the notice issued u/s. 148A(b), that the mutual fund had manipulated accounting methodology so as to artificially inflate the distributable surplus and the investors, in order to reduce their tax liability, had entered into sham transactions and received dividend and short-term capital loss, did not implicate the assessee in any manner. There was nothing to indicate that the assessee had participated knowingly in a sham transaction to reduce his tax liability or to earn dividend or book short-term capital loss.

iv) The Assessing Officer was also not clear whether the assessee had booked loss or claimed dividend in the mutual fund which indicated non-application of mind by the Assessing Officer. The initial notice u/s. 148A(b), the order passed u/s. 148A(d) and the notices u/s. 148 were therefore, quashed and set aside.”

BCAJ Admin

Reassessment — Notice — Limitation — New procedure — Extension of period of limitation by 2020 Act — Supreme Court ruling in UOI vs. Ashish Agarwal [2022] 444 ITR1 (SC) — Effect — Notice for reassessment u/s. 148 after 31st March, 2021 for A.Y. 2015–16 — Extension of period not applicable where limitation had already expired — Notice does not relate back to original date — 2020 Act would not extend limitation

Hexaware Technologies Ltd. vs. ACIT

[2024] 464 ITR 430 (Bom)

A.Y.: 2015–16

Date of order: 3rd May, 2024

Ss. 119, 147, 148, 148A(b), 148A(d) and 149 of ITA 1961

41. (A) Reassessment — Notice — Limitation — New procedure — Extension of period of limitation by 2020 Act — Supreme Court ruling in UOI vs. Ashish Agarwal [2022] 444 ITR1 (SC) — Effect — Notice for reassessment u/s. 148 after 31st March, 2021 for A.Y. 2015–16 — Extension of period not applicable where limitation had already expired — Notice does not relate back to original date — 2020 Act would not extend limitation.

(B) Reassessment — Notice — Document identification number — CBDT Circular stipulating mention of document identification number — Binding nature of — Failure to mention document identification number in notice — Violation of mandatory requirement — Notice invalid.

(C) Reassessment — Notice — Jurisdiction — Faceless assessment scheme — Specific jurisdiction assigned to jurisdictional Assessing Officer or faceless Assessment Officer under scheme is to exclusion of other — No concurrent jurisdiction — Office memorandum cannot override mandatory specifications in scheme.

In its return for the A.Y. 2015–16, the assessee claimed deduction u/s. 10AA of the Income-tax Act, 1961, and special deduction u/s. 80JJAA, filing audit reports in forms 56F, 10DA, 3CB and 3CD. Notices were issued calling upon the assessee to file details of the deductions with all supporting documents with which the assessee complied. The Assessing Officer passed an assessment order u/s. 143(3) of the Act, accepting the return of income filed by the assessee. On 8th April, 2021, the Assessing Officer issued notice u/s. 148 of the Act.

The assessee filed a writ petition challenging the notice as having been issued on the basis of provisions which had ceased to exist. The petition was allowed and the court held that the notice dated 8th April, 2021 was invalid.

Pursuant to the decision of the Supreme Court in UOI vs. Ashish Agarwal [2022] 444 ITR 1 (SC); directing that notices issued u/s. 148 of the Act after 1st April, 2021 be treated as notice issued u/s. 148A(b) of the Act, the Assessing Officer issued notice dated 25th May, 2022 to the assessee u/s. 148A(b) proposing, inter alia, to deny the deduction u/s. 80JJAA of the Act. Notwithstanding the detailed reply filed by the assessee, the Assessing Officer issued a notice called for further information due to change in incumbency as per the provisions of section 129 of the Act. The assessee informed the Assessing Officer that the submissions earlier made should be considered as a response to the notice. The Assessing Officer thereafter passed an order u/s. 148A(d) dated 26th August, 2022, inter alia, dismissing the assessee’s objections. Separately, a communication dated 27th August, 2022 was issued where the Assessing Officer stated that document identification number had been generated for the issuance of notice dated 26th August, 2022 u/s. 148 of the Act.

On the grounds that the notice dated 25th May, 2022 purporting to treat notice dated 8th April, 2021 as notice issued u/s. 148A(b) of the Act for the A.Y. 2015–16, the order dated 26th August, 2022 u/s. 148A(d) of the Act for the A.Y. 2015–16, and the notice dated 27th August, 2022 issued u/s. 148 of the Act for the A.Y. 2015–16, were unlawful, the assessee filed a writ petition. The Bombay High Court allowed the writ petition and held as under:

“i) F or the A. Y. 2015-16 the provisions of the 2020 Act were not applicable. The reliance by the Department on Instruction No. 1 of 2022 ([2022] 444 ITR (St.) 43) issued by the CBDT was misplaced and neither the provisions of the 2020 Act nor the judgment in UOI v. Ashish Agarwal [2022] 444 ITR 1 (SC); provided that any notice issued u/s. 148 of the 1961 Act after March 31, 2021 would travel back to the original date.

ii) The notice, dated August 27, 2022, u/s. 148 of the 1961 Act was barred by limitation since it was issued beyond the period of limitation prescribed in section 149 read with the first proviso. Section 149(1)(b) of the unamended provisions provided a time limit of six years from the end of the relevant assessment year for issuing notice u/s. 148. The relevant assessment year, being 2015-16, the sixth year had expired on March 31, 2022. The first proviso to section 149 provided that up to the A. Y. 2021-22 (period before the amendment), the period of limitation as prescribed in the unamended provisions of section 149(1)(b) would be applicable and only from the A. Y. 2022-23, the period of ten years as provided in section 149(1)(b), would be applicable. To interpret the first proviso to section 149 to be applicable only for the A. Ys. 2013-14 and 2014-15, i. e., for the assessment years where the period of limitation had already expired on April 1, 2021, was contrary to the plain language of the proviso and would render the first proviso to section 149 redundant and otiose and one phrase would have to be substituted with another in section which was impermissible. When the limitation period had already expired on April 1, 2021 when section 149 was amended for the A. Ys. 2013-14 and 2014-15, it could not be revived by way of a subsequent amendment and, hence, for these assessment years the proviso to section 149 was not required. Reopening for the A. Ys. 2013-14 and 2014-15 had already been barred by limitation on April 1, 2021. Accordingly, the extended period of ten years as provided in section 149(1)(b) would not have been applicable to the A. Ys. 2013-14 and 2014-15, de hors the proviso. Hence, to give meaning to the proviso it has to be interpreted to be applicable for the A.Y. up to 2021-22.

iii) The period of limitation and the restriction under the proviso to section 149 were provided in respect of a notice u/s. 148 and not for a notice u/s. 148A. The notice dated April 8, 2021, which though originally issued as a notice u/s. 148, (under the old provisions prior to the amendments made by the Finance Act, 2021), had now been treated as a notice issued u/s. 148A(b) in accordance with the decision of the Supreme Court in UOI v. Ashish Agarwal [2022] 444 ITR 1 (SC). Once the notice dated April 8, 2021 had been treated as having been issued u/s. 148A(b), it was no longer relevant for the purpose of determining the period of limitation prescribed u/s. 149 or the restriction in the first proviso to section 149. Therefore, for considering the restriction on issue of a notice u/s. 148 prescribed in the first proviso to section 149, the fresh notice dated August 27, 2022 issued u/s. 148 was required to be considered. Such notice was beyond the period of limitation of six years prescribed by the 1961 Act prior to its amendment by the Finance Act, 2021. For the A. Y. 2015-16, the unamended time limit of six years had expired on March 31, 2022 and the notice u/s. 148 had been issued on August 27, 2022 and, therefore, was barred by the restriction of the first proviso to section 149.

iv) Even if the fifth and sixth provisos were to be applicable, the notice u/s. 148 dated August 27, 2022 for the A. Y. 2015-16 would still be beyond the period of limitation. The fifth proviso extends limitation with respect to the time or extended time allowed to an assessee in the show-cause notice issued u/s. 148A(b) or the period, during which the proceeding u/s. 148A were stayed by an order of injunction by any court. Hence, in view of the fifth proviso, the period to be excluded would be counted from May 25, 2022, i.e., the date on which the show-cause notice was issued u/s. 148A(b) by the Assessing Officer subsequent to the decision in UOI v. Ashish Agarwal [2022] 444 ITR 1 (SC) and up to June 10, 2022, which is a period of 16 days. The period from June 29, 2022 up to July 4, 2022 could not be excluded since it was not based on any extension sought by the assessee, but at the behest of the Assessing Officer. Even if it was it would only be an exclusion of five days. Even after considering the excluded periods, the notice dated August 27, 2022 was still beyond limitation. The fact that the original notice dated April 8, 2021 issued u/s. 148 was stayed by this court on August 3, 2021, and its stay came to an end on March 29, 2022 on account of the decision of this court, would not be relevant for providing extension under the fifth proviso. The fifth proviso provides for extension only for the period during which the proceeding u/s. 148A is stayed. The original stay granted by the court was not with respect to the proceeding u/s. 148A but with respect to the proceeding initiated under the unamended provisions of section 148 and, hence, such stay would not extend the period of limitation under the fifth proviso to section 149. On the facts, the sixth proviso was not applicable.

v) The notice issued u/s. 148 for the A. Y. 2015-16 had been issued without mentioning a document identification number. Issuance of a separate intimation letter on even date would not validate the notice issued u/s. 148 since the intimation letter referred to a document identification number with respect to some notice u/s. 148 dated August 26, 2022. The notice in question issued to the assessee was dated August 27, 2022 and not August 26, 2022 for which the document identification number was generated. The procedure prescribed in Circular No. 19 of 2019 dated August 14, 2019 ([2019] 416 ITR (St.) 140) for non-mention of document identification number in case letter or notice or order had not been complied with by the Assessing Officer. If the document identification number was not mentioned the reason for not mentioning it, and the approval from the specified authority for issuing such letter or notice or order without the document identification number had to be obtained and mentioned in such letter or notice or order. No such reference was stated in the notice.

vi) The notice dated August 27, 2022 u/s. 148 had been issued by the jurisdictional Assessing Officer and not the National Faceless Assessment Centre and hence was not in accordance with the Scheme announced by notification dated March 29, 2022 ([2022] 442 ITR (St.) 198).

vii) The Scheme dated March 29, 2022 ([2022] 442 ITR (St.) 198) in paragraph 3 clearly provides that the issuance of notice ‘shall be through automated allocation’. It was not the contention of the Assessing Officer that he was the random officer who had been allocated jurisdiction.

viii) No reliance could be placed by the Department on the Office Memorandum, dated February 20, 2023, to justify that the jurisdictional Assessing Officer had jurisdiction to issue notice u/s. 148. The Office Memorandum, merely contained the comments of the Department issued with the approval of Member (L&S) of the CBDT and was not in the nature of a guideline or instruction issued u/s. 119 to have any binding effect on the Department.

ix) The guidelines dated August 1, 2022 did not deal with or even refer to the Scheme dated March 29, 2022 ([2022] 442 ITR (St.) 198) framed by the Government u/s. 151A. The Scheme dated March 29, 2022 u/s. 151A, would be binding on the Department and the guidelines dated August 1, 2022 could not supersede the Scheme and if it provided anything to the contrary to the Scheme, it was invalid.

x) There was no allegation regarding income escaping assessment u/s. 147 on account of any undisclosed asset. In his order, the Assessing Officer had restricted the escapement of income only with regard to the claim of deduction u/s. 80JJAA and had made disallowance of claim of foreign exchange loss. The Assessing Officer had accepted the contentions of the assessee in respect of the foreign exchange loss and therefore, it could not be justified as an escapement of income. He had also accepted that the transactions in issue had been duly incorporated in the assessee’s accounts and that no deduction was claimed in respect of the deduction allowed u/s. 10AA. None of the issues raised in the order showed an alleged escapement of income represented in the form of asset as required u/s. 149(1)(b). The alleged claim of disallowance of deduction did not fall either under clause (b) or clause (c) as it was neither a case of expenditure in relation to an event nor of an entry in the books of account as no entries were passed in the books of account for claiming a deduction under the provisions of the Act.

xi) The assessment could not be reopened u/s. 147 based on a change of opinion. The Assessing Officer had no power to review his own assessment when the information was provided and considered by him during the original assessment proceedings. The claim of deduction u/s. 80JJAA was made by the assessee in the return of income and form 10DA being the report of the chartered accountant had been filed. In the note filed along with form 10DA, the assessee had specifically submitted that software development activity constituted “manufacture or production of article or thing”. During the assessment proceedings, in response to the notice the assessee had furnished the details of deduction claimed under Chapter VI of the Act along with supporting documents. The Assessing Officer had passed the assessment order allowing the claim of deduction u/s. 80JJAA. Such claim had been allowed in the earlier assessment as well from the A. Y. 2010-11. The concept of change of opinion being an in-built test to check abuse of power by the Assessing Officer and the Assessing Officer having allowed the claim of deduction u/s. 80JJAA, reopening of assessment on change of opinion or review of the original assessment order was not permissible even nder the new provisions.

xii) The initial notice issued u/s. 148A(b), the order u/s. 148A(d) to issue the notice and the notice issued u/s. 148 for the A. Y. 2015-16 were quashed and set aside.”

BCAJ Admin

Reassessment — Change of law — Jurisdiction — Notice issued under existing law and reassessment order passed and becoming final — Issue of notice u/s. 148A pursuant to subsequent direction of Supreme Court in UOI vs. Ashish Agarwal — Without jurisdiction and therefore quashed

Arvind Kumar Shivhare vs. UOI
[2024] 464 ITR 396(All)
A.Y.: 2017–18
Date of order: 4th April, 2024
Ss. 147, 148 and 148A of the ITA 1961

40. Reassessment — Change of law — Jurisdiction — Notice issued under existing law and reassessment order passed and becoming final — Issue of notice u/s. 148A pursuant to subsequent direction of Supreme Court in UOI vs. Ashish Agarwal — Without jurisdiction and therefore quashed.

The assessee was originally assessed to tax u/s. 143(3) of the Income-tax Act, 1961 for the A.Y. 2017–18, by an assessment order dated 29th May, 2019. Thereafter, the assessee received a reassessment notice dated 31st March, 2021 issued u/s. 148 of the Act. The assessee participated in the reassessment proceeding and a reassessment order dated 28th March, 2022 was passed by the Assessing Officer. The assessee did not challenge it, and it attained finality. A second reassessment notice for the A.Y. 2017–18 dated 30th July, 2022 was issued, invoking section 148A of the Act.

The assessee filed a writ petition and challenged the validity of notice u/s. 148A.

The counsel for the Revenue contended that since the reassessment notice dated 31st March, 2021 was digitally signed on 1st April, 2021, by virtue of the law declared by the Supreme Court in Civil Appeal No. 3005 of 2022 (UOI vs. Ashish Agarwal 1), decided on 4th May, 2022, the Revenue authorities have taken a view that the notice dated 31st March, 2021 was wrongly acted upon. That notice having been digitally signed on 1st April, 2021, the day when the amended law that introduced section 148A of the Act after making amendment to sections 147 and 148 of the Act came into force, the entire proceedings culminating in the reassessment order dated 28th March, 2022 were vitiated.

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

“i) There could exist only one assessment order for an assessee for one assessment year. Since the reassessment order had already been passed on March 28, 2022 for the A. Y. 2017-18, there was no proceeding pending to have been influenced or affected or governed by the order of the Supreme Court dated May 4, 2022 in UOI v. Ashish Agarwal 1.

ii) In the absence of any declaration of law to annul or set aside the pre-existing reassessment u/s. 147 and assessment order dated March 28, 2022, after issuing notice u/s. 148, the assessing authority had no jurisdiction to reissue the notice dated July 30, 2022 u/s. 148A. The proceedings were without jurisdiction and a nullity, and therefore, quashed.”

BCAJ Admin

Non-resident — Double taxation avoidance — Income deemed to accrue or arise in India — Royalty — Meaning of — Difference between transfer of copyright and right to copyrighted article — Provision of customer relationship management services by resident of Singapore — Fees received not royalty within meaning of Act — Not also taxable in India under DTAA between Singapore and India.

CIT (International Taxation) vs. Salesforce.Com

Singapore Pte. Ltd.

[2024] 464 ITR 257 (Del)

A,Ys.: 2011–12 to 2017–18

Date of order: 14th February, 2024

Ss. 9(1)(vi), Expl. 2of the ITA 1961: and DTAA

between Singapore and India Art. 12(4)(b)(1)

39. Non-resident — Double taxation avoidance — Income deemed to accrue or arise in India — Royalty — Meaning of — Difference between transfer of copyright and right to copyrighted article — Provision of customer relationship management services by resident of Singapore — Fees received not royalty within meaning of Act — Not also taxable in India under DTAA between Singapore and India.

The assessee was a tax resident of Singapore and was stated to provide a customer relationship management services application which was stated to be an ‘enterprise business application’. The application enabled customers and subscribers to record, store and act upon business data, formulate business strategies and enable businesses to manage customer accounts, track sales positions, evaluate marketing campaigns as well as bettering postsales services. The income derived from the subscription fee, which the assessee received from customers in India for providing customer relationship management-related services, was assessed to income-tax.

The Tribunal held that the amount was not assessable in India.

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

“i) Section 9 of the Income-tax Act, 1961, defines royalty as the amount received for the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. The right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the definition of royalty.

ii) In order qualify as fees for technical services, the services rendered ought to satisfy the ‘make available’ test. Therefore, in order to bring services within the ambit of technical services under the Double Taxation Avoidance Agreement between India and Singapore, the services would have to satisfy the ‘make available’ test and such services should enable the person acquiring the services to apply the technology contained therein.

iii) S ince the copyright in the application was never transferred nor vested in a subscriber, the fees were not assessable u/s. 9 of the Act.

vi) Article 12(4)(b) of the DTAA between Singapore and India would have been applicable provided the Department had been able to establish that the assessee had provided technical knowledge, experience, skill, know-how or processes enabling the subscriber acquiring the services to apply the technology contained therein. The explanation of the assessee, which had not been refuted even before the High Court was that the customer was merely accorded access to the application and it was the subscriber which thereafter inputs the requisite data and took advantage of the analytical attributes of the software. This would clearly not fall within the ambit of article 12(4)(b) of the Agreement.

v) That the amount was not assessable in India.”

BCAJ Admin

Charitable purpose — Exemption — Denial of exemption by AO on grounds that assessee did not furnish proper information to Charity Commissioner, that there was shortfall in provision for indigent patients fund, that assessee had generated huge profits, that hospital did not serve poor and underprivileged class, and assessee paid remuneration to two trustees — Grant of exemption by appellate authorities on finding that orders for earlier assessment years not set aside in any manner or over-ruled by court — No infirmity in order of Tribunal granting exemption

CIT(Exemption) vs. Lata Mangeshkar Medical Foundation

[2024] 464 ITR 702 (Bom.)

A.Y.: 2010–11

Date of order: 30th August, 2023

S. 11 of ITA 1961

38. Charitable purpose — Exemption — Denial of exemption by AO on grounds that assessee did not furnish proper information to Charity Commissioner, that there was shortfall in provision for indigent patients fund, that assessee had generated huge profits, that hospital did not serve poor and underprivileged class, and assessee paid remuneration to two trustees — Grant of exemption by appellate authorities on finding that orders for earlier assessment years not set aside in any manner or over-ruled by court — No infirmity in order of Tribunal granting exemption.

The assessee-trust was running a medical institution. For the A.Y. 2010–11, the Assessing Officer (AO) denied the assessee-trust exemption u/s. 11 of the Income-tax Act, 1961 on the grounds that (a) the assessee did not furnish proper information to the Charity Commissioner, (b) there was shortfall in making provision for indigent patients fund, (c) the assessee had generated huge surplus and therefore, its intention was profit making, (d) the hospital of the assessee did not provide services to the poor and under-privileged class of the society, and (e) there was violation of provisions of section 13(1)(c) since the assessee paid remuneration to two individual trustees who did not possess significant qualification and one of them was beyond 65 years of age.

The Commissioner (Appeals) restored the exemption u/s. 11 following the orders of the Tribunal for the A.Y. 2008–09 and 2009–10. The Tribunal affirmed his order of the Commissioner (Appeals).

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

“i) There was no reason to interfere with the order of the Tribunal. The Tribunal had followed its own decision in which it had granted exemption u/s. 11 to the assessee for the A. Ys. 2008-09 and 2009-10. Since there was nothing on record that such orders had been set aside or overruled in any manner by the court, the Tribunal had found no reason to interfere with the order of the Commissioner (Appeals).

ii) There was no infirmity in the order of the Tribunal granting exemption u/s. 11 to the assessee for the A. Y. 2010-11.”

BCAJ Admin

Business expenditure — Capital or revenue expenditure — Software development expenses — Product abandoned on becoming obsolete due to development in technology — No enduring benefit accrued to the Assessee — Expenditure incurred revenue in nature and allowable

Principal CIT vs. Adadyn Technologies Pvt. Ltd.

[2024] 465 ITR 353 (Kar.)

A.Ys.: 2015–16 and 2016–17

Date of order: 10th April, 2023

S. 37 of the ITA 1961

37. Business expenditure — Capital or revenue expenditure — Software development expenses — Product abandoned on becoming obsolete due to development in technology — No enduring benefit accrued to the Assessee — Expenditure incurred revenue in nature and allowable.

The Assessee was engaged in the business of rendering customised internet advertising services for advertisers which could be used on the desktop. The Assessee had incurred software development expenditure of R6,06,30,146 during A.Y. 2015–16 and R20,80,24,899 during A.Y. 2016–17. In the scrutiny assessment, the Assessing Officer (AO) held that if the software platform was developed, it would give enduring benefit to the Assessee, and therefore, held the expenditure to be capital in nature.

The CIT(A) confirmed the action of the AO. The Tribunal reversed the finding of the AO and allowed the appeals of the Assessee.

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

“i) The Assessee’s investment to develop a software platform for desktops had become obsolete due to rapid change in the technology and the Assessee had abandoned further development as a result of which it had abandoned the product and incurred a loss. The project having been abandoned, the assessee would not get any enduring benefit.

ii) The Tribunal, on correct analysis of the facts, had held that the expenditure was revenue and not capital in nature. There was no ground for interference with the findings recorded by the Tribunal.”

BCAJ Admin

Disallowance under section 13 relating to benefit to interested persons cannot apply to charities notified under section 10(23C)(iv).

33 ITO vs. Theosophical Society

(2024) 163 taxmann.com 770 (ChennaiTrib)

ITA No.: 624 (Chny) of 2024

A.Y.: 2014–15

Date of order: 10^th June, 2024

Sections: 10(23C), 13

Disallowance under section 13 relating to benefit to interested persons cannot apply to charities notified under section 10(23C)(iv).

FACTS

The assessee was a society notified under section 10(23C)(iv) and also registered under section 12A(1)(a) of the IT Act. The assessee filed its return of income on 26^th September, 2014, admitting NIL income after claiming exemption under section 11.

The AO denied exemption under section 11 on the grounds that two individuals who had made donations to the society [“interested persons”] had stayed in the lodging facilities of the society by paying nominal maintenance charges, and therefore, the society had violated section 13(1)(c)(ii).

CIT(A) allowed all the grounds of appeal of the assessee-society and observed that:

(a) On perusal of details of interested persons, it was seen that those individuals were providing services to the society without remuneration and their stay in guest house was for theosophical work. It was debatable whether such donors to society will be qualified as interested persons. People staying in society lodgings to serve the society are obviously not benefitting from the society as such.

(b) Even if it was so, then such instance would only affect the case of an assessee since sections 11 to 13 relating to interested persons could not be imported to deny exemption under section 10(23C) as per CBDT Circular No.557 dated 19th March, 1990.

Aggrieved, the revenue filed an appeal before ITAT.

HELD

The Tribunal noted that it was an admitted fact that the society was notified under section 10(23C)(iv) and registered under section 12A(1)(a) and held that the conditions prescribed under section 13 of the IT Act were not applicable, as per CBDT Circular No.557 dated 19^th March, 1990, once the society was notified under section 10(23C). Similarly, the AO could not make any disallowance under section 11 as the society was an organisation notified under section 10(23C)(iv) of the IT Act.

Author’s note: The law has undergone a change by the insertion of the 21^st proviso to section 10(23C) w.e.f. A.Y. 2023–24.

BCAJ Admin

Deeming provision of section 50C is not applicable to leasehold rights in property.

32 Shivdeep Tyagi vs. ITO

(2024) 163 taxmann.com 614(DelTrib)

ITA No.: 484(Delhi) of 2024

A.Y.: 2011–12

Date of order: 18^th June, 2024

Section: 50C

Deeming provision of section 50C is not applicable to leasehold rights in property.

FACTS

The assessee, a salaried employee, filed his return of income without declaring capital gains on sale of leasehold property for ₹60,00,000.

Subsequently, based on AIR information, the AO reopened the case. Since the assessee did not file any proof of cost of acquisition of the leasehold property, the assessment was completed under section 143(3) / 147 by taxing the entire sale consideration of ₹75,94,850 for stamp duty purposes under section 50C as against the actual sale consideration of ₹60,00,000.

The assessee did not succeed in the appeal filed before CIT(A). CIT(A) also did not adjudicate on the issue of validity of reopening of assessment.

Aggrieved, the assessee filed an appeal before ITAT.

HELD

Since the issue of validity of reopening of the assessment had not been adjudicated by CIT(A), the Tribunal restored the matter of validity of reopening of the assessment to the file of CIT(A) to decide it afresh.

On merits, the Tribunal observed as follows:

(a) It is axiomatic that the leasehold right in a plot of land is neither “land or building or both” as such nor can be included within the scope of “land or building or both”. The distinction between a capital asset being “land or building or both” and any “right in land or building or both” is well recognised under the Act, as can be seen from section 54D, which shows that “land or building” is distinct from “any right in land or building”;

(b) Section 50C is a special provision for full value of consideration in certain cases and is a deeming provision; therefore, the fiction created therein cannot be extended to any asset other than those specifically provided therein;

(c) Following decision of the coordinate bench in the case of Noida Cyber Park (P.) Ltd., (2021) 123 taxmann.com 213 (Delhi Trib), section 50C, being deeming provision, is not applicable to leasehold right in a plot of land;

(d) However, the AO was empowered to compute capital gains as per the IT Act, without invoking the provisions of section 50C.

BCAJ Admin

Interest earned by a co-operative housing society on investment with co-operative banks in Maharashtra is eligible for deduction under section 80P(2)(d).

31 Ashok Tower “D” Co Op Housing Society Ltd. vs. ITO

(2024) 163 taxmann.com 598 (Mum Trib)

ITA No.: 434(Mum) of 2024

A.Y.: 2015–16

Date of order: 21^st June, 2024

Section: 80P

Interest earned by a co-operative housing society on investment with co-operative banks in Maharashtra is eligible for deduction under section 80P(2)(d).

FACTS

The assessee, a cooperative housing society, filed its return of income, claiming deduction under section 80P(2)(d) on the interest income of ₹14,72,930 earned by it from its investment in co-operative banks.

During scrutiny proceedings, the AO denied the deduction under section 80P(2)(d) on the grounds that such deduction is available only in case of investment in another co-operative society and co-operative banks cannot be regarded as “co-operative society” under section 2(19) of the IT Act.

CIT(A) rejected the contentions of the assessee and confirmed the addition made by AO.

Aggrieved, the assessee filed an appeal before the ITAT.

HELD

Noting that a “co-operative bank” is defined under section 2(10) of the Maharashtra Co-operative Societies Act, 1960 to mean a “co-operative society” which is doing the business of banking, the Tribunal held that the amount of investment in fixed deposit receipts or in savings bank account made by the assessee with co-operative banks in Maharashtra is also investment made in co-operative society, and therefore, interest earned thereon is also eligible for deduction under section 80P(2)(d) of the IT Act.

BCAJ Admin

Where assessee sold a land and made investment in new land from sale proceeds of old land in name of his son, assessee is entitled to exemption u/s 54B even if investment was made before registration of sale deed.

30 Siddhulal Patidar vs. ITO

[2024] 111 ITR(T) 541 (Indore – Trib.)

ITA No. 110 (IND.) of 2023

A.Y.: 2011–12

Date of order: 28^th February, 2024

Section 54B

Where assessee sold a land and made investment in new land from sale proceeds of old land in name of his son, assessee is entitled to exemption u/s 54B even if investment was made before registration of sale deed.

FACTS

The assessee sold a land vide agreement dated 29^th September, 2006 for ₹35,00,000, which was registered on 6^th September, 2010. The assessee made a new investment of ₹53,29,440 on 20^th June, 2007 in purchase of an agricultural land in the name of his son, Shri Rameshwar Patidar. On the strength of this investment, the assessee had claimed exemption u/s 54B.

The AO had denied the exemption u/s 54B for two reasons, namely:

the new land was purchased in the name of son and not in the name of assessee himself;
the new investment was made on 20^th June, 2007 whereas the sale deed was registered on 6^th September, 2010; thus, the investment has been made before the date of transfer which is not permitted u/s 54B.

Aggrieved by the assessment order, the assessee filed an appeal before the CIT(A). The CIT(A) confirmed the order of the AO. Aggrieved by the order, the assessee filed an appeal before the ITAT.

HELD

The ITAT followed the decision of Hon’ble Jurisdictional High Court of Madhya Pradesh in PCIT vs. Balmukund Meena ITA No. 188/2016 and held that the assessee can be said to be entitled for exemption u/s 54B even if the registration was taken in the name of son.

As for the second reason, the ITAT relied on the following decisions wherein it is already established that the assessee is eligible for exemption u/s 54B where the investment was made by assessee after execution of sale agreement but before registration of sale deed, from the moneys received under sale agreement:

Dharmendra J. Patel vs. DCIT [2023] 152 taxmann.com 465 (Ahmedabad – Trib.)
Ramesh Narhari Jakhadi vs. ITO [1992] 41 ITD 368 (Pune)
Smt. Narayan F. Patel vs. PCIT [2023] 152 taxmann.com 53 (Surat-Trib.) – It followed the decision of Hon’ble Bombay High Court in Mrs. Parveen P Bharucha vs. Union of India WP No. 10437 of 2011 dated 27th June, 2012 (Para No. 12 of order).

In the result, the appeal of the assessee was allowed for the above-mentioned issue.

EDITORIAL COMMENT

The Hon’ble Punjab and Haryana High Court in the case of Bahadur Singh vs. CIT(A) [2023] 154 taxmann.com 456 (P&H) had rejected assessee’s claim of exemption u/s 54B on the basis of purchase of land in the name of wife and the assessee’s SLP against the said decision was dismissed by Hon’ble Supreme Court vide order dated 29^th August, 2023 published in [2023] 154 taxmann.com 457/295 Taxman 313 (SC). The ITAT followed the view favourable to the assessee by relying on the decision of CIT vs. Vegetable Products [1973] 88 ITR 192 (SC) and also mentioned that the Hon’ble SC had dismissed the assessee’s SLP against the decision of Hon’ble Punjab & Haryana High Court by passing a one line summary order; therefore, as per settled judicial view, such dismissal cannot be treated as pronouncement of final law by the Hon’ble Supreme Court.

BCAJ Admin

Addition made by Assessing Officer during reassessment proceedings, not being based on any incriminating material during search and seizure action, was to be deleted.

29 Ashish Jain vs. DCIT

[2024] 111ITR(T)152 (Chd – Trib.)

ITA No. 352 (CHD) of 2023

A.Y.: 2012–13

Date of order: 23^rd January, 2024

Section: 153A

Addition made by Assessing Officer during reassessment proceedings, not being based on any incriminating material during search and seizure action, was to be deleted.

FACTS

A search and seizure operation u/s 132(1) was carried out at the residential and business premises of M/s Jain Amar Clothing Pvt. Ltd. Group of cases on 26^th February, 2016, and the assessee’s premises were also searched on the said date. Thereafter, a notice dated 28^th September, 2016 u/s 153A was issued upon the assessee.

The assessee had purchased 1,700 equity shares of M/s. Maple Goods Pvt. Ltd. in F.Y. 2010–11 through share broker S.K. Khemka. M/s. Maple Goods Pvt. Ltd. was later on amalgamated with M/s. Access Global Ltd. and as against 1 share of M/s Maple Goods (P) Ltd., 47 equity shares of M/s Access Global Ltd. were allotted. The shares of M/s. Access Global Ltd. were received in D-Mat account of the assessee. The assessee had sold these shares in F.Y. 2012–13 and earned long-term capital gains (LTCG) of ₹87,04,733 thereon.

The AO had referred upon the report of the Directorate of Income-tax (Inv.), Kolkata dated 27^th April, 2015, which stated that the share of M/s Access Global Ltd. and M/s Maple Goods (P) Ltd. resembled the character of Penny Stocks and provided accommodation entries in the guise of LTCG. The AO further referred to the documents so seized from the locker no. 194, HDFC Bank, Ludhiana which belonged jointly to Shri Sunil Kumar Jain, the father of the assessee and Smt. Kamla Jain, the grandmother of the assessee and that documents so seized were share certificates of M/s Maple Goods (P) Ltd. in respect of shares purchased by the assessee through Shri S.K. Khemka and the copy of the contract cum bill notes issued by Shri S.K. Khemka. The AO also referred to the statement recorded on oath on 13^th March, 2015 of Shri S.K. Khemka who had admitted to provide “kachhapanna” [Purchase Contract Notes] of M/s Maple Goods (P) Ltd. and provided bogus LTCG entries to the assessee.

During the course of assessment proceedings, the assessee submitted that no incriminating material was found during the action of search but the AO stated that the said contention is not tenable and treated the LTCG of ₹87,04,733 as bogus and added to the total income of the assessee treating the same as unexplained cash credit under section 68 of the Act.

Aggrieved by the assessment order, the assessee filed an appeal before the CIT(A). The CIT(A) in its order held that the assessment order and remand report of the AO dated 5^th February, 2020, clearly brought on record the share certificates and the contract bills seized from the bank locker no. 194, HDFC Bank which belonged jointly to Shri Sunil Kumar Jain, the father of the assessee and Smt. Kamla Jain, the grandmother of the assessee on the basis of which bogus LTCG had been claimed by the assessee were incriminating in nature as they had a direct bearing on the estimation of correct income of the assessee. Further, on merits as well, various contentions raised by the assessee were rejected, and the findings and order of the AO was confirmed.

Aggrieved by the order, the assessee filed an appeal before the ITAT.

HELD

The ITAT observed that it was an undisputed fact that the assessee had purchased 1,700 equity shares of M/s. Maple Goods Pvt. Ltd. in F.Y. 2010–11 through share broker S.K. Khemka, which were later on amalgamated with M/s. Access Global Ltd and received 79,900 shares of M/s. Access Global Ltd. The assessee had earned LTCG gains of R87,04,733 in A.Y. 2012–13 from sale of these shares which were disclosed in the original return of income u/s 139(1) of the Act.

The only issue was whether the documents seized from the bank locker no. 194, HDFC Bank – share certificate / contract cum bill notes in the name of the assessee issued by Shri S.K. Khemka for purchase of shares of M/s. Maple Goods Pvt. Ltd were incriminating material found during the course of search in case of the assessee.

The assessee had submitted that:

it is a case of unabated assessment, and during the course of search on the assessee, no incriminating material / evidence was found in respect of LTCG on shares;
the share certificates and the contract notes relating to purchase of shares cannot be an incriminating material; rather the said documents support the case of the assessee that the purchase of shares is genuine and is backed by proper documents;
the statements of Shri S.K. Khemka and Shri Sunil Kumar Kayan and others had nothing to do with the search proceedings of the assessee as these were recorded during their respective investigation proceedings way back in the year 2015.

The ITAT held that the term “incriminating material” has to be read and understood in the context of one or more of the conditions stipulated in section 132(1) of the Act, on satisfaction of which a search can be authorised and search warrant can be issued. Therefore, the information in possession of the competent authority at the time of authorisation of search becomes relevant, and on the basis of the same, his satisfaction that search action is warranted coupled with material actually found and seized during the course of search which has not been disclosed or produced or submitted in the course of original assessment.

The ITAT further held that in case of unabated assessment, the reassessment can be made on the basis of the satisfaction note pursuant to which the search has been initiated and books of account or other documents not produced in the course of original assessment but found in the course of search which indicate undisclosed income or undisclosed property, and the reassessment can be made on the basis of the undisclosed income or undisclosed property which is physically found and discovered in the course of search.

Applying the aforesaid legal proposition, the ITAT held that it was not the case of the revenue that the locker from which the documents were seized was in the possession of the assessee or was being operated by the assessee, and thus, what was found and seized was from the possession of third persons, who no doubt were part of the assessee’s family and covered as part of the same search proceedings, but the same cannot be held as found during the course of search in case of the assessee.

The ITAT further observed that though the assessee was part of the search proceedings and action was initiated u/s 153A in his case, the same doesn’t take away the statutory requirement of recording of satisfaction note by the AO of family members whose locker was searched and from where the documents belonging to the assessee were found and seized.

The ITAT held that:

it was an admitted and undisputed position that the assessee had purchased the shares of M/s Maple Goods (P) Ltd. during the F.Y. 2010–11 relevant to A.Y. 2011–12 and thus, the said transaction doesn’t pertain to impugned A.Y. 2012–13 and cannot be held as incriminating in nature for the impugned A.Y.;
the assessee had purchased the shares wherein the payment was made through normal banking channel and the transaction was duly reflected and disclosed in the bank statement;
proceedings for A.Y. 2011–12 were also reopened u/s 153A pursuant to search action and the reassessment proceedings were completed u/s 153A r/w 143(3) vide order dated 29th December, 2017 where the AO has not recorded any adverse findings regarding the aforesaid purchase of shares;
the transaction of sale and purchase of shares have been duly disclosed as part of the original return of income, and the assessment thereof stood completed / unabated as on the date of search;
the share certificates and contract notes represent and corroborate a disclosed transaction of purchase and sale of shares as part of the original return of income and cannot be termed as incriminating material so found and seized during the course of search;
where there is no incriminating material found during the course of search, the statement of Shri S.K. Khemka (and what has been stated therein) which is recorded well before the date of search in case of the assessee and in the context of some other proceedings, independent of the impugned search proceedings, is availability of certain “other material / documentation” with the AO during the course of reassessment proceedings but not material / documentation which is incriminating in nature found during the course of search in case of assessee for the impugned assessment year.

In view of the aforesaid discussion and in the entirety of facts and circumstances of the case, the ITAT was of the view that the addition of ₹87,04,733 made by the AO during the reassessment proceedings completed u/s 153A is not based on any incriminating material found or seized during the course of search and seizure action u/s 132 of the Act in case of the assessee. Being a case of completed / unabated assessment, in absence of any incriminating material found during the course of search, the addition so made cannot be sustained and was directed to be deleted.

In the result, the appeal of the assessee was allowed.

BCAJ Admin

The loss incurred on the sale of shares on stock exchange platform, where STT was duly paid, is eligible to be set of against the long-term capital gain earned by the assessee from sale of unlisted shares.

28 Rita Gupta vs. DCIT

ITA No. 46/Kol./2024

A.Y.: 2014–15

Date of Order: 6^th June, 2024

Sections:10(38), 45, 70, 74

The loss incurred on the sale of shares on stock exchange platform, where STT was duly paid, is eligible to be set of against the long-term capital gain earned by the assessee from sale of unlisted shares.

FACTS

The assessee filed return of income on 31^st July, 2014, declaring total income of ₹18,31,980. The Assessing Officer (AO) assessed the total income of the assessee, making various additions including the addition of ₹47,90,616, resulting on non-allowance of set off of loss from sale of equity shares on recognised stock exchange with STT paid against the profit on sale of unquoted equity shares. The AO held that the long-term capital gain on sale of quoted shares is exempt u/s 10(38) of the Act and similarly, the loss incurred was also not liable to be set off against the other taxable income.

Aggrieved, the assessee preferred an appeal to the CIT(A) who dismissed the appeal of the assessee and confirmed the action of the AO on this issue on the same reasoning that since long-term gain from sale of securities / shares are exempt in terms of provisions of Section 10(38) of the Act, and therefore, on the same analogy, the long-term capital loss resulting from the sale of equity shares with STT paid cannot be allowed to be set off against the taxable long-term capital gain resulting from sale of any other asset.

Aggrieved, assessee preferred an appeal to the Tribunal.

HELD

The Tribunal having perused the provisions of sections 2(14), 45, 47, 70 to 74 held that it is only the long-term capital gain resulting from sale of shares / securities which was granted exemption u/s 10(38) subject to the fulfilment of certain conditions and not the entire source which was excluded from the aforesaid sections. Therefore, when the entire source is not excluded from the charging section and only special type of income is excluded, then the interpretation of law has to be made strictly and cannot be deemed to include any other income or loss resulting or falling within the same source. The case of the assessee is squarely covered by the decision of Hon’ble jurisdictional High Court in the case of Royal Calcutta Turf Club vs. CIT [144 ITR 709 (Cal)].

The Tribunal noted that:

i) the Co-ordinate Bench in another decision in the case of Raptacos Brett & Co Ltd. [69 SOT 383] has also decided the similar issue by following the decision of Calcutta High Court in the case of Royal Calcutta Turf Club vs. CIT (supra) and by considering the decision of CIT vs. Hariprasad & Co. Pvt. Ltd. [99 ITR 118] as relied by the CIT(A);

ii) the decision of Hon’ble Apex Court in the case of CIT vs. Hariprasad & Co. Pvt. Ltd. (supra) did not apply to the case of the assessee as the principle laid down in the above decision would be applicable if entire source is excluded from the charging section.

The Tribunal having perused the decision relied upon by the CIT(A) found that except two decisions of the coordinate benches namely Nikhil Sawhney [119 taxmann.com 372] and DDIT vs. Asia Pacific Performance SICAV [55 taxmann.com 333] and decision of Gujarat High Court in the case of Kishorebhai Bhikhabhai Virani vs. ACIT [367 ITR 261], all others are distinguishable of facts.

In the case of Nikhil Sawhney (supra), the Co-ordinate Bench has relied on the decision of Supreme Court in the case of CIT vs. Hariprasad& Co. Pvt. Ltd., which has been rendered on the different principle that the income includes loss; however, the said legal proposition would apply only when the entire source is exempt and not liable to tax and not as in a case where the income falling within such source is treated as exempt. The Hon’ble Supreme Court in the case of Hariprasad & Co. Pvt. Ltd. (supra) has held that the expression “income” shall include loss because the loss is nothing but negative income. But in our opinion, the principle laid down by the Hon’ble Apex Court that income includes negative income can be applied only when the entire source of income falls within the charging provision of Act but where the source of income is otherwise chargeable to tax but only a specific kind of income derived from such source is granted exemption, then in such case, the proposition that the term “income” includes loss would not be applicable. Thus, if the source which produces the income is outside the ambit of charging provisions of the section, in such case negative income or loss can be said to be outside the ambit of taxing provisions. Consequently, the negative income is also required to be ignored for tax purpose. In other words, where only one of the streams of income from a source is granted exemption by the legislature upon fulfilment of specified conditions, then the concept of income includes loss would not be applicable. Similarly, the second decision of DDIT vs. Asia Pacific Performance SICAV (supra) has relied on the decision of Hariprasad & Co. Pvt. Ltd. [55 taxmann.com 333], CIT vs. J H Gotla [156 ITR 323], and CIT vs. Gold Coin Health Food Pvt. Ltd. [304 ITR 308], which are distinguishable of facts. In the case of Kishorebhai Bhikhabhai Virani vs. ACIT [367 ITR 261], the issue was decided against the assessee; but in the said decision, the decision of Hon’ble Calcutta High Court in the case of Royal Calcutta Turf Club (supra) has not been referred at all, and considering the ratio laid down by the Hon’ble Supreme Court in the case of CIT vs. Vegetable Products Ltd. 88 ITR 192 (SC), where there are two construction, then the construction / interpretation which is in favour of the assessee has to be followed.

The Tribunal held that the loss incurred on the sale of shares on stock exchange platform, where STT was duly paid, is eligible to be set of against the long-term capital gain earned by the assessee from sale of unlisted shares.

BCAJ Admin

Payment made by assessee to tenants of a co-operative housing society towards alternate accommodation charges / hardship allowance / rent are not liable for deduction of tax at source under section 194I.

27 ITO vs. Nathani Parekh Constructions Pvt.

ITA Nos. 4088 and 4087/Mum/2023 and 4101 and 4100/Mum/2023

A.Ys.: 2013–14 & 2016–17

Date of Order: 21^st May, 2024

Sections: 194I, 201

Payment made by assessee to tenants of a co-operative housing society towards alternate accommodation charges / hardship allowance / rent are not liable for deduction of tax at source under section 194I.

FACTS

The assessee, a real estate developer, engaged in the business of development and construction, entered into a redevelopment agreement with M/s Dalal Estate Co-operative Housing Society Ltd. In the course of survey conducted under section 133A(2A) of the Act, it was found that the assessee has debited amounts under the head “Alternate Accommodation / Rent” in each of the four years under appeal.

The Assessing Officer (AO) called upon the assessee to explain why tax has not been deducted at source in respect of the payments debited under the head “Alternate Accommodation / Rent”. The assessee submitted that it has entered into a re-development agreement dated 30^th April, 2017 with M/s Dalal Estate Co-operative Housing Society Ltd., which was encumbered with more than 300 tenants and that for the purpose of vacating the premises, the assessee had agreed to pay compensation of hardship according to the nature of tenancy occupied by each tenant. The assessee further submitted that these tenants could not be provided the alternate accommodation, and therefore, the assessee agreed to pay the above amount as compensation for the hardship of the tenants. The assessee also submitted that the amount paid towards alternate accommodation / hardship allowance does not fall within the definition “Rent”, and therefore, tax was not liable to be deducted at source on the said payments. The assessee accordingly submitted that no tax was deducted at source from the payment of alternate accommodation charges / rent.

The AO did not agree with the contentions of the assessee and held that the payment made by the assessee is liable for deduction of tax at source under section 194I of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the appeal of the assessee by relying on the decisions of the Co-ordinate Bench in the case of Jitendra Kumar Madan (32 CCH 59, Mumbai), Sahana Dwellers Pvt. Ltd. [2016] 67 taxmann.com 202 (Mum. Trib.) and Shanish Construction Pvt. Ltd. in ITA Nos. 6087 and 6088/Mum/2024 dated 11^th January, 2017.

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the common issue arising in each of the four appeals preferred by the Revenue is “Whether the payment made by the assessee to the tenants of M/s Dalal Estate Co-operative Housing Society Ltd. towards alternate accommodation charges/hardship allowance/rent are liable for tax deduction under section 194I of the Act.”

On behalf of the assessee, it was contended that:

i) the impugned payment is made in lieu of the alternate accommodation which the assessee could not provide to the tenants / members of the society;

ii) the definition of term “Rent” as per the provisions of section 194I which states that the payment which is made towards use of land or building. In assessee’s case, the payment is made not towards the use of land or building but as a compensation for the hardship that the tenants would undergo by vacating the property for the purpose of re-development;

iii) the CIT(A) has correctly relied on the various decisions of the Co-ordinate Bench which has been consistently holding that the amount paid towards compensation / hardship allowance is not taxable in the hands of the tenants for the reason that the same is not paid towards use of land or building but for the hardship in vacating the property for re-development;

iv) the Hon’ble Bombay High Court in the case of Sarfaraz S. Furniturewalla vs. Afshan Sharfali Ashok Kumar & Ors in Writ Petition No. 4958 of 2024, has held that the “transit rent” i.e., the rent paid by the developer to the tenant who suffers due to dispossession is not a revenue receipt and is not liable to be taxed. As a result, there will not be any question of deduction of TDS from the amount payable by the developer to the tenant.

The Tribunal having quoted the decision of the Bombay High Court in Sarfaraz S. Furniturewalla (supra) observed that the Hon’ble High Court in the above decision has held that the transit rent which is paid to the tenant who suffers hardship due to dispossession does not fall within the definition “rent” under section 194I. It held that in assessee’s case, the payment is made towards compensation for handing over the vacant possession of the property and towards rent if any payable by the tenants in the alternate accommodation until the completion of the re-development.

Applying the ratio of the decision of the Hon’ble High Court, the Tribunal held that the payment made by the assessee towards “Alternate accommodation charges / rent” is not liable for tax deduction under section 194I, and accordingly, the Tribunal upheld the order passed by the CIT(A) for A.Y. 2013–14 to 2016–17, setting aside the order of the AO treating the assessee as an assessee in default for non-deduction and non-payment of TDS under section 194I of the Act.

BCAJ Admin

Section 9(1)(vi): Supply of software — “Royalty” — Article 12 under the Indo-US DTAA.

11 CIT (IT) -3 Mumbai vs. M/s. Lucent Technologies GRL LLC

Income Tax Appeal (L) Nos. 3695 & 3693 of 2018

A.Ys.: 2006–07 & 2010–11 alongwith other companion appeals

Dated: 1^st July, 2024 (Bom) (HC)

Section 9(1)(vi): Supply of software — “Royalty” — Article 12 under the Indo-US DTAA.

The Revenue has raised the following question of law:

“Whether on the facts and in the circumstances of the case and in law, the Tribunal has erred in not holding payments received by the assessee for supply of software to Reliance Infocomm Limited (now Reliance Communication Limited) to be in the nature of “royalty” under Section 9(1)(vi) of the Income Tax Act, 1961?”

In the connected Appeals, the question of law as raised is similar, which by consent of the parties was re-framed as under:

“Whether on the facts and circumstances of the case and in law, the Tribunal has erred in holding that the payment made to assessee did not amount to income of the payee by way of ‘royalty’ under Section 9(1)(vi) of the Income Tax Act, 1961?”

The Respondent-assessee filed its return of income declaring NIL income, and also claimed Tax Deducted at Source (TDS) from the payments received from the purchasers (referred as “Reliance”). The return as filed by the Respondent was taken up for scrutiny. The Assessing Officer was of the view that receipts of the amounts in question from Reliance were on account of supply of the copyright software as per the terms of the Wireless Software Assignment and License Agreement. However, the case of the assessee was to the effect that the amount was a business income and was not taxable in India, in the absence of assessee having a Permanent Establishment (PE) in India.

The Respondent-assessee contended that the Revenue receipts were in terms of the sale, as the software supplied to Reliance was not a customised software but a software which was sold to several clients. The AO did not agree with the assessee’s case, and held that the supply of such software amounted to a transfer of intellectual property rights, and hence, the consideration paid to the assessee was in fact towards a license to use the software as no title or interest in the software was transferable to the user. The AO, accordingly, held that the transaction not being a sale of the software and being a payment received for the license to use such software, it was taxable as “royalty” in terms of Section 9(1)(vi) of the Act, read with relevant Article of the Double Taxation Avoidance Agreement (DTAA) (i.e., Article 12 under the Indo-US DTAA and similar clauses in the other DTAA’s). Thus, the amount received by the assessee from Reliance was assessed as royalty and, accordingly, was sought to be taxed.

The assesee’s appeal was adjudicated by the CIT(A) taking into consideration the agreements in question, as also the transaction being viewed and considered on the applicability of Section 9(1)(vi) of the Act and the relevant Articles of the DTAA, namely, Article 12. The CIT(A) accordingly held that such amount received by the assessee did not amount to receipt of “royalty” within the meaning of Section 9(1)(iv) of the Act.

The Revenue being aggrieved by such orders of the CIT(A) carried the proceedings before the Tribunal. By the impugned orders, the Tribunal confirmed the orders passed by the CIT(A) by upholding the contentions as raised on behalf of the assessee and recording finding against the Revenue.

The Hon. Court observed that the question whether the payments made by Reliance Communication Limited for obtaining computer software, whether were liable to be taxed in India as ‘royalties’ under the provisions of Section 9(1)(vi) of the Act, had fallen for consideration of the Court in a batch of appeals filed by the Revenue on similar issues filed against Reliance Industries Ltd., came to be disposed of by an order dated 24^th June, 2024.

The Respondent-assessee submitted that once in respect of the party making payment to the assessee, such question of law had fallen for consideration of the Court, and when the Court had come to a considered view that the payment for software which was supplied by the assessee was not liable to be taxed as “royalty” under the provisions of Section 9(1)(vi) of the Act, then certainly, the present assessee, which had in fact supplied the software, cannot be treated differently and the same parameters of law would be required to be applied.

The Hon. Court observed that the question of law as raised by the Revenue in the present batch of appeals would stand covered by the orders in Income Tax Appeal No. 1655 of 2018 and also a batch of appeals decided on 24^th June, 2024 in Income Tax Appeal No. 28 of 2018 and other connected appeals.

The Court further observed that the order dated 24^th June, 2024 passed in Income Tax Appeal No. 28 of 2018 is also required to be noted.

The Hon. Court observed that the question of law would stand covered by the authoritative pronouncement of the Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd. vs. Commissioner of Income Tax 2. [2021] 125 taxmann.com 42 (SC).

The Revenue appeals were accordingly dismissed.
No costs.

BCAJ Admin

Section 148 / 151: Reopening of assessment — Beyond three years — Sanction by the specified authority.

10 Cipla Pharma and Life Sciences Limited vs. Dy. CIT Circle – 1(1)(1)

WP NO. 149 OF 2023

A.Y.: 2016–17

Dated: 2^nd July, 2024, (Delhi) (HC)

Section 148 / 151: Reopening of assessment — Beyond three years — Sanction by the specified authority.

The primary ground of challenge before the Hon. High Court was that the impugned notice u/s. 148 of the Act had been issued in breach of the provisions of Section 151 of the Act, which provides for a sanction by the specified authority before issuance of notice.

The Petitioner-assessee contended that the sanction to issue the impugned notice dated 30^th July, 2022 was issued by the Principal Commissioner which itself is contrary to the provisions of Section 151(ii), in as much as admittedly the impugned notice was issued after a period of more than three years having elapsed from that of the relevant assessment year 2016–17. Accordingly, such sanction ought to have been issued by the Specified Authority as set out in Section 151(ii) and not by an authority falling under clause (i) of the said provision. It was contended that once such compliance itself was lacking, the impugned notice issued under Section 148 would be rendered illegal, and on such count, would be required to be quashed and set aside. In support, reliance was placed on the decision of the Division Bench of this Court in Siemens Financial Services Pvt. Ltd. vs. Deputy Commissioner of Income Tax, Circle 8 (2)(1), Mumbai &Ors. (Writ Petition No. 4888 of 2022, decided on 25^th August, 2023).

The Hon. Court observed that on a plain reading of Section 148A, it is clear that the Assessing Officer (AO) before issuing any notice under Section 148 is required to follow the procedure as set out in clauses (a) to (d) of Section 148A. One of the pre-conditions as ordained by clause (d) of Section 148A is that an order under such provision can be passed by the AO only with the approval of “Specified Authority”. Thus, necessarily when clause (d) of Section 148A provides for prior approval of specified authority, it relates to the provisions of Section 151 of the Act providing for “Specified authority for the purposes of Section 148 and Section 148A of the Act”. In the present case, Section 151 as amended by the Finance Act, 2021 and Section 148A as also introduced by Finance Act, 2021 have become applicable, as although the assessment year in question is 2016–17 in respect of which the assessment is sought to be reopened by issuance of notice under Section 148, which is dated 30^th July, 2022. Such amended provision would squarely become applicable the date of notice under section 148 itself being 30^th July, 2022.

The Hon. Court further observed that the record clearly indicates that the sanction in the present case was issued by the Principal Commissioner which can only be in respect of cases if three years or less than three years have elapsed from the end of the relevant assessment year, as would fall under the provisions of clause (i) of Section 151 of the Act. As in the present case, the assessment year in question is 2016–17 and the impugned notice itself has been issued on 30^th July, 2022, it is issued after a period more than three years having elapsed from the end of the said assessment year. Accordingly, clause (ii) of Section 151 of the Act was applicable, which required the sanction to be issued by either Principal Chief Commissioner or Principal Director General or where there is no Principal Chief Commissioner or Principal Director General, Chief Commissioner or Director General for issuance of notice under Section 148 of the Act.

The Hon. Court further observed that such an issue fell for consideration of the Division Bench of this Court in Siemens Financial Services Pvt. Ltd. (supra), wherein the Division Bench considered the provisions of Section 151 of the Act read with the provisions of Section 148A(b). The latter provision clearly provided that prior to issuance of any notice under Section 148 of the Act, the AO shall provide an opportunity of being heard to the assessee, only after considering the cumulative effect of Section 148A(b) read with Section 151 of the Act. As provided under sub-clause (d), the AO shall decide on the basis of material available on record, including reply of the assessee, whether or not it is a fit case to issue a notice under Section 148 by passing an order, with the prior approval of specified authority within one month from the end of the month in which the reply is received. The sanction of the specified authority has to be obtained in accordance with the law existing when the sanction is obtained. Therefore, the sanction is required to be obtained by applying the amended Section 151(ii) of the Act, and since the sanction has been obtained in terms of Section 151(i) of the Act, the impugned order and impugned notice are bad in law and should be quashed and set aside.

The Hon. Court further observed that the respondent’s case based on the notification dated 31^st March, 2020 issued under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (for short, “TOLA”) was concerned, the Court held that such notification was a subordinate legislation, and it could not override the statute enacted by the Parliament and in that regard, the position in law was discussed by the Division Bench in Siemens Financial Services Pvt. Ltd. (supra), paragraph 27 of the said decision.

The impugned notices are quashed and set aside, the petition is allowed.

BCAJ Admin

Writ — Competency to file writ petition — Chartered Accountant authorised to represent assessee in income-tax matters — Chartered Accountant could file writ against order of assessment.

36 TiongWoon Project and Contracting Pte. Ltd. vs. CBDT

[2024] 463 ITR 641 (Mad)

A.Ys. 2012–13 and 2013–14

Date of order: 22^nd January, 2024

ART. 226 of Constitution of India

Writ — Competency to file writ petition — Chartered Accountant authorised to represent assessee in income-tax matters — Chartered Accountant could file writ against order of assessment.

The petitioner is a company incorporated in Singapore and engaged in undertaking turnkey construction projects involving erection, installation and commissioning activities. In these two writ petitions, the petitioner assails a common order dated 3^rd November, 2023 refusing to condone delay in filing the return of income of the petitioner for the A.Y. 2012–13 and 2013–14. The writ was signed by the chartered accountants. The assessee-company had authorised the chartered accountants to represent it in relation to its Income-tax assessments and all other proceedings arising therefrom.

The standing counsel for the respondents raised the preliminary objection that the writ petition should not have been filed by the chartered accountants of the petitioner. By referring to the authorisation issued by the petitioner to the chartered accountants, it was submitted that the authorisation does not extend to the conduct of proceedings before this court. A reference was also made to the ethics code of the Institute of Chartered Accountants of India and the annual report of TiongWoon Corporation Holding Ltd. to contend that the chartered accountants through whom the writ petitions were filed were the statutory auditors of one of the subsidiaries of the above-mentioned holding company, and that the chartered accountants should not act as authorised representatives in such situation.

Rejecting the preliminary objection of the Respondents, the Madras High Court held as under:

“The authorisation in favour of the chartered accountants was on record and the assessee-company had authorised the chartered accountants to represent it in relation to its Income-tax assessments and all other proceedings arising therefrom. Although proceedings before the court were not expressly referred to the language of the authorisation was wide enough to embrace these proceedings. As regards the alleged breach of the ethics code, even if established, that could not be the basis to reject this petition.”

BCAJ Admin

Revision — Powers of Commissioner — Commissioner (Appeals) holding amounts included in fringe benefits tax return not chargeable to fringe benefits tax — Revision application for refund of fringe benefits tax — Revision application rejected on grounds of delay — Commissioner conferred with power to condone delay to do substantial justice — Commissioner (appeals) taking long time to dispose of appeal — Commissioner ought to have condoned delay — Order rejecting revision application quashed — Direction to condone delay and consider revision application on merits and pass reasoned order.

35 Hindalco Industries Ltd. vs. UOI

[2024] 464 ITR 236 (Bom.)

A.Y. 2007–08

Date of order: 17^th January, 2024

Ss. 115WD(1) and 264 of the ITA 1961

Revision — Powers of Commissioner — Commissioner (Appeals) holding amounts included in fringe benefits tax return not chargeable to fringe benefits tax — Revision application for refund of fringe benefits tax — Revision application rejected on grounds of delay — Commissioner conferred with power to condone delay to do substantial justice — Commissioner (appeals) taking long time to dispose of appeal — Commissioner ought to have condoned delay — Order rejecting revision application quashed — Direction to condone delay and consider revision application on merits and pass reasoned order.

For the A.Y. 2007–08, the Commissioner (Appeals) by order dated 31^st August, 2016, held the amounts included in the fringe benefits tax return as not chargeable to fringe benefits tax. Since the Commissioner (Appeals) allowed the claim of the assessee, the assessee filed an application u/s. 264 of the Income-tax Act, 1961 for refund of the fringe benefits tax return. The Commissioner rejected the revision application on the grounds of substantial delay in filing the application and that the intimation u/s. 143(1) of the Act was not an assessment order.

The assessee preferred a writ petition contending that the Commissioner (Appeals) took almost five to six years to decide that the amounts included in the fringe benefits tax returns were not chargeable to fringe benefits tax and hence there was no delay in filing the revision application. The Bombay High Court allowed the writ petition and held:

“i) On the issue of condonation of delay in an application filed u/s. 264 of the Income-tax Act, 1961, courts have held that the authorities should not take a pedantic approach but should be liberal. The courts have held that the words ‘sufficient cause’ should be given a liberal construction so as to advance substantial justice when no negligence or inaction or want of bona fides is imputable to the assessee. The courts have held that the principle of advancing substantial justice is of prime importance and while considering the question of condonation, the revisional authority is not all together excluded from considering the merits of the revision petition.

ii) U/s. 264 of the Act, the Commissioner is empowered either on his own motion or on an application made by the assessee to call for the record of any proceedings under the Act and pass such order thereon not being an order prejudicial to the assessee and this power has been conferred upon the Commissioner in order to enable him to give relief to the assessee in cases of over-assessment.

iii) The Commissioner having been conferred power to condone the delay to do substantial justice to parties by disposing of the matter on the merits should, considering the facts and circumstances of the case, in particular that it took a long time for the Commissioner (Appeals) to dispose of the assessee’s appeal, have condoned the delay. The order rejecting the application u/s. 264 of the Act was quashed and set aside. The Commissioner was directed to condone the delay and consider the application u/s. 264 of the Act on the merits and pass a reasoned order in accordance with the law.”

BCAJ Admin

Revision — Rectification of mistake — Time limit — Computation of long-term capital gains — Sale of flat inherited by the assessee and three others — Omission of claim of deduction of indexed renovation expenses in return of income — Rejection of application for rectification and revision on grounds that new claim not raised earlier — Revision Application within one year from the date of rectification order — AO accepting indexed renovation expenses in case of co-owner — Amount accepted in co-owner’s case to be accepted as correct and allowance to be made while computing long-term capital gain.

34 Pramod R. Agrawal vs. Principal CIT

[2024] 464 ITR 367 (Bom.)

A.Y.: 2007–08

Date of order: 13^th October, 2023

S. 48, 143(3), 154 and 264 of ITA 1961

Revision — Rectification of mistake — Time limit — Computation of long-term capital gains — Sale of flat inherited by the assessee and three others — Omission of claim of deduction of indexed renovation expenses in return of income — Rejection of application for rectification and revision on grounds that new claim not raised earlier — Revision Application within one year from the date of rectification order — AO accepting indexed renovation expenses in case of co-owner — Amount accepted in co-owner’s case to be accepted as correct and allowance to be made while computing long-term capital gain.

The assessee was a co-owner of a flat which was inherited by the assessee along with three others. The assessee’s share was to the extent of 25%. In the return of income, the assessee offered capital gains from the sale of the said flat. The assessee offered the capital gains without claiming the indexed cost of improvement in respect of the renovation expenses incurred. On the advice of the chartered accountant that a co-owner had sought rectification and had been allowed deduction of the entire renovation expenses of the flat from full value of consideration, while computing the share of capital gains, the assessee also filed an application u/s. 154 of the Act seeking rectification by allowing deduction of indexed cost of improvement being renovation expenses not claimed in the original return of income. The assessee’s application for rectification was rejected on the grounds that the claim was made for the first time in the application u/s. 154 and it was never brought to the attention of the lower authorities earlier. Against this order rejecting the assessee’s application for rectification of mistake, the assessee filed a revision application u/s. 264 of the Act which application was also rejected.

Against this order rejecting the assessee’s application u/s. 264, the assessee filed a writ petition before the High Court. The Bombay High Court allowed the petition and held that:

“i) Section 264 confers wide jurisdiction on the Commissioner. The proceedings u/s. 264 of the Act are intended to meet a situation faced by an aggrieved assessee who is unable to approach the appellate authorities for relief and has no alternate remedy available under the Act. The Commissioner is bound to apply his mind to the question whether the assessee was taxable on that income and his powers are not limited to correcting the error committed by the sub-ordinate authorities but could even be exercised where errors are committed by the assessee. It would even cover situation where the assessee because of an error has not put forth legitimate claim at the time of filing the return and the error is subsequently discovered and is raised for the first time in an application u/s. 264 of the Act.

ii) There was no delay in filing the application u/s. 264 of the Income-tax Act, 1961 because the application u/s. 264 of the Act was against the order passed u/s. 154 of the Act and not that passed u/s. 143(3) of the Act. The order u/s. 154 of the Act was passed within one year from the date of application filed u/s. 264 of the Act.

iii) In the assessment order passed in the case of another co-owner of the flat, the Assessing Officer had accepted certain amount as the cost of indexed renovation. Therefore, the amount had to be accepted as correct and suitable allowance should be made while arriving at the long-term capital gains. The order is quashed and set-aside. The matter was remanded for de novo consideration and to pass a reasoned order after providing the assessee with an opportunity of hearing.”

BCAJ Admin

Return of income — Delay in filing revised return — Condonation of delay — Power to condone — Meaning of “genuine hardship” — Power vested in authority to be judiciously exercised — Compensation received on compulsory land acquisition inadvertently declared as income — Payment of tax more than liability is “genuine hardship” — Department to enable assessee to file revised return of income.

33 K. S. Bilawala and Others vs. Principal CIT

[2024] 463 ITR 766 (Bom.)

A.Y. 2022–23

Date of order: 16^th January, 2024

S. 119(2)(b) of the ITA 1961

Return of income — Delay in filing revised return — Condonation of delay — Power to condone — Meaning of “genuine hardship” — Power vested in authority to be judiciously exercised — Compensation received on compulsory land acquisition inadvertently declared as income — Payment of tax more than liability is “genuine hardship” — Department to enable assessee to file revised return of income.

For the A.Y. 2022–23, the assessee inadvertently declared as income the compensation received by him on acquisition of its land under the provisions of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013. The return of income was processed u/s. 143(1) of the Income-tax Act, 1961 and the assessee received an intimation. Thereafter, the assessee filed an application u/s. 119(2)(b) for condonation of delay and leave to file a revised return. The application was rejected on the grounds that he did not show any genuine hardship which was caused due to delay in the application.

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

“i) The phrase ‘genuine hardship’ used in section 119(2)(b) of the Income-tax Act, 1961 should be considered liberally. There cannot be a straitjacket formula to determine what is genuine hardship. The power to condone delay has been conferred to enable the authorities to do substantial justice to the parties by disposing of matters on the merits. While considering these aspects, the authorities are expected to bear in mind that no applicant stands to benefit by filing delayed returns. Refusing to condone the delay can result in a meritorious matter being thrown out at the very threshold and the cause of justice being defeated, but, when the delay is condoned, a cause would be decided on the merits after hearing the parties.

ii) When the assessee felt that the amount of compensation that it received under the 2013 Act need not have been offered to tax, under the 1961 Act, the authority should have condoned the delay and considered the matter on the merits. The fact that an assessee had paid more tax than what he was liable to pay would cause hardship and that would be a ‘genuine hardship’. The delay in filing the revised return was to be condoned and accordingly the Department was to enable the assessee to file the revised return for the A. Y. 2022-23. Thereafter, the authority could decide whether or not the compensation received by the assessee under the 2013 Act was liable to tax.”

BCAJ Admin

Reassessment — Notice — Sanction of Authority — Application of mind to material on basis of which reopening of assessment sought for by AO — Discrepancy in quantum of escapement of income in order in initial notice and order for issue of notice — Not noticed by concerned Sanctioning Authorities — Non-application of mind in passing sanction order — Orders and consequent notice set aside.

32 Vodafone India Ltd. vs. Dy. CIT

[2024] 464 ITR 385 (Bom.)

Date of order: 19^th March, 2024

Ss. 147, 148, 148A(b), 148A(d) and 151 of the ITA 1961

Reassessment — Notice — Sanction of Authority — Application of mind to material on basis of which reopening of assessment sought for by AO — Discrepancy in quantum of escapement of income in order in initial notice and order for issue of notice — Not noticed by concerned Sanctioning Authorities — Non-application of mind in passing sanction order — Orders and consequent notice set aside.

In this case, the petitioner is impugning a notice dated 30^th March, 2023, u/s. 148A(b) of the Income-tax Act, 1961, an order dated 19^th April, 2023 passed u/s. 148A(d) of the Act and a notice dated 19^th April, 2023 issued u/s. 148 of the Act on various grounds. One of the grounds raised across the Bar is that the sanction for issuance of the order u/s. 148A(d) of the Act has been granted without application of mind by all the five officers involved.

The Bombay High Court allowed the petition and held:

“i) The power vested in the sanctioning authorities u/s. 151 of the Income-tax Act, 1961 to grant or not to grant approval to the Assessing Officer to reopen the assessment u/s. 147 is coupled with a duty. The sanctioning authorities are duty bound to apply their mind to the proposal put up for approval considering the material relied upon by the Assessing Officer and cannot exercise their power casually on a routine perfunctory manner. While recommending and granting approval it is obligatory on the part of the officers to verify whether there is any genuine material to suggest escapement of income on all the authorities and the Principal Chief Commissioner in particular to consider whether or not power to reopen is being invoked properly.

ii) The contention that the record had been carefully considered before granting approval u/s. 151 was an incorrect statement made by the Principal Chief Commissioner. The information annexed to the notice issued u/s. 148A(b) had stated the quantum of income that had escaped assessment more than the amount mentioned in the order passed u/s. 148A(d) without any explanation as to how the amount had changed or had been reduced. In the affidavit it was stated that in the notice the value of the transaction in question was taken gross and subsequently it was seen that there were duplicate entries which were corrected while passing the order u/s. 148A(d). The notice did not contain any duplicate entries. If there were duplicate entries, the Assessing Officer was duty bound to clarify in the order and also give details of what were those duplicate entries and should have come clean on the error made. If the Principal Chief Commissioner or the other officers had seen the records and had applied their mind those errors would not have crept in. This displayed non-application of mind by all those persons who had endorsed their approval for issuance of notice u/s. 148.

iii) Had the authorities read the record carefully, they would have never come to the conclusion that this was a fit case for issuance of notice u/s. 148 and would have either told the Assessing Officer to correct the amounts or would have sent the papers back for reconsideration. They had substituted the form for substance, important safeguards provided in sections 147 and 151 were treated lightly by the concerned officers. The order of approvals u/s. 151, having been granted mechanically and without application of mind in a most casual manner, were quashed and set aside. The order passed u/s. 148A(d) and the consequent notice issued u/s. 148 were also quashed and set aside.”

BCAJ Admin

Offences and prosecution — Compounding of offences — Application for — Limitation — Application can be filed either before or subsequent to launching of prosecution — Circular issued by CBDT stipulating limitation period of 12 months — Contrary to legislative intent of provision — Application for compounding rejected as barred by limitation period prescribed in circular issued by CBDT — Not sustainable — Relevant clause of Circular struck down — Matter remitted to decide application on the merits.

31 Jayshree vs. CBDT

[2024] 464 ITR 81 (Mad)

A.Y.: 2013–14

Date of order: 3^rd November, 2023

S. 119(1) and Explanation to S. 279(2) of the ITA 1961

Offences and prosecution — Compounding of offences — Application for — Limitation — Application can be filed either before or subsequent to launching of prosecution — Circular issued by CBDT stipulating limitation period of 12 months — Contrary to legislative intent of provision — Application for compounding rejected as barred by limitation period prescribed in circular issued by CBDT — Not sustainable — Relevant clause of Circular struck down — Matter remitted to decide application on the merits.

During the previous year relevant to the A.Y. 2013–14, the assessee sold an immovable property and reinvested the capital gains in the purchase of another immovable property. The Assessee was under the impression that since there was no liability to pay income tax, she was not required to file return of income and, therefore, did not file her return of income. The return of income was filed belatedly on 13^th June, 2016. Subsequently, she was prosecuted for delay in filing of the return. In view of provisions of section 279(2) of the Act, the assessee filed an application for compounding of offence in the year 2021. The application was rejected on the grounds that it was filed beyond the time limit of 12 months from the date of launching prosecution which was prescribed under the Circular F. No. 285/08/2014-IT(Inv.) 147 dated 14^th June, 2019.

The assessee filed the writ petition and challenged the order of rejection. The Madras High Court allowed the writ petition as under:

“i) The power of the CBDT u/s. 119(1) of the Income-tax Act, 1961 to issue circulars, directions and instructions should not be exercised beyond the scope of the Act. The CBDT is not empowered to fix the time limit for filing the application for compounding of offences u/s. 279, which is contrary to the provisions of section 279(2) in terms of which the assessee can file the application for compounding of offences either before or subsequent to the launching of the prosecution. The Explanation to section 279 which empowers the CBDT to issue circulars is only for the purpose of implementation of the provisions of the Act with regard to the compounding of offences and not for the purpose of fixing the time limit for filing the application for compounding of offences.

ii) Nowhere in section 279(2), had a time limit been mentioned for filing an application for compounding of offences u/s. 279 though the Explanation thereunder, stated that the CBDT was empowered to issue orders, circulars, instructions and directions for the purpose of implementation of the Act. The intention of the legislation for bringing section 279(2) was to permit the assessee to file an application for compounding of offences either before institution of proceedings or after institution of proceedings. The fixing of a time limit by the CBDT by way of a Circular was contrary to the intention of the legislation and amounted to amendment of section 279(2). Since the idea of the legislation was that the compounding of offences was permissible either before or after the institution of the proceedings, the CBDT could not issue a circular contrary to the object of the provisions of section 279. Clause 7(ii) of Circular F.No. 285/08/2014-IT(Inv.V)/147, dated June 14, 2019 was beyond the scope of the Act and hence, that portion of the circular was to be struck down.

iii) The matter was remitted to the authority to decide the application on the merits in accordance with law.”

BCAJ Admin

Offences and prosecution — Failure to file returns in time — Relief from prosecution — Effect of proviso to s. 276CC — Prepaid taxes resulting in NIL liability — Prosecution u/s. 276CC not valid.

30 Manav Menon vs. DCIT

[2024] 463 ITR 752 (Mad)

A.Y. 2013–14

Date of order: 17^th November, 2023

S. 276CC of ITA 1961

Offences and prosecution — Failure to file returns in time — Relief from prosecution — Effect of proviso to s. 276CC — Prepaid taxes resulting in NIL liability — Prosecution u/s. 276CC not valid.

For the A.Y. 2013–14, the Assessing Officer filed complaint for the offence punishable u/s. 276CC of the Income-tax Act, 1961 for non-filing of income-tax return. The crux of the complaint is that the accused is an assessee within the jurisdiction of the respondent. During the course of proceedings for assessment, the respondent detected that the petitioner failed to file his return of income for A.Y. 2013–14. As per section 139(1) of the Income-tax Act, the petitioner ought to have filed the return of income on or before 30^th September, 2013.

The assessee filed a criminal writ petition for quashing the prosecution proceedings. The Madras High Court allowed the writ petition and held as under:

“i) Filing of the Income-tax return is mandatory in nature u/s. 139(1) of the Income-tax Act, 1961 and failure to file the Income-tax return is punishable u/s. 276CC of the Act, 1961. The proviso to section 276CC gives some relief to genuine assessees. The proviso in clause (ii)(b) to section 276CC provides that if the tax payable determined by regular assessment as reduced by advance tax paid and tax deducted at source does not exceed ₹3,000, such an assessee shall not be prosecuted for not furnishing the return u/s. 139(1) of the Act. Therefore, this proviso takes care of genuine assessees who either file their returns belatedly but within the end of the assessment year or those who have paid substantial amounts of their tax dues by prepaid taxes from the rigour of the prosecution u/s. 276CC.

ii) A perusal of the records revealed that admittedly the assessee had failed to file his return of income for the A. Y. 2013-14. However, the assessee had paid taxes under the heads of advance tax, tax deducted at source, tax collected at source, and self assessment tax to the tune of ₹23,75,066. According to his returns, the total tax and interest payable by him was ₹23,74,610. Therefore, he had claimed a refund of ₹460 and the proviso (ii)(b) to section 276CC would come to the rescue of the assessee from the rigour of the prosecution u/s. 276CC of the Act. Therefore, the initiation of prosecution for the offence punishable u/s. 276CC of the Act could not be sustained.”

BCAJ Admin

Accrual of income — Meaning of accrual — Time of accrual — Assessee terminating lease following dispute — Assessee not accepting lease rent — Matter before Small Causes Court — Small Causes Court allowing lessor to deposit lease rent in Court specifying that deposit was allowed without prejudice to rights of contestants — Matter still pending in Small Causes Court — Lease rent did not accrue to the Assessee.

29 T. V. Patel Pvt. Ltd. vs. DCIT

[2024] 464 ITR 409 (Bom.):

A.Ys. 1986–87 to 1991–92, 1993–94

Date of order: 4^th December 2023

Ss. 4 and 5 of the ITA 1961

Accrual of income — Meaning of accrual — Time of accrual — Assessee terminating lease following dispute — Assessee not accepting lease rent — Matter before Small Causes Court — Small Causes Court allowing lessor to deposit lease rent in Court specifying that deposit was allowed without prejudice to rights of contestants — Matter still pending in Small Causes Court — Lease rent did not accrue to the Assessee.

The assessee entered into a sub-lease agreement with IDBI on an annual lease rent of ₹3,42,720. The said income was offered for tax under the head “Income from Other Sources”. During the previous year 1980–81, dispute arose between the assessee and IDBI for breaches committed by IDBI, which lead to termination of the sub-lease agreement by the assessee, and subsequently, the assessee refused to accept rent from IDBI post termination of the agreement. In October 1981, IDBI filed a Declaratory Suit in the Small Causes Court and obtained injunction against the assessee from terminating the sub-lease agreement.

In March 1984, the Department issued a garnishee notice u/s. 226(3) in respect of the outstanding tax arrears of the assessee and directed IDBI to pay rent to the Department. In response to the notice, the assessee informed the Department that the sub-lease agreement had been terminated and there was no rent due and payable to the assessee and, therefore, the notice issued by the Department was illegal. The Assessee also addressed a letter to IDBI about the termination and recorded that IDBI should not make payment to the Income-tax Department. However, IDBI made the payment to the Department despite the fact that the agreement was terminated.

Thereafter, in the year 1984, the Assessee filed a suit for eviction and claimed reliefs. On an application made by IDBI to the Small Causes Court, the Small Causes Court allowed IDBI to deposit the lease rent in Court. The assessee, however, did not withdraw any amount.

In the return of income for A.Ys. 1982–83 to 1986–87 filed by the assessee, the lease rent was not offered for tax. The assessments were completed and no addition was made. Subsequently, the assessment for A.Y. 1986–87 was re-opened for assessing the lease rent which the assessee had not offered for tax in the return of income for A.Y. 1986–87. In the re-assessment order, the AO added the amount of annual lease rent agreed between the assessee and IDBI.

On appeal before the CIT(A) and the Tribunal, both dismissed the appeal of the assessee. The reason for dismissing the appeal was that the claim for arrears of rent and compensation was pending before the Court. The consideration under the agreement had been paid by IDBI. The assessee was demanding compensation over and above the amount of rent. It was held by the Tribunal that the consideration did accrue to the assessee and it was being utilised for payment of tax arrears.

Against the order of the Tribunal, the Assessee filed an appeal before the High Court. The Bombay High Court allowed the appeal and held as follows:

“i) Section 5(1)(b) of the Income-tax Act, 1961 provides for scope of total income to include all income which ‘accrues’ or ‘arises’ or ‘is deemed to accrue or arise’ in India during such year. The words ‘accrue’ or ‘arise’ have different meanings attributed to them while the former connotes the idea of a growth or accumulation, the latter connotes the idea of crystallisation of the former into a definite sum that can be demanded as a matter of right. For determining the point of time of accrual, two factors are relevant. The first is a qualitative factor and the second is a quantitative factor. The qualitative factor is relatable to the terms of the agreement or the conduct of the parties for determining when the legal right to receive income emerges. The quantitative factor is relatable to the exact sum in respect of which the qualitative factor of legal right to receive is applied. These two factors have no order of priority between them. When both converge, there is a legal right to receive a certain sum of money as income. Such convergence determines a point of time of accrual. In order that the income may be said to have accrued at a particular point of time, it must have ripened into a debt at that time, that is to say, the assessee should have acquired a right to receive payment at that moment, though the receipt itself may take place later. There must be a debt owed to the assessee by somebody at that moment or, as is otherwise expressed, ‘debitum in praesentisolvendum in futuro’. Until it is created in favour of the assessee, the debt due by somebody, it cannot be said that he has acquired a right to receive any income accrued to him.

ii) There is also a difference between ‘accrue or arise’ or ‘earned’. Earning income is not the same as accrual of income but is a stage anterior to accrual of income. A person does not have a legal right to receive the income by merely earning income. Although, earning of income is a necessary prerequisite for accrual of income, mere earning of income without right to receive it does not suffice. A person may be said to have ‘earned’ his income in the sense that he has contributed to its production by rendering service and the parenthood of the income can be traced to him but in order that the income may be said to have ‘accrued’ to him an additional element is necessary that he must have created a debt in his favour.

iii) There is a distinction between cases where the right to receive payment is in dispute and it is not a question of merely quantifying the amount to be received and cases where the right to receive payment is admitted and the quantification of the amount received is left to be payable in amount. The principle of law as laid down in various decisions is to the effect that if the matter is pending before the judicial forum or the amount is allowed to be withdrawn by the party, till the case is decided finally by the judicial forum, it cannot be said that the assessee has acquired a right to receive the income for the purposes of section 5 of the Act. The time of accrual for taxing income gets postponed till the dispute is adjudicated by the civil court.

iv) In the present case, it was not disputed that the cross suits filed by the assessee and the tenant against each other were pending before the Small Causes Court. It was also not disputed that the assessee had not accepted the rent from the tenant post termination of the sub-lease agreement in the year 1981. The Small Causes Court had permitted the tenant to deposit the lease rent in the court till the rights of the parties were decided and the order of deposit of the rent was without prejudice to the rights and contentions of the parties. In the light of these facts, whether the sub-lease agreement between the tenant and the assessee subsisted post 1981 termination by the assessee, was itself a subject matter of dispute between the assessee and the tenant which was pending adjudication. In the light of these facts, it could not be said that the assessee was entitled to receive a sum of ₹3,42,720 under the sub-lease agreement with the tenant or a right was vested in the assessee to that sum. The determination of the amount payable by the tenant to the assessee as prayed for by the assessee in its suit was to be determined by the Small Causes Court and when the Court passed a final decree one could not say that the right to receive the sum decreed by the Small Causes Court had accrued to the assessee. Till then, the right to receive any sum by the assessee was in jeopardy and sub judice before the Small Causes Court. Therefore, the Revenue was not justified in bringing to tax the sum of ₹3,42,720 as accrued income for the A. Y. 1986-87 and for the other years being A. Y. 1988-89 to 1991-92 and 1993-94.”

BCAJ Admin

Applicability of Section 50c to Rights in Land

ISSUE FOR CONSIDERATION

Section 50C of the Income Tax Act, 1961 provides for substitution of the actual consideration by the stamp duty valuation on the transfer of a capital asset, being land or building, if the consideration is less than the stamp duty valuation, for purposes of computing capital gain under section 48. In other words, the full value of consideration, in such cases, shall be deemed to be the value adopted for the purpose of levy of stamp duty. Section 50C reads as follows:

“Where the consideration accruing as a result of transfer of the capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government (hereinafter in this section referred to as the “stamp valuation authority”) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of section 48, be deemed to be the full value of consideration received or accruing as a result of such transfer.”

The issue has arisen before the Courts as to whether this deeming fiction of s. 50C applies to a case of transfer of leasehold or other rights in land or building, which are not ownership rights and are not land and building simpliciter. While the Rajasthan High Court has held that the provisions of section 50C do apply to such leasehold and other rights, the Karnataka and Bombay High Courts have held that the provisions of section 50C do not apply in such cases.

RAM JI LAL MEENA’S CASE

The issue had come up before the Rajasthan High Court in the case of Sh. Ram Ji Lal Meena s/o Sh. Bachu Ram Meena vs. ITO 423 ITR 439 (Raj).

In this case, the land was sold by the assessee under a registered sale deed for a consideration of ₹11,70,000. The Registering Authority adopted the value of the property at ₹53,11,367 for stamp duty purposes. The assessee or the transferee did not file any appeal against such valuation by the stamp authorities before the appellate authorities appointed under the stamp duty law. The land in question had been allotted by a cooperative society to the assessee’s predecessor, from whom the assessee had purchased the land. The land was acquired by the Government for the public purpose for RIICO after its purchase / allotment by / to the co-operative society. A writ petition for validating the purchase / allotment of land was filed by the co-operative society, which was allowed by the Rajasthan High Court. At the time of validation of the sale to the society, an appeal by RIICO against the Rajasthan High Court’s order was pending before the Supreme Court. Subsequent to the sale by the assessee, the Supreme Court reversed the High Court’s order on an appeal by RIICO, and upheld the acquisition by the Government for RIICO.

The assessee did not file any tax return either u/s 139(1) or in response to a notice received for reassessment u/s 148. During reassessment proceedings, he merely filed a computation of total income, disclosing a capital loss of ₹1,22,303. In reassessment proceedings, the assessee objected to the stamp duty valuation. The Assessing Officer referred the matter to the Departmental Valuation Officer, who returned the reference stating that statutory references normally required 120 days, and it was not possible to take up the case, as it was getting time barred by 31^st March 2016.

The assessee contended that section 50C was not applicable as the land was under dispute, and the assessee had only sold out / transferred the rights to the land under dispute. The Assessing Officer did not accept the assessee’s contention and made an addition of ₹41,80,805 to the capital gains by applying the provisions of section 50C.

The Commissioner (Appeals) dismissed the appeal of the assessee.

The Tribunal, on appeal by the assessee, held that there was a transfer of a plot of land, by the assessee, and not just rights in land as claimed by the assessee, because the Rajasthan High Court’s order, which had held that the co-operative society was entitled to the land, was in force at the point of sale of the land by the assessee and as such the assessee sold the land in his capacity as the owner of the land. The Tribunal however restored the matter to the file of the Assessing Officer to decide the matter afresh after obtaining a valuation report from the Departmental Valuation Officer.

The assessee filed an appeal to the High Court against the order of the Tribunal. Before the Rajasthan High Court, it was argued on behalf of the assessee that this was not a case of transfer of land, but the transfer of rights therein, since the land was under acquisition by the Government for RIICO. Due to upholding the order of acquisition by the Supreme Court, it was claimed that the land vested in the State Government, and the possession remained with RIICO and not with the assessee. It was therefore urged that it was wrongly taken as a transfer of land when what was transferred by the assessee was only rights in land. Therefore, it was submitted that section 50C was not applicable.

It was also submitted that as per the revenue records the rights in land were khatedari rights, the ownership of the land vested with the Government and not the assessee, and the assessee had leasehold and not freehold rights over land, and as such section 50C could not have been invoked. Reliance was placed on various decisions of the Tribunal and the decision of the Bombay High Court in the case of Greenfield Hotels & Estates Pvt Ltd 389 ITR 68, to support the contention that section 50C would not be applicable when there was a transfer of leasehold land. It was contended that the assessee had rights similar to that possessed by a leaseholder, and therefore section 50C would not apply.

The High Court observed that a sale deed was executed for the sale of land, and the assessee had received consideration. The sale deed was registered by the Sub-Registrar. A transfer of a capital asset existed and for a valuable consideration received by the assessee. There was a dispute regarding possession of the property, which possession according to the assessee was with RIICO, but according to the revenue, the possession was with the assessee. The High Court noted that the material on record did not show any possession with RIICO, as only a notification for the acquisition of land had been issued, and there was no award passed for the acquisition by the Government for RIICO. It was the notification, the court noted, that was in dispute before the Supreme Court and not the possession of the land.

The High Court held that no question of law was involved in the case, as the dispute had been raised on facts, and the Commissioner (Appeals) and the Tribunal had held that section 50C would apply in the circumstances. According to the High Court, the appeal preferred by the assessee against the order passed by the Tribunal could not be admitted.

The Rajasthan High Court rejected reliance placed on behalf of the assessee on the decision of the Ahmedabad Tribunal in the case of Smt Devindraben I Barot vs. ITO 159 ITD 162 (Ahd), on the ground that in that case there was a relinquishment without there being a relinquishment deed and that the tribunal had decided the case without examining what was the difference between sale of the land and relinquishment of right therein. The Rajasthan High Court also rejected the reliance placed by the assessee on the Jaipur Tribunal decision in the case of ITO vs. Tara Chand Jain 155 ITD 956 (Jp), on the ground that the finding in that case that the assessee had transferred only the right in the land for valuable consideration and thereby did not transfer the capital asset, was recorded without proper scrutiny of facts and without elaborate finding on the issue. The tribunal in that case had not examined how the land and building or both were disclosed by the assessee in the balance sheet had not been taken note of, nor had it been shown how it was not a transfer of capital asset.

Referring to the decision of the Bombay High Court in the case of Greenfield Hotels & Estates Pvt Ltd (supra), the Rajasthan High Court observed that a bare perusal of section 50C did not show that transfer of a capital asset for consideration should be other than that of leasehold property or khatedari land, and that the Court could not rewrite the provision. According to the Rajasthan High Court, if the analogy taken by the Bombay High Court was applied in general, then section 50C would not be applicable in the majority of the cases as it was not allowed for leasehold property. The Rajasthan High Court further observed that the Bombay High Court had not referred to how the land was reflected in the balance sheet, whether as a capital asset or not. It therefore expressed its inability to apply the ratio of the judgment of the Bombay High Court to the case before it.

The Rajasthan High Court dismissed the appeal, holding that it did not find any question of law involved in the case before it.

V S CHANDRASHEKHAR’S CASE

The issue had also come up before the Karnataka High Court in the case of V S Chandrashekhar vs. ACIT 432 ITR 330.

In this case, the assessee had entered into an unregistered agreement for the purchase of land from Namaste Exports Ltd for a consideration of ₹4.25 crore. Under the agreement, the assessee was neither handed over the possession of the land nor was power of attorney executed in his favour. Namaste Exports Ltd. subsequently sold the land to another person, to which agreement the assessee was a consenting party.

The assessing officer of the assessee made an addition under section 50C, in his hands, in respect of the capital gains offered by the assessee for the transaction of consenting to the transfer by Namaste Exports Ltd. of the land. The appeals by the assessee to the Commissioner (Appeals) and the Tribunal confirmed the order of the assessing officer.

Before the Karnataka High Court, on appeal by the assessee, it was claimed that the provisions of section 50C were not applicable to the case of the assessee, since he was merely a consenting party in the transaction of transfer of land by a third party. It was urged that section 50C, being a deeming provision, required strict interpretation, and applied to the transfer of the land, by Namaste Exports Ltd. In its hands, and not to the assessee, who was a consenting party and not the transferor / co-owner of the property. It was further argued that since the assessee was only a consenting party, he had no locus standi in the transaction of transfer of land. It was further pointed out that section 50C used the expression ‘capital asset’ as being ‘land, building or both’, and the expression ‘being’ was more like ‘namely’, and therefore section 50C did not deal with interest in land but only dealt with land.

It was also urged on behalf of the assessee that where the language of the statute was clear and unambiguous, there was no room for the application of either the doctrine of ‘causes omissus’ and external aids for interpretation of the provision of s.50C could also not be taken recourse to. It was submitted that the assessee could not be taxed without clear words for the purpose and that every Act of Parliament must be read according to the natural construction of words.

Various alternative arguments were made on behalf of the assessee, including that the land was stock-in-trade and that section 50C did not therefore apply.

On behalf of the Revenue, besides rebutting the arguments that the land was stock-in-trade, it was contended that section 50C mandated the adoption of consideration on the basis of guidance value prescribed by the State Government for the purposes of stamp duty, as the consideration reflected by the assessee was much less than the guidance value provided by the Government of Karnataka. Therefore, the assessing officer had rightly adopted the stamp duty valuation in terms of section 50C.

It was also argued on behalf of the revenue that since the assessee had entered into a purchase agreement and had paid substantial consideration to the extent of 80%, rights had accrued in his favour, which had been extinguished by the sale deed, which would amount to transfer under section 2(47). Reliance was placed on the decision of the Supreme Court in the case of Sanjeev Lal vs. CIT 365 ITR 389 for this proposition that consideration had rightly been subjected to capital gains.

The Karnataka High Court examined the provisions of section 2(47) and section 50C. It noted that explanation 1 to section 2(47) used the term “immovable property”, whereas section 50C used the term “land or building or both” instead of “immovable property”. The Karnataka High Court was of the view that it was pertinent that wherever the legislature intended to expand the meaning of land to include rights or interest in land, it had said so specifically; viz., sections 35(1)(a), 54G(1), 54GA(1), 269UA(d) and Explanation to section 155(5A). According to the Court, section 50C therefore applied only in the case of a transferor of land, which in the case before the court, was Namaste Exports Ltd., and not the assessee, who was only a consenting party and not the transferor or co-owner of land.

According to the Karnataka High Court, the assessee had certain rights under the agreement, but from the clear, plain and unambiguous language used in section 50C, it was evident that it did not apply to a case of rights in land. According to the Karnataka High Court, it was a well-settled rule that in interpreting the taxing statutes no charge should be applied where the words used in the law by the legislature are clear and not ambiguous and the words used in the statute should be given natural meaning when they were clear and unambiguous, and the extended meaning should not be read into such words in the name of legislative intent and for any other reason.

For these reasons, the Karnataka High Court was of the view that the provisions of section 50C were not applicable to the case of the assessee.

OBSERVATIONS

The issue under consideration though moves in a narrow compass has a wider application. Other provisions of the Act namely, s.2(42A), s. 43CA and 56(2)(x) apply in the same context of bringing to tax the difference between the agreement value and the stamp duty value in respect of the transfer of land or building or both or for determination of the period of holding a capital asset. Besides these direct provisions, the Act is replete with provisions that use the term ‘immovable property’ in preference to the term ‘land or building or both’. They are found in s.27, 35(1)(a), 54G(1), 54GA(1), 269UA(d) and Explanation to section 155(5A) of the Act. The Transfer of Property Act and the General Clauses Act also deal with immovable property instead of land or building. All of these make one thing clear that the term immovable property is wider in its scope and embraces in its sweep the terms land and building, though the converse of the same is not true.

Various benches of the tribunal and some high courts have held that the profits and gains on transfer of rights in the land or building are not exigible to the deeming provisions being discussed herein. This is based on the application of the understanding that the terms ‘land or building’ have narrower meaning than the term ‘immovable property’ which is wider to include in its scope the rights and interest in the land or building, besides the land or building. These decisions hold that tenancy rights, leasehold rights, and rights in buildings under construction and development rights are not the same as the ‘land’ or ‘building’.

It’s useful to refer to the meaning of the term ‘immovable property’ provided under s.269UA of the Income Tax Act s.3 of the Transfer of Property Act (“TOPA”) and s.3 of the General Clauses Act (“GCA”). Immovable property, under TOPA and GCA, is defined to mean “Immovable property does not include standing timber, growing crops and grass”,. and “Immovable property shall include land benefits to arise out of the land, and things attached to the earth ”, respectively. S. 269UA of the Income-tax Act defined the term as under;

“immovable property” means-

(i) any land or any building or part of a building, and includes, where any land or any building or part of a building is to be transferred together with any machinery, plant, furniture, fittings or other things, such machinery, plant, furniture, fittings or other things also.

Explanation. – For the purposes of this sub-clause, “land, building, part of a building, machinery, plant, furniture, fittings and other things” include any rights therein;

(ii) any rights in or with respect to any land or any building or a part of a building (whether or not including any machinery, plant, furniture, fittings or other things, therein) which has been constructed or which is to be constructed, accruing or arising from any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement of whatever nature), not being a transaction by way of sale, exchange or lease of such land, building or part of a building;

A bare reading of the definitions leaves no doubt that the term ‘immovable property’ as defined, is wider in its scope and includes the terms land or building while the latter terms are not defined and would be assigned their natural meaning, and not the wider meaning to include the rights in the land and building.

Importantly, the legislature in framing the different provisions of the Income Tax Act has a clear perception and understanding of the difference between these terms which is made clear by the use of different terms at different places with different objectives. Had the intention been to cover the cases of the rights in land too in the ambit of the provisions being examined namely, s.43CA, 50 C and 56(2), the legislature would have used the term’ immovable property’ in place and stead of the terms ‘land’ or ‘building’. S.27, 35(1)(a), 54G(1), 54GA(1), 269UA(d) and Explanation to section 155(5A) of the Act use the term ‘immovable property’ whose meaning would be supplied reference to the enactments which define this term while the meaning of the terms ‘land’ or ’building’ used in the Act should be gathered by the natural meaning of these terms.

This issue had first come up before the Bombay High Court in the case of CIT vs. Greenfield Hotels & Estates (P) Ltd 389 ITR 68. In that case, the Bombay High Court noted that the tribunal had followed its decision in Atul G Puranik vs. ITO 132 ITD 499, which had held that section 50C is not applicable while computing capital gains on the transfer of leasehold rights in land and buildings. In that case, the counsel for the revenue stated that the revenue had not preferred any appeal against the decision of the tribunal in the case of Atul G Puranik (supra). The Bombay High Court therefore stated that it could be inferred that the tribunal decision in Atul Puranik’s case had been accepted by the Government. The High Court referred to its own decision in the case of DIT vs. Credit Agricole Indosuez 377 ITR 102 and the decision of the Supreme Court in the case of UOI vs. Satish P Shah 249 ITR 221, for the salutary principle that where the revenue had accepted the decision of the court / tribunal on an issue of law and not challenged it in appeal, then a subsequent decision following the earlier decision cannot be challenged. Therefore, the Bombay High Court had taken the view that no substantial question of law arose in that case.

An identical view had been taken by the Bombay High Court on the same reasoning earlier in CIT vs. Heatex Products Pvt Ltd 2016 (7) TMI 1393 – Bombay High Court. However, in a subsequent matter in the case of Pr CIT vs. Kancast Pvt Ltd 2018 (5) TMI 713 – Bombay High Court, the Bombay High Court took note of its decisions in Greenfield Hotels & Estates (P) Ltd (supra) and Heatex Products Pvt Ltd (supra) and observed that these were decided on the basis that no appeal had been filed against the Tribunal’s decision in the case of Atul G Puranik (supra). The High Court observed that in the case before it, reliance had been placed on the Tribunal decisions in the case of Atul G Puranik (supra) and ITO vs. Pradeep Steel Re-Rolling Mills Pvt Ltd 2011(7) TMI 1101 – ITAT Mumbai (supra). The counsel for the Revenue pointed out that the Revenue had preferred an appeal against the Tribunal’s order in Pradeep Steel Re-Rolling Mills Pvt Ltd (supra), which was admitted. It was however later withdrawn in view of the low tax effect.

The Bombay High Court noted that when both appeals in Greenfield Hotels & Estates Pvt Ltd (supra) and Heatex Products Pvt Ltd (supra) were not entertained by it, the decision of the Court in Pradeep Steel Re-Rolling Mills Pvt Ltd (supra) admitting the appeal on the same question had not been brought to its notice. It therefore admitted the appeal on the substantial question of law in Kancast Pvt Ltd’s (supra) case. Therefore, the issue is still pending for decision before the Bombay High Court.

However, in a decision of the Bombay High Court in the case of Pr CIT vs. MIG Co-op. Hsg. Soc. Group II Ltd 298 Taxman 284 (Bom), in the context of a redevelopment agreement entered into by a co-operative housing society, the Bombay High Court noted with approval the following observations of the Tribunal in the case before it:

“We also hold that Society was only the lessee and what was transferred to the developer is development rights, not land or building. Section 50C of the Act stipulates as under:

“Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both.….…”

No authority is required to hold that terms’ land or building’ ‘or both’ do not include development rights and that in the case before (them) there was the transfer of such rights only.”

Looking at the number of judicial decisions, including various decisions of the Tribunal, it appears that the majority of the Courts and the Tribunals seem to favour the proposition that given the express language of section 50C, referring to “capital asset, being land or building or both” and not using the broader term “immovable property”, the intention clearly seems to be that only land building per se was intended to be covered, and not all types of immovable property.

The facts in both cases are highly peculiar. In the case before the Rajasthan High Court, the subsequent order of the Supreme Court has made the entire transaction of the transfer by the assessee non-est and not enforceable in law, and the assessee would have been better off by contending that no capital gains could be said to have arisen out of a non-est transaction by relying on the settled position in law including by the decisions of the Supreme Court in the case of Balbir Singh Maini,86 taxmann.com 94 and Ranjit Kaur, 89 taxmann.com 9. In the facts of the assessee before the Karnataka High court the assessee had never acquired any land or building, nor had he acquired even the rights in the land, nor had he possessed the land, neither had he transferred the land, nor was he capable of doing so; he was just a consenting or confirming party and was included for the reason of he having made the part payment to the extent of 80% of the consideration agreed. In such facts, it was not possible for the court to have come to any other conclusion other than the one delivered by it.

Therefore, the better view is that rights in immovable property which are inferior to ownership rights, such as leasehold rights or the right to acquire immovable property, would not be covered by section 50C.

BCAJ Admin

Glimpses of Supreme Court Rulings

6 Special Leave Petition — Dismissed on grounds of efflux of time — Question of Law kept open

PCIT vs. Atlanta Capital Pvt. Ltd.

(2024) 464 ITR 346 (SC)

A notice dated 27^th March, 2008 u/s. 148 of the Act for the assessment year 2001–02 was issued to the assessee at an old address, though the Assessing Officer had served letters dated 8^th August, 2007 and intimation u/s. 14(1) dated 25^th January, 2008 for the assessment year 2006–07 at the new address. The Tribunal quashed the reassessment proceedings holding that there was no proper service of notice. The Delhi High Court dismissed the appeal holding that there was no substantial question of law. According to the High Court, the mere fact that an assessee participated in the reassessment proceedings despite not having been issued or served with the notice u/s. 148 of the Act in accordance with law will not constitute a waiver of the jurisdictional requirement of the issuance and the service of notice.

The Supreme Court observed that the said notice as followed by the order passed by the Assessing Officer/Commissioner was set aside by the Income-Tax Appellate Tribunal on 21^st June, 2013. Subsequently the order of the Tribunal was upheld by the High Court on 15^th September, 2015. The proceeding initiated in 2008 was concluded by the order of the High Court in 2015. Yet another decade had passed thereafter. Under the circumstances, while keeping the question of law open for consideration in another case, the Supreme Court decided not to interfere with the judgment of the High Court.

7 Business Expenditure—Expenditure cannot be disallowed merely because no income is earned SLP dismissed since it was accepted that the business had commenced
PCIT vs. Hike Pvt. Ltd (2024) 464 ITR 394 (SC)

The assessee filed its return of income for the assessment year 2014–15 declaring a loss of ₹42,24,57,146. The assessment order u/s. 143(3) was passed determining total income at ₹78,83,350. The Assessing Officer inter alia disallowed the expenses of ₹43,01,40,500 for the reason that the assessee had not earned any revenue from its business. The only income that it had earned was income from other sources, i.e., interest earned on fixed deposits.

On an appeal, the Commissioner of Income-tax (Appeal) inter alia confirmed the disallowance of expenses.

The Tribunal reversed the view taken by the Commissioner of Income-tax (Appeals) noting that for AY 2012–13, the Assessing Officer had accepted the stand of the assessee that the expenses incurred by it were on revenue account and the later order passed by the Commissioner u/.s 263 for AY 2012–13 was quashed by the Tribunal.

Before the High Court, the Revenue contended that the expenditure was incurred before the business was set up and therefore not allowable. The High Court noted that the objection of the Assessing Officer was that the said amount was spent in building a brand for future utilization, therefore, was not in the nature of revenue. The High Court noted that even in AY 2012–13 the expenses were disallowed because according to the Assessing Officer, the business was not set up and the software purchased was not put to use.

The High Court considering that the assessee was in the business of software development did not interfere with the order of the Tribunal.

On a special leave by the Revenue, the Supreme Court declined to interfere with the High Court judgment as it was accepted that the business had commenced.

BCAJ Admin

Article 11 of India-Cyprus DTAA — Assessee is the beneficial owner of income if it has the right to receive and enjoy interest income without any obligation to pass on income to any other person.

7 [2024] 162 taxmann.com 766 (Delhi — Trib.)

Little Fairy Ltd vs. ACIT

ITA No: 1513/Del/2022

A.Y.: 2017–18

Dated: 15^th May, 2024

Article 11 of India-Cyprus DTAA — Assessee is the beneficial owner of income if it has the right to receive and enjoy interest income without any obligation to pass on income to any other person.

FACTS

Assessee, a tax resident of Cyprus, invested in Compulsorily Convertible Debentures (CCDs) of an Indian Company (ICO). In terms of India-Cyprus DTAA, the assessee offered a gross amount of interest on CCDs to tax @10 per cent. AO held that the assessee was not the beneficial owner of income as (a) the Assessee had not performed any activity in Cyprus; (b) there were other companies having the same registered address; and (c) the Assessee was merely a conduit for channelizing the funds invested in CCDs. Accordingly, AO charged tax @40 per cent on the interest income of the assessee.

On appeal, CIT(A) confirmed the order of AO. Being aggrieved, the assessee appealed to ITAT.

HELD

ITAT held that the assessee is the beneficial owner of income on account of the following facts:

The Assessee had taken the following decisions in its Board meeting held in Cyprus:

(a) Decision to invest in ICO. (b) Declaration of dividend to its sole shareholder.

The parent company by itself does not become the beneficial owner of income because it does not get any right over the assets of the assessee.
The Assessee made an investment in CCD’s of ICO in its own name through proper banking channels. Unlike in the case of manufacturing and trading businesses where a person is required to undertake business activity, after making an investment, no activity is required since the investment may fetch either interest or capital gains to the assessee without doing anything.
The Assessee being an investment company, does not require any personnel other than directors on its payroll to carry out day-to-day operations. The Directors of the assessee company were qualified and competent to run the company and make its business investment decisions. Furthermore, the assessee had availed services of a professional administrator for general administration, such as book-keeping, company secretarial services, etc., and there was no need to have any employee on its own payroll.
The Assessee received interest in its bank account. Assessee had the right to receive interest income. There was no compulsion or contractual obligation to simultaneously pass on the same to another entity. The assessee had also borne foreign currency risk as well as counter-party risk.

BCAJ Admin

S. 115JB, 147–Reopening under section 147 is not maintainable where MAT liability would not get disturbed on correct application of law and tax on such book profits exceeded the total income determined as per the normal provisions of the Act.

26 (2024) 162 taxmann.com 730 (DelhiTrib)

Genus Power Infrastructure Ltd. vs. ACIT

ITA Nos.: 2573 & 2680(Del) of 2023

A.Y.: 2010–11

Dated: 10^th May, 2024

S. 115JB, 147–Reopening under section 147 is not maintainable where MAT liability would not get disturbed on correct application of law and tax on such book profits exceeded the total income determined as per the normal provisions of the Act.

FACTS

For AY 2010–11, the assessee filed its return of income on 23^rd September, 2010 declaring total income at Nil. The case was subjected to regular assessment vide order under section 143(3) dated 28^th March, 2013 and income was assessed at ₹8,71,08,200 and book profit under section 115JB at ₹31,04,38,156.

Thereafter, notice under Section 148 was issued by the AO on 31^st March, 2017, that is, after a period of four years from the end of the assessment year where the original assessment was earlier completed under Section 143(3). The reasons recorded by AO showed that an adjustment at ₹4,28,41,017 was proposed to the book profit on the ground that provision on the repair of partly damaged assets had been wrongly allowed and was not eligible for deduction while computing book profits. The reasons recorded also made allegations towards escapement of income on varied grounds [namely, prior period expenses, deduction under s. 80IC, calculation mistakes etc.] while reassessing the taxable income under the normal provisions of the Act. The book profit was thus reassessed at ₹35.31 crores [as opposed to ₹31.04 crores in original assessment] whereas the taxable income under the normal provisions was assessed at ₹13.67 crores [as opposed to ₹8.71 crores in original assessment].

Cross appeals were filed by the Revenue and assessee against the order of CIT(A).

A jurisdictional controversy had been raised before the Tribunal as to whether re-opening under section 147/148 is maintainable where MAT liability as per book profits computed under section 115JB would not get disturbed on the correct application of the law, and tax on such book profits also exceeded the total income determined as per normal provisions.

HELD

The Tribunal observed as follows:

Escapement alleged qua book profits did not meet the conditions embodied in the first proviso to section 147 having regard to full and true disclosure of the relevant/material facts attributable to provisions for repairs in the ROI by making disallowances under normal provisions and suitable declarations in the audited financial statement;

One cannot say that when the adjustment on account of such provision for repairs has been made by the assessee while determining the income as per normal provisions of the Act, there was a failure on the part of the assessee to disclose facts in not making such corresponding adjustments while determining the book profit. The disclosures were also made in the financial statement. The condition of the first proviso was thus clearly not satisfied in the instant case. Hence, the escapement qua book profits were not sustainable in law.

In the absence of escapement qua book profits, the escapement alleged under normal provisions was of no consequence since despite the purported escapement qua normal provision which may lead to enhancement of taxable income under the normal provision, the tax liability thereon would still be lower than the book profits assessable in law;

The claim of the assessee that the tax liability on book profit was higher than the income assessable under normal provisions including escapement alleged qua normal provisions, had not been disputed by the revenue.

Accordingly, following the decisions of the Gujarat High Court in India Gelatine and Chemical Ltd. vs. ACIT, (2014) 364 ITR 649 (Guj) and Motto Tiles P. Ltd. vs. ACIT, (2016) 286 ITR 280 (Guj), the Tribunal quashed the reassessment notice and declared the reassessment order null and void.

BCAJ Admin

S. 12A–Where the assessee-trust selected an incorrect clause in an application for section 12A / 80G, since the mistake was not fatal, CIT was directed to treat the application under the appropriate clause and consider the case on merits.

25 Shree Swaminarayan Gadi Trust vs. CIT

(2024) 162 taxmann.com 772 (SuratTrib)

ITA Nos.: 369 & 370(Srt) of 2024

A.Y.: N.A

Dated: 13^th May, 2024

S. 12A–Where the assessee-trust selected an incorrect clause in an application for section 12A / 80G, since the mistake was not fatal, CIT was directed to treat the application under the appropriate clause and consider the case on merits.

FACTS

The assessee-trust applied for registration under section 12A and section 80Gin Form 10AB. Instead of selecting section 12A(1)(ac)(iii) in the Form, the assessee incorrectly selected section 12A(1)(ac)(iv). A similar mistake was also made in the Form relating to section 80G. In the proceedings before CIT(E), the assessee requested the CIT to consider the application under the appropriate sub-clause.

CIT(E) held that he has no power to change / amend / rectify Form 10AB and therefore, rejected the applications.

Aggrieved, the assessee filed appeals before ITAT.

HELD

The Tribunal observed as follows—

a) the mistake in filing entry was not fatal and could be considered under the appropriate sub-clause or clause of section 12A(1).

b) Being the first appellate authority, the plea of the assessee for correction in Form-10AB should be accepted and the order of CIT(E) be set-aside.

The Tribunal directed CIT(E) to treat the application of the assessee under Section 12A(1)(ac)(iii) in place of Section 12A(1)(ac)(iv) and to consider the case on merit and pass the order in accordance with the law. Similar directions were also given for application for approval under section 80G(5).

BCAJ Admin

I. The area of Balconies open to the sky is not to be considered as part of the built-up area of a particular residential unit. Claim for deduction under section 80IB(10) cannot be denied in respect of those residential units whose built-up area exceeds 1,000 sq. feet only when the area of open balcony is added to the built-up area of the residential unit. II. The project completion method is the right method for determining the profits. The Project Completion Method should not have been disturbed by the AO as it was being regularly followed by the assessee in earlier years also and there is no cogent reason to change the method.

24 Shipra Estate Ltd. & Jai Krishan Estate Developers Pvt. Ltd. vs. ACIT

ITA No. 3569/Del./2016

Assessment Year: 2012–13

Date of Order: 24^th April, 2024

Section: 80IB(10)

I. The area of Balconies open to the sky is not to be considered as part of the built-up area of a particular residential unit. Claim for deduction under section 80IB(10) cannot be denied in respect of those residential units whose built-up area exceeds 1,000 sq. feet only when the area of open balcony is added to the built-up area of the residential unit.

II. The project completion method is the right method for determining the profits. The Project Completion Method should not have been disturbed by the AO as it was being regularly followed by the assessee in earlier years also and there is no cogent reason to change the method.

FACTS I

The assessee aggrieved by the order of CIT(A) denying a claim for deduction under section 80IB(10) in respect of those residential units whose built-up area exceeds 1,000 sq. feet only when the area of open balcony is added to the built-up area of the residential unit preferred an appeal to the Tribunal.

HELD I

The Tribunal upon perusal of the orders of the authorities below and the decision of the Tribunal in the assessee’s own case for AYs 2008–09 to 2011–12 observed that the Tribunal for AYs 2008–09 and 2009–10 in the common order dated 30^th May, 2016 in ITA Nos. 1950/Del/2012 & 5849/Del/2012 allowed the claim for deduction under section 80IB(10) of the Act in respect of flats excluding the balcony open to the sky for the purpose of calculating the built-up area of the individual units. Following the earlier orders, the Tribunal allowed the claim for deduction u/s 80IB(10) in respect of those flats whose area exceeded 1,000 sq. feet only as a result of including a balcony open to the sky. The AO was directed to verify the claim of the assessee after obtaining the details and allow the deduction after providing adequate opportunity of being heard by the assessee.

FACTS II

Aggrieved by the order of the CIT(A) directing the AO to accept the project completion method followed by the assessee, revenue preferred an appeal to the Tribunal.

It was submitted that this issue came up for adjudication in assessee’s case for AY 2008–09 to 2011–12. It was also mentioned that the Tribunal for AY 2008–09 and 2009–10 has upheld the order of the CIT(A) in accepting the project completion method adopted by the assessee.

HELD II

The Tribunal observed that the Tribunal has decided the issue in appeal in favour of the assessee by sustaining the order of CIT(A) in holding that the project completion method adopted by the assessee is the right method for determining the profits. The CIT(A) had held that the AO should not have disturbed the project completion method followed by the assessee regularly and there is no cogent reason to change the method. Both these findings of the CIT(A) were upheld by the Tribunal for AYs 2008–09 and 2009–10. The appeal of the revenue has been dismissed by the High Court in ITA No. 766/2016 and 178/2017 dated 16^th May, 2017 holding that there is no substantial question of law. The tribunal also observed that the Court held that the question “whether the addition made by the AO to the income of the Respondent for the relevant year based on percentage completion method was not correct as held by the ITAT’ stands answered in favour of the assessee and against the revenue by order dated 16^th November, 2016 in ITA No. 802/2016 in PCIT vs. Shipra Estate Ltd. & Jai Krishan Estate Developers Pvt. Ltd. Following this decision of the High Court, Tribunal rejected the ground of the revenue.

BCAJ Admin

For a claim of deduction under section 54 the date of possession and not the date of agreement should be considered to be the date of purchase.

23 Sunil Amritlal Shah vs. ITO

ITA No. 4069/Mum./2023

Assessment Year: 2011-12

Date of Order: 13^th May, 2024

Section: 54

For a claim of deduction under section 54 the date of possession and not the date of agreement should be considered to be the date of purchase.

FACTS

The assessee, an individual, preferred an appeal against the assessment order dated 3^rd October, 2023 passed under section 144C(13) read with section 147 read with section 254 of the Act determining total income of ₹35,97,395 and denying a claim of deduction of ₹34,25,243 made under section 54 of the Act.

During the year under consideration, the assessee had long-term capital gain on the sale of a residential house on 10^th February, 2011. The entire long-term capital gain was claimed to be exempt under section 54 on the ground that the assessee purchased a residential house at Ghatkopar. For this new house, the assessee entered into an agreement for sale with builder Runwal Capital Land India Private Limited on 25^th July, 2009 for a consideration of ₹73,06,530. The possession of the new house was granted to the assessee on 2^nd February, 2011 after receipt of the occupancy certificate and when the building was habitable. Assessee considered the date of possession i.e., 2^nd February, 2011 to be the date of acquisition of the property. The AO denied the claim by holding the date of acquisition of the property to be 25^th July, 2009.

Aggrieved, assessee preferred an appeal to the Tribunal.

HELD

On behalf of the assessee reliance was placed on the decision of Bombay High Court in CIT vs. R K Jain [ITA No. 260 of 1993 (1994) 75 Taxman 145] wherein the Court has held that the date of possession of new residential premises is considered for exemption under section 54F instead of the date of sale agreement. It was submitted that there is no difference in the eligibility for deduction under section 54F and section 54 of the Act. It was also submitted that following this decision of the jurisdictional High Court, the co-ordinate bench in the case of Sanjay Vasant Jumde vs. ITO [148 taxmann.com 34] has so held. Reliance was also placed on several other decisions.

HELD

The Tribunal observed that —

(i) by agreement dated 25^th July, 2009, the assessee acquired a `right to purchase a house’ which was under construction. On 2^nd February, 2011 when the house was handed over to the assessee, when it was inhabitable (sic habitable) the assessee purchased the house;

(ii) in PCIT & Others vs. Akshay Sobit & Others [(2020) 423 ITR 321 (Delhi)], the Delhi High Court held that the provision in question is a beneficial provision for assessees who replace the original long-term capital asset with a new one. It was further held that booking of the bare shell of a flat is a construction of house property and not purchase. Therefore, the date of completion of construction is to be looked into which is as per provision of section 54 of the Act. In the present case as well, the assessee has booked the flat under construction which was handed over to the assessee upon completion of construction;

(iii) the Bombay High Court in the case of Beena K Jain [217 ITR 363 (Bom.)], in connection with section 54F which is parimateria, affirmed the action of the Tribunal and held that the date of the agreement is not the date of purchase but the date of payment of full consideration amount on flat becoming ready for occupation and having obtained possession of the flat is the date of purchase. The action of the Tribunal in looking at the substance of the transaction and coming to the conclusion that the purchase was substantially effected when the agreement of purchase was carried out or completed by full payment of consideration and handing over of possession of the flat on the next day was upheld by the court;

(iv) the co-ordinate bench in Bastimal K Jain vs. ITO [(2016) 76 taxmann.com 368 (Mum.)] has also held that the assessee’s claim for deduction under section 54 was to be reckoned from the date of handing over of possession of the flat by the builder to the assessee.

The Tribunal held that the assessee is entitled to deduction under section 54 of the Act on the purchase of a new house considering the date of possession when it is completed as the date of purchase of property as agreement to purchase the property was for under-construction property. By entering into an agreement to purchase assessee acquired the right to purchase the property and did not purchase the property as the same was under construction. The section requires “purchase” of property.

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

BCAJ Admin

An assessment order passed, in search cases, without obtaining approval of the Joint Commissioner under section 153D is void. Failure on the part of the department to produce a copy of the approval gives rise to a presumption that there was no approval at all. In the absence of the same, no conclusion can be drawn if the approval was in accordance with the law or not.

22 Emaar MGF Land Limited vs. ACIT

ITA Nos. 825 to 820/Del/2018 and 1378/Del/20123

Assessment Years: 2010–11 & 2015–16

Date of Order: 30^th May, 2024

Section: 153D

An assessment order passed, in search cases, without obtaining approval of the Joint Commissioner under section 153D is void. Failure on the part of the department to produce a copy of the approval gives rise to a presumption that there was no approval at all. In the absence of the same, no conclusion can be drawn if the approval was in accordance with the law or not.

FACTS

The assessments of the assessee company for AY 2010–11 to 2015–16 were completed by the Assessing Officer (AO). Aggrieved by the assessments so made, the assessee preferred an appeal to the Commissioner of Income-tax (Appeals) who vide his order dated 30^th November, 2017 decided some of the grounds in favour of the assessee and some of the grounds were decided against the assessee.

Aggrieved by the order passed by CIT(A), the assessee preferred an appeal to the Tribunal. In the course of appellate proceedings before the Tribunal, the assessee filed an application under Rule 11 of the Income-tax Appellate Tribunal Rules, 1963 for admission of additional grounds which inter alia had the following as an additional ground —

“5. That, on the facts and circumstances of the case and in law, the approval under section 153D of the Act is mechanical and without application of mind and thus the impugned assessment order is illegal, bad in law and liable to be quashed.”

It was only ground no. 5 out of the additional grounds filed which was pressed and since the same raised purely a question of law, the Tribunal admitted the same.

HELD

Upon the Revenue not being able to produce a copy of the approval granted by the Range Head under section 153D of the Act, it was contended that as there is no order available with the Department for the purpose of section 153D of the Act, presumption has to be drawn that no such order was passed and in the absence of such order the assessment concluded in the relevant assessment years under section 153A read with section 143(3) of the Act are void. For this proposition reliance was placed on the decision of the Delhi High Court in the case of Rajsheela Growth Fund (P.) Ltd. vs. ITO [ITA No. 124/202 and other judgment dated 8^th May, 2024].

On behalf of the revenue, reliance was placed on concluding para 7 of the assessment order and it was submitted that there is a reference of letter No. Jt. CIT/C.R.-1/153D Appr./2016–17/1025 dated 26^th December 2016, by which approval was given, so it is not correct to contend that there was no approval under section 153D of the Act.

The Tribunal held that it is now a settled proposition of law that prior approval of competent authority under section 153D of the Act is mandatory and the same is required to pass rigour of the law, to show that the approval was granted after due consideration of the assessment record and it was not a mechanical approval.

In spite of giving reasonable and sufficient opportunities to the department, AO failed to produce any copy or other evidence of the existence of the approval. That only gives rise to a presumption that there was no approval at all. In the absence of the same, no conclusion can be drawn if the approval was in accordance with law or not but to hold that the assessments in hand were concluded without the requisite approval under section 153D of the Act.

The Tribunal allowed additional ground no. 5 with a caveat that, in case the department is able to lay hand on any evidence showing existence and content of approval, application may be filed for re-calling this order and to contest this issue afresh on merits along with other issues raised in respective appeals.

The Tribunal allowed the appeals of the assessee.

BCAJ Admin

The resulting company in case of demerger and the Transferee Company in the case of transfer are eligible to claim TDS credit, even if the TDS certificates are in the name of the demerged company / Transferor Company.

21 Culver Max Entertainment Pvt. Ltd. vs. ACIT

ITA Nos. 7685/Mum/2019 and 925/Mum/2021

Assessment Years: 2015–16 & 2016–17

Date of Order: 02^nd May, 2024

Section: 199

The resulting company in case of demerger and the Transferee Company in the case of transfer are eligible to claim TDS credit, even if the TDS certificates are in the name of the demerged company / Transferor Company.

FACTS

MSM Satellite (Singapore) Pte Ltd. (MSN Singapore) a wholly owned subsidiary of the assessee purchased, in March 2005, a TV channel named “SAB TV” from a company named Shri Adhikari Brothers. Subsequently, during the financial year 2014–15 MSN Singapore demerged its broadcasting business and the same was taken over by the assessee herein. The demerger scheme was sanctioned by the Bombay High Court on 10^th January, 2014 and it came into effect on 1^st April, 2014.

Upon completion of the assessment u/s 143(3) r.w.s. 144C of the Act in pursuance of the directions given by the Dispute Resolution Panel, the assessee preferred an appeal to the Tribunal. One of the grounds of the appeal was with regards to the non-granting of TDS to the tune of ₹8,13,81,645.

On behalf of the assessee, it was submitted that the TDS credit was not given by the Assessing Officer (AO) for the reason that the TDS certificates were not in the name of the assessee, but it was in the name of amalgamated / demerged company. The contention was that the relevant income has already been assessed in the hands of the assessee and hence the TDS deducted from the said income should be allowed credit in the hands of the assessee.

HELD

The Tribunal noted that in the following cases, in identical circumstances, the AO has been directed to allow TDS credit —

(a) Popular Complex Advisory P. Ltd. vs. ITO [ITA No. 595/Kol./2023; order dated 22^nd August, 2023];

(b) Adani Gas Ltd. vs. ACIT [ITA Nos. 2241 & 2516/Ahd./2011; order dated 18^th January, 2016];

The Tribunal observed that —

(i) In the above-mentioned cases, the co-ordinate benches have held that the resulting company in the case of demerger and transferee company in the case of transfer, are eligible to claim TDS credit, even if the TDS certificates are in the name of demerged company / transferor company;

(ii) The assessee has offered the relevant income, even though the TDS certificates were in the name of demerged company.

Following the above decisions, the Tribunal directed the AO to allow TDS credit to the assessee after verifying that the relevant income has been assessed by the AO this year.

BCAJ Admin

Section – 148 — Reassessment — Assessment Year 2013–14 — Search — computation of the “relevant assessment year”.

9 Flowmore Limited vs. Dy. CIT Central Circle – 28

WP (C) No. 3738 OF 2024 & CM APPL. 15409/2024

Dated: 27^th May, 2024. (Del) (HC)

Section – 148 — Reassessment — Assessment Year 2013–14 — Search — computation of the “relevant assessment year”.

Pursuant to a search and seizure operation conducted in respect of the Alankit Group on 18^th October, 2019, the Petitioner was served a notice under Section 153C on 3^rd March, 2022. On culmination of those proceedings, the Department proceeded to pass a final order of assessment on 23^rd March, 2023, accepting the income which had been assessed originally under Section 143(3) of the Act. The Petitioner stated that insofar as the original Section 143(3) assessment was concerned, an appeal was taken to the Income Tax Appellate Tribunal which ultimately accorded relief to the petitioner with respect to disallowances made under Section 40(a)(ia) of the Act.

The subsequent notice under Section 148 of the Act dated 31^st March, 2023 was concerned with a search which was conducted in the case of the Proform Group on 9^th February, 2022.

The court noted that for the purposes of reopening, bearing in mind the proviso to Section 149(1), action could have been initiated only up to A.Y. 2014–15. Since the notice was issued on 31^st March, 2023, it would be the amended regime of reassessment which came into effect from 1^st April, 2021 which would be applicable. The action for reassessment would thus have to satisfy the provisions made in the First Proviso to Section 149(1) of the Act.

The Court observed that from a reading of that provision, any action for reassessment pertaining to an A.Y. prior to 1st April, 2021 can be sustained only if it be compliant with the timeframes specified under Section 149(1)(b), Section 153A or Section 153C as the case may be and on the anvil of those provisions as they existed prior to the commencement of Finance Act, 2021. Viewed in that light, it is manifest that the assessment for A.Y. 2013–14 could not have been reopened.

The Honourable Court referred and relied on the following decisions:

Filatex India Ltd. vs. Deputy Commissioner of Income Tax & Anr.[WP(C) 12148/2023]; Principal Commissioner of Income Tax-1 vs. Ojjus Medicare Pvt. Ltd[2024 SCC OnLine Del 2439]

Principal Commissioner of Income Tax-Central-1 vs. Ojjus Medicare Pvt. Ltd.[2024 SCC Online Del 2439]

The Court further observed that the computation of the “relevant assessment year” from the date of the impugned Section 148 notice dated 31^st March, 2023 would be as follows:

Therefore, ex-facie evident that A.Y. 2013–14 falls beyond the 10-year block period as set out under Section 153C read with Section 153A of the Act. Consequently, the impugned notice was unsustainable.

The writ petition was allowed, and the notice dated 31^st March, 2023 under Section 148 of the Act was quashed.

BCAJ Admin

Section – 220(6) — Stay application — Rectification application —Adjustment of a disputed tax demand against refunds which were due during pendency of the above application.

8 National Association of Software and Services Companies vs. Dy. CIT (Exemption) Circle – 2(1)

WP (C) NO. 9310 of 2022

A.Y.: 2018–19

Dated: 1^st March, 2024, (Delhi) (HC)

Section – 220(6) — Stay application — Rectification application —Adjustment of a disputed tax demand against refunds which were due during pendency of the above application.

The Petitioner filed its Return of Income for A.Y. 2018–19 on 29^th September, 2018 claiming a refund of ₹6,45,65,160 on account of excess taxes deducted at source which was deducted during the course of the said year. In the course of processing of that ROI, notices under Sections 143(2) and 142(1) of the Act came to be issued on 22^nd September, 2019 and 9^th January, 2020, respectively. On 16^th November, 2019, the petitioner received an intimation, referable to Section 143(1) of the Act, apprising it of an amount of ₹6,42,30,413 being refundable along with interest. However, when the assessment was ultimately framed and a formal order was passed under Section 143(3) read with Section 144B of the Act, various additions came to be made to the income disclosed in the ROI and leading to the creation of a demand of ₹10,26,85,633.

Aggrieved by the aforesaid, the petitioner preferred an appeal before the Commissioner of Income Tax (Appeals), which was pending. Simultaneously, petitioner also moved an application purporting to be under Section 154 of the Act for correction of rectifiable mistakes, which according to it were apparent on the face of the record. Along with the rectification application, the petitioner on 28^th May, 2021 also filed a stay application in respect of the demand so raised. The rectification application however came to be perfunctorily rejected in terms of an order dated 7^th June, 2021

During the pendency of the appeal before CIT(A), NFAC, and without attending to the stay application which had been moved, the department proceeded to adjust the demand that stood created by virtue of the assessment order dated 29^th April, 2021 against various refunds which were payable to the petitioner for A.Y.s’ 2010–11, 2011–12 and 2020–21.

According to the Petitioner, the action so initiated and the adjustments effected are wholly arbitrary and illegal in as much as there existed no justification for the adjustments being made without its application referable to Section 220(6) being either considered or examined. According to petitioner, the very purpose of Section 220(6) has been nullified by the action of the department who have proceeded to make the impugned adjustments without even examining the application of the petitioner for not being treated as an “assessee in default”.

The Petitioner relied on the Central Board of Direct Taxes Office Memorandum No. 404/72/93-ITCC6 dated 31^st July, 2017, to state that the department could have at best required the petitioner to deposit 20 per cent of the outstanding demand.

The department contented that the application for stay which was moved by the writ petitioner was not accompanied by any challan evidencing deposit of monies against the demand for A.Y. 2018–19 which was outstanding. Thus, and according to department, since a pre-condition as specified in the Office Memorandum dated 31^st July, 2017 and OM dated 29^th February, 2016 was not adhered to, the application of the assessee was rightly not considered.

The Honourable Court observed that the Revenue department have proceeded on a wholly incorrect and untenable premise that the assessee was obliged to tender or place evidence of having deposited 20 per cent of the disputed demand before its application for stay under section 220(6) of the Act could have been considered. The interpretation which was sought to be accorded to the aforesaid OM was misconceived.

The Honourable Court noted that the two OMs neither prescribe nor mandate 15 per cent or 20 per cent of the outstanding demand as the case may be, being deposited as a pre-condition for grant of stay. The OM dated 29^th February, 2016, specifically spoke of a discretion vesting in the AO to grant stay subject to a deposit at a rate higher or lower than 15 per cent dependent upon the facts of a particular case. The subsequent OM merely amended the rate to be 20 per cent. In fact, while the subsequent OM chose to describe the 20 per cent deposit to be the “standard rate”, the same would clearly not sustain.

The Honourable Court referred and relied on the decision of Avantha Realty Ltd. vs. The Principal Commissioner of Income Tax Central Delhi 2 & Anr [2024] 161 taxmann.com 529 (Delhi) wherein it was observed that the administrative circular will not operate as a fetter on the Commissioner since it is a quasi-judicial authority, and it will be open to the authorities, on the facts of individual cases, to grant deposit orders of a lesser amount than 20 per cent, pending appeal.

The Honourable Court further relied on the order passed by the Supreme Court in Principal Commissioner of Income Tax & Ors. vs. LG Electronics India Private Limited [2018] 18 SCC 447 wherein it had been emphasised that the administrative circular would not operate as a fetter upon the power otherwise conferred on a quasi-judicial authority; and that it would be wholly incorrect to view the OM as mandating the deposit of 20 per cent, irrespective of the facts of an individual case. This would also flow from the clear and express language employed in sub-section (6) of Section 220 which speaks of the Assessing Officer being empowered “in his discretion and subject to such conditions as he may think fit to impose in the circumstances of the case”. The discretion thus vested in the hands of the AO is one which cannot possibly be viewed as being cabined by the terms of the OM.

The Honourable Court further referred the following decisions:

Dabur India Limited vs. Commissioner of Income Tax (TDS) & Anr. [2023] 291 Taxman 3 (Delhi); Indian National Congress vs. Deputy Commissioner of Income Tax Central – 19 & Ors.[2024] 463 ITR 182 (Delhi); Benara Valves Ltd. & Ors. vs. Commissioner of Central Excise & Anr [2007] 6 STT 13 (SC).

Thus, the Honourable Court held that while 20 per cent is not liable to be viewed as an entrenched or inflexible rule, there could be circumstances where the department may be justified in seeking a deposit in excess of the above dependent upon the facts and circumstances that may be obtained. This would have to necessarily be left to the sound exercise of discretion by the department based upon a consideration of issues such as prima facie, financial hardship and the likelihood of success.

The Court held that the department have clearly erred in proceeding on the assumption that the application for consideration of outstanding demands being placed in abeyance could not have even been entertained without a 20 per cent pre-deposit. The aforesaid stand as taken is thoroughly misconceived and wholly untenable in law.

Undisputedly, and on the date when the impugned adjustments came to be made, the application moved by the petitioner referable to Section 220(6)of the Act had neither been considered nor disposed of. This action of the department was wholly arbitrary and unfair. The intimation of adjustments being proposed would hardly be of any relevance or consequence once it is found that the application for stay remained pending and the said fact is not an issue of contestation.

The writ petition was allowed and the matter was remitted to the department for considering the application of the petitioner under Section 220(6) in accordance with the observations made hereinabove.

BCAJ Admin

Search and seizure — Assessment in search cases — Special deduction — Return processed and no notice issued for enquiry — No incriminating material found during search — Special deduction cannot be disallowed on basis of statement recorded subsequent to search.

28 Principal CIT vs. Oxygen Business Park Pvt. Ltd.

[2024] 463 ITR 125 (Del)

A.Y. 2011–12

Date of order: 8^th December, 2023

Ss. 80IAB, 132, 143(1), 143(2) and 153A of ITA 1961

Search and seizure — Assessment in search cases — Special deduction — Return processed and no notice issued for enquiry — No incriminating material found during search — Special deduction cannot be disallowed on basis of statement recorded subsequent to search.

For the A.Y. 2011–12, the assessee’s return of income wherein it claimed deduction of net profit u/s. 80-IAB of the Income-tax Act, 1961 was processed u/s. 143(1). Thereafter, on 29^th October, 2013, search and seizure operation was conducted u/s. 132 at the premises of the assessee. In response to notice u/s. 153A, the assessee requested the Department to treat the original return of income as the return filed in response to notice u/s. 153A of the Act. The Assessing Officer disallowed the deduction claimed u/s. 80-IAB and also initiated penalty proceedings u/s. 271(1)(c).

The Commissioner (Appeals) accepted the contention of the assessee that since no incriminating material belonging to the assessee was found during the course of the search, initiation of proceedings u/s. 153A was bad in law, especially because the assessment proceedings stood closed u/s. 143(1) and partly allowed the assessee’s appeal. The Tribunal dismissed the Department’s appeal.

The following question was raised in the appeal by the Department:

“Whether the decision in the case of CIT vs.. Kabul Chawla applies to a case where a fresh material/information received after the date of search is sufficient to reopen the assessment under section 153A (see Dr. A. V. Sreekumar vs. CIT)?”

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

“i) The assessment for the A. Y. 2011-12 was finalized on 20^th January, 2012 and no notice u/s. 143(2) having been issued, no assessment was pending on the date of search, i. e., 29^th October, 2013. Also, during the search of the assessee no incriminating material was found and the material in the form of statement sought to be relied upon by the Department was recorded subsequent to the search action.

ii) In view of the aforesaid, we are unable to find any substantial question of law in this appeal for our consideration u/s. 260A of the Act. Therefore, the appeal is dismissed.”

BCAJ Admin

Reassessment — Initial notice — Order for issue of notice — Notice — Investments by foreign companies in shares of their own Indian subsidiaries — Transactions are capital account transactions — No proof of transactions being consequence of round tripping — AO treating investments as escapement of income chargeable to tax — In contravention of CBDT circular — Investment in shares capital account transaction not income — Notices and orders set aside.

27 Angelantoni Test Technologies Srl vs. Asst. CIT

[2024] 463 ITR 139 (Del)

A.Y.: 2019–20

Date of order: 19^th December, 2023

Ss. 147, 148, 148A(b) and 148A(d) of the ITA, 1961

Reassessment — Initial notice — Order for issue of notice — Notice — Investments by foreign companies in shares of their own Indian subsidiaries — Transactions are capital account transactions — No proof of transactions being consequence of round tripping — AO treating investments as escapement of income chargeable to tax — In contravention of CBDT circular — Investment in shares capital account transaction not income — Notices and orders set aside.

Where the assessees, foreign companies, invested in shares of their own Indian subsidiaries, the Assessing Officer (AO) treated the investment as giving rise to income chargeable to tax which had escaped assessment. On writ petitions challenging the notices issued u/s. 148A(b) of the Income-tax Act, 1961, the orders passed by the AO u/s. 148A(d) of the Act, the consequential notices issued to the assessees u/s. 148 of the Act, the Delhi High Court allowed the writ petition and has held as under:

“i) It is settled law that investment in shares in an Indian subsidiary cannot be treated as ‘income’ as it is in the nature of a ‘capital account transaction’ not giving rise to any income.

ii) It was an admitted position that the transactions were capital account transactions. Though there was a doubt expressed that the transactions might be a consequence of round tripping, no evidence or proof of these said allegations had been stated or annexed with the orders and notices. Further, the action of the respondents was in contravention of the Central Board of Direct Taxes Instruction No. 2 of 2015, dated 29^th January, 2015 [2015] 371 ITR (St.) 6, reiterating the view expressed by the Bombay High Court in Vodafone India Services Pvt. Ltd. vs. Union of India. In fact, the judgment of the Bombay High Court was accepted by the Union Cabinet and a press note dated January 28, 2015, was issued by the Press Information Bureau, Government of India. Consequently, the notices issued under section 148A(b) of the Act, orders passed under section 148A(d) of the Act and the notices issued under section 148 of the Act and all consequential actions taken thereto were set aside.

iii) It was clarified that if any material became subsequently available with the Revenue, it shall be open to it to take proceedings in accordance with law.”

BCAJ Admin

Penalty — Concealment of income — Immunity from penalty — Effect of ss. 270A and 270AA — Application for immunity — Assessee must be given opportunity to be heard — Amount surrendered voluntarily by assessee — Assessee entitled to immunity from penalty.

26 Chambal Fertilizers and Chemicals Ltd. vs. Principal CIT

[2024] 462 ITR 4 (Raj)

A.Y. 2018–19

Date of order: 4^th January, 2024

Ss. 270A and 270AA of ITA 1961

Penalty — Concealment of income — Immunity from penalty — Effect of ss. 270A and 270AA — Application for immunity — Assessee must be given opportunity to be heard — Amount surrendered voluntarily by assessee — Assessee entitled to immunity from penalty.

The petitioner had filed its original return of income u/s. 139(1) of the Income-tax Act 1961 on 30^th November, 2018 for the A.Y. 2018–19 and revised return of income on 29^th March, 2019 u/s. 139(5) of the Act. The case of the petitioner was selected for complete scrutiny and an exhaustive list of issues was communicated by a notice u/s. 164(2) of the Act on 22^nd September, 2019. During the course of scrutiny, various notices u/s. 142(1) of the Act were issued and replies to the same were submitted by the petitioner. It is claimed that during the course of scrutiny proceedings, the petitioner realised that “provision for doubtful goods and services tax input tax credit” amounting to ₹16,30,91,496 had been inadvertently merged with another expense account and mistakenly claimed as expenses under the income-tax provisions. Accordingly, the said amount was suo motu surrendered by the petitioner by revising its return of income and adding back the amount “provision for doubtful goods and services tax input tax credit”, to the total income. The said aspect was communicated vide letter dated 24^th February, 2021 along with submission of revised computation.

The assessment order u/s. 143(3) of the Act was passed by the National E-Assessment Centre (“NeAC”), making only addition of suo motu surrendered amount of ₹16,30,91,496; however, it was observed in the order that the penalty u/s. 270A of the Act is imposed for misreporting of the income. The petitioner filed an application u/s. 270AA of the Act against the penalty order before the Deputy Commissioner, which came to be rejected by an order dated 27^th July, 2021.

The petitioner challenged the order of rejection by filing revision petition u/s. 264 of the Act, inter alia, on the grounds that no opportunity of hearing was provided to the petitioner, which was in non-compliance of section 270AA of the Act and that the order rejecting the application did not specify how there was misreporting of the income when the amount was disclosed by the petitioner on its own volition and that the case of the petitioner did not fall in any of the exceptions u/s. 270AA of the Act. However, the revision petition came to be rejected by an order dated 13^th March, 2023.

The assessee filed a writ petition challenging the order u/s. 264. The Rajasthan High Court allowed the writ petition and held as under:

“i) A perusal of sections 270A and 270AA of the Income-tax Act, 1961, would reveal that under sub-section (3) of section 270AA of the Act, the assessing authority can grant immunity from imposition of penalty u/s. 270A, where the proceedings for penalty u/s. 270A have not been initiated under the circumstances referred to in sub-section (9) of section 270A of the Act, and under the provisions of sub-section (4), it has been provided that no order rejecting an application shall be passed unless the assessee has been given an opportunity of being heard.

ii) Although several notices were issued u/s. 142 of the Act, during the course of scrutiny proceedings, and as many as ten issues were raised, on which the authority could not make any additions, the aspect of merging goods and services tax input tax credit with expenses was not pointed out/detected and this was only pointed out voluntarily by the assessee. Admittedly, the assessee in its application u/s. 270AA of the Act had sought personal hearing and the authority was bound to provide such personal hearing, but, admittedly no opportunity of hearing was provided to the assessee. The Deputy Commissioner had violated the provisions of the proviso to section 270AA(4) of the Act by not providing any opportunity of hearing, and the order passed was wholly laconic.

iii) The order passed by the assessing authority rejecting the application u/s. 270AA and the order passed by the revisional authority rejecting the revision petition, could not be sustained.”

BCAJ Admin

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