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Category: Direct Taxes

7. Revision – Difference of view – it is not open to CIT to revise it – Further CIT has considered wrong facts – revision not permissible : Section 263

Commissioner
of Income Tax-III, Pune vs. V. Raj Enterprises. [Income tax Appeal no 1335 of
2014 dt : 31/01/2017 (Bombay High Court)].

 

[V. Raj
Enterprises vs. Commissioner of Income Tax, [dated 30/09/2013 ; A Y: 2007-08
.Pune   ITAT ]

 

The Assessee is
engaged in the business of arbitrage and jobbing through various share broking
firms. For the subject AY in its ROI, assessee returned an income of Rs.2.10
crore. The AO by an order dated 30/11/2009 u/s. 143(3) of the Act, determined
the income at Rs.2.11 crore.

 

Thereafter, the
CIT in exercise of its powers u/s. 263 of the Act, by order dated 30/3/2012
revised the assessment order. The CIT held that the Assessee was not entitled
to rebate u/s. 88E of the Act in respect of STT (Security Transaction Tax) paid
as it was a share broker. Moreover, it helds that this aspect was not examined
by the AO while passing the Assessment Order.

 

Being aggrieved,
the Assessee carried the issue in appeal to the Tribunal. The Tribunal held
that the AO while passing the Assessment Order u/s. 143(3) of the Act had
verified and examined the Contract Notes, Bills of respective brokers etc.,
before granting the rebate of STT paid u/s. 88E of the Act as claimed by the
Assessee. Further, on same set of facts, the Assessee’s claim for rebate u/s.
88E of the Act had been allowed by the Revenue in the earlier Assessment Years.
Further, the order also notes that the CIT while revising the order of
Assessment proceeded on an incorrect assumption of fact that the Assessee is a
share broker. This is contrary to the facts on record as the Assessee was doing
the work of jobbing through different share brokerage firm. Thus, for the above
reasons, the Tribunal allowed the appeal and set aside the CIT order dated
30/3/2012 , passed in exercise his powers u/s. 263 of the Act. 

 

The grievance
of the Revenue in appeal before High Court was that the Assessee is not
entitled to the benefit of rebate of STT u/s. 88E of the Act. The High Court
noted that the issue arising in the appeal was a jurisdictional issue of the
powers of the CIT to exercise his powers of Revision u/s. 263 of the Act in the
present facts. The grievance of Revenue on merits of the dispute would merit
examination only if the exercise of jurisdiction u/s. 263 of the Act, is
proper. As noted by the Tribunal, the entire basis of exercising jurisdiction
u/s. 263 of the Act is on the basis of assumption of incorrect fact that the
Assessee is a share broker. This, in fact, is not so. Where the basic facts
have been misunderstood by the CIT, the exercise of powers of Revision is not
sustainable.

 

Moreover, the
same issue also arose for the earlier AYs i.e. 2005-06 and 2006-07. The Revenue
had accepted the Assessee’s claim for rebate u/s. 88E of the Act to the extent
STT is paid. Last but not the least, Revenue is not able to dispute the fact
that the AO while passing the Assessment Order dated 30th November,
2009 had granted the claim of the Petitioner for benefit u/s. 88E of the Act on
examination and verification of the Contract Notes, Bills of respective brokers
etc. Thus, on the basis of the records available and examination by the
AO, a view has been taken by the AO and it is not open to CIT to revise it
merely because his view on the same facts, is different, as held by the Apex
Court in Malbar Industrial Co. Ltd., vs. CIT 243 ITR 83 (SC).

 

In view of the
above, the revenue Appeal was dismissed.

36. Section 144C and CBDT Circulars No. 5 of 2010 dated 03/06/2010 and Circular No. 9 of 2013 dated 19/11/2013- International transactions – A. Y. 2009-10 – Transfer pricing – Arm’s length price – Assessment order – Procedure to be followed – Issuance of draft assessment orders by AO mandatory – Failure to do so – Not mere procedural error – Failure makes assessment order invalid – Circular clarifying that requirement u/s. 144C applies to all orders passed after 01/10/2009 irrespective of A. Y. – Department not entitled to rely on earlier circular saying provision applicable for A. Y. 2010-11 onwards

CIT vs. C-Sam (India) Pvt. Ltd.; 398 ITR 182 (Guj):

 

For the A. Y. 2009-10, upon a scrutiny
assessment and applying transfer pricing on account of assessee’s international
transactions with associated persons against the nil returned income, the
Assessing Officer computed the assessee’s income at Rs. 2.86 crores making
various additions and deletions according to the order of the Transfer Pricing
Officer (TPO). In appeal before the Commissioner (Appeals) the assessee
challenged the validity of the assessment order and the additions on the ground
that the procedure laid down u/s. 144C of the Income-tax Act, 1961, was not
followed by the Assessing Officer. The Commissioner (Appeal) allowed the
assessee’s claim and quashed the assessment order passed u/s. 143(3) of the Act
without complying with the requirement of section 144C(1) of the Act. The
Tribunal dismissed the Department’s appeal and confirmed the order of the
Commissioner (Appeal).

 

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

 

“i)   The
procedure laid down in section 144C of the Act, is mandatory. Before the
Assessing Officer can make variations in the returned income of an eligible
assessee, section 144C(1) lays down the procedure to be followed
notwithstanding anything to the contrary contained in the Act. This non
obstante clause thus gives an overriding effect to the procedure. When an
Assessing Officer proposes to make variations in the returned income declared
by an eligible assessee he has to first pass a draft order, provide a copy
thereof to the assessee and only thereupon the assessee could exercise his
valuable right to raise objections before the Dispute Resolution Panel (DRP) on
any of the proposed variations. In addition to giving such opportunity to an
assessee, the decision of the DRP is made binding on the Assessing Officer. It
is therefore not possible to say that such requirement is merely procedural.
The requirement is mandatory and gives substantive rights to the assessee to
object to any additions before they are made and such objections have to be
considered not by the Assessing Officer but by the DRP. The legislative desire
is to give an important opportunity to an assessee who is likely to be
subjected to upward revision of income on the basis of transfer pricing
mechanism. Such opportunity cannot be taken away by treating it purely
procedural in nature.

ii)   Circular dated June 3,
2010 was an explanatory circular issued by the Finance Ministry in which it was
provided that the amendments (which include section 144C of the Act) are made
applicable w.e.f. October 1, 2009 and will accordingly apply in relation to A.
Y. 2010-11 and subsequent years. In the clarificatory circular dated November
19, 2013, it was provided that section 144C would apply to any order which is
being passed after October 1, 2009 irrespective of the assessment year. The
latter circular clarified what all along was the correct position in law.
Section 144C(1) itself in no uncertain terms provides that the Assessing
Officer shall forward a draft order to the eligible assessee, if he proposes to
make any variation in the income or loss which is prejudicial to the interest
of the assessee on or after October 1, 2009. The statute was thus clear,
permitted no ambiguity and required a procedure to be followed in case of any
variation which the Assessing Officer proposed to make after October 1, 2009.
The earlier circular dated June 3, 2010 did not lay down the correct criteria
in this regard.

iii)   The upward revision was
made in the income of the assessee on the basis of the order of the TPO and was
done without following the mandatory procedure laid down u/s. 144C. When the
statute permitted no ambiguity and required the procedure to be followed in
case of any variation which the Assessing Officer proposed to make after
October 1, 2009 the assessee could not be made to suffer on account of any
inadvertent error which ran contrary to the statutory provisions.

iv)  No question of law arises.
Tax appeal is therefore dismissed.”

 

35. Sections 144C(1), 156 and 271(1)(c) – International transactions – A. Ys. 2007-08 and 2008-09 – Transfer pricing – Arm’s length price – Scope of section 144C(1) – Issuance of draft assessment orders by AO mandatory – Condition not fulfilled – Assessment orders, consequent demand notices and penalty proceedings invalid

Turner International India Pvt. Ltd. vs.
Dy. CIT; 398 ITR 177 (Del):

 

The assessee was a wholly owned subsidiary
of T engaged in the business of sub-distribution of distribution rights and
sale of advertisement inventory on satellite delivered channels. For A. Ys.
2007-08 and 2008-09, the Assessing Officer made a reference u/s. 92CA of the
Act, to the Transfer Pricing Officer (TPO) who passed separate orders in
respect of the distribution activity segment. On that basis, the Assessing
Officer passed orders. The Dispute Resolution Panel (DRP) concurred with the
orders of the TPO and the final orders were passed by the Assessing Officer.
The Tribunal held that neither the assessee nor the TPO had considered the
appropriate comparables and therefore, the determination of the arm’s length
price (ALP) was not justifiable. It set aside the orders of the DRP and
remanded the matter to the Assessing Officer for undertaking a transfer pricing
study afresh and accordingly make the assessments. The TPO issued fresh notices
u/s. 92CA(2) and passed separate orders proposing upward adjustments.
Subsequently, the Assessing Officer passed orders in respect of both assessment
years confirming the additions proposed by the TPO. He also issued demand
notices u/s. 156 and notices u/s. 271(1)(c) initiating penalty proceedings.

 

The assessee filed writ petitions and
challenged the assessment orders, demand notices u/s. 156 and the notices u/s.
271(1)(c). The assessee contended that there was non-compliance with the
provisions of section 144C(1) which required the Assessing Officer to first
issue draft assessment orders.

 

The Delhi High Court allowed the writ
petitions and held as under:

“i)   The legal position is
unambiguous. The failure by the Assessing Officer to adhere to the mandatory
requirement of section 144C(1) and first pass draft assessment orders would
result in invalidation of the final assessment orders and the consequent demand
notices and penalty proceedings.

ii)   The final assessment
orders dated 31/03/2015 passed by the Assessing Officer for the A. Ys. 2007-08
and 2008-09, the consequent demand notices issued by the Assessing Officer and
the initiation of penalty proceedings are hereby set aside.”

6 Section 54B – Deduction u/s. 54B cannot be denied on the ground that entering into agreement to sell does not amount to `purchase’.

6 
[2017] 86 taxmann.com 217 (Chandigarh- Trib.)

     Anil Bishnoi vs. ACIT

      ITA No. : 1459 (Chd.) of 2016

      A.Y.: 2014-15    Date of Order:  27th September, 2017


The word `purchase’ cannot
be interpreted and detached from the definition of word `transfer’ as given
u/s. 2(47) of the Act.

 

FACTS       

The assessee, during the
year under consideration, sold land for a consideration of Rs. 1,29,00,000 and
claimed deduction u/s. 54B claiming purchase of following agricultural lands –

 

(i)  Agricultural  land 
at  Kiratpur  Rotwara, 
Jaipur, of Rs. 28,84,500 through a registered sale deed dated 6.5.2013;

 

(ii) Agricultural   land  
at   Village   Dudu, 
Jaipur  for Rs. 1,00,00,000 through an agreement to sell dated 16.4.2014.

The Assessing Officer,
allowed deduction for purchase of land mentioned at S. No. (i) above but in
respect of land mentioned at (ii) above he asked the assessee to show cause why
deduction claimed should not be disallowed on the ground that the sale deed is
not registered, but only an agreement to sell is entered into. 

The assessee submitted that
the entire payment for purchase of land was made through cheques and the
possession was handed over to the assessee by the seller with all the rights to
use the said land or to sell it further. The name of the assessee had also been
entered in Khasra Girdawari, a document showing the possession and cultivation
of the land. The assessee also submitted that at the time of execution of the
agreement to sell, the assessee was not aware of the Stay Order to the sale of
land issued by ADM and hence, the sale deed could not be registered.

The AO held that the word
used in section 54B is `purchase’ and not `transfer’ as defined in S. 2(47).
The purchase, according to the AO, could be only through a registered sale
deed. He disallowed the claim for deduction u/s. 54B with reference to the land
for which only an agreement to sell was entered into.

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

Aggrieved, the assessee
preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the
assessee paid consideration through cheques and also obtained possession of the
property in question. The claim of deduction was denied on the ground that the
deed of purchase / sale had not been registered with the competent authority.

The Tribunal having noted
the ratio of the decisions of the Supreme Court in the case of Sanjeev Lal
vs. CIT (2014) 269 CTR 1 (SC); CIT vs. T. R. Arvinda Reddy (1979) 12 CTR 423
(SC) and the decision of the Bombay High Court in the case of CIT vs.
Dr. Laxmichand Narpal Nagda (1995) 211 ITR 804 (Bom.), held as follows –

If capital gains are deemed
to have been earned by the assessee on transfer of land as per the provisions
of section 2(47) of the Act, as per which registration of the sale deed is not
necessary, the consequences are that the seller of the assessee is said to have
transferred his right in property and consequently, those rights are acquired
by the transferee; if in the case of transferor, the same is to be treated as
sale, then, we do not find any reason to give a different meaning to the word
`purchase’. If someone has sold a property, consequently the other person has
purchased the said property.

If the transfer of property
is complete as per the definition of transfer u/s. 2(47) of the Act, the
assessee is made liable to pay tax on the capital gains earned by him, on the
same analogy, the transfer is also complete in favour of the purchaser also.
The provisions cannot be interpreted in a manner to say that transfer vis-à-vis
selling is complete, but vis-à-vis purchase is not complete in respect
of same transaction. In view of this, the word `purchase’ cannot be interpreted
and detached from the definition of word `transfer’ as given u/s. 2(47) of the
Act.

When the transfer takes
effect as per the provisions of section 2(47) of the Act, if a liability to pay
tax arises in the case of the seller, the consequent right to get deduction on
the purchase of property accrues in favour of the purchaser, if he otherwise is
so eligible to claim it as per the relevant provisions of the Act. The Tribunal
directed the AO to give the benefit of deduction u/s. 54B of the Act in respect
of the purchase of property at Village Dadu.

The Tribunal allowed the
appeal filed by the assessee.

5 Section 54 – Investment made upto due date of filing return u/s. 139(4) of the Act qualifies for deduction u/s. 54 provided the investment is made upto date of filing of return of income.

5   TS-443-ITAT-2017 (Ahmedabad- Trib.)

      Anita Ajay Shad vs. ITO

       ITA No. 3154 (Ahd.) of 2015

       A.Y.: 2011-12      Date
of Order: 18th September, 2017


FACTS

During the previous year
relevant to assessment year 2011-12, a long term capital gain of Rs. 35,23,326
arose to the assessee, an individual, on transfer of an immovable property
jointly owned by her. The assessee claimed that a sum of Rs. 35 lakh was exempt
u/s. 54 on the ground that the assessee has deployed the consideration for
purchase of a new residential house. The assessee made the following
investments towards purchase of a new residential property –

 

#    Rs.
15 lakh before 31.7.2011 (being due date for
filing ROI u/s. 139(1)

 

#    Rs.
5 lakh before actual date of filing ROI (being 25.8.2011); and

 

#    Rs.
15 lakh between Sept. 2011 to Dec. 2011  (which
is within the time limit available under section
139(4) of the Act).


While assessing the total
income of the assessee, the Assessing Officer (AO) denied the claim for
deduction u/s. 54 on the ground that the assessee has not invested capital gain
before filing return of income and the tax payer has not acquired the new
property before filing return of income.

Aggrieved, the assessee
preferred an appeal to CIT(A) who observed that the assessee has invested the
gains after furnishing the return of income. He, held that the assessee is
entitled to claim partial exemption u/s. 54 of the Act.

Aggrieved, the assessee
preferred an appeal to the Tribunal where, on behalf of the assessee, it was
contended that the investment made is within the due date stipulated u/s.
139(4) of the Act and that the property was acquired and put to use within a period
of two years from the date of transfer of original asset and therefore,
qualifies for exemption u/s. 54 of the Act.

HELD

Section 54(2) enjoins that
the capital gain is required to be appropriated by the assessee towards
purchase of a new asset before furnishing of return of income u/s. 139 of the
Act. Alternatively, in the event of non-utilisation of capital gains towards
purchase of new asset, the assessee is required to deposit the capital gains in
specified bank account before the due date of filing of return of income u/s.
139(1) of the Act. Any payment towards purchase subsequent to the furnishing of
return of income (25.8.2011 in the instant case) but before the last date
available to file the return of income u/s. 139(4) of the Act is irrelevant.
Such subsequent payments after filing of return are required to be routed out
of deposits made in capital gain account scheme. Thus, the plea of the assessee
that utilisation of capital gain can be made before   the  
extended   date for filing of
return of income  u/s. 139(4) of the Act
even after filing of return do not coincide with the plain language employed in
section 54(2) of the Act. Nonetheless, the capital gain employed towards
purchase of new asset before the actual date of furnishing return of income
either u/s. 139(1) or  u/s. 139(4) of the
Act will be deemed to be sufficient compliance of section 54(2) of the Act.

The Tribunal observed that
the legislature in its wisdom has used the expression section 139 for purchase,
etc. of new asset while on the other hand, time limit u/s. 139(1) has
been specified for deposit in the capital gain account scheme. When viewed
liberally, the distinction between the two different forms of expression of
time limit can yield different results. A beneficial view may be taken to say
that section 139 being omnibus would also cover extended time limit provided
u/s. 139(4) of the Act. Thus, when an assessee furnishes return subsequent to
due date of filing return u/s.139(1), but within the extended time limit u/s.
139(4), the benefit of investment made upto the date of furnishing return of
income u/s. 139(4) cannot be denied on such beneficial construction. However,
any investment  made after   the 
furnishing of return of income but before extended date available u/s.
139(4) would not receive beneficial construction in view of unambiguous and
express provision of section 54(2) of the Act. The suggestion on behalf of the
assessee on eligibility of payments subsequent to furnishing of return of
income is not aligned with and militates against the plain provision of law as
stated in section 54(2) of the Act.

Since there was ambiguity
on record as to whether the other joint owner of the property purchased by the
assessee has also availed exemption in respect of investment made from joint
account and if yes, to what extent, the Tribunal set aside and remanded back to
the file of AO for the limited purpose of verification of the extent of claim
made by the other joint owner.

The appeal filed by the
assessee was allowed.

4 Section 68 – Addition u/s. 68 cannot be sustained in respect of share application money received from shareholder who is a daughter of a director and is therefore, not a stranger. Also, shareholder was a resident of USA, earnings statement of her husband were on record, the payments were made through banking channels and receipts in bank account of the shareholder were also through banking channels.

4    TS-432-ITAT-2017 (Ahd.)

Namision Powertech Pvt. Ltd. vs. ACIT

 ITA No. : 218/AHD/2015

A.Y.: 2010-11      Date of Order:  21st
September, 2017

FACTS 

During the financial year
2009-10, the assessee company received a sum of Rs. 19,00,000 towards share
application money from Smt. Pammi Sandesara, daughter of one of the directors
of the assessee company. The Assessing Officer (AO) held that the source of
funds in the hands of Smt. Pammi Sandesara and her creditworthiness are not
proved.  He rejected the explanation
furnished by the assessee viz. that she was a resident of USA, money was
received in US dollars through her ICICI Bank account in India.

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

Aggrieved,
the assessee preferred an appeal to the Tribunal.

HELD 

The Tribunal observed that
Smt. Pammi Sandesara was a resident of USA as was evident from her passport. It
also noted that the earnings statement of her husband issued by NetApp Inc USA
was filed. The payments were made through banking channels and receipts in her
bank account were also through banking channels.

The relationship between
the assessee-company and the shareholder is well established in the sense that
the shareholder is the daughter of one of the directors of the company. It is,
therefore, not a transaction between two strangers and her bank accounts show prima
facie evidence of the means of the shareholder. The amounts have been
received through the banking channels. The Tribunal held that bearing in mind
all these factors, the receipts from Smt. Pammi Sandesara cannot be treated as
unexplained cash credit. The Tribunal deleted the addition made by the AO.

The Tribunal allowed the
appeal filed by the assessee.

8 Sections 69B and 147 – Reassessment – Undisclosed investment – Where as per rule 11UA, value of shares was less than Rs. 5, but assessee purchased same at Rs. 10 per share and disclosed all facts in return, reassessment notice for valuing these shares at Rs. 35 as per valuation by Government valuer was not justified

[2018] 90 taxmann.com 284 (Bom)
Shahrukh Khan vs. DCIT
A.Y.: 2010-11, Date of Order: 08th Feb., 2018

In the A. Y. 2010-11, the assessee had purchased 1,10,00,000 shares at the rate of Rs. 10 per share. The Assessing Officer received information that Government valuer has determined fair market value of the said shares at Rs. 33.35/- per share. Therefore, on the basis of the said information, the Assessing Officer issued notice u/s. 148 of the Income-tax Act, 1961 on the reason to believe that 1,10,00,00 shares were purchased at an undervaluation of Rs. 25.69 crores. Objections filed by the assessee were rejected.

The assessee filed writ petition challenging the reassessment proceedings. The Bombay High Court admitted the writ petition and held as under:

“i)    The assessment order itself mentions that the value of shares is less than Rs. 5 per share on application of Rule 11UA of the Income-tax Rules. There was a complete disclosure of all facts during regular assessment proceedings. Prima facie, the order disposing of the objections, while dealing with the objection of no reason to believe that income has escaped assessment on application of section 56(2)(vii), has completely ignored the Explanation thereto. The Explanation to section 56(2)(vii) states that the fair market value is to be determined in accordance with the Income-tax Rules. On application of Rule 11UA of the Income Tax Rules, the value per share came to less than Rs. 5 per share.

ii)    In the circumstances, the impugned notice indicates a change of opinion, as this very issue namely – valuation of share was a subject matter of consideration during the regular assessment proceedings. Besides, on the application of method of valuation as mandated by the Explanation to section 56(2)(vii), prima facie, the Assessing Officer could not have had reason to believe that income chargeable to tax has escaped assessment.

iii)    In the above view, prima facie, the impugned notice is without jurisdiction. Accordingly, there shall be interim relief in terms of prayer clause (d).”

34. Section 37- Income – Charge of tax – Commission – Business expenditure – A. Ys. 1997-98 and 1998-99 – Assessee receiving 95% of payments against invoices after deduction of commission of 5%. – Finding of fact by Tribunal – Liability to tax only actual receipts

CIT vs. Olam Exports (India) Ltd.; 398 ITR 397 (Ker):

 

For the A. Ys.
1997-98 and 1998-99, the assessee claimed dediction u/s. 37 of the Act, of the
amounts payed towards commission to a concern, LE, for consignment sales. The
Assessing Officer disallowed the claim on the ground that the existence of such
an agent itself was in doubt. The Tribunal found that the evidence indicated
that the assessee had received only 95% of the invoice price and held that the
assessee could not have been taxed for the income which the assessee had not
received.

 

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

 

“i)   The assessee could only
be taxed for the income that it had derived. There were transactions between
the assessee and LE and the invoices which were raised by the assessee in the
name of the agent contained the gross sale prices and the net amount payable
after recovery of 5% towards commission and other expenses due. Based on such
transactions, the amounts were realised by the assessee through banks and the F
form under the Central Sales Tax Act, 1956 were also obtained from the agent.

ii)   Those admitted facts,
therefore, showed that the assessee had received only 95% of the gross price
and the Department had no material before it to show that the assessee had
received anything in excess thereof, either directly or otherwise. If that was
so, despite the contentions raised by the Department regarding the doubtful
existence of the agent, the assessee having received only 95% of the gross
value, it could have been taxed only for what it had actually received.

iii)   Therefore, the Tribunal
was justified in coming to the factual conclusion that the assessee could not
have been taxed for anything more than what it had received. No question of law
arose.”

7 Sections 80-IA(4), 147 and 148 – Reassessment – Where AO rejected claim of assessee of deduction u/s. 80-IA(4) and, Commissioner (Appeals) allowed said claim of deduction in its entirety, thereafter AO could not reopen this very claim of deduction for disallowance u/s. 148

[2018] 91 taxmann.com 186 (Guj)
Gujarat Enviro Protection & Infrastructure Ltd. vs. DCIT
A.Y.: 2010-11, Date of Order: 19th February, 2018    

For the A. Y. 2010-11, the assessee filed return of income after claiming deduction u/s. 80-IA(4). The return of the assessee was taken in scrutiny by the Assessing Officer. During such scrutiny assessment, the Assessing Officer examined the assessee’s claim of deduction u/s. 80-IA and disallowed the claim of deduction. On appeal, the Commissioner (Appeals) allowed the assessee’s claim.

Thereafter, the Assessing Officer issued reassessment notice u/s. 148 on grounds that on perusal of records, it was seen that the amount on which the assessee had claimed exemption u/s. 80-IA included the interest income assessable under the head ‘Income from other sources’. On verification of bifurcation of interest income, it was clear that this interest income was not derived from the infrastructure development activity of the undertaking. Hence, it was not to be considered for the purpose of deduction under section 80-IA. Thus, deduction so allowed on the interest income was not allowable. The objection filed by the assessee were rejected.

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

“i)    The assessee’s reply to the Assessing Officer would show that out of the total interest income, the assessee had attributed a sum of certain amount as business income. It is this claim of the assessee of the interest income of certain amount, as being part of its business income which is a focal point of the reasons recorded by the Assessing Officer for reopening the assessment. He contends that the interest income cannot be treated as arising out of the assessee’s business, and therefore, deduction u/s. 80-IA(4) would not be allowable. However, this is for later. For the present, one may record that the Assessing Officer passed an order of assessment in which he rejected the assessee’s claim of deduction under section 80-IA. He therefore had no occasion to separately comment on the assessee’s claim of interest income being eligible for such deduction. Be that as it may, the assessee carried entire issue in appeal before the Commissioner. The Commissioner (Appeals) by his order, allowed the assessee’s claim of deduction u/s. 80-IA in toto. Record is not clear whether the revenue has carried the order of Commissioner (Appeals) before the Tribunal or not. However, this by itself may not be a determinative factor.

ii)    At that stage, after the Commissioner allowed the assessee’s appeal, the Assessing Officer issued the instant reassessment notice. Since the notice was issued beyond the period of four years from the end of relevant assessment year, the requirement of the assessee to make true and full disclosure, and the failure to make such disclosures leading to income chargeable to take escaping the assessment becomes crucial. In this context, the record would show that the crucial requirement arising out of the proviso to section 147 is not satisfied. The Assessing Officer has, in fact, in the reasons recorded itself proceeded on the basis of ‘on verification of record’. Thus, clearly the Assessing Officer proceeded on the basis of disclosures forming part of the original assessment. Even otherwise, as noted, during the original assessment, the Assessing Officer had called upon the assessee to clarify on the interest income which include the assessee’s claim of certain amount as business income and, therefore, eligible for deduction u/s. 80-IA(4). There was no failure on the part of the assessee to disclose fully and truly all relevant facts.

iii)    There is yet another and equally strong reason to quash the impugned notice. Before elaborating on this, it is recorded that the assessee’s contention of possible change of opinion cannot be accepted. The Assessing Officer had rejected entire claim of deduction u/s. 80-IA(4). He, therefore, had no occasion to thereafter comment on a part of such claim relatable to the assessee’s interest income. Had the Assessing Officer accepted in principle the assessee’s claim of deduction under section 80-IA(4) and thereafter, after scrutiny not made any disallowance for interest income forming part of such larger claim, the principle of change of opinion would apply. In the present case, once the Assessing Officer rejected the claim of deduction u/s. 80-IA(4) in its entirety, there was thereafter no occasion and any need for him to dissect such claim for rejection on some additional ground.

iv)    The second reason which it is referred to is of merger. The Assessing Officer having rejected the claim of deduction u/s. 80-IA(4), the issue may be recalled was carried in appeal by the assessee and the Commissioner (Appeals) allowed the claim in its entirety. It would thereafter be not open for the Assessing Officer to reopen this very claim for possible disallowance of part thereof. When the Commissioner (Appeals) was examining the assessee’s grievance against the order of Assessing Officer disallowing the claim, it was open for the revenue to point out to the Commissioner (Appeals) that even if in principle the claim is allowed, a part thereof would not stand the scrutiny of law. It was open for the Commissioner to examine such an issue, even suo motu. If one allow the claim in its entirety, the Assessing Officer thereafter cannot re-visit such a claim and seek to disallow part thereof. This would be contrary to the principle of merger statutorily provided and judicially recognised. Even after the Commissioner (Appeals) allow such a claim and the revenue was of the opinion that he has not processed it and committed an error, it was always open for the revenue to carry the matter in appeal. At any rate, reopening of the assessment would simply not be permissible. Reassessment carried an entirely different connotation. Once an assessment is reopened, the same gives wider jurisdiction to the Assessing Officer to examine the claims which had been formed part of the reasons recorded, but which were not originally concluded.

v)    In the result, impugned notice is quashed. Petition is allowed and disposed of accordingly.”

6 Section 43(6) – Depreciation – WDV – While computing written down value u/s. 43(6) for claiming depreciation, depreciation allowed under State enactment cannot be reduced

[2018] 90 taxmann.com 420 (Ker)
Rehabilitation Plantations Ltd. vs. CIT
A.Y.: 2002-03, Date of Order: 29th Jan., 2018

The assessee was engaged in the business of manufacture and sale of centrigued latex and rubber. For the A. Y. 2002-03, it claimed depreciation of the entire cost of the plant and machinery to the extent of 35 per cent treating it as the actual cost allowable on which the allowable deduction for depreciation is computed. The Assessing Officer found that the depreciation on assets used in the plantations, including for manufacturing activity, was found to have been claimed by the assessee-company for more than two decades. It was found that earlier the assessments had not been taken under the Income-tax Act, 1961, since the entire income was assessable under the Kerala Agricultural Income-tax Act, 1991 (AIT Act). It was found that as per section 32(1) of the IT Act, depreciation on building, machinery, etc. is to be allowed on the written down value of the assets, owned by the assessee and used for the purposes of the business. The written down value of the assets as per section 43(6) is the actual cost when the assets were acquired before the previous year. Otherwise the written down value shall be the actual cost of the assets less all depreciation actually allowed under the IT Act. The assessee had been claiming depreciation in computing the income from plantations, and if the actual cost of the assets is adopted it would lead to the assessee getting a double benefit on the same component of cost, to the extent of 35 per cent. Hence, the written down value for the previous year was only permissible to be claimed as depreciation, was the specific ground on which such claim was rejected. The Assessing Officer allowed depreciation on written down value after reducing the depreciation claimed under AIT Act from the actual cost.

The Tribunal held that there could be no claim for the assessee over and above the written down value as per the books of account and upheld the decision of the Assessing Officer.

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

“i)    It is seen from the report filed by the Assessing Officer under the AIT Act that the assessee has claimed depreciation in the earlier years when filing returns under the AIT Act. The report of the Assessing Officer under the IT Act also indicates that the assets pertaining to the agricultural income has not been projected for depreciation under the IT Act for the previous years. The Assessing Officer points out that depreciation was claimed in the years 1998-99 to 2001-02 with respect to the building and plant & machinery of rubber sheeting factory, the income derived from which, being a manufacturing activity, however is not covered under the AIT Act. In such circumstances, one has to look at whether in allowing the depreciation on the basis of the written down value as available in section 43(6)(b), the entire cost of the building and plant and machinery for the purpose of generation of agricultural income has to be allowed or not.

ii)    There need not be any controversy raised on the interpretation of the provision of section 43(6) at sub-clause (b). What can be reduced from the actual cost to the assessee is all depreciation actually allowed under the IT Act, 1961 or the IT Act, 1922 or any Act repealed by that Act or any executive orders issued when the Indian Income-tax Act, 1886 was in force. The AIT Act having not been specifically noticed and the depreciation allowed with respect to the income assessed to tax under any other enactments having not been excluded, there is no reason for this Court to come to a different finding as to the written down value which could be claimed as depreciation on the first year in which the assessee is assessed under the IT Act. The assessee was earlier assessed under the IT Act, but for its manufacturing activity and not its agricultural operations, the income from which was assessed under the AIT Act. The assets employed for agricultural operations were never accounted for computing the depreciation under the IT Act, since that income, prior to rule 7A, was not exigible to tax under the IT Act.

iii)    The question arise since the entire income generated from the agricultural income was assessable to tax under the AIT Act, a State enactment. Only in the relevant assessment year i.e. 2002-03, the provision for a separate assessment under the AIT Act and IT Act came into force by virtue of the Income-tax Rules. Income from the manufacture of rubber which was earlier treated as agricultural income was made assessable under the IT Act to the extent of 35 per cent of the income derived from the business. Hence, the assessee would be entitled to claim only 35 per cent of the depreciation for the relevant assessment year. However, in computing such depreciation, should one adopt the entire cost of the plant and machinery or that shown as the written down value after reducing the depreciation allowed under the AIT Act, is the vexing question.

iv)    As noticed, the deeming provision is very clear and there is nothing to exclude from the computation of the cost of the assets; the depreciation allowed under the AIT Act. The revenue would contend that this Court has ample powers to iron out the creases and avoid a double benefit being conferred on the assessee. There is no doubt of such powers, but, whether it could be exercised in the present case is the question. In ironing out creases one should not be accused of burning the cloth, by adding words into the statute to digress from the essential unambiguous intention.

v)    The rule providing division of income to be assessed respectively under the AIT Act and the IT Act was brought in the year 2002. The Government was quite aware of the provision available in the IT Act, 1961 by which the depreciation in cases, where it was not being claimed under the enactments as specified in section 43(6)(b), can only be excluded and otherwise the written down value has to be deemed to be the cost of the assets. On apportioning the income from agriculture to be assessed under the respective enactments of the State and the Union; amendments ought to have been brought in accordingly to ensure that no double benefit accrues on an assessee.

vi)    Such amendments were brought in with prospective effect as is seen from Explanation 7 to section 43(6) of the IT Act which got inserted by the Finance Act, 2009 with effect from 1-4-2010. The Explanation takes in the specific defect of double benefit being conferred on the assessee. The legislature thought it fit to give it effect from 1-4-2010. The assessment year herein is 2002-03 relating to the income of the previous year being 2001-02. The amendment does not apply to that year. The amendment brought in without any retrospective effect, further makes it clear that the legislature cured the defect, but however, did not do so for the years previous to the amendment and not for the relevant assessment year. This is not a situation in which casus omissus could be supplied.

vii)    On the above reasoning, the disallowance of the depreciation and the computation made of the written down value cannot be accepted. The Assessing Officer is directed to employ the deeming provision for computing the written down value de hors the depreciation granted under the AIT Act and take 35 per cent of the cost of the total assets as written down value, allowing the depreciation for the relevant assessment year to that extent. The Assessing Officer shall deem the written down value to be the cost of the assets and compute the depreciation allowable at 35 per cent of such deemed written down value and apply it to the portion of the income derived from the agricultural business, that is assessable under the IT Act. The appeal is allowed with the above observations.”

5 Section 32(2) – Unabsorbed depreciation – Law applicable – Effect of amendment to section 32(2) by Finance Act, 2001 – Removal of restriction of eight years for carry forward and set off – Unabsorbed depreciation or part thereof not claimed till relevant year – Carry forward and set off permitted

(2018) 400 ITR 569 (Delhi)
Principal CIT vs. British Motor Car Co. (1934) Ltd.
A.Y.: 2010-11, Date of Order: 09th January, 2018

The relevant period is the
A. Y. 2010-11. The assessee had the accumulated carried forward depreciation
u/s. 32(2) of the Income-tax Act, 1961 starting from the A. Y. 1998-99. In the
A. Y. 2010-11, the assessee claimed set off of the carried forward
depreciation. The Assessing Officer disallowed the claim in respect of amounts
carried forward from the years prior to A. Y. 2002-03 on the ground that the
amendment to section 32(2) of the Act, which removed of eight years limit, was
prospective and effective only from 01/04/2002.

 

The Commissioner (Appeals)
reversed the order and his decision was upheld by the Tribunal.

 

In
appeal by the Revenue, on the question whether section 32(2) as amended by the
Finance Act, 2001, w.e.f. 01/04/2002 could be given effect beyond the period of
eight years prior to its commencement, the Delhi High Court upheld the decision
of the Tribunal and held as under:

 

“i)   The rationale for the amendment of section
32(2) the restriction against set off and carry forward limited to eight years,
beyond which the benefit could not be claimed under the provisions of the 1961
Act, was for the reasons deemed appropriate by Parliament.

ii)    The limit was imposed in the year 1996
through the Finance (No. 2) Act, 1996. Had the intention of Parliament been
really to restrict the benefit, of unlimited carry forward prospectively, there
were more decisive ways of doing so, such as, an express provision or an
exception or proviso. The absence of any such legislative device meant that the
provision had to be construed in its own terms and not so as to restrict the
benefit or advantage it sought to conform. No question of law arose.”

 

4 Section 54EC – Exemption of Capital gain – Time of six months from date of transfer for investment – Transfer effected only on transfer of physical possession of property and not on date of execution of development agreement – Investment made by assessee falling within time specified u/s. 54EC

(2018) 401 ITR 96 (Bom)
CIT vs. Dr. Arvind S. Phake
A.Y. 2008-09, Date of Order: 20th Nov., 2017

The assessee entered into a
registered development agreement dated 23/09/2017 in respect of certain
property. The total consideration agreed was Rs. 5,32,00,000/. Physical
possession was given on 01/03/2008. For the A. Y. 2008-09, a return was filed
by the assessee declaring his income on account of long term capital gain on
sale of the immovable property. The assessee claimed exemption u/s. 54EC of the
Income-tax Act, 1961 in respect of investment of Rs. 50,00,000/- in bonds of
the NHAI made on 28/03/2008 and Rs. 50,00,000/- in bonds of RECL on 22/08/2008.
The Assessing Officer held that the investment of the bonds of NHAI was within
the period specified u/s. 54EC of the Act and the investment of Rs. 50,00,000/-
in the bonds of RECL was beyond the period provided in section 54EC in as much
as the investment made on 22/08/2008 was not within six months from the date of
transfer of assets.

The Tribunal found that on
the date of execution of the development agreement, i.e., on 13/09/2007, full
consideration was admittedly not paid, and therefore the transfer was not
effected on 13/09/2017. Therefore, taking the date of transfer as 01/03/2008 on
which date physical possession of the property was delivered, the investment made
on 22/08/2008 was well within the time specified under section 54EC of the Act.
The Tribunal, accordingly allowed the assessee’s claim.

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

“i) The Tribunal considered
various clauses in the development agreement. Sub clause (d) of clause (3) of
the agreement provided that after full payment of consideration, the
construction would be undertaken by the developer. Admittedly, on the date of
execution of the development agreement, the entire consideration was not
received by the assessee.

ii)    Physical possession of the property, the
subject matter of development agreement was parted with by the assessee on
01/03/2008. It was on that day that complete control over the property was
passed on to the developer.

iii)   After having perused the various clauses in
the agreement and the factual aspects, the Tribunal rightly took 01/03/2008 as
the date of transfer and the investment made on 22/08/2008 was well within the
time specified u/s. 54EC of the Act. Therefore, no substantial question of law
arose.”

3 Section 14A – Business expenditure – Disallowance – Assessing Officer cannot attribute administrative expenses for earning tax free income in excess of total administrative expenditure

[2018] 91 taxmann.com 29 (Guj)
Principal CIT vs. Adani Agro (P.) Ltd.
Date of Order: 05th February, 2018

The assessee incurred administrative expenses amounting to Rs. 30 lakhs. The Assessing Officer was of the view that the assessee failed to fully disclose the expenditure for earning the exempt income and based on the format provided under rule 8D, made the disallowance to the tune of Rs. 60 lakhs.

The Tribunal noted that the entire administrative expenses of the assessee was Rs. 30 lakhs, out of which, the assessee had offered Rs. 10 lakhs i.e., 1/3rd of the total administrative expenditure for earning income covered u/s. 14A. The Tribunal was of the opinion that even after completing the format, the disallowance cannot exceed the total administrative expenditure incurred by the assessee.

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

“i)    Under no circumstances, can the Assessing Officer attribute administrative expenses for earning tax free income in excess of the total administrative expenditure incurred by the assessee.

ii)    If it is a case where Assessing Officer disputes, question and disallow the very declaration of the assessee regarding total administrative expenditure, the issue can be somewhat different. Nevertheless, when the Assessing Officer has in the present case did not disturb the assessee’s declaration that total administrative expenses incurred by the assessee for all its activities was Rs. 30 lakhs, there was no question of disallowing administrative expenses to the tune of Rs. 60 lakhs u/s. 14A with the aid of rule 8D.”

2 Sections 40(a)(ia), 194H and 194J – Business expenditure – Disallowance – Payments subject to TDS – Compensation paid to joint venture partner under MOU – Finding that agreement not sham – Payment cannot be treated as expenditure required to deduct tax at source – Disallowance for failure to deduct tax not attracted

1.      
(2018) 400 ITR 521 (Cal)

Principal
CIT vs. Entrepreneurs (Calcutta) Pvt. Ltd.

A.Y.:
2006-07, Date of Order: 13th Sept., 
2017


For the A. Y. 2006-07, the
assessee claimed as expenditure a sum of Rs. 5,17,48,439 paid to company A, as
compensation in connection with a land transaction. The assessee’s explanation
was that the amount was paid in performance of its obligation under a
memorandum of understanding with A under which A and the assessee were to share
the profit on sale of land in the ratio of 75% to A and 25% to the assessee,
that the services to be rendered by A included identifying the buyer and also
carrying out various other tasks in respect of the sale of the landed property
involved. The Assessing Officer was of the view that A was a sham company. He
treated the entire sum of compensation paid to A as the assesee’s income
chargeable to tax, on the grounds that the transaction was a sham, and that the
assessee had not deducted tax at source on the amount, invoking the provisions
of section 40(a)(ia).

 

The Tribunal held that the
transactions were made by a valid written contract on various terms and
conditions between the parties, which were essential for a joint venture
project. Such facts were not denied nor were any defects found in the agreement
by the Assessing Officer. It further held that the transaction was in lieu of
the agreement and the Assessing Officer was not justified in treating the
payment of compensation as an expenditure and that no tax at source was
required to have been deducted on the profit so shared between the two joint
venture partners and deleted the addition.   

 

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

 

“i)   Whether a transaction was sham or not was a
question of fact. The Commissioner (Appeals) had found the Assessing Officer’s
conclusion that it was sham transaction between assessee and A to be in direct
conflict with the Assessing Officer’s own acceptance that the services rendered
by A were of specialised, professional and technical in nature. Upon analyzing
the memorandum of understanding and other materials on record, the Commissioner
(Appeals) had accepted the contention of the assessee that the compensation paid
was not an expenditure incurred so as to attract the provisions of sections
194H and 194J requiring tax deduction at source. As a consequence, the question
of disallowance of the payments applying the provisions of section 40(a)(ia)
could not have arisen.

 

ii)   The findings of the Commissioner (Appeals),
concurred with by the Tribunal, were based on appreciation of material on
record. Further, the Tribunal had recorded that the Assessing Officer did not
point out any defect in the “settlement/contract”. There was no perversity in
the findings of the Commissioner (Appeals) and the Tribunal. No question of law
arose.”

1 Section 143(3) – Assessment – Construction business – Estimate of cost of construction – Reference to DVO – Books of account maintained by assessee not rejected – AO cannot refer matter to DVO

(2018) 401 ITR 285 (Mad)
CIT vs. A. L. Homes
A.Y.: 2009-10, Date of Order: 20th Sept., 2017    


The assessee was in
construction business. In the course of the assessment for the relevant year,
the Assessing Officer made a reference to the District Valuation Officer (DVO)
for estimation of the cost of construction. The estimated cost of construction
by the DVO was higher than that found according to the books of account of the
assessee. The valuation report was objected to by the assessee, on the ground
that it had been maintaining regular books of account and that reference could
not have been made to the DVO without rejecting the books of account. However,
the Assessing Officer added the difference in the cost of construction, as
unaccounted investment to the income of the assessee.

 

The Commissioner (Appeals)
deleted the addition and held that the Assessing Officer could not have made a
reference to the DVO for estimation, when the books of account of the assessee
had not been rejected. He further held that the difference between the cost
shown in the books of account and the estimation by the DVO was only 6.85%,
whereas, statutorily a reference for valuation could be made only if, in the
opinion of the Assessing Officer, the difference would have exceeded 15%. The
Tribunal found that the assessee had sold the flats and that most of the
purchasers had occupied the flats and that the cost improvements made had to be
considered as income of the purchasers. It upheld the deletion made by the
Commissioner (Appeals).

 

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

 

“i)   The appellate authorities had concurrently
found that the books of account of the assessee had not been rejected by the
Assessing Officer and therefore, the matter ought not to have been referred to
the DVO for estimation of the cost of construction.

 

ii)    The reliance placed on the report of the DVO
for making the addition was misconceived. No question of law arose.”

18 TDS – Certificate for deduction at lower rate/nil rate – Cancellation of certificate – Judicial order – Recording of reasons is condition precedent – No change in facts during period between grant of certificate and order cancelling certificate – No valid or cogent reasons recorded and furnished to assessee for change – Violation of principles of natural justice – Order of cancellation quashed

Tata Teleservices (Maharashtra) Ltd. vs. Dy.
CIT; 402 ITR 384 (Bom); Date of Order:16-25/01/2018:

A.
Y. 2018-19:

Section
197; R. 28AA of ITR 1962; Art. 226 of Constitution of India


The
assessee provided telecommunication services. For the A. Ys. 2014-15 to
2016-17, it filed return declaring loss aggregating to Rs. 1330 crore and
making a claim of refund of an aggregate sum of Rs. 121 crore. In the course of
its business, the assessee received various payments for the services rendered
which were subject to tax deduction at source (TDS) under Chapter XVII of the
Income-tax Act, 1961. According to the assessee it was not liable to pay
corporate tax in the immediate future in view of the likely loss for the A. Y. 2018-19
and the carried forward losses. Therefore, it filed an application/s. 197 of
the Act for a certificate for nil/lower TDS to enable it to receive its
payments from various parties which were subject to TDS, without actual
deduction at source. On 04/05/2017, the Dy. Commissioner (TDS) issued a
certificate u/s. 197 and directed the deduction of tax at nil rate by the
various persons listed in the certificate while making payments to the assessee
u/ss. 194, 194A, 194C, 194-I, 194H and 194J. Thereafter, the Dy. Commissioner
(TDS) communicated that he was reviewing the certificate u/s. 197 which had
been issued, in respect of cases in which outstanding tax demand was pending.
Consequently, the assessee furnished the details of tax outstanding. The Dy.
Commissioner (TDS) issued a show cause notice and granted a personal hearing to
the assessee. By an order dated 23/10/2017, the certificate dated 04/05/2017
issued u/s. 197 was cancelled on the ground that any future tax payable might
not be recoverable from the assessee and that there was an outstanding tax
demand of Rs. 6.90 crore payable by the assessee.


The Bombay
High Court allowed the writ petition filed by the assessee, quashed the order
of the Dy. Commissioner (TDS) dated 23/10/2017 cancelling the certificate and
held as under:


“i)   The issuance of the certificate was the
result of an order holding that the assessee was entitled to a certificate u/s.
197. In the absence of the reasons being recorded, the certificate u/s. 197
would not be open to challenge by the Department, as it would be impossible to
state that it was erroneous and prejudicial to the Revenue. The recording of
reasons was necessary as only then it could be subject to revision by the
Commissioner u/s. 263. Therefore, there would have been reasons recorded in the
file before issuing a certificate dated 04/05/2017 and that ought to have been
furnished to the assessee before contending that the aspect of rule 28AA was
not considered at the time of granting the certificate. Further, if the Department
sought to cancel the certificate on the ground that a particular aspect had not
been considered, before taking a decision to cancel the certificate already
granted, it must have satisfied the requirement of natural justice by giving a
copy of the same to the assessee and heard the assessee on it before taking a
decision to cancel the certificate.


ii)    The notices which sought to review the
certificate did not indicate that the review was being done as the certificate
dated 04/05/2017 was granted without considering the applicability of rule 28AA
in the context of the assessee’s facts. Therefore, there was no occasion for
the assessee to seek a copy of the reasons recorded while issuing the
certificate. Moreover, it was found on facts that there was no change in the
facts that existed on 04/05/2017 and those that existed when the order dated
23/10/2017 was passed. Thus, there was a flaw in the decision-making process
which vitiated the order dated 23/10/2017. The grant or refusal to grant the
certificate u/s. 197 had to be determined by parameters laid down therein and
rule 28AA and it could not be gone beyond the provisions to decide an
application.


iii)   The order dated 23/10/2017 did not indicate,
what the profits were likely to be in the near future, which the Department
might not be able to recover as it would be more than the carried forward
losses. However, such a departure from the earlier view had to be made on valid
and cogent reasons. Therefore, on the facts, the basis of the order, that the
financial condition of the assessee was that any further tax payable might not
be recoverable, was not sustainable and rendered the order bad.


iv)   Neither section 197 nor rule 28AA provided
that no certificate of nil or lower rate of withholding tax could be granted if
any demand, however miniscule, was outstanding. Rule 28AA(2) required the
authority to determine the existing estimated liability taking into
consideration various aspects including the estimated tax payable for the
subject assessment year and also the existing liability. The existing and
estimated liability also required taking into account the demands likely to be
upheld by the appellate authorities. The assessee’s appeal with respect to the
demand of Rs. 6.68 crore was being heard by the Commissioner (Appeals) and no
order had been passed thereon till date.


v)   The order in question did not deal with the
assessee’s contention that the demand of Rs. 28 lakh was on account of mistake
in application of TRACE system nor did it deal with the assessee’s contention
that the entire demand of Rs. 6.90 crore could be adjusted against the
refundable deposit of Rs. 7.30 crore, consequent to the order dated 27/05/2016
of the Tribunal in its favour. The order dated 23/10/2017 seeking to cancel the
certificate dated 04/05/2017 was a non-speaking order as it did not consider
the assessee’s submissions. Therefore, the basis of the order cancelling the
certificate, that there was outstanding demand of Rs. 6.90 crore payable by the
assessee, was not sustainable.


vi)   In the above view, the impugned order dated
23/10/2017 is quashed and set aside.”

1 Section 54 – Two separate contracts for purchase of flat viz. one for house property and the other for furniture, etc. considered, in substance, as the one only and deduction allowed in full.

Rajat B. Mehta vs. Income Tax Officer
(Ahmedabad)
ITA No. 19/Ahd/16
A.Y: 2011-12. Date of Order: 9th February, 2018
Members: Pramod Kumar (A.M.) and S. S.
Godara (J.M.)Counsel for Assessee / Revenue:  Urvashi Shodhan / V. K. Singh


FACTS
The assessee is a non-resident who sold off a house for a consideration of Rs 2.46 crore and earned long term capital gain of Rs. 1.9 crore. He invested a portion of the sale proceeds, Rs. 78 lakhs, in another residential unit and claimed a deduction u/s. 54. The AO noted that the assessee had entered into two separate contracts viz., for purchase of house property and another for purchase of furniture and fixtures therein. The payment of Rs. 60 lakhs was for the purchase of house property and Rs. 18 lakhs was for the purchase of furniture and fixtures. The AO was of the opinion that the assessee had executed two separate deeds to save stamp duty on it, (and) now the assessee is trying to evade income tax. He was further of the view that most of the furniture items are removable, and, that it cannot be said that furniture was purchased to make the house habitable. Therefore, the AO declined deduction u/s. 54 F to the extent of Rs 18 lakhs paid under a separate agreement for furniture and fixtures in the residential property purchased by the assessee.

HELD
Analysing the provisions of section 54, the Tribunal noted that the expression used in the statute is “cost of the residential house so purchased” which according to it does not necessarily mean that the cost of the residential house must remain confined to the cost of civil construction alone. A residential house may have many other things, other than civil construction and including things like furniture and fixtures, as its integral part and may also be on sale as an integral deal. Further, it noted that there are, for example, situations in which the residential units for sale come, as a package deal, with things like air-conditioners, geysers, fans, electric fittings, furniture, modular kitchens and dishwashers. If these things are integral part of the house being purchased, the cost of house has to essentially include the cost of these things as well. In such circumstances, what is to be treated as cost of the residential house is the entire cost of house, and it cannot be open to the AO to treat only the cost of only civil construction as cost of house and segregate the cost of other things as not eligible for deduction u/s. 54.

However, from the arrangement in which the transaction was entered into, the Tribunal noted that in substance and in effect the house was sold for Rs 78 lakhs. Even if the assessee was to buy the house, without the furniture, it would have been for Rs 78 lakhs – as was clearly specified in the agreement to sell. The cause or trigger for the splitting of the consideration was not relevant and it had no bearing on de facto consideration for purchase of house property. The two agreements, according to it, cannot be considered in isolation with each other on standalone basis, and have to be considered essentially as a composite contract, particularly in the light of the undisputed contents of the agreement to sale. Given these facts, the Tribunal held that the cost of the new asset has to be treated as Rs 78 lakhs. Accordingly, the Tribunal directed the AO to delete the disallowance of deduction u/s. 54 to the extent of Rs 18 lakhs.

4 Section 54 – The exemption u/s. 54 cannot be denied even in a case where the assessee has utilised the entire capital gain by way of making payment to the developer of flat but could not get possession of the flat as the new flat was not completed by the developer. Section 54(2) does not say that in case assessee could not get possession of property, he was not entitled for exemption u/s. 54.

[2018] 91 taxmann.com 11 (Chennai-Trib.)
ACIT vs. M. Raghuraman
ITA No. : 1990/Mds/2017
A.Y.: 2013-14                               
Date of Order: 08th February, 2018

FACTS

The assessee, in his return
of income, claimed exemption u/s. 54 of the Act.  The claim for exemption was made on the basis
of payments made to the developer for sale consideration. The flat, however,
was not completed even though payment was made to the promoter. The possession
was not yet given to the assessee.

 

The Assessing Officer (AO)
denied deduction on the ground that construction is not completed and
therefore, the assessee is not eligible to claim exemption.

 

Aggrieved, the assessee
preferred an appeal to the CIT(A) who allowed the claim of the assessee.

 

Aggrieved, the revenue
preferred an appeal to the Tribunal.

 

HELD 

A bare reading of section
54 clearly says that in case the assessee purchased a residential house in
India or constructed a residential house in India within a period stipulated in
section 54(1), the assessee is eligible for exemption u/s. 54. Section 54(2)
clearly says that in case the capital gain, which is not appropriated by the
assessee towards purchase of new asset or which is not utilised in purchase of
residential house or construction of residential house, then it shall be
deposited in a specific account. It is not the case of the revenue that capital
gain was not appropriated or it was not utilised. The fact is that the entire
capital gain was paid to the developer of the flat. In other words, the
assessee has utilised the entire capital gain by way of making payment to the
developer of the flat.

 

Section
54(2) does not say that in case the assessee could not get the possession of
the property, he is not entitled for exemption u/s. 54. The requirement of
section 54 is that the capital gain shall be utilised or appropriated as
specified in section 54(2). The assessee has complied with the conditions
stipulated in section 54(2). Therefore, the Commissioner (Appeals) has rightly
allowed the appeal of the assessee. The Tribunal held that it did not find any
reason to interfere with the order of the lower authority and accordingly, it
confirmed the same.

 

The appeal filed by the Revenue
was dismissed.

 

3 Section 47(iv) – Transaction of transfer of shares by a company to its second step down 100% subsidiary cannot be regarded as ‘transfer’ in view of the provisions of section 47(iv) of the Act. A second step down subsidiary company is also regarded as subsidiary of the assessee company under Companies Act, 1956 as the term ‘subsidiary company’ has not been defined under the Act.

[2018] 91 taxmann.com 62 (Kolkata-Trib.)
Emami Infrastructure Ltd. vs. ITO
ITA No. : 880/Kol/2014
A.Y.: 2010-11: Date of Order: 28th February, 2018

FACTS
The assessee filed its return of income declaring therein a total income of Rs. 88,79,544. In the return of income, the assessee also claimed that it has incurred a long term capital loss of Rs. 25,05,20,775 which it carried forward. The Assessing Officer (AO), assessed the total income of the assessee to be Rs. 29,99,30,657.

During the previous year under consideration, on 31.3.2010, the assessee sold 2,86,329 shares of Zandu Realty Ltd., at the rate of Rs. 2100 per share, to Emami Rainbow Niketan Pvt. Ltd., a 100% subsidiary of the assessee’s subsidiary viz. Emami Realty Ltd. The sale was in accordance with the decision taken by the Board of Directors on 23.3.2010 and also in accordance with the valuation report of SSKM Corporate Advisory Pvt. Ltd.

The Assessing Officer found that the assessee had sold shares of Zandu Realty Ltd. at a price ranging from Rs. 6200 per share on 23.12.2009 to Rs. 4390 per share on 11.2.2010. He asked the assessee to show cause why the sale price per share of Zandu Realty Ltd. should not be taken at Rs. 3989.80 being the average price traded at NSE as on 31.3.2010 against the sale price of Rs. 2100 per share taken by the assessee.

The AO held that he found the explanation of the assessee to be not acceptable. Considering the huge price variance between the quoted price in NSE and the off-market selling price shown by the assessee he held that when the shares are traded in stock exchange the best way to determine the selling price of a share is the price quoted in the stock exchange. Accordingly, he determined the long term capital gain to be Rs. 29,05,83,769, by considering the sale price to be Rs. 3989.80 per share as against Rs. 2100 per share taken by the assessee, as against the claim of loss of Rs. 25,05,20,775 shown by the assessee in the return of income.

Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO by relying on the ratio of the decision of Gujarat High Court in the case of Kalindi Investments Pvt. Ltd. vs. CIT (256 ITR 713)(Guj.)

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the assessee sold equity shares of Zandu Realty Ltd. to Emami Rainbow Niketan Pvt. Ltd based on price of shares determined by Corporate Advisory Pvt. Ltd.  It also noted that the buyer Emami Rainbow Niketan is a 100% subsidiary of Emami Realty Ltd. Emami Realty Ltd. is a 100% subsidiary of Emami Infrastructure Ltd, the assessee. The Tribunal observed that the two issues which arise for its adjudication are –

(i)    whether there is a transfer of shares in view of the provisions of section 47(iv) of the Act; and

(ii)    if the transaction in question is not covered by section 47(iv) of the Act, then whether the computation of capital gains as made by the AO and confirmed by the CIT(A) is correct or not and whether the AO can substitute the sale consideration of the shares sold with FMV as determined by him?

The Tribunal observed that if it comes to the conclusion that this is not a transfer then the assessee’s claim that it had incurred a long term capital loss and same has to be carried forward cannot be allowed. Similarly, capital gain computed by the AO based on fair market value computed by him and substituted for the sale consideration agreed to by the seller and buyer has to be cancelled.

The Tribunal noted that the transfer is to a second step down 100% subsidiary of the assessee. The issue is whether provisions of section 47(iv)(a)(b) are applicable to a second step down subsidiary. It noted the following two divergent views on this issue –

(i)    the Bombay High Court in the case of Petrosil Oil Co. Ltd. vs. CIT (236 ITR 220)(Bom.) has, in the context of provisions of section 108 of the Act, held that a 100% owned sub-subsidiary of a 100% 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(a) of the Act;

(ii)    the Gujarat High Court has in the case of Kalindi Investments Pvt. Ltd. (256 ITR 713)(Guj) held that there is no justification for invoking clause (c) of sub-section (1) of section 4 of the 1956 Act while interpreting the provisions of clauses (iv) and (v) of section 47.

Applying the decision of the Bombay High Court (supra), the transaction in question cannot be regarded as a transfer in view of provisions of section 47(iv) of the Act, as it is a transfer of a capital asset by a company to its subsidiary company and as a second step down 100% subsidiary company is also a subsidiary of the assessee company under the Companies Act, 1956 as the term ‘subsidiary company’ has not been defined under the Income-tax Act.

Upon going through the two judgments, the Tribunal held that it prefers to follow the decision of the Bombay High Court in the case of Petrosil Oil Co. Ltd. (supra) as in its view a second step down 100% subsidiary is also covered by the provision of section 47(iv) of the Act, as this is the letter and spirit of the enactment.

Following the decision of the Bombay High Court in the case of Petrosil Oil Co. Ltd. (supra), the Tribunal held that the transaction of sale of shares of Zandu Realty by assessee to Emami Rainbow Niketan Ltd. is not regarded as transfer in view of section 47(iv) of the Act. Hence, the question of computing either the capital loss or capital gain does not arise. The Tribunal held that the assessee is not entitled to carry forward the capital loss of Rs. 25 crore as claimed.

This ground of appeal of assessee was dismissed.

2 Sections 2(29A) r.w.s. 2(42B) and 251 – Gain arising on sale of shares of a private limited company, offered in the return of income as `short term capital gain’ can be claimed, for the first time, to be `long term capital gain’ before appellate authority even without filing a revised return of income.

 .       2018] 91 taxmann.com 28 (Mumbai – Trib.)

Ashok Keshavlal Tejuja vs. ACIT

ITA No. : 3429 (MUM.) of 2016

A.Y.: 2011-12: Date of Order: 15th
February, 2018


FACTS

During the previous year
relevant to assessment year 2011-12, the assessee had sold shares of a private
limited company. Gain arising on sale of these shares was shown in the return
of income, filed by the assessee, as short term capital gains. In the course of
assessment proceedings, the assessee, without having revised the return of
income, filed a letter and also a revised computation of income thereby making
a claim that the gain arising on sale of shares of private limited company need
to be considered as `long term capital gains’. This additional claim was denied
to the assessee.

Aggrieved by the assessment
made, the assessee preferred an appeal to the CIT(A) and in the course of
appellate proceedings the assessee raised the said claim before the CIT(A). The
CIT(A) did not entertain the claim made by the assessee on the ground that it
was made otherwise than by filing a revised return of income.

Aggrieved,
the assessee preferred an appeal to the Tribunal where the assessee brought to
the notice of the Tribunal the decision of the Apex Court in the case of Goetze
(India) Ltd. vs. CIT [2006] 284 ITR 323 (SC) and also the decision of the
Bombay High Court in the case of CIT vs. Pruthvi Brokers & Shareholders
[2012] 349 ITR 336 (Bom.).

HELD

The Tribunal noted that the
Supreme Court in the case of Goetze India Ltd. (supra) and also the
Bombay High Court in the case of Pruthvi Brokers & Shareholders (supra)
has clearly held that the additional claim can be filed before the appellate
authorities even if the same is not filed by way of revised return of income.
Since the assessee had filed the claim before the AO as well as before the
CIT(A) to bring to tax the capital gains as long term capital gains on sale of
share of private limited company instead of short term capital gain as declared
in the return of income, the Tribunal admitted the claim filed by the assessee.

The Tribunal remitted the
matter to the file of the AO for considering the aforesaid additional claim
raised by the assessee on merits after hearing the contention of the assessee
and evaluating the evidences filed / to be filed by the assessee on merits in
accordance with law.

 This ground of appeal filed
by the assessee was allowed.

1 Section 253 – An erroneous disallowance made by the assessee in its return of income on account of non-deduction of tax at source which disallowance was not contested before CIT(A) can be challenged by the assessee, for the first time, before the Tribunal.

[2018] 90 taxmann.com 328 (Kolkata-Trib.)
Allahabad Bank vs. DCIT
ITA No. : 127/Kol/2011
A.Y.: 2007-08 and 2009-10                  
Date of Order:   07th February, 2018

If the stand of the
assessee is found to be correct and if it results in income being assessed
lower than returned income, that would be the true and correct income of the
assessee and it would be the duty of the revenue to assess the correct tax
liability of the assessee.

 

FACTS 

The assessee, in his return
of income for AY 2007-08, disallowed a sum of Rs. 3,17,32,735 u/s. 40(a)(ia) of
the Act.  Since this disallowance was
made voluntarily in the return of income, the assessee did not contest it in an
appeal filed before CIT(A) against the assessment order. 

 

In Assessment Year 2008-09,
the deduction was claimed in the return of income and same was disallowed by
the Assessing Officer (AO). This disallowance was contested in an appeal before
CIT(A) who allowed the deduction to the extent of Rs. 96,38,366 after
examination of copies of challans and other documents.

 

Subsequent to the passing
of the order by CIT(A), the assessee bank observed that in respect of
disallowance amounting to Rs. 99,32,277 out of Rs. 3,17,32,735, the provisions
of TDS are not applicable at all and consequently the provisions of section
40(a)(ia) are not attracted.

 

For the first time in an
appeal before the Tribunal, the assessee took an additional ground that the AO
be directed to allow deduction of Rs. 99,32,277 after verification of all
necessary documents in support of the claim of the assessee.

 

Before the Tribunal, it was
contended that the assessee never had an occasion to address this issue before
the lower authorities and hence had no option but to file an additional ground
before the Tribunal. It was also submitted that since the issue has not been
examined by the lower authorities, in order to appreciate the contentions of
the assessee, it could be remanded to the file of the AO. The revenue had no
objection except that it would result in an assessment being framed at lesser
than returned income.

 

HELD 

As regards the contention
of the revenue that the assessment would be framed at lesser than returned
income, the Tribunal noted the observations of the Calcutta High Court in the
case of Mayank Poddar (HUF) vs. WTO [2003] 262 ITR 633 (Cal.) and
observed that it is now well settled that there is no estoppel against the
statute. It observed that the assessee is only pleading for claim of deduction
which had been erroneously disallowed by it in the return of income and
considered as such by the AO in the assessment. Though there was no occasion
for the revenue to adjudicate this issue on merits, the revenue could not take
advantage of the mistake committed by the assessee. The scheme of taxation is
primarily governed by the principles laid down in the Constitution of India and
as per Article 265 of the Constitution of India, no tax shall be levied or
collected unless by an authority of law. When a particular item is not to be
taxed as per statute, then taxing the same would amount to violation of
constitutional principles and revenue would be unjustly enriched by the same.
Hence, in the process of verification by the AO, if the stand of the assessee
is found to be correct and if it results in income being assessed lower than
the returned income, that would be the true and correct income of the assessee
and it would be the duty of the revenue to assess the correct tax liability of
the assessee.

 

Having made the aforesaid
observations, the Tribunal, in the interest of justice and fair play, remanded
the issue to the file of the AO for adjudication of merits.

 

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

4 Section 4 – Charge of income-tax – Interest on advance – if the income does not result at all – then the same cannot be taxed – even though an entry is made in the books of account about such a hypothetical income – which has not been materialised.

1.      
CIT vs. Godrej Realty Pvt.
Ltd.

ITA
No.: 264 of 2015  (Bom High Court)

AY:
2008-09 Dated: 11th December, 2017 

[Godrej
Realty Pvt. Ltd v. ITO; ITA No.: 4487/Mum/2012; 
Dated: 04th June, 2014; Mum. ITAT]


The Assessee Company had
entered into a Memorandum of Understanding (MoU) with M/s. Desai & Gaikwad
to develop residential project on a plot of land, belonging to M/s. Desai &
Gaikwad at Pune. In terms of the MoU, the Assessee had given an advance to M/s.
Desai & Gaikwad and the assessee was entitled to receive from M/s. Desai
& Gaikwad interest at 10% p.a. on the aforesaid project advance. However,
the obligation to pay interest on M/s. Desai & Gaikwad to the assessee, was
from the date of execution of the development agreement. In its return for the
subject AY, the assessee did not offer to tax any interest on the aforesaid
advance with M/s. Desai & Gaikwad.

 

However, the A.O, brought
to tax the amount of interest on advance. This on the basis of M/s. Desai &
Gaikwad’s ledger account showed an aggregate of advance and interest, as
payable by it to the assessee. Thus, concluding that interest had accrued to
the assessee, as it follows the mercantile system of accounting. Therefore,
interest is includable in its total income.

The CIT(A) dismissed the
assessee appeal. Thus, upholding the view of the A.O that as M/s. Desai &
Gaikwad had shown interest liability to the assessee as expenditure in its
books of account, it follows that interest has accrued to the assessee.
Therefore, the interest was includable in the total income subject to tax.

 

The Revenue case is that,
assessee was following the mercantile system of accounting. Therefore, it was
obligatory on its part to account for its accrued interest, which had so
accrued in terms of MoU. This accrual of interest is further supported,
according to him by the fact that M/s. Desai & Gaikwad has shown in its
books the above amount as a liability to the assessee. In support of the
proposition that in a mercantile system of accounting, the income is said to
accrue, when it becomes due and the postponement of the date of payment or non
receipt of the payment, would not affect the accrual of interest, he places
reliance upon the decision of the Supreme Court in Morvi Industries Ltd.
vs. CIT (1971) 82 ITR 835.

 

The Tribunal records the
fact that in terms of MOU, M/s. Desai & Gaikwad was liable to pay interest
at 10% p.a. on the advance from the date of the execution of the development
agreement and the undisputed position is, it has not been executed. The debit
note sent by the assessee to M/s. Desai & Gaikwad towards the interest chargeable
on the advance was returned by M/s. Desai & Gaikwad, denying its liability
to pay any interest as demanded. Moreover, the board of directors of the
assessee had recording the no acceptance of the debit note towards the interest
payable, decided to waive the interest chargeable which is to be recovered from
M/s. Desai & Gaikwad.

Being aggrieved, the
Revenue carried the issue in appeal to the High court. The Hon. Court observed
that, in fact, there was no accrual of income in the present case. This for the
reason that there was no right to receive income of Rs.1.98 crores as interest
as admittedly development agreement has not been executed. The interest in
terms of the MoU would only commence on development agreement, being executed.
Admittedly, this is not done. Further, the return of the debit note by M/s.
Desai & Gaikwad was also an indication of the fact that M/s. Desai &
Gaikwad did not accept that interest is payable to the Assessee. Consequently,
there was no amount which had become due to the Assessee.

 

The entire grievance of the
Revenue before us is that the entries made by M/s. Desai & Gaikwad in its
ledger account, indicating that interest was payable, by itself, lead to the
conclusion that interest had accrued to the assessee is not correct.
Particularly, in the context of the MoU and return of debit note. Moreover, the
board of directors of assessee had passed a resolution, waiving the interest
receivable from M/s. Desai & Gaikwad. This, on account of non acceptance of
liability to interest by M/s. Desai & Gaikwad. Therefore, it was not an
unilateral giving up of accrued income but acceptance of the rejection of debit
note by M/s. Desai & Gaikwad. Moreover, the reliance upon Morvi Industries
Ltd., (supra) is inapplicable for the reasons on facts, the accrual of
income in this case would only arise after the execution of the development
agreement. Undisputedly, it has not taken place. Thus, as no income i.e.
interest has accrued or has been received, the occasion to levy tax on such
hypothetical income, cannot arise. Accordingly, Revenue appeal was dismissed.  


3 Income in respect of sale of flats – accrued when possession of the flat was given – not when allotment letter was issued.

CIT vs. Millennium Estates Private Ltd.
ITA No.: 853 of 2015 (Bom. High Court)
A.Y.: 2007-08      Dated: 30th January, 2018
[Millennium Estates Private Ltd. v. DCIT; ITA No. 517/Mum/2011;  Dated: 16th May, 2012; Mum.  ITAT]

The assessee carries on
business as a contractor and developer. During the scrutiny proceedings the A.O
found that an amount was shown under the head current liabilities i.e. as
advances received from it buyers. The A.O did not accept the contention of the
Assessee that the aforesaid amounts from M/s. Siddhi Vinayak Securities Pvt.
Ltd. and M/s. Manomay Estates Pvt. Ltd. were received as advance at the time of
allotment on 14 & 15 March 2007 and that further consideration was received
on 1 April 2007, when the possession of the flats was given, thus chargeable to
tax in the next AY. The A.O made addition the aggregate amount received from
M/s. Siddhi Vinayak Securities Pvt. Ltd and M/s. Manomay Estates Pvt. Ltd. as
accrued income in the subject Assessment Year. 

 

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

 

On further Appeal, the
Tribunal  allowed the Assessee appeal.
Thus  after being examined all the
clauses of the allotment letter as well as the clauses of the possession letter
concluded that the sale of the flats took place only in the subject Assessment
Year i.e. on 1 April 2007 i.e. when the possession of the flats was given and
the balance amount was paid. The accrual of income took place in the next year.
Till then, the amount received was only in the nature of advances. The Tribunal
also records the fact that it was not the case of the Revenue that the possession
letter dated 1 April 2007 was not genuine. Nor has the Revenue brought on
record any evidence to show that the possession was given to M/s. Siddhi
Vinayak Securities (P.) Ltd. and M/s. Manomay Estates (P.) Ltd. prior to 1
April 2007. In the above view the addition was made by the A.O and upheld by
the CIT (A) was deleted.

 

The Tribunal also records
the fact that in the next AY , the Assessee has offered the income on the sale
of the flats to M/s. Siddhi Vinayak Securities Pvt. Ltd. and M/s. Manomay
Estates Pvt. Ltd. to tax. The same has also been accepted by the Revenue as
taxable income for the next AY.

 

The grievance of the
Revenue is that the sale of the flats under consideration had in fact taken
place on 14 and 15 March 2007 when they were allotted under an allotment
letters to M/s. Siddhi Vinayak Securities Pvt. Ltd. and M/s. Manomay Estates
Pvt. Ltd.

 

Being aggrieved, further
Revenue filed an appeal to the High Court. The Hon. High Court observed that
the Tribunal has reproduced the relevant clauses of the allotment letter dated
15 March 2007 which is similar to the allotment letter dated 14 March 2007 and
the relevant clause. The Tribunal, held that the amount of Rs.2.14 Crores was
an advance during the subject AY. It thus held that part of the above amount
had accrued as income during the AY 2007-08. From the above clauses of the
allotment letter and clause 9 of the possession letter referred to by the
Tribunal it is very evident that the possession of the flats was given on
receipt of total consideration only on 1 April 2007. The Tribunal records as a
matter of fact that there is no dispute about the genuineness of the letter of
possession dated 1 April 2007. Moreover, no statement of the buyers or other
evidence, even circumstantial in nature, was brought on record to indicate that
the facts are different from what has been recorded in the possession letter
dated 1 April 2007. In the aforesaid facts, the view taken by the Tribunal on
the self evident terms of allotment and possession letter does not give rise to
any substantial question of law. Accordingly, Appeal of dept was  dismissed.

 

33. U/s. 80HHC – Export Business – Deduction – A. Y. 1996-97 – Supporting manufacturer – Application by exporter for renewal of trading house certificate pending before concerned authorities – Does not disentitle supporting manufacturer to the deduction u/s. 80HHC – Exporter gave disclaimer certificate with details of export – Supporting manufacturer entitled to benefit of deduction u/s. 80HHC(1A)

CIT vs. Arya Exports and Industries; 398 ITR 327 (Del):

 

The assessee was a supporting manufacturer
of an export trading house, R. In its return for the A. Y. 1996 97, the assessee claimed deduction u/s. 80HHC(1) on the net profit
shown in the profit and loss account. It had dispatched the supplies prior to
31/03/1995 and on various dates between 01/04/1995 to 05/06/1995 and the goods
were exported by R which had issued a disclaimer certificate on 29/08/1996. It
submitted the certificate in form 10CCAB, which was issued by the export
trading house R, confirming that no deduction u/s. 80HHC(1) had been claimed by
R in respect of the export turnover shown by the assessee. The certificate
contained the particulars which related to the supporting manufacturers and the
export trading house, also included the invoice numbers, dates of invoice,
shipping bill numbers, nature of goods with quantities, etc. R had a
trading house certificate, valid up to 31/03/1995 and had filed an application
for renewal of its trading house certificate by a receipt dated 16/10/1995, and
had not received any communication to indicate that its application for renewal
was rejecetd. The Assessing Officer held that it was obligatory on the part of
R, the export trading house, to obtain a certificate from the concerned
Government authorities and that without the renewal certificate, the claim for
deduction u/s. 80HHC by the assessee, a supporting manufacturer, was not valid
and that therefore, the exports done after 01/04/1995 were not entitled to
deduction u/s. 80HHC. The Commissioner (Appeals) and the Tribunal allowed the
assessee’s claim for deduction.

 

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

 

“i)   The assessee was entitled
to the deduction u/s. 80HHC(1A) for the A. Y. 1996-97. The legislative scheme
which emanated from sub-section (1A) of section 80HHC was to treat the
supporting manufacturer and its entitlement to deduction separately from that
of the exporter. The words “assessee” used throughout s/s. (1) referred only to
the exporter whereas the same word used throughout s/s. (1A) referred to the
supporting manufacturer. There was a discernible distinction, in the
legislative scheme of section 80HHC between, the deduction that could be
claimed by an exporter and the deduction that could be claimed by a supporting
manufacturer. While the supporting manufacturer has to fulfil the condition of
a certificate having been issued by the exporter/export trading house to avail
the benefit of a deduction from the turnover that had been made available to
the supporting manufacturer, expressly u/s. 80HHC(1A), the deduction did not
hinge upon the eligibility of the exporter for the deduction u/s. 80HHC(1).
Further, a perusal of form 10CCAB showed that there was a separate certificate
to be issued in favour of the supporting manufacturer where the exporter made a
declaration that it had not claimed a deduction u/s. 80HHC(1) and there was a
counter verification by the chartered accountant of such a certificate. It was,
therefore, clear that there was no double deduction claimed in respect of the
export, which was consistent with the legislative intent of extending the
benefit u/s. 80HHC either to the exporter or to the supporting manufacturer and
not to both.

 

ii)   Even
after the period for which the renewal of the trading house certificate was
sought, R continued to be treated as an export house according to the facts
that had emerged before the Commissioner (Appeals) and the Tribunal. R filed an
application for renewal of its trading house certificate, which was pending
before the relevant authorities for four years and was pending even on the date
of the assessment order.

 

iii)   The export import policy
for the relevant period expressly stated that during the interim period the
export trading house would be eligible to claim all the facilities and benefits
of the exporter and, therefore, the further benefit of the supporting
manufacturer as well. The benefit u/s. 80HHC was, therefore, available to R for
the exports made during the period in question. However, R having issued the
disclaimer, did not, in fact, claim the deduction. The mere non-grant of the
renewal of the trading house certificate by the Director General of Foreign
Trade could not deprive the assessee as a supporting manufacturer of the
deduction it was entitled to u/s. 80HHC(1A).”

32. Sections 2(15) and 12AA – Charitable Trust – Registration – A. Y. 2012-13 – Meaning of charitable purpose – Institution for training Government officials in water and land management – Direct connection with preservation of environment – Institution entitled to registration

CIT vs. Water and Land Management
Training and Research Institute; 398 ITR 283 (T&AP):

 

The assessee is an institution established
in the year 1983, under the control of the Irrigation Department of the
Government of Andhra Pradesh. The assessee applied for registration u/s. 12AA
of the Act. The Director of Income Tax (Exemptions) observed that though the
institute was mainly functioning as a training institute for the purpose of
training Government officials in the field of water and land management, the
institute was also providing guidance to farmers and rendering consultancy
services to various organisations for a fee. With this view, the Director of
Income-tax (Exemptions) rejected the application for registration. The Tribunal
allowed the appeal and directed registration u/s. 12AA. 

 

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

 

“i)   A careful reading of the
definition of the expression “charitable purpose” appearing in section 2(15) of
the Act, 1961 would show that it is an inclusive definition. This is clear from
the usage of the word “includes”. The definition “includes” within its ambit,
(a) relief of the poor, (b) education, (c) yoga, (d) medical relief, (e)
preservation of environment including waterheads, forests and wildlife, (f)
preservation of monuments or places or objects of artistic or historic interest
and (g) the advancement of any other object of general public utility.
Interestingly, the first proviso does not deal with anyone of the first six
items. The first proviso as it stood before April 1, 2016 or even as it stands
after April 1, 2016 deals only with one of the seven items covered by the
substantive part of the definition, namely, “advancement of any other object of
general public utility”. The second proviso takes away from the ambit of the
first proviso, even an activity relating to the advancement of any other object
of general public utility, if the aggregate value of the receipts from the
activities referred to in the first proviso is 
Rs. 25 lakhs or less in the previous year.

 

ii)   It is only after an
institution is granted registration u/s. 12AA of the Act; that the examination
of the gross receipts year after year for the purpose of finding out the
eligibility for exemption would arise. This has also been clarified by the CBDT
Circular No. 21 of 2016, dated May 27, 2016.

 

iii)   Charitable purpose
includes preservation of environment including waterheads, forests and
wildlife. The activity carried out by the assessee had a direct casual
connection to the activity of preservation of environment. The Tribunal was
correct and the assessee was entitled to registration.”

Sections 45, 48 – The cost of construction incurred by the Builder cannot be the consideration for exchange of land in the scheme of Joint Development. It is the FMV, based on the value of the Sub-Registrar, on the date of JDA, which needs to be taken as full value of consideration

16.  Y. S. Mythily vs. ITO
(Bangalore)

Members : Inturi Rama Rao (AM) and Lalit
Kumar (JM)

ITA No. 235/Bang./2016

A.Y.: 2006-07.                                                                    
Date of Order: 9th June, 2017.

Counsel for assessee / revenue: H. Guruswamy / Swapna Das

FACTS  

The assessee owned vacant site in respect of which she
entered into a Joint Development Agreement (JDA) with M/s Sai Dwarka Builders
and Developers. As per the terms of JDA entered into by the assessee, the
assessee agreed to transfer to the developer 55% of the undivided portion of
the land measuring 3153 sq. ft. (sic mts) out of total 5733 sq. ft. (sic mts)
and the remaining undivided portion of 2580 sq. mts was retained by the
assessee. The proposed built up area to be constructed was about 19,836 sq. ft.
out of which the assessee was entitled to 45% of the built-up area measuring
8735 sq. ft. in exchange of 3153 sq. ft of undivided portion of land and
developer was entitled to 55% of the built-up area measuring 11000 sq. ft.

In the course of assessment proceedings, the Assessing
Officer (AO) proposed to adopt cost of construction incurred by the Builder as
consideration for exchange of 55% of the undivided portion of land measuring
3153 sq. ft. According to the AO, the cost of construction, as provided by the
Builder to the AO, was Rs. 1238 per sq. ft. The AO accordingly, determined the
consideration to be Rs. 1,08,13,930 in respect of 55% of undivided portion of
land transferred by the assessee in favor of the Builder. The assessee, relying
on the ratio of the decision of Karnataka High Court in the case of Sri. Ved
Prakash Rakhra (2015) 370 ITR 762 (Kar.) submitted that the cost of
construction incurred by the Builder cannot be the consideration for exchange
of land in the scheme of Joint Development. The AO did not accept the
contentions of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
dismissed the appeal on the ground that the decision of the Karnataka High
Court in the case of Sri. Ved Prakash Rakhra (supra) is distinguishable
in as much as in the case of the assessee the agreement does not mention the
price of land transferred by the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD 

The Tribunal upon going through the relevant clauses of the
JDA observed that neither the AO nor the CIT(A) had adjudicated as to the date
of transfer i.e. as to when the property would be transferred in terms of JDA.
In the opinion of the Tribunal, prima facie, the property would not be
transferred to the assessee during the assessment year under consideration in
terms of JDA. However, since this was not urged before the Tribunal, it did not
adjudicate this issue on merit.

The Tribunal held that for the purposes of
determining the cost of construction, in identical facts and circumstances of
the case, the Hon’ble jurisdictional High Court has in the case of Ved Prakash
Rakhra (supra) held that the date of entering into the JDA would be “the
date” for the purposes of arriving at the cost of transfer i.e. cost of
structure as on the date of agreement would be the cost of transfer instead of
cost of actual construction in terms of JDA. Following the decision of the High
Court, the Tribunal allowed the appeal filed by the assessee.

Sections 43(5), 271(1)(c) – Penalty cannot be levied in a case where set off of loss against normal business income was not allowed because the AO assessed the loss to be speculative loss as against normal business loss claimed by the assessee in its return of income. Such a change amounts to change in sub-head of loss and not furnishing of inaccurate particulars of income invoking penal provisions.

18.  [2017] 84
taxmann.com 63 (Kolkata – Trib.)

DCIT vs. Shree Ram Electrocast (P.) Ltd.

A.Y.: 2009-10                                                                     
Date of Order: 2nd June, 2017

FACTS 

The assessee in its return of income for AY 2009-10 claimed
deduction of Rs. 51,00,000. This sum represented amount paid by the assessee as
damages to Global Alloys Pvt. Ltd. with whom assessee had entered into a
contract on 9.7.2008 for purchase of 200 MT of “Silicon Magnum” and 50MT of
“Ferro Silicon” at the rate of Rs. 78,000/MT and Rs. 86,000/MT respectively.
The contract was valid till 28.2.2009. The contract interalia provided
that in case of failure on the part of the assessee to lift the material on the
date fixed for performance of the agreement, the assessee would pay damages to
seller. Similar was the provision in case the supplier failed to supply the
material. The quantification of damages was with reference to market price on
the date of failure.

The Assessing Officer (AO) held that –

(i)   the agreement read as a whole showed that the
loss in question was speculative in nature;

(ii)  the element of speculation was embedded in
clauses 7 and 8 of the agreement;

(iii)  non-delivery of material was contemplated in
the contract itself and the payment of Rs. 51 lakh was emanating directly from
the settlement of the contract rather than on account of any arbitration award
on account of any separate suit filed by counter party for breach of the
contract;

(iv) non-delivery of material was never a breach of
the contract but was a part of the contract under clauses of the contract and
either assessee or the seller could lose or gain depending upon whether price
of the material decreases or increases in future.

The AO rejected the contention of the assessee that the
amount paid was damages and damages paid for breach of contract was not to be
regarded as speculative loss was not accepted by the AO.

As a result of the AO treating the loss to be speculative in
nature, there was a consequent addition to the total income of the assessee.
Further, the AO initiated penalty proceedings u/s. 271(1)(c) for furnishing
inaccurate particulars and concealing particulars of income. He levied penalty
u/s. 271(1)(c) of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
held that a loss declared in the income was treated as a speculative loss and
consequently not allowed to be set off against the normal business income would
only be a change of the sub-head of the loss and it could not be said that
there was furnishing of inaccurate particulars. He decided the appeal in favour
of the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD

The Tribunal noted that in the quantum proceedings, the
Tribunal has vide order dated 22.3.2013 confirmed the action of the CIT(A) that
the loss under consideration is a speculation loss and cannot be set off
against income of a non-speculative nature. It observed that the question that
requires consideration and decision is whether the disallowance of the
assessee’s claim for set off of share trading loss against other income by
treating the same as speculation loss will attract penalty u/s. 271(1)(c). It
observed that the issue is covered in favour of the assessee by the following
judicial pronouncements –

(i)   CIT vs. SPK Steels (P.) Ltd. [2004]
270 ITR 156 (MP);

(ii)  CIT vs. Auric Investment & Securities
Ltd. [2009] 310 ITR 121 (Delhi)

(iii)  CIT vs. Bhartesh Jain [2010] 323 ITR
358 (Delhi).

The Tribunal noted that the Delhi High Court in the case of
Auric Investment & Securities Ltd. (supra) has held that penalty
imposed by the AO u/s. 271(1)(c) was not sustainable as mere treatment of
business loss as speculation loss by the AO did not automatically warrant
inference of concealment of income and there was nothing on record to show that
in furnishing return of income, the assessee has concealed its income or had
furnished any inaccurate particulars of income.

The Tribunal upheld the action of the CIT(A) in deleting the
penalty levied by the AO.

The Tribunal dismissed the appeal filed by the
revenue.

Section 5: Where foreign employer directly credited the salary, for services rendered outside India, into the NRE bank account of the non-resident seafarer in India, same cannot be brought to tax in India u/s. 5.

17.  [2017] 82
taxmann.com 209 (Kolkata – Trib.)

Shyamal Gopal Chattopadhyay 
vs. DDIT

A.Y.: 2011-12                                                                                  
Date of Order: 2nd June, 2017

FACTS 

The assessee, a Marine Engineer, engaged with Wallem Ship
Management Ltd., in capacity as a Master was paid USD 74271.36 on different
dates, convertible into Indian Rupees of Rs. 33,47,312. The amount was received
in USD outside India and on request of the assessee, was remitted to the
Savings Bank NRE Account maintained by the assessee with HSBC in India. The
above income was not offered for taxation on the ground that it has been
received from outside India in foreign currency.

In the course of assessment proceedings, the Assessing
Officer (AO) issued asked the assessee to show cause why remuneration received
in India should not be brought to tax in terms of section 5(2)(a) of the Act.

The AO rejected the assessee’s contention that the payments
were received outside India and at the request of the assessee, were remitted
to his savings bank NRE account maintained in India. The AO charged to tax the
sum of Rs. 33,47,112 as income chargeable to tax in India. For this
proposition, he placed reliance on the Third Member decision of Mumbai Tribunal
in the case of Capt. A. L. Fernandes vs. ITO [2002] 81 ITD 203, wherein
it has been held that salary received by the assessee in India is taxable u/s.
5(2)(a) of the Act.

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

Aggrieved, the assessee preferred an appeal to the Tribunal
where it contended that its case is squarely covered by the following decisions
–

(i) DIT
(Int Tax) vs. Prahlad Vijendra Rao [2011] 198 Taxman 551 (Kar.)

(ii) CIT
vs. Avtar Singh Wadhwan [2001] 247 ITR 260 (Bom.)

It was also submitted that the issue is now squarely covered
in favour of the assessee by CBDT Circular No. 13/2017 dated 11.4.2017 wherein
it has been categorically clarified by CBDT that the subject mentioned receipt
is not taxable as income u/s. 5(2)(a) of the Act.

HELD 

The Tribunal observed that the decision in the case of Tapas
Kumar Bandhopadhya vs. DDIT (Int. Tax) [2016] 159 ITD 309 (Kol.-Trib.),
relied upon by the ld. DR, was rendered by placing reliance on the Third Member
decision of Mumbai Tribunal in case of Capt. A. L. Fernandes (supra).
This decision clearly lays down that the receipt in India of salary for
services rendered on board a ship outside the territorial waters of any country
would be sufficient to give the country where it is received the right to tax
the said income on receipt basis. Such a provision is found in section 5(2)(a)
of the Act which was applied in the aforesaid decision. It is trite that
decision of a Third Member would be equivalent to a decision of a Special Bench
and thereby would become a binding precedent on the division bench. However, we
find that the impugned issue has been duly addressed by the CBDT Circular No.
13/2017 dated 11.4.2017 as rightly relied upon by the ld AR.

A perusal of the Circular referred to above, shows that
salary accrued to a non-resident seafarer for services rendered outside India
on a foreign going ship (with Indian flag or foreign flag) shall not be
included in the total income merely because the said salary has been credited
in the NRE account maintained with an Indian bank by the seafarer. Remittances
of salary into NRE Account maintained with an Indian Bank by a seafarer could
be of two types: (i) Employer directly crediting salary to the NRE Account
maintained with an Indian Bank by the seafarer; 
(ii) Employer directly crediting salary to the account maintained
outside India by the seafarer and the seafarer transferring such money to NRE
account maintained by him in India. The latter remittance would be outside the
purview of provisions of section 5(2)(a) of the Act, as what is remitted is not
“salary income” but a mere transfer of assessee’s fund from one bank
account to another which does not give rise to “Income”. It is not
clear as to whether the expression “merely because” used in the
Circular refers to the former type of remittance or the latter. To this extent,
the Circular is vague.

In the instant case, the employer has directly
credited the salary, for services rendered outside India, into the NRE bank
account of the seafarer in India. In our considered opinion, the aforesaid
Circular is vague inasmuch as it does not specify as to whether the Circular
covers either of the situations or both the situations contemplated above.
Hence, we deem it fit to give the benefit of doubt to the assessee by holding
that the Circular covers both the situations referred to above. The result of
such interpretation of the Circular would be that the provisions of sec.5(2)(a)
of the Act are rendered redundant. Be that as it may, it is well settled that
the Circulars issued by CBDT are binding on the revenue authorities. This
position has been confirmed by the Hon’ble Apex Court in the case of Commissioner
of Customs vs. Indian Oil Corpn. Ltd. [2004] 267 ITR 272, wherein their Lordships
examined the earlier decisions of the Apex Court with regard to binding nature
of the Circulars and laid down that when a Circular issued by the Board remains
in operation then the revenue is bound by it and cannot be allowed to plead
that it is not valid or that it is contrary to the terms of the statute.
Accordingly, the grounds raised by the assessee are allowed.

Sections 23, 198, 199 – Credit has to be granted even in respect of TDS on the part of annual value which has been claimed as unrealised rent.

16.  [2017] 82 taxmann.com 456 (Mumbai- Trib.)

Shree Ranji Realties (P.) Ltd. vs. ITO

A.Y.: 2010-11                                                                     
Date of Order: 9th June, 2017

FACTS 

The assessment of total income of the assessee company having
investment in shares, mutual funds and immovable properties, etc. was
completed u/s. 143(3) of the Act. 
Subsequent to completion of assessment, the Assessing Officer (AO)
noticed that the assessee had offered income under the head `Income from House
Property’ after deducting amount of unrealised rent under Rule 4 of the
Income-tax Rules, 1962 (“Rules”) and had claimed credit of TDS on both,
realized as well as unrealised rent.  The
AO, in an order passed u/s. 154 of the Act restricted the credit of TDS to the
extent of actual amount of rent received.

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

Aggrieved, the assessee preferred an appeal to the Tribunal
where relying on the decision of the Apex Court in the case of T. S.
Balaram, ITO vs. Volkart Bros. [1971] 82 ITR 50 (SC), it was contended that
the issue is highly debatable and cannot be rectified u/s. 154 of the Act. 

HELD  

The Tribunal observed that –

(i)   the facts are not in dispute that the
assessee has disclosed rental income but claimed deduction of unrealised rent
u/s. 23(1) read with rule 4 of the Rules;

(ii)  the Unrealised rent is duly offered to tax by
the assessee at the first instance, and then the same is claimed as deduction from
Rental Income u/s. 23(1) of the Act r.w. Rule 4 of the rules;

(iii)  the assessee duly fulfils all the conditions
as laid down in section 198 r.ws. 199 read with Rule 37A of the Act. 

(iv) TDS had been deducted and paid to the Central
Government by the deductee and Payment / Credit of Rent Income has been
included in the accounts of the assessee;

(v)  the deductor had duly filed requisite TDS
returns as per Rules and also issued TDS certificate to the assessee and the
same was furnished to the AO;

(vi) amount of TDS claimed, corresponding to claim
of unrealised rent, is duly offered to tax as income of the assessee, in view
of section 198 of the Act and also assessed by the AO. 

It held that the Unrealised rent is deduction which is
claimed u/s. 23(1) of the Act, read with Rule 4 of the Rules, from the total
rental income offered during the year. The unrealised rent is not an exempt
income. As the total rental income (including unrealised rent) is duly offered
to tax under the head ‘Income from House Property’, corresponding TDS credit
needs to be allowed. The Tribunal observed that there are similar instances,
where although the deduction is allowed with respect to total income offered
during the year, still the claim of TDS with respect to such deduction is duly
allowable under the Act i.e. TDS credit is allowed on deduction of Income u/s.
8OIA, 8OIB, 80IC of the Act, etc. and also TDS credit is allowed on bad
debts claimed u/s. 36(1)(vii) of the Act.  

Further, the issue is covered by the decision of co-ordinate
bench of this Tribunal in the case of Chander Shekhar Aggarwal (2006) 157 ITD
626 (Delhi).

The Tribunal held that the assessee’s action is in accordance
with provisions of section 199 of the Act and the assessee is eligible for seeking credit of the TDS amount. 

The Tribunal set aside the order of the authorities below and
decided the issue in favour of the assessee. It also held that this issue is
highly debatable and cannot be acted upon by the revenue.

The Tribunal allowed the appeal filed by the
assessee.

10. Capital Gain – purchase and sale of shares and mutual funds – Whether chargeable to tax under the head ‘capital gains’ or as business income

CIT, vs. Mohan Vallabhdas Bhatiya. [ Income tax Appeal no
1201 of 2014 dt : 24/01/2017 (Bombay High Court)].

[ACIT , vs. Mohan Vallabhdas Bhatiya., [dated 31/01/2014;
A Y: 2005-06. Mum.ITAT]

The assessee carries on business as a trader in shares. He
also has investments, consequently he holds two portfolios one an investment
portfolio showing the capital assets and the other is trading portfolio. The
assessee was consistently showing gains on account of his investment portfolio
and offering them to tax under the head ‘capital gains’. In fact, right from
the AY : 2003-04 till AY: 200-10, the Revenue has consistently accepted the claim
of the assessee with regard to the gain made on its investment portfolio is
taxable under the head Capital gain except for the subject AY, the Revenue is
seeking to take a different view. The grievance of the Revenue is that in the
subject Assessment Year, there were borrowed funds. Thus, the gains claimed to
have been made on investments are in fact trading gains.

So far as borrowed funds are concerned, the Tribunal records
the fact that a small amount of loan was taken from the relatives and it did
not bear any interest. Moreover, the use of borrowed funds is not necessarily
attributable to the investments made, as there is no such finding given by the
authorities below.

The Hon. High Court dismissed the Revenue’s appeal upholding
the stand of the Assessee that the income earned on account of purchase and
sale of shares and mutual funds were chargeable to tax under the head ‘capital
gains’ and not as business income.

The High Court observed that even before the Tribunal, the
Revenue did not point out any variation in the facts and circumstances of the
case for the subject Assessment Year from those of the earlier and subsequent
years on account of income earned on investment. Moreover, the loan which has
been taken from relatives were for a small amount and further the use of these
borrowed funds were not established to be for purchase of shares for investment
by the authorities.

Therefore, in view of the fact that the Revenue
has been consistently taking a view that the income earned on investments is
taxable under the head capital gains no difference in facts and /or in law has
been pointed out to take a different view for the subject AY. Moreover, both
the CIT(A) as well as the Tribunal have concurrently come to a finding of fact
that the income earned on the investment portfolio is chargeable under the head
capital gains and not under the head ‘profits from trading of shares’ which is
not shown to be perverse. In the above view, the revenue’s Appeal was
dismissed. 

9. TDS – Payments made for hiring of cranes – the crane owner responsible for day-to-day maintenance and operating costs – liable for TDS u/s. 194C of the Act – not u/s. 194I of the Act.

CIT (TDS) vs. M/s. UB Engineering Ltd. [ Income tax Appeal
no 1312 of 2014 With 1313 of 2014, dt : 23/01/2017 (Bombay High Court)].

[ITO , (TDS – 3), vs. M/s. UB Engineering Ltd. [ ITA NO.
2025 & 2026/PN/2012; Bench : A ; dated 30/09/2013 ; A Y:2007-08 &
2008-09. Pune. ITAT ]

The assessee is engaged in the business of erection and
commissioning of Industrial Plants and also in A.Ys. 2008-09 & 2009-10
undertakes maintenance of operational plants. The assessee undertakes such work
on contractual basis. Amongst the machinery deployed, it includes ‘cranes’
which are mobilised for movement of heavy machinery. Apart from the deployment
of machinery, assessee also allocated specific activities to labour
contractors. In the case of such activities, assessee incurred expenditure of
Rs.1,21,14,506/- for mobilisation of cranes. The assessee company deducted tax
at source on such payments treating the same to be contractual payments and
applying the provisions of section 194C of the Act. Accordingly, the assessee
deducted tax at source u/s. 194C @ 1% whereas as per the AO the tax was liable
to be deducted in terms of the provisions of section 194I of the Act @ 10% plus
surcharge, treating the payments as rental payments. For the said reason, the
AO treated the assessee as an assessee in default in terms of section 201(1) of
the Act for short deduction of tax to the extent of Rs.12,39,043/- and also
held the assessee liable for the payment of interest on such short deduction in
terms of section 201(1A) amounting to Rs.4,46,055/-.

The CIT(A) considered the facts of the case and concluded
that assessee had correctly applied the provisions of section 194C of the Act
while deducting the tax at source on the impugned payments. The CIT(A) has
noticed that assessee hired services of cranes for which entire maintenance,
repairs, drivers’ salaries etc. was borne by the supplier. The CIT(A) relied
upon the decision of the Pune Tribunal in the case of Wings Travels, ITA No.
1136/PN/2009 and also the judgement of the Hon’ble Gujarat High Court in the
case of Swayam Shipping Services (P) Ltd., 339 ITR 647 (Gujarat) and concluded
that the AO was not justified in invoking the provisions of section 194I of the
Act in respect of the ‘crane hire charges’.

The Tribunal observed that factually, it is not in dispute
that the crane owner not only provides the services of a crane but is also
responsible to provide the operator and incur maintenance & repairs costs, etc.
The Hon’ble Gujarat High Court in the case of Swayam Shipping Services (P) Ltd.
(supra) held that the payments for hiring cranes and Trailers were
liable for deduction of tax at source in terms of section 194C of the Act and
not in terms of section 194I of the Act. The Tribunal also relied on decision,
of the Pune Bench decision in the case of Wings Travels (ITA
No.1136/PN/2009, dated 30th August, 2011 and Bharat Forge Ltd.
vs. Addl. CIT vide ITA No.1357/PN/2010, wherein a similar view to the
effect that in cases where the crane owner provides the operator as also is
responsible for day-to-day maintenance and operating costs, the payments made
for hiring of cranes would be liable for deduction of tax at source u/s. 194C
of the Act and not u/s. 194I of the Act, as contended by the Revenue. Accordingly,
the order of the CIT(A) was affirmed.

Being aggrieved, the Revenue carried the issue in appeal to
the High Court. The High Court observed that the impugned order dismissed the
Revenue’s  appeal before it by inter
alia placing reliance upon the decision of the  coordinate 
bench in the case of  Wings
Travels (Supra). In the affidavit dated 13th January, 2017, Mr.
Rajesh Gawali,  Deputy Commissioner of
Income Tax (TDS) stated that the 
decision of the coordinate  bench
of the Tribunal in  Wings Travels  (supra) has been accepted by the Income
Tax Department in view of an  earlier
view taken in the case of  Accenture
Services (P) Ltd. (ITAT  No.5920,
5921 and 5922/Mum/2009).

In the above view, Revenue Appeal was dismissed.

8. Advance received for exports – shown in the accounts as a liability for a period of more than 10 years – no addition of the amount shown as a liability u/s. 41(1)

CIT vs. M/s. Aasia Business Ventures Pvt.Ltd. [ Income tax
Appeal no 1010 of 2014, dt : 24/01/2017 (Bombay High Court)].

[M/s. Aasia Business Ventures Pvt. Ltd. vs. ITO. [ITA
No.430/MUM/2011 ; Bench : A ; date:08/11/2013 ; A Y: 2007- 2008. MUM. ITAT ]

The assessee is engaged in giving advisory services and
traded in shares. Earlier, the assessee was a trader in SKO Superior Kerosene
Oil. It imported SKO and was selling the same in domestic market. During the
course of assessment, the AO noticed that an amount of Rs.3.04 crore was
reflected under the head “current liabilities” (being advance against exports)
in its balance sheet for the year ending 31st March, 2007. On
inquiry, the AO found that the advance had been received as far back as on 24th
January, 1997 from one Amas Mauritius Ltd. in order to export goods.
However, the exports could not be made till date and the balance is still due
and payable to  Amas Mauritius Ltd. in
the books of assessee. The AO in the above view held that the transaction of
advance from Amas Mauritius Ltd. was not a genuine transaction and it was not
to be repaid. Therefore, an addition of Rs.3.04 crore was made on application
of section 41(1) of the Act as cessation of liability.

The CIT(A) upheld the order of AO. Being aggrieved by the
order of the CIT(A), the assessee filed an appeal to the Tribunal. The assessee
pointed out that it had approached the Reserve Bank of India for permission to
return the amount of Rs.3.04 crore shown as an advance against export to Amas
Mauritius Ltd. However, the approval of RBI had not yet been received. The
Tribunal allowed the assessee’s appeal by following the decisions of this Court
in Commissioner of Income Tax vs. Chase Bright Steel Ltd. 177 ITR 128 to
hold that where an amount is shown as an advance in the balance sheet by the
assessee, it amounts to acknowledgment of liability and it does not cease to
exist. So far as the genuineness of the transaction as well as creditworthiness
of the creditor is concerned, the impugned order holds that the same was appearing
in the books of account for all the earlier assessment years and the same was
accepted by the Revenue as genuine. Further, the ITAT placed reliance upon a
decision of its Co-ordinate bench in Jayram Holdings Pvt. Ltd. (ITA
No.6914/Mum/2010) rendered on 4th July, 2012 wherein in almost identical fact
situation, advance received for exports was also shown in the accounts as a
liability for a period of more than 10 years, the Tribunal took a view that
there can be no addition of the amount shown as a liability either u/s. 41(1)
and/or u/s. 28(iv) of the Act. This is so as long as the liability exists.

Before the High Court, the grievance of the Revenue was that
the above transaction is not genuine. This particularly in view of the fact
that Amas Mauritius Ltd. is a 40% shareholder in the assessee company. Thus
related.

Therefore, the impugned order of the Tribunal requires
consideration by this Court to determine its correctness.

The High Court observed that the issue as arising herein was
also a subject matter of consideration before the Tribunal in the case of M/s.
Jayram Holdings Pvt. Ltd. (supra) and it is relied upon in the impugned
order to conclude that section 41(1) of the Act cannot be applied in the
present facts. The Court noticed that in the above case also, the assessee
therein had received from its sister concern an advance for export and shown in
its books over a period of 10 years as a liability.

However, the Tribunal held that section 41(1) of the Act
cannot be applied so long as the liability is acknowledged. The Court held that
the liability does not cease, so long as the party acknowledges its liability.
The order of the Tribunal in Jayram Holdings Pvt. Ltd. (supra) has been
accepted by the revenue. No distinguishing features in the present case have
been indicated during the course of the hearing.

Moreover, it was stated that on obtaining the
permission from Reserve Bank of India on 21st April, 2014, the
amounts have been repatriated to  Amas
Mauritius Ltd. on 16th May, 2014. Thereafter, this amount is not now
shown as a liability. In the above view, the appeal was dismissed.

41. Revision- Section 264 – A. Y. 2013-14- Power of Commissioner – Intimation u/s. 143(1) whether can be considered in revision – Assessee filing revised return and seeking interference by Commissioner – Commissioner to consider revision application

Agarwal Yuva Mandal (Kerala) vs. UOI; 395 ITR 502 (Ker):

For the A. Y. 2013-14, the assessee society filed return of
income claiming certain deductions. The assessee received an intimation u/s.
143(1) disallowing certain expenses on the ground that it was not registered
u/s. 12A of the Act, 1961. The assessee was assessed to a liability of Rs.
2,85,190-. The assessee later revised its return, but no action was taken by
the Department based on the revised return. The assessee thereafter received a
reminder for payment of the outstanding amount of Rs. 2,85,190. The assessee
sent a reply requesting consideration of its revised return. Since there was no
response, the assessee filed a revision petition u/s. 264 of the Act. The
Principal Commissioner declined to exercise the revisional authority holding
that the intimation u/s. 143(1) was not an order of assessment for the purpose
of section 264, whereas it was deemed to be a notice of demand u/s. 156 of the
Act. The assessee filed a writ petition against the order of the Principal
Commissioner.

The Kerala High Court allowed the assessee’s writ petition
and held as under:

“i)  Section 143 had undergone certain changes
w.e.f. 01/06/1999. The statute uses the word intimation and not order. It was
in the light of the change in the statutory provision that one had to consider
the scope and effect of the revisional powers u/s. 264.

ii)  Though not as a challenge to section 143(1)
notice, when the assessee filed a revised return and sought for interference by
the Commissioner, necessarily a claim had to be considered in accordance with
law. The Commissioner would be justified in considering the claim to deduction
by the assessee in accordance with law u/s. 264 of the Act. The Commissioner is
directed to consider the matter.”

40. TDS – Rent – Section 194-I – A. Y. 2010-11 – Meaning of “rent”- Passenger service fees collected by airline operators – Use of land and building incidental – Tax not deductible at source on such fees

CIT(TDS) vs. Jet Airways (India) Ltd.; 395 ITR 230 (Bom):

The assessee was engaged in the business of transportation by
aircraft and for that purpose used and occupied airports run by airport
operators. In the course of its business the assessee collected on behalf of
the airport operators, a passenger service fees and handed it over to the
airport operators.

However, as no tax was deducted at source while handing over
the passenger service fees to the airport operator, a notice u/s.
201(1)(1a)  of the Act, 1961 was issued
calling for the assessee’s explanation. The basis of the notice was that the
passenger service fees paid over to the airport operator was “rent” falling
within the scope of section 194-I of the Act. The assessee contended that the
passenger service fees collected by it from its passengers and handed over to
the airport operator is not in the nature of rent. That it consisted of two
components, i.e., security component and facilitation component.

However, the Assistant Commissioner (TDS) did not accept the
assessee’s submission and held the assessee liable to deduct and pay the amount
of tax at source and the interest thereon u/s. 201(1) and (1A). The Tribunal
held that the payment could not be considered to be rent and allowed the
assessee’s claim.

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

“i)  The
assessee collected passenger service fees only from its embarking passengers
for and on behalf of the airport operator. The payment of passenger service
fees was for use of secured building and furniture. Therefore, the use of land
or building in this case was only incidental. As the substance of the passenger
service fees was not for use of land or building, but for providing security
service and facilities to the embarking passengers, the payment could not be
considered to be rent within the meaning of section 194-I.

ii)  Tax
was not deductible at source on the payment. Proposed question of law does not
give rise to any substantial question of law and thus not entertained.”

31. Section 2(47) – Capital gain – Computation – Transfer – A. Y. 1995-96 – Transfer of land to developer – 44% of land transferred in exchange for 56% of built-up area – Consideration for transfer of land was cost of construction of 56% of built up area – Cost of acquisition of land was its market value on 01/04/1981 – Land and development charges deductible from sale consideration

CIT vs. Vasavi Pratap Chand; 398 ITR 316 (Del):

 

A piece of land
was owned by co-owners. They entered into an agreement with A on 02/05/1984. In
terms of the agreement, the building on the land was to be demolished and an
apartment complex was to be constructed thereon. It was agreed that the
co-owners would get built up area of 89,136 sq. ft. which constituted 56% of
the total built up area. 44% of the built-up area would belong to A. The entire
cost of construction was to be met by A. The co-owners entered into agreements
with various flat buyers and ultimately sold constructed flats during the
assessment years 1993-94 to 1995-96. In the A. Y. 1995-96, the three co-owners
sold 18,636 sq. ft. of built up area for a total consideration of Rs.
4,72,98,075. Each co-owner disclosed a loss of Rs. 31,30,663 under the head
“capital gains” in his individual return. The Assessing Officer held that the
cost of acquisition of property (one-third share) would be only Rs. 2,03,334.
In other words, the Assessing Officer adopted the computation of cost of
acquisition in the manner indicated in section 49(1)(i) of the Wealth-tax Act,
1957. The Tribunal held that the figure indicated in the wealth-tax return
filed by the assessee could not be taken to be the basis for determining
capital gains. It held that the agreement of sale clearly showed that 56% of
the built-up area including the land would be retained by the assessee and 44%
by the builder. There was simultaneous transfer of possession of 44% of land by
the assessee to the builders and possession of 56% of the built-up area by the
builder to the assesses in the financial year 1991-92 in terms of section 2(47)
of the Income-tax Act, 1961 read with section 53A of the Transfer of Property
Act. The Tribunal further held that the cost of acquisition of land had to be
its market value as on 01/04/1981. It did not reduce the land and development
charges from the sale consideration.

 

On appeal, the Delhi High Court held as under:

 

“i)   There was transfer of
title to the land by the assessee in favour of A. What was transferred under
the collaboration agreement was only 44% of the land owned by them in exchange
for 56% of the built-up area and not the entire land. Further, the assesee not
only transferred the flats to the buyers but the proportionate right in the
appurtenant land as well. There was transfer of possession of 44% of the land
by the assesee to the builder and possession of 56% of the built-up area by the
builder to the assessee in terms of section 2(47) of the 1961 Act read with
section 53A of the Transfer of Property Act.

 

ii)   The consideration for the
transfer of 44% land was the cost of construction of the 56% built-up area. The
land and development charges had to be reduced from the sale consideration.

 

iii)   The value declared in
the tax return filed by the assessee under the Wealth-tax Act could not be
taken to be the cost of acquisition in the hands of the assessee. The cost of
acquisition of land had to be the market value of land as on 01/04/1981.”

30. Section 153 – Assessment – Limitation – Computation of period – Exclusion of time during which assessment proceedings stayed by Court – Expl. 1 – A. Y. 2006-07 – Effect of section 153 – Period between vacation of stay and receipt of order by Income Tax Department not excluded – Vacation of stay on 09/11/2016 – Order of reassessment passed on 30/01/2017 – Barred by limitation

Saheb Ram Omprakash Marketing P. Ltd. vs.
CIT; 398 ITR 292 (Del):

 

In the case of the assessee, a notice u/s.
148 of the Act, was issued on 27/03/2012 for reopening the assessment for the
A. Y. 2006-07. The assessee filed a writ petition and challenged the validity
of the notice and the reassessment proceedings. The High Court granted stay of
the reassessment proceedings by an order dated 18/03/2013. The stay was vacated
by an order dated 09/11/2016. According to the assessee, on the date of the
stay order being vacated i.e., on 09/11/2016, there were only 13 days left for
passing the reassessment order where period is extended to 60 days by
Explanation 1 to section 153. Therefore, the assessee claimed that a valid reassessment
order could have been passed only up to 08/01/2017, i.e. within 60 days from
09/11/2016; the date on which the stay was vacated by the Court. The Department
rejected the assessee’s claim. It was the claim of the Department that the said
order of the Court dated 09/11/20016 was received by the Department on
02/12/2016 and therefore, the Department would have 60 days from 02/12/2016 to
pass the order of reassessment. Accordingly, the Assessing Officer passed the
reassessment order on 30/01/2017. 

 

The assessee filed a writ petition and
challenged the validity of the reassessment order on the ground of limitation.
The Delhi High Court allowed the writ petition and held as under:

 

“i)   In terms of explanation 1
to section 153 of the Act, in computing the period of limitation “the period
during which the assessment proceedings are stayed by an order or injunction by
the court” shall be excluded. In terms of the first proviso to Explanation 1,
where, after the vacation of stay, the period available to the Assessing
officer to complete the reassessment proceedings is less than 60 days, then
such remaining period shall be extended to 60 days and the period of limitation
shall be deemed to be extended accordingly.

 

ii)   Clause (ii) of
Explanation 1 only excludes from the computation of limitation, “the period
during which the assessment proceeding is stayed by an order or an injunction
of any court”. It does not exclude the period between the date of the order of
vacation of stay by court and the date of receipt of such order by the
Department.

 

iii)   Circular No. 621 dated
19/12/1991, issued by the CBDT, while explaining the reason for introduction of
the proviso to Explanation 1, acknowledged that the time remaining after
vacation of stay in terms of section 153(2) of the Act may not be sufficient to
complete the reassessment proceedings which is why the language used in the
first proviso is that the period “shall be extended to 60 days” for passing the
assessment order in terms of section 153(2) of the Act, if the period remaining
within limitation after the excluded period has elapsed, is less than 60 days.

 

iv)  The Revenue could not take
advantage of the fact that it received the copy of the order dated 09/11/2016
of the Court only on 02/12/2016 to contend that the assessment order having
been passed on 30/01/2017 within 60 days of the date of receipt of the order of
the High Court, was not issued (passed) beyond the period stipulated u/s.
153(2) of the Act read with the proviso to Explanation 1 thereof.

 

v)   Even otherwise, the
assertion that the Revenue was aware of the order only on 02/12/2016 was not
correct. The Revenue had been unable to dispute the fact that, on 30/11/2016, a
notice was issued by the Assessing Officer u/s. 142(1) of the Act and this was
pursuant to the order passed by this Court on 09/11/2016. Clearly, therefore,
on the date such notice was issued, the Assessing Officer was aware of the
order dated 09/11/2016 of the Court. Also, the order dated 09/11/2016 was
passed in the presence of counsel of the Revenue and, therefore, the Revenue
clearly was aware of the order on that date itself.

 

vi)  The order dated 30/01/2017
was time-barred.”

29. Section 254 –Appellate Tribunal – Power and duties as final fact finding authority –A. Y. 2009-10 and 2010-11 – Must reappraise and reappreciate all factual materials – Failure by Tribunal to render complete decision in terms of powers conferred on it – Matter remanded to Tribunal

Thyrocare Technologies Ltd. vs. ITO(TDS);
398 ITR 443 (Bom):

 

The assessee
is a sample testing laboratory. The Assessing Officer was of the view that the
sample collectors were not independent persons but were agents of the assessee
which was the principal and that it was an arrangement with the sample
collectors to avoid the obligation to deduct tax at source. The assessee
submitted before the Commissioner (Appeals) that the samples were not collected
directly by it from the patients, but by the sample collectors who visited the
patients and thereafter, brought the samples to it for testing. It was also
submitted that there was no privity of contract between it and the patients and
that the sample collectors did not collect the samples exclusively for it, but
were free to send the samples collected by them for testing to any other
laboratories and therefore it was a principal to principal relationship. The
order of the Assessing Officer was set aside by the Commissioner (Appeals). The
Tribunal held that the payments made by the assessee to the sample collectors
were in the nature of commission or brokerage which was evident from the
affidavit-cum-undertaking executed by the sample collectors and their
application forms for appointment as sample collectors and also from the
statements recorded during the survey u/s. 133A of the Income-tax Act, 1961
(Hereinafter  for the sake of
brevity  referred to as the “Act”).
It also held that the assessee did not satisfactorily explain the queries
raised. It further held that the Commissioner (Appeals) erred in not correctly
appreciating the nature of the payments made to the sample collectors, that
there was a principal and agent relationship between the assessee and the
sample collectors and deleting the interest levied u/s. 201(1A).

 

In appeal before the High Court, the
assessee raised the issue whether the findings of the Tribunal that the
assessee had not “satisfactorily explained the queries”, “not produced any
documents to substantiate the contention” and “not discharged the burden”, were
perverse, contrary to the facts on record and that it never indicated during
the hearing that it was not satisfied with the evidence. The Bombay High Court
remanded the matter back to the Tribunal and held as under:

“i)   The order of the Tribunal
was vitiated not only by non-application of mind but also by misdirection in
law. The Tribunal as the last fact finding authority, failed to make any
reference to the observations, findings and conclusions in the order of the
Assessing Officer and that of the first appellate authority.

 

ii)   It termed certain facts
as undisputed, whereas, they were very much disputed such as the non-admission
by the assessee that the service providers were its agents or that they were
allowed to collect the necessary charges from its clients for collecting the
sample and delivering the reports. There was no reference to any communication
or any document which indicated that the Tribunal’s queries had not been
satisfactorily answered by the assessee.

 

iii)   The
Tribunal should, independent of the statements recorded during the survey u/s.
133A, have referred to such of the materials on record which disclose that the
assessee had entered into such arrangements so as to have avoided the
obligation to deduct tax at source. If the arrangements were sham, bogus or
dubious, then such a finding should have been rendered.

 

iv)  The Tribunal was obliged,
in terms of the statutory powers conferred on it, to examine the matter,
reappraise and reappreciate all the factual materials satisfactorily. It had
not rendered a complete decision and its order was to be set aside.

 

v)   We direct the Tribunal to
hear the appeals afresh on the merits and in accordance with law after giving
complete opportunity to both sides to place their versions and arguments. The
Tribunal shall frame proper points for its determination and consideration and
render specific findings on each of them.”

28 Sections 253 and 254 –Appeal to Appellate Tribunal – Condonation of delay – A. Ys. 1994-95 and 1996-97 – Delay of 2984 days in filing appeal – Request for condonation of delay not to be refused unless delay is shown to be deliberate and intentional – Orders of Tribunal rejecting condonation of delay based on irrelevant factors – erroneous – delay condoned – Appeals filed by assessee to be restored for adjudication by Tribunal

Vijay Vishin Meghani vs. Dy. CIT; 398 ITR
250 (Bom):

 

For the A. Ys. 1994-95 and 1996-97, the
assessee filed appeals before the Appellate Tribunal against the orders of the
Commissioner (Appeals) with a delay of 2,984 days. The assessee made applications
for condonation of delay. The assessee submitted an affidavit stating that he
followed the advice given by his chartered accountant not to file further
appeals before the Tribunal for the A. Ys. 1994-95 and 1996-97, as the issue
involved was    identical to the appeal
filed before the Tribunal for the A. Y. 1993-94, which was then pending before
the Tribunal, to avoid multiplicity of litigation and that after the
adjudication of appeal for the A. Y. 1993-94 by the Tribunal, he could move a
rectification application before the Assessing Officer to bring the assessment
order in conformity with the decision of the Tribunal. In support of the
averments made in the affidavit, the assessee also filed an affidavit by one of
the partners of the firm of chartered accountants.

 

The Tribunal dismissed the appeal in limine
and observed that a chartered accountant could not have given an absurd advice.
The affidavit filed by the firm of chartered accountants was rejected. The
affidavit filed by the assessee was also rejected on the ground that it gained
strength only from the affidavit filed by the firm of chartered accountants.
The Tribunal held that the assessee had failed to show the reasons for the
entire period of delay, i.e., no reason was given for the delay that occurred
between periods and therefore, the delay in filing the two appeals could not be
condoned. In a miscellaneous application u/s. 254(2).

 

The Bombay High Court allowed the appeals
filed by the assessee against the said orders of the Tribunal dismissing the
appeals as barred by limitation and held as under:

 

“i)   None should be deprived
of an adjudication on the merits unless the Court or the Tribunal or appellate
authority found that the litigant had deliberately and intentionally delayed filing
of the appeal, that he was careless, negligent and his conduct lacked
bonafides. Those were the relevant factors.

 

ii)   The Tribunal’s order did
not meet the requirement set out in law. It had misdirected itself and had
taken into account factors, tests and considerations which had no nexus to the
issues at hand. The Tribunal, therefore, had erred in law and on the facts in
refusing to condone the delay. The explanation placed on affidavit was not
contested nor could it have been concluded that the assessee was at fault, that
he had intentionally and deliberately delayed the matter and had no bona
fide or reasonable explanation for the delay in filing the proceedings. The
position was quite otherwise.

 

iii)   In the light of the
above discussion, we allow both the appeals. We condone the delay of 2,984 days
in filing the appeals but on the condition of payment of costs, quantified
totally at Rs. 50,000. Meaning thereby,  
Rs. 25,000 plus 25,000 in both appeals. The cost to be paid in one set
to the respondents within a period of eight weeks from today. On proof of
payment of costs, the Tribunal shall restore the appeals of the assessee to its
file for adjudication and disposal on the merits.”

 

Loan Or Advance To Specified ‘Concern’ By Closely Held Company Which Is Deemed As Dividend U/S. 2 (22) (E) – Whether Can Be Assessed In The Hands Of The ‘Concern’? – Part II

(Continued
from the last issue)

 

2.6     As stated in para 1.4
of Part I of this write-up, under the New Provisions, loan given to two
categories of persons are covered u/s. 2(22) (e) viz. i) certain shareholders
(first limb of the provisions) and ii) the ‘concern’ in which such shareholder
has substantial interest (second limb of the provisions). As mentioned in para
1.5 of Part I of this write-up, in cases where the requisite conditions of the
second limb of the New Provisions are satisfied, the issue is under debate
that, in such cases where the loan is given to a ‘concern’, whether the amount
of loan is taxable as deemed dividend in the hands of the shareholder or the
‘concern’ which has received the amount of the loan. As also mentioned in that
para, the judicial precedents [including the Special Bench in Bhaumik Colour’s
case reported in (2009) 18 DTR 451] largely, directly or indirectly, showed
that, in such cases, deemed dividend should be taxed in the hands of the
shareholder and on the other hand, in CBDT circular [No. 495 dtd. 22/9/1987], a
view is taken that the same should be taxed in the hands of the ‘concern’. As
further mentioned in para 2.5       read
with para 2.4 of Part I of this write-up, the Delhi High Court decided this
issue in favour of the assessee company on the short ground that the deemed
dividend can not be assessed in the hands of the assessee company which was not
a shareholder of the lending company [i.e. BPOM] as dividend can be assessed
only in the hands of the shareholder of the lending company and can not be
assessed in the hands of a non-shareholder. For this, the Delhi High Court
merely relied on its judgement in the case of Ankitech P. Ltd. [ITA No
462/2009] and passed a short order to this effect (Ref: para 2.4 of Part I of this
write-up). Therefore, it is necessary to analyse, that judgement of the Delhi
High Court also, more so as that has been ultimately approved by the Apex
Court.

 

         CIT vs.
Ankitech[P]Ltd[(2012)40ITR14(Del)-ITA No. 462/2009] & connected Appeals

 

3.1     In the above, the High Court dealt with and simultaneously
disposed of number of appeals relating to different assessees by a common order
by taking the facts of the case of Ankitech P. Ltd. [ITAT No.462/2009] as the
base.

 

3.2     In the above case, the brief facts were that the assessee company
had received advances of Rs. 6,32,72,265 by way of a book entry from M/s
Jackson Generator (P) Ltd. [JGPL]. There was sufficient accumulated profit with
JGPL to cover this amount. So far as the shareholding pattern of the two
companies is concerned, the undisputed facts revealed that the same
shareholders (Guptas) were holding (it seems beneficially) more than 10% of
equity shares carrying voting power in JGPL and the same shareholders were also
holding (it seems beneficially) equity shares carrying voting power in the
assessee company much more than 20% and accordingly, were having substantial
interest therein. As such, the facts would reveal that the conditions of the
second limb of the New Provisions were satisfied. It is also worth noting that
the assessee company itself was neither a registered shareholder nor the
beneficial shareholder in JGPL(i.e. lending company). On these facts, the
Assessing Officer (AO), while completing the assessment for the Asst. Year. 2003-04,
assessed the above referred amount of advances as deemed dividend in the hands
of the assessing company. While doing so, the AO rejected the specific
contention raised by the assessee company that since the assessee company is
not a shareholder in JGPL, the provisions of section 2(22) (e) will not be
attracted as one of the essential conditions for taxing deemed dividend u/s.
2(22) (e) was that such income is to be assessed in the hands of the
shareholder. The view of AO was confirmed by the Commissioner of Income-tax
(Appeals). However, the Tribunal deleted the addition by taking a view that
though the amount received by the assessing company by way of book entry is
deemed dividend u/s. 2(22)(e), the same cannot be assessed in the hands of the
assessee company as it was not a shareholder in JGPL and a dividend cannot be
paid to a non-shareholder.

 

        The Tribunal also took the view that it would
have to be taxed, if at all, in the hands of the shareholders who have
substantial interest in the assessee company and also holding not less than 10%
shares carrying voting power in the lending company. For this, it appears that
the Tribunal had relied on the Special Bench decision in Bhaumik Colour’s case
(supra).

 

3.3     When the issue came-up
before the High Court at the instance of the Revenue with four questions
raised, the Court, in this context, felt that real question is one and stated
as under [pg 16]:

 

          “Though as many as
four questions are framed, it is with singular viz., whether the assessee who
was not the shareholders of M/S. Jackson Generators (P) Ltd. (JGPL) could be
treated as covered by the definition of “dividend“ as contained in section
2(22)(e) of the Income-tax Act (hereinafter referred to as “the Act”).”

  

 3.3.1 To decide the issue,
the Court referred to the relevant provisions of section  2(22) (e) along with the share holding
pattern of both the companies and stated that the payment of advance given by
JGPL to the assessee company (‘concern’) would be treated as deemed dividend u/s.
2(22)(e). With these undisputed facts, the Court, in the context of the issue
on hand, stated as under [pg 19]:

 

          “…….. The dispute
which has arisen, in the scenario is to whether this is to be treated as
dividend income in the form of dividend advance of the shareholders or advance
of the said concern,(i.e. the assessees herein). Whereas the Department has
taken it as income at the hands of the assessee, as per the assessee it cannot
be treated as dividend income to their account. The Tribunal has accepted this
plea of the assessee holding that such dividend income is to be taxed at the
hands of the shareholders.” 

 

3.3.2 The Court then referred to the historical background of the
provisions from 1922 Act to the New Provisions narrated by the Special Bench in
Bhaumik Colour’s case (supra) and observed as under [pg 21]:

 

          “It is clear from the
above that under the 1922 Act, two categories of payments were considered as
dividend viz., (a) any payment by way of advance or loan to a shareholder was
considered as dividend paid to shareholder; or (b) any payment by any such
company on behalf of or for the individual benefit of a shareholder was
considered as dividend. In the 1961 Act, the very same two categories of
payments were considered as dividend but an additional condition that payment
should be to a shareholder being a person who is the beneficial owner of shares
and who has a substantial interest in the company, viz., shareholding which
carries not less than twenty per cent. of voting power, was introduced, By the
1987 amendment with effect from April 1, 1988, the condition that payment
should be to a shareholder who is the beneficial owner of shares (not being
shares entitled to a fixed rate of dividend whether with or without a right to
participate in profits) holding not less than ten per cent. of the voting power
was substituted. Thus, the percentage of voting power was reduced from twenty
per cent. to ten per cent. By the very same amendment, a new category of
payment was also considered as dividend, viz., payment to any concern in which
such shareholder is a member or a partner and in which he has a substantial interest.
Substantial interest has been defined to mean holding shares carrying 20 per
cent. of voting power.”

 

3.3.3  After referring to the
above referred historical background, the Court noted that the controversy in
the present case refers to the second limb of the New Provisions. The Court
then stated that a Special Bench in Bhaumik Colour’s case has analysed the New
provisions and spelt out the conditions [Ref. para 1.4.1. of Part I of this
write-up] which are required to be satisfied for attracting this category of
the New Provisions. These include the view that the expression ‘such
shareholder’ found in the second limb of the New Provisions refers to
registered shareholder [for this, basically reliance was placed on Apex Court’s
judgement in the case of C. P. Sarathy Mudaliar (supra)] and the
beneficial holder of the shareholding carrying 10% voting power. In this
context, the Court also referred to the relevant part of the order of the
Special Bench and noted that the Special Bench held that the intention behind
this provision is to tax dividend in the hands of the shareholders. The Court
then also referred to the judgements of the Bombay High Court in the case of
Universal Medicare (P) Ltd [(2010)324 ITR 263] and Rajasthan High Court in the
case of Hotel Hilltop [(2009) 313 ITR 116] in which also similar view was
taken.

 

 3.4 The Court then noted that
despite the above referred judgements of the High Courts of Bombay and
Rajasthan, the learned counsel appearing on behalf of the Revenue (Ms. Bansal)
made a frantic afford to persuade the Court to take a contrary view. Her
endeavour was to demonstrate on first principle that by this deeming provision
fictionally the ‘concern’ which receives the amount would be treated as
shareholder for the purpose of this provision and the same should be treated as
dividend in the hands of the recipient (i.e. ‘concern’). In this regard, her
contention was that under the New provisions, deeming fiction is specifically
created to tax the amount of such loan given to a ‘concern’ as deemed dividend
and when this legal fiction is created, it was to be taken to its logical
conclusion and as such, the ‘concern’ which had received the amount should be
taxed. For this, she placed reliance on certain judgements including of the Apex
Court dealing with the effects of creation of a legal fiction. According to
her, this is the effect of the second limb of the New Provisions read with Explanation 3. She also relied on the
CBDT Circular No. 495 dtd 22/9/1987 in which such a view is taken (Ref. para
2.6 above)

 

3.4.1  The Court then dealt
with the contentions of the learned counsel for the Revenue and pointed out
that we have already referred to the relevant provisions of section 2(22)(e)
and requisite conditions for invoking the same as well as the historical
background of section 2(22)(e). Considering the intention behind enacting these
provisions, the Court stated as under [pg 35]:

 

          “…… The intention behind the provisions of section 2(22)(e)
of the Act is to tax dividend in the hands of shareholders. The deeming
provisions as it applies to the case of loans or advances by a company to a
concern in which its shareholder has substantial interest, is based on the
presumption that the loans or advances would ultimately be made available to
the shareholders of the company giving the loan or advance. “

 

3.4.2 The Court then proceeded
further to deal with the contention with regard to creation of deeming fiction
and its effects and stated as under [pg 35]:

 

          “Further, it is an
admitted case that under the normal circumstances, such a loan or advance given
to the shareholders or to a concern, would not qualify as dividend. It has been
made so by a legal fiction created u/s. 2(22)(e) of the Act. We have to keep in
mind that this legal provision relates to “dividend”. Thus, by a deeming
provision, it is the definition of dividend which is enlarged. Legal fiction
does not extend to “shareholder”. When we keep in mind this aspect, the
conclusion would be obvious, viz., loan or advance given under the conditions
specified u/s. 2(22) (e) of the Act would also be treated as dividend. The
fiction has to stop here and is not to be extended further for broadening the
concept of shareholders by way of legal fiction. It is common case that any
company is supposed to distribute the profits in the form of dividend to its
shareholders/members and such dividend cannot be given to non members. The
second category specified u/s. 2(22) (e) of the Act, viz., a concern (like the
assessee herein), which is given the loan or advance is admittedly not a
shareholder/member of the payer company. Therefore, under no circumstances, it
could be treated as shareholder/member receiving divided. If the intention of
the Legislature was to tax such loan or advance as deemed dividend at the hands
of “deeming shareholder”, then the Legislature would have inserted a deeming
provision in respect of shareholder as well, that has not happened. Most of the
arguments of the learned counsel for the Revenue would stand answered, once we
look into the matter from this perspective.”

 

3.4.3 Finally, rejecting the argument with regard to creation of
deeming fiction and its logical effect as contented by the learned counsel for
the Revenue, the Court stated as under [pg 36]:

 

          “No doubt, the legal
fiction/deemed provision created by the Legislature has to be taken to “logical
conclusion” as held in Andaleeb Sehgal [2010] 173 DLT 296 (Delhi) [FB].
The revenue wants the deeming provision to be extended which is illogical and
the attempt is to create a real legal fiction, which is not created by the
Legislature. We say at the cost of repetition that the definition of
shareholder is not enlarged by any fiction.”

 

3.4.4 With regard to the view
expressed in the CBDT Circular, the Court stated that it is inclined to agree
with the observations of the Special Bench in Bhaumik Colour’s case (supra)
that the same is not binding on the courts. In this regard, the Court further
observed as under [pg 36]:

 

          “…..Once it is found that such loan or advance cannot be
treated as deemed dividend at the hands of such a concern which is not a
shareholder, and that, according to us, is the correct legal position, such a
circular would be of no avail. ”

 

3.5    Having taken a view
that such deemed dividend cannot be assessed in the hands of the assessee
company which is not the shareholder of JGPL, the Court further concluded as
under [pg 36]:

 

          “Before we part with,
some comments are to be necessarily made by us. As pointed out above, it is not
in dispute that the conditions stipulated in section 2(22)(e) of the Act
treating the loan and advance as deemed dividend are established in these cases
Therefore, it would always be open to the Revenue to take corrective measure by
treating this dividend income at the hands of the shareholders and tax them
accordingly. As otherwise, it would amount to escapement of income at the hands
of those shareholders.”

 

3.6         In the above
judgement, the Court took the view that once the requisite conditions of the
second limb of the New Provisions are satisfied, the amount of loan can be
assessed as deemed dividend in the hands of the shareholder only and not in the
hands of a ‘concern’ (non-shareholder). On this basis, the Court also
simultaneously disposed of all other connected appeals. However, in addition to
this, the Court also passed further orders in respect of four other appeals,
which are based on specific facts of these cases with which we are not
concerned in this write-up. These additional four orders are in the cases of
Timeless Fashions Pvt Ltd. [ITA No. 1588 of 2010], Nandlala Securities Pvt.
Ltd. [ITA No. 211 of 2010], Roxy Investment [ITA No. 2014 of 2010] and Indian
Technocraft Ltd. [ITA No. 352 of 2011].

 

         CIT vs. Madhur Housing
and Development Company (Appeal No. 3961 of 2013-
SC)

 

4.1     As mentioned in para 2.6 above, in the above case, the Delhi High
Court decided the issue of taxation of deemed dividend in the hands of the
assessee company [i.e. ‘concern’] on the short ground that the deemed dividend
cannot be assessed in its hands, as it was not a shareholder of the lending
company (i.e. BPOM) and for that purpose, the Court merely followed its earlier
decision in the case of Ankitech (P) Ltd. [ITA No 462/2009] (supra).

 

4.2   The above judgement of
the Delhi High Court along with number of appeals relating to different
assessees invoking similar issue came-up before the Apex Court and the Apex
Court disposed of all of them, by a common order, by referring to the judgement
and the order of the Delhi High Court in the above case (i.e. Madhur Housing’s
case) by passing the following order: 

 

          “The impugned
judgement and order dated 11.05.2011 has relied upon a judgement of the same
date by a Division Bench of the High Court of Delhi in ITA No. 462 of 2009.
Having perused the judgement and having heard arguments, we are of the view
that the judgement is a detailed judgment going into section 2(22)(e) of the
Income-tax Act which arises at the correct construction of the said Section. We
do not wish to add anything to the judgment except to say that we agree
therewith.

 

         These appeals are
disposed of accordingly. “

 

4.3   
From the above, it would appear that the Apex Court took note of the
fact that the judgment of the Delhi High Court in the case of Ankitech (P) Ltd.
(supra) is a detailed judgement considering this aspect of the
provisions of section 2(22)(e) of the Act and approved the same. It is worth
noting that the Apex Court has approved the judgement of the Delhi High Court
only in the case of Ankitech (P) Ltd. [ITA No 462/2009] which is analysed in
para 3 above. For this purpose, it seems that the Apex Court has not considered
separate orders simultaneously passed by the Delhi High Court in four other
connected appeals [Ref. para 3.6 above].

 

Conclusion

 

5.1    The above judgement of
the Division Bench of the Apex Court directly dealt with and decided the issue
referred to in para 2.6 above [read with para 1.5 of Part I of this write-up]
that in a case where the conditions for invoking the second limb of the New
Provisions of section  2(22) (e) are
satisfied, the amount of loan given to a ‘concern’, which is treated as deemed
dividend, should be assessed only in the hands of the common shareholder with
requisite shareholding in the lending company and who is also having
substantial interest in the ‘concern’ and not in the hands of the ‘concern’
receiving the loan. As such, the issue referred to in para 2.6 above read with
para 1.5 of part I of this write-up now could be treated as settled. Based on
this, the judicial precedents supporting this view, referred to in para 1.5 of
Part I of this write-up, could also be treated as impliedly approved. In this
respect, based on this, the view expressed in the CBDT Circular [No. 495 dtd.
22/9/1987] referred to in para 2.6 above could be treated as incorrect position
in law.

 

5.1.1  In the above case, the
Apex Court has also specifically considered the effect of a legal fiction
created in section 2(22)(e) and its logical effect. In this context, the Court
has emphatically taken a view that the legal fiction created in   section 2(22)(e) only expands the meaning of
the expression ‘dividend’ and it does not, in anyway, enlarge the meaning of
the expression ‘shareholder’ as contemplated in the said provisions. In fact,
this and the general principles that dividend can be paid by the company only
to its shareholders/members and it cannot be given to non-shareholders/members
are the main basis of conclusion arrived by the Apex Court in the above case.

 

5.2     Interestingly, as
mentioned in para 1.6 of part I of this write-up, the Division Bench of the
Apex Court in the case of Gopal and Sons HUF [ (2017) 391 ITR 1] also had an
occasion to indirectly deal with similar issue of the type referred to in para
2.6 above [read with para 1.5 of part I of this write-up] in the context of a
case of a loan given by closely held company to an HUF, which was the
beneficial owner of the shares with requisite shareholding in the lending
company. In that case, there was some debate as to whether the HUF itself was a
registered shareholder or its Karta was the registered shareholder of the
lending company. On these facts, the following question was raised before the
Apex Court:

 

          “Whether in view of the settled principle that
HUF cannot be a registered shareholder in a company and hence, could not have
been both registered and beneficial shareholder, loan/ advances received by HUF
could be deemed as dividend within the meaning of section 2(22)(e) of the
Income-tax Act, 1961 especially in view of the term “concern” as defined in the
Section itself?”

 

5.2.1  Under the above
circumstances, in that case, the Apex Court, on peculiar facts of the case,
took the view that the amount of loan in question should be treated as deemed
dividend under the second limb of the New Provisions and it should be taxable
as such in the hands of the HUF, as the Karta of the HUF is having undisputedly
substantial interest in the HUF. The Court also further concluded that even if
it is presumed that HUF itself is not a registered shareholder of the lending
company, as per the provisions of section 2(22)(e), once the payment is
received by the HUF (which was admittedly beneficial owner of the shares) and
the registered shareholder of the lending company [it’s Karta] is a member of
the said HUF with substantial interest, the payment made to the HUF constitutes
deemed dividend u/s. 2(22) (e) and taxable as such in the hands of HUF.
According to the Court, that is the effect of Explanation 3 to the said
section. According to the Court, the judgment of C.P. Sarathy Mudaliar (supra)
will have no application as that was delivered u/s. 2(6A)(e) of the 1922 Act,
wherein     there was no provision like
Explanation 3. Effectively, the Court concluded that, in view of the
Explanation 3 to section 2(22)(e), the amount of loan constitutes deemed
dividend under the second limb of the New Provisions of section 2(22)(e) in the
hands of the HUF, even if one presumes that HUF itself is not a registered
shareholder of the lending company.

 

5.2.2  From the above, it
would appear that in Gopal and Sons HUF’s case (supra), the Apex Court
impliedly decided the issue referred to in para 2.6 above read with para 1.5 of
Part I of this write-up, by taking a view that the deemed dividend under the
second limb of the New Provisions is taxable in the hands of the ‘concern’
(i.e. HUF). This gives support to the opinion expressed in CBDT circular
referred to in that para. This judgement has been analysed by us in this column
in April and May, 2017 issues of this journal. 

 

5.3    Interestingly, in the above judgement of the Apex Court in the case
of Madhur Housing and Development Company, the Apex Court’s  judgement in Gopal and Sons HUF’s case (supra)
has not been referred to or considered. Apex Court in the above case referred
to the judgement of the Delhi High Court in the case of Ankitech (P) Ltd. (Ref.
para 4.2 above) and approved the same and the judgement of the Apex Court in
the case of Gopal and Sons HUF(supra), which is the recent one, was not
available before the Delhi High Court in that case.

 

5.3.1  It is also worth noting
that in the case of Gopal and Sons HUF (supra), the facts were peculiar
and it was also noted that though the share certificates were issued in the
name of the Karta of the HUF but in the annual returns of the company filed
with the ROC, HUF was also shown as registered shareholder. Whether this
factual position could be regarded as relevant in the context of the issue on
hand (i.e. to determine the taxable person of deemed dividend) to distinguish
the effect of Gopal and Sons HUF’s case (supra) may be a matter of
consideration. However, this would be an uphill task in view of the conclusion
of the Apex court in the case of Gopal and Sons HUF (supra) referred to
in para 3.9 read with para 3.8 of part II of the write-up on that judgement
appeared in May, 2017 issue of this journal.

 

5.4          In
view of the above, an interesting issue is likely to come-up for consideration
as to which judgement of the Apex Court, between the two of the above, would be
relevant, for the purpose of determining the taxable person under the second limb
of the New Provisions in cases where the loan is given to a ‘concern’ and the
other conditions for treating such a loan as deemed dividend under these
provisions are satisfied. _

Allowability Of Interest On Delayed Payment Of Tax Deducted At Source

Issue for Consideration

Chapter XVII of the
Income-tax Act, 1961 contains several provisions for collection and recovery of
tax, by way of Tax Deduction at Source (‘TDS’) and Tax Collection at Source
(‘TCS’), by the payer and the receiver respectively. The payer and receiver are
also tasked with remitting the TDS and TCS to the government, filing periodic
statements and issuing certificates in respect of the same. Interest is levied
u/s. 201(1A), on the payer/receiver, for the period of delay in case of
non-deduction or collection of tax, or for failure to pay the same as required
by the Act.

 

Section 37(1) of the Act
provides for allowance of a deduction in respect of any expenditure, which is
not dealt with in sections 30 to 36 and is not in the nature of capital
expenditure or personal expenses of the assessee, but is laid out or expended
wholly and exclusively for the purposes of the business or profession.

 

Further, Explanation 1 to
section 37(1) declares that, for the removal of doubts, any expenditure
incurred by an assessee for any purpose which is an offence or which is
prohibited by law shall not be deemed to have been incurred for the purpose of
business or profession and no deduction or allowance shall be made in respect
of such expenditure.

 

Four attributes emerge from
the provisions of section 37 as being essential for claiming deduction in respect
of any expenditure in computing the income under the head “Profits and gains of
business or profession” –

 

1)     It
must not be capital in nature;

2)     It
must not be personal in nature;

3)     It
must be laid out or expended wholly and exclusively for the purposes of
business or profession; and

4)     It
must not be incurred for a purpose which is an offence or which is prohibited
by law.

 

        In
claiming the deduction u/s. 37(1) for interest u/s. 201(1A), an issue arises as
to whether such interest can be considered to be incurred wholly and exclusively for the
purpose of business or profession.

 

Conflicting decisions of
the different benches of the Tribunal, delivered in recent times, have
reignited the controversy. The Ahmedabad bench has, in two separate decisions,
taken a view that no deduction can be allowed in respect of such interest and
the Kolkata bench, on the other hand, has upheld the allowability of deduction
of interest in a recent decision.

 

Shree Saras Spices & Food P.
Limited’s case

The issue came up before
the Ahmedabad bench of the Tribunal in the case of Shree Saras Spices &
Food P. Limited vs. DCIT ITA Nos. 2527/Ahd/2010 and 1220/Ahd/2012 for
assessment years 2007-08 and 2009-10.

 

In the said case, the
assessee had claimed deduction in respect of interest on TDS. The A.O.
disallowed the same. The assessee challenged the addition before the CIT(A),
who dismissed the appeal and confirmed the action of the A.O., relying on the
Supreme Court decisions in the case of East India Pharmaceutical Works Ltd.
vs. CIT (1997) 224 ITR 627 (SC) and Bharat Commerce & Industries
Ltd. vs. CIT (198) 230 ITR 733 (SC). The CIT(A) observed that interest was
paid on TDS only upon late payment to the Government treasury, which implied that
the assessee had utilised Government funds and paid interest as a compensation
for enjoyment of the amount due to the Government.

 

On second appeal by the
assessee, the Tribunal also noted that the assessee had used the Government
money for its own purposes and interest on late payment of TDS was not
allowable as was held in East India Pharmaceutical Works Ltd. vs. CIT
(supra) and accordingly, dismissed the appeal.

 

The issue of allowability
of interest on late payment of TDS was also examined by the Ahmedabad bench in
an earlier decision in the case of ITO vs. Royal Packaging ITA No.
1363/Ahd/2010 for assessment year 2005-06.

 

In that case, interest on
TDS was disallowed by the A.O. on the ground that since TDS was not allowable,
interest on same was also not allowable. On appeal before the CIT(A), it was
argued by the assessee that since interest received on tax refund was taxable,
in the same manner, interest on late payment of TDS was an allowable expense.
The CIT(A) accepted the contention of the assessee and deleted the addition
made by the A.O.

 

On further appeal, the
Tribunal relying on the Supreme Court decision in the case of Bharat
Commerce & Industries Ltd. vs. CIT (supra), held that interest on late
payment of TDS is also not allowable and restored the disallowance made by the
A.O.

 

Narayani Ispat Pvt. Ltd.’s case

Recently, the issue had
once again arisen before the Kolkata bench in the case of DCIT vs. Narayani
Ispat Pvt. Ltd. ITA No. 2127/Kol/2014 for assessment year 2010-11.

In that case, interest on
late payment of service tax and TDS was claimed by the assessee as a part of
its interest and finance expenses. However, the A.O., relying on the Supreme
Court decision in the case of Bharat Commerce & Industries Ltd. vs. CIT
(supra), disallowed the claim of interest.

 

The assessee preferred an
appeal against the addition before the CIT(A), wherein it was pointed out that
in the case of Bharat Commerce & Industries Ltd. vs. CIT (supra),
the disallowance was made in respect of interest u/s. 215 of the Act due to
delay in the payment of income tax on the income disclosed under Voluntary
Disclosure of Income and Wealth Act, 1976, which was different from the
interest u/s. 201(1A) on late deposit of service tax and TDS. The assessee
relied on the decision of the Karnataka High Court in the case of CIT vs.
Mysore Electrical Industries Ltd. 196 ITR 884 (Kar), where interest for
failure to pay PF contribution was held deductible, and also on the Supreme
Court decision in the case of Lachmandas Mathura Das vs. CIT 254 ITR 799 (SC),
where interest on sales tax arrears was held deductible. Accepting the
arguments of the assessee, the CIT(A) held that the impugned interest expense
was incurred wholly and exclusively for the purpose of business and was thus,
allowable.

 

The Tribunal, in further
appeal by the Revenue discussed the judgement in the case of Bharat Commerce
& Industries Ltd. vs. CIT (supra) in detail and distinguished its facts
since it dealt with interest on delayed payment of income tax, whereas in the
appeal before the tribunal, interest was paid for delayed payment of service
tax and TDS. The Tribunal observed that interest for delay in making payment of
service tax and TDS was compensatory in nature and not in the nature of
penalty. It also delved upon the decision of the Supreme Court in the case of Lachmandas
Mathura Das vs. CIT (supra), and held that its principles can be applied to
interest on delayed payment of TDS, noting that interest on late payment of TDS
related to expenses claimed by the assessee which were subjected to the TDS
provisions and that TDS did not represent tax of the assessee, but rather the
tax of the payee. The deduction allowed by the CIT(A) in respect of interest on
TDS was thus upheld by the Tribunal.

 

Observations

The issue under
consideration is relevant for a large number of assessees.

 

Section 40(a)(ii) of the
Act expressly provides for disallowance of any sum paid on account of any rate
or tax levied on the profits or gains of any business or profession under the
head ‘Profits and Gains of Business Profession’. The case for disallowance of
income tax levied on the profits and gains of the business or profession is
thus specifically settled by the express provisions of the Act. Similarly
settled by the decisions of the Supreme Court, is the proposition of the law
that any interest paid for delay in payment of income tax on profits and gains
of business or profession is also not deductible in computing the profits and
gains of business. It is also settled that any interest paid on borrowings made
for payment of such income tax is also not deductible in computing such profits
and gains of business.

 

In the case of Bharat
Commerce & Industries Ltd. vs. CIT (supra), the assessee, a
manufacturing company, had claimed deduction in respect of interest on delay in
payment of advance tax u/s. 37(1) of the Act on the ground that delayed payment
of taxes resulted in increase in the assessee’s financial resources, which
became available for its business. The assessee also contended that the
interest paid to the Government represented in effect, the interest on capital
that would have been borrowed by it otherwise and thus, it was an expense
incurred wholly and exclusively for the purpose of its business.

 

The Apex Court observed as under –

“When interest is paid
for committing a default in respect of a statutory liability to pay advance
tax, the amount paid and the expenditure incurred in that connection is in no
way connected with preserving or promoting the business of the assessee. This is
not expenditure which is incurred and which has to be taken into account before
the profits of the business are calculated. The liability in the case of
payment of income- tax and interest for delayed payment of income-tax of
advance tax arises on the computation of the profits and gains of business. The
tax which is payable is on the assessee’s income after the income is
determined. This cannot, therefore, be considered as an expenditure for the
purpose of earning any income or profits.”

 

The Supreme Court, in the
said case, in conclusion, held that the interest levied u/s. 139 and section
215 of the Income-tax Act was not deductible as a business expenditure u/s.
37(1) of the Act. The court in that case held that the income tax was a tax on
profit of the business and was therefore not allowable as a deduction.
Similarly, interest also was not deductible as the same was inextricably
connected with the assessee’s tax liability; if the income tax was not a
permissible deduction u/s. 37, any interest payable for default in payment of
such income tax could not be allowed as a deduction. In arriving at the
conclusion, the court followed its own decision in the cases of East India
Pharmaceutical Works Ltd, 224 ITR 627 and Smt. Padmavati Jaikrishna, 166
ITR 176, where decisions dealt with the issue of deductibility of interest
paid on moneys borrowed for payment of income tax.

 

The principles that emerge
from the observations of the Apex Court in the above decision as well as in the
various decisions cited therein, are that interest on delayed payment of income
tax would take its colour from the principal amount of income tax and thus, it
could not be considered to be incurred wholly and exclusively for the purpose
of business and consequently, such interest cannot be claimed as a deduction.
Where, however, the principal amount is an expenditure for the purpose of
earning any income or profits and is incidental to the business, whether
interest on delayed payment thereof would be allowed as a deduction u/s. 37(1)
is a question that was not addressed by the court.

The Bombay High Court had
the occasion to examine the issue of deductibility u/s. 37(1) of the interest
u/s 201(1A) of the Act. The court, in a brief order, upheld the disallowance of
the deduction u/s. 37 by simply following the decisions in the cases of Aruna
Mills Ltd, 31 ITR 153 (Bom.), Ghatkopar Estate and Finance Corporation Pvt.
Ltd, 177 ITR 222 (Bom.), Bharat Commerce Industries Ltd, 153 ITR 275 (Del.) and
Federal Bank Ltd, 180 ITR 37 (Kerela) after noting that the high courts in
the above referred decisions had taken a similar view.

 

Subsequently, the Madras
High Court in the case of Chennai Properties and Investments (P) Ltd., 239
ITR 435 (Mad) examined the deductibility u/s. 37(1) of the interest u/s.
201(1A) of the Act. The court noted that the interest paid took it’s colour
from the nature of the principal amount remaining unpaid.The principal amount
being income tax, interest thereon was in the nature of a direct tax, and could
not be regarded as a compensatory payment, and was therefore not allowable as
business expenditure. In deciding against the assessee, the court followed the
decision of the Supreme Court in the case of Bharat Commerce and Industries
Ltd, 230 ITR 733 (SC).

 

In spite of the issue of
the deductibility and allowance of interest paid for delay in payment of the
tax deducted at source levied u/s 201(1A) being decided against the assessee by
the high courts, in our considered opinion, it remains open and debatable.
While the Bombay and the Madras High Courts have examined the issue and have
held against the allowability of such interest, the said decisions, in our very
respectful opinion, cannot be taken to have been delivered on due examination
of the law, in as much as the courts, in those cases, have simply relied on the
precedents to arrive at a conclusion without appreciating that the decisions,
referred to as precedents, were concerned with the payment of interest under
sections 139, 215 and 270, levied for delay in payment of income tax on gains
of business. None of them were concerned with the payment of interest on
delayed payment of the tax deducted at source. Neither was this distinction
highlighted before the courts nor did the courts on their own examine the vital
difference between the tax on income and the tax deducted at source. It is
possible that the decisions in question may be reviewed or reconsidered or
dissented or distinguished. The law shall remain debatable till such time as
the same is examined by the highest court of the land.

 

It is significant to note
that usually a tax is deducted at source on payments made by a businessman in
his character as a trader and, in most of the cases, such payments are
expressly or otherwise deductible under the Act, in computing the Profits and
Gains of Business or Profession. In the absence of any specific provisions such
as section 40(a), for expressly disallowing the payments, the tax deducted and
withheld is a part of the expenditure of the payer and in no manner can be construed
as a tax on his profits or gains of business or profession. Therefore,
provisions of section 40(a)(ii) have no application to such payments or
interest thereon. In fact, the entire expenditure representing the payment,
including tax deducted and withheld, is deductible in law without reservation.

 

The
term “tax” is defined u/s. 2(43) to mean income tax chargeable under the
provisions of Income-tax Act and includes the fringe benefit tax. On a bare
reading of this provision, it is clear that the term “tax” in no manner
includes the tax deducted at source which is tax on somebody else’s income and
not on the income of the assessee payer; in any case, the tax deducted at
source is not an income tax ‘chargeable’ under the provisions of the Act.

 

The view of the Kolkata
Tribunal in the case of Narayani Ispat Pvt. Ltd. (supra), thus,
appears reasonable that TDS, by itself, does not represent income tax of the
assessee, but is a deduction from the payment made to a party in respect of
expenses claimed by the assessee, at a certain percentage prescribed in the
Act. So long as the expenses from which tax is deducted, relate to the business
of the assessee, the TDS thereon would also be considered to be relating to the
business of the assessee and therefore, interest on delayed payment of such TDS
would be considered to be incurred wholly and exclusively for the purpose of
business.

 

It may be true that the
interest for delay in payment of the tax deducted at source would not be
considered to be interest on capital borrowed for the purposes of business and
therefore, may not be eligible for deduction u/s. 36(1)(iii) of the Act. The same however, would be eligible for deduction
u/s.37(1) of the Act, being an expenditure wholly and exclusively incurred for
the purposes of business.

 

The better view therefore, is that
interest on delayed payment of the tax deducted at source, payable u/s. 201(1A)
or any other similar provision, is deductible in law in computing the Profits
and Gains of Business or Profession of the payer. _

Delhi High Court On ICDS – Battle Begins!

The first ever decision on ICDS has been pronounced by Delhi High Court in a writ petition filed by The Chamber of Tax Consultants assailing its constitutional validity. The Court has read down the provisions of section 145(2) enabling the Central Government to notify only such standards which do not seek to override binding judicial precedents interpreting statutory provisions contained in the Act. Some of the ICDS have been struck down fully and few selected provisions of other ICDS which were inconsistent with judicial precedents have been knocked off.

Here is a summary of the important observations of the Court on the conflicting provisions of ICDS and the final decision of the Court thereon.

ICDS

Observations

Final Decision

ICDS I – Accounting Policies

Non-acceptance of the concept of prudence in
ICDS is per se contrary to the provisions of the Act. This concept is
embedded in Section 37(1) of the Act which allows deduction in respect of
expenses “laid out” or “expended” for the purpose of business. It is
acknowledged by the Courts also.

ICDS is unsustainable in law.

ICDS II – Valuation of Inventories

The requirement to value inventories at market
value in case of the dissolution of a firm, where its business is taken over
by other partners is contrary to the decision of the Supreme Court in the
case of Shakti Trading Co. vs. CIT 250 ITR 871.

 

Where the assessee regularly follows a certain
method for valuation of goods then that will prevail irrespective of the ICDS
because of a non-obstante clause in Section 145A.

ICDS is held to be ultra vires the Act
and struck down.

ICDS III – Construction contracts

ICDS requires recognition of the retention
money as a part of the contract revenue on the basis of percentage of
completion method. However, the retention money does not accrue to the
assessee until and unless the defect liability period is over. The treatment
to be given to the retention money depends upon the facts of each case and
the conditions attached to such amounts.

To that extent, Para 10(a) of ICDS is held to
be ultra vires.

Para 12 of ICDS III read with Para 5 of ICDS
IX, provides that no incidental income can be reduced from the borrowing cost
while recognising it as a part of contract costs. This is contrary to the
decision of the Supreme Court in CIT vs. Bokaro Steel Limited 236 ITR 315
wherein it was held that if an Assessee receives any amounts which are
inextricably linked with the process of setting up of its plant and
machinery, such receipts would go to reduce the cost of its assets.

This particular provision of ICDS is struck
down.

ICDS IV – Revenue Recognition

ICDS requires an Assessee to recognise income
from export incentive in the year of making of the claim if there is
‘reasonable certainty’ of its ultimate collection. It is contrary to the
decision of the Supreme Court in the case of CIT vs. Excel Industries
Limited 358 ITR 295 wherein it was held that, until and unless the right
to receive export incentives accrues in favour of the assessee, no income can
be said to have accrued.

This particular provision in Para 5 of ICDS is
ultra vires the Act and struck down.

 

The proportionate completion method as well as
the contract completion method have been recognised as valid method of
accounting under mercantile system of accounting by the Courts. However, Para
6 of ICDS permits only one of the methods, i.e., proportionate completion
method for recognising revenue from service transactions and therefore, it is
contrary to the Court decisions.

This particular provision in Para 6 of ICDS is
ultra vires the Act and struck down.

ICDS VI – Effects of Changes in Foreign
Exchange Rates

In Sutlej Cotton Mills Limited vs. CIT 116
ITR 1 (SC), it was held that exchange gain/loss in relation to a loan
utilised for acquiring a capital item would be capital in nature. ICDS
provides contrary treatment.

 

ICDS does not allow recognition of marked to
market loss/gain in case of foreign currency derivatives held for trading or
speculation purposes. This is also not in consonance with the ratio laid down
by the Supreme Court.

ICDS is held to be ultra vires the Act
and struck down as such.

 

Circular No. 10 of 2017 clarifies that Foreign
Currency Translation Reserve Account balance as on 1st April 2016 has to be
recognised as income/loss of the previous year relevant to the AY 2017-18. It
is only in the nature of notional or hypothetical income which cannot be even
otherwise subject to tax

 

ICDS VII – Government Grants

ICDS provides that recognition of government
grants cannot be postponed beyond the date of actual receipt. It is contrary
to and in conflict with the accrual system of accounting.

To that extent it is held to be ultra vires
the Act and struck down.

ICDS VIII – Securities (Part A)

The method of valuation prescribed under ICDS
is different from the corresponding AS. Therefore, the assessees will be
required to maintain separate records for income tax purposes for every year
since the closing value of the securities would be valued separately for
income tax purposes and for accounting purposes.

To that extent it is held to be ultra vires
the Act and struck down.

It is relevant to note that the Delhi High Court has held that the ICDS is not meant to overrule the provisions of the Act, the Rules there under and the judicial precedents applicable thereto as they stand.  There may be instances, other than those taken up before the Delhi High Court, where the provisions of ICDS are contrary to and/or overrule the judicial precedents applicable, in view of the ratio of the Delhi High Court, such provisions of ICDS will also have to give way to the provisions of the Act, the Rules there under and the judicial precedents applicable. To illustrate, ICDS IX on Borrowing Costs requires capitalization of interest to Qualifying Assets.  Work-in-progress in the case of a builder / developer will qualify as a qualifying asset as defined in ICDS IX.  A question arises as to whether the requirement of capitalizing borrowing costs to inventory as per ICDS is in conflict with section 36(1)(iii) of the Act.  The Bombay High Court has in the case of CIT vs. Lokhandwala Construction Industries (2003) 260  ITR 579 (Bom) held that interest on funds borrowed for construction of work-in-progress in case of a builder is a period cost.  Similar is the view expressed in the Technical Guide of ICAI on ICDS in para 4.5 of Chapter X titled ‘ICDS IX: Borrowing Costs’.  The ratio of the decision of Delhi High Court will be applicable to such cases as well.

The decision of the Delhi High Court is the only decision of the competent court in the country.  A question arises as to whether the decision of the Delhi High Court under consideration is binding throughout the country or it is binding only to cases falling within the jurisdiction of the Delhi High Court.   In this connection it is relevant to note that Bombay High Court in the case of  Group M. Media India Pvt. Ltd. vs. Union of India [(2017) 77 taxmann.com 106] was dealing with a case where the Bombay High Court was concerned with an instruction which had been struck down by the Delhi High Court.  The Court, observed as under –  “Therefore, in view of the decision of this Court in Smt. Godavaridevi Saraf (supra), the officers implementing the Act are bound by the decision of the Delhi High Court and Instruction No.1 of 2015 dated 13th January, 2015 has ceased to exist. Therefore, no reference to the above Instruction can be made by the Assessing Officer while disposing of the petitioner’s application in processing its return u/s. 143(1) of the Act and consequent refund, if any, u/s. 143(1D) of the Act. Needless to state that the Assessing Officer would independently apply his mind and take a decision in terms of Section 143 (1D) of the Act whether or not to grant a refund in the facts and circumstances of the petitioner’s case for A.Y. 2015-16.”

In view of the above observations of the Bombay High Court, it appears that the ratio of the decision of the Delhi High Court could be considered to be binding on all the officers implementing the Act.

BCAS had made number of suggestions through representations (November 20161  to scrap ICDS and December 20152  on specific aspects of all 10 ICDS) which did not find favour in the formulation / implementation of ICDS. When the need of the hour is to bring tax certainty, bringing more cohesiveness amongst laws and bring reduction in multiplicity of compliances, ICDS in their present form are taking things in a contrary direction. It is unfortunate that the tax payers have to seek judicial intervention to arrest anomalies that are already pointed out through well reasoned representations.

This intervention and Court’s strictures seem to be a beginning of the battle over ICDS. Time will only tell as to what would be fate of these and many more controversial provisions of ICDS. 


1   https://www.bcasonline.org/resourcein.aspx?rid=389

2   https://www.bcasonline.org/files/res_material/resfiles/1612152944merged_document.pdf

16 Section 54 – Acquisition of a flat in a building under construction is a case of `construction’ and not `purchase’. Construction of new house may commence before transfer of old house but should be completed within a period of 3 years from the date of transfer of old house.

[2017] 88 taxmann.com 275 (Mumbai-Trib.)

Mustansir I Tehsildar vs. ITO

ITA No. : 6108/Mum/2017

A.Y. : 2013-14     Date of Order: 18th December, 2017



FACTS 

During the previous year relevant to the
assessment year under consideration, on 5-12-2012, the assessee sold his 1/3rd
share in Flat No.2902 of an apartment named Planet Godrej located at Byculla,
Mumbai, for a consideration of Rs.126.83 lakh. Long term capital of Rs. 78.36
lakh accrued to the assessee on transfer of his flat in
Planet Godrej. 

 

The assessee had earlier, vide agreement
dated 5.2.2010, booked a flat at Elegant Tower, which was under construction.
The details of payments made to the builder are as detailed below:-

 

Particulars of payment

Rupees

Before the date of transfer of old house

 

From 12.04.2007 to 03-11-2009

86,38,225

On 21.4.2012

7,28,525

                                                               
Sub-total (a)

93,66,750

Payments subsequent to the date of transfer of old house

 

14.06.2014

3,12,225

22.10.2014

7,28,525

Sub-total (b)

10,40,750

Total (a + b)

1,04,07,500

 

 

Thus, the aggregate payments made by the
assessee towards the new flat were Rs.104.07 lakh. Since the aggregate of
payments made was more than the amount of Capital gain, the assessee claimed
that entire amount of capital gain of Rs.78.36 lakh was deductible u/s. 54 of
the Act. The assessee treated the acquisition of new flat as a case of “Construction”.  As per the provisions of section 54, the new
flat is required to be constructed within 3 years from the date of transfer of
old flat. Since the old flat was transferred on 05-12-2012, the assessee submitted
that the time limit was available up to December, 2015 and the new flat was
acquired before that date.

 

The Assessing Officer (AO) treated the case
of acquisition of new house by the assessee as a case of purchase and not of
construction. He, accordingly, held that the purchase should have been between
06-11-2011 to 04-12-2014.  Accordingly, he held that –

 

(a) the payments aggregating to
Rs.86.38 lakh made between 12-04-2007 to 03-11-2009 falls outside the period
mentioned above and hence not eligible for deduction u/s. 54 of the Act;

 

(b) the capital gains not
utilised for purchase of new asset before the due date for filing return of
income should have been deposited in Capital gains Account Scheme as per the
provisions of section 54 of the Act. The payments of Rs.3,12,225/- and Rs.7,28,525/-made
on 14.6.2014 and 22.10.2014 respectively have violated the provisions of
section 54 of the Act, since the assessee did not deposit them in Capital gains
Account scheme. Accordingly, the AO held that the above said two payments are
not eligible for deduction u/s. 54 of the Act;

 

(c) The payment of
Rs.7,28,525/- made on 21-04-2012 was within the range of period mentioned by
him. Accordingly, he allowed deduction u/s. 54 of the Act only to the extent of
Rs.7,28,525.

 

Aggrieved, the assessee preferred an appeal
before CIT(A) who following the decision of the Bombay High Court in the case
of CIT vs. Smt. Beena K. Jain (217 ITR 363)(Bom.) held that the
acquisition of the new house by the assessee was a case of purchase and not
construction.  He, confirmed the action
of the AO.

 

Aggrieved, the assessee preferred an appeal
to the Tribunal.

 

HELD

The Tribunal noted that the Hon’ble Bombay
High Court in the case of Mrs. Hilla J. B. Wadia (216 ITR 376)(Bom.) has held
that booking of flat in an apartment under construction must also be viewed as
a method of constructing residential tenements.

 

Accordingly, the co-ordinate bench has taken
the view in the case of Sagar Nitin Parikh (ITA No.6399/Mum/2011 dated
03-06-2015) that booking of flat in an apartment under construction is a
case of “construction”. In view of the above said decision of the
Hon’ble Bombay High Court and the Tribunal, the acquisition of new flat in an
apartment under construction should be considered as a case of “construction”
and not “purchase”. The Tribunal set aside the view taken by the tax
authorities and held that the assessee has constructed a flat and the
provisions of section 54 should be applied accordingly.

 

It also noted that section 54 of the Act
provides the condition that the construction of new residential house should be
completed within 3 years from the date of transfer of old residential house.

 

It noted that the Hon’ble Karnataka High
Court has held in the case of CIT vs. J. R. Subramanya Bhat [1987](165 ITR
571) that commencement of construction is not relevant for the purpose of
section 54 and it is only the completion of construction. The above said ratio
has been followed in the case of Asst. CIT vs. Subhash Sevaram Bhavnani
[2012](23 taxmann.com 94)(Ahd. Trib.). Both these cases support the
contentions of the assessee.

 

The Tribunal held that, for the purpose of
section 54 of the Act, it has to be seen whether the assessee has completed the
construction within three years from the date of transfer of old asset. It noted
that there is no dispute that the assessee took possession of the new flat
within three years from the date of sale of old residential flat.

 

The Tribunal held that the assessee has
complied with the time limit prescribed u/s. 54 of the Act. Since the amount
invested in the new flat prior to the due date for furnishing return of income
was more than the amount of capital gain, the requirements of depositing any
money under capital gains account scheme does not arise in the instant case.
Further, the Hon’ble High Court has held in the case of K.C.Gopalan [(1999)
107 Taxman 591 (Kerala)] that there is no requirement that the sale
proceeds realised on sale of old residential house alone should be utilised.

 

The Tribunal held that the assessee is
entitled for deduction of full amount of capital gains u/s. 54 of the Act, as
he has complied with the conditions prescribed in that section.  It set aside the order passed by Ld CIT(A)
and directed the AO to allow the deduction u/s. 54 of the Act as claimed by the
assessee.

 

2 Section 271D – Penalty – Accepting/ repaying loans/ advances via journal entries contravenes section 269SS & 269T – Penalty cannot be levied if the transactions are bona fide, genuine & reasonable cause u/s. 273B

CIT vs. Lodha Properties Development Pvt. Ltd.
ITA No: 172 of 2015 (Bom High Court)
A.Y.: 2009-10,  Dated: 06th February, 2018  
[Lodha Properties Development Pvt. Ltd. vs. ACIT; ITA No. 476/Mum/2014;  
Dated: 27th June, 2014 Mum.  ITAT]

The assessee who belongs to the Lodha group , was engaged in the business of land development and construction of real estate properties. Assessee filed the return of income declaring the total income at Rs. NIL and the same was subsequently revised to adjust carry forward losses. Assessment was completed determining the total income of Rs. 26,69,084/- under the special provisions of section 115JB of the Act. In the assessment, vide para 6, the AO, mentioned about “Accepting / repayment of loans other than account payee cheques / draft”. Eventually, AO mentioned that such accepting / repayment of loans other than account payee cheques / drafts (through journal entries) amounts to violation of the provisions of section 269SS and 269T of the Act.

The assessee submitted that the loans received are by way of “journal entries? and there is no acceptance of cash by any method other than the one prescribed in the statute. The core transactions were undertaken by way of cheque only and however, the assessee resorted to the journal entries for transfer / assignment of loan among the group companies for business consideration. In case of journal entries, as per the assessee, the liabilities are transferred / assigned by the group companies to the assessee or to take effect of actionable claims /payments/ received by group companies on behalf of the company. The journal entries were also passed in the books of accounts for reimbursement of expenses and for sharing of the expenses within the group.

The assessee further submitted during the period when journal entries were passed, the assessee company was under the bona fide belief that there is no breach of provisions of income tax Act considering recognized method of assigning credit / debit balance by passing journal entries.

In such cases, the provisions of section 269SS of the Act have no application and for this, the assesse relied on the judgement of the Honble Madras High Court in the case of CIT vs. Idhayam Publications Ltd [2007] 163 Taxman 265 (Mad.) which is relevant for the proposition that the deposit and the withdrawal of the money from the current account could not be considered as a loan or advance. It is the contention of the assessee that there is no cash transactions involved and relied on the contents of the CBDT Circular No.387, dated 6th July, 1984 and mentioned that the purpose of introducing section 269SS of the Act is to curb cash transactions only and the same is not aimed at transfer of money by transfer / assignment of loans of other group companies.

Addl. CIT  mentioned that even bona fide and genuineness of the transactions, if carried out in violation of provisions of section 269SS of the Act, the same would attract the provisions of section 271D of the Act .

The ld. CIT(A)  confirmed the findings recorded by the A.O.

The Tribunal held  that there is no finding  in the order of the AO that during the assessment proceedings the impugned transactions constitutes unaccounted money and are not bona fide or not genuine. As such, there is no information or material before the AO to suggest or demonstrate the same. In the language of the Hon’ble High Court in the case of Triumph International (I) Ltd, 345 ITR 370 (Bom), neither the genuineness of the receipt of loan/deposit nor the transaction of repayment of loan by way of adjustment through book entries carried out in the ordinary course of business has been doubted in the regular assessment. Admittedly, the transactions by way of journal entries are aimed at the extinguishment of the mutual liabilities between the assessees and the sister concerns of the group and such reasons constitute a reasonable cause.

In the present case, the causes shown by the assessee for receiving or repayment of the loan/deposit otherwise than by account-payee cheque/bank draft, was on account of the following, namely: alternate mode of raising funds; assignment of receivables; squaring up transactions; operational efficiencies/MIS purpose; consolidation of family member debts; correction of errors; and loans taken in case. In our opinion, all these reasons are, prima facie, commercial in nature and they cannot be described as non-business by any means. Further, it was observed that why should the assessee under consideration take up issuing number of account payee cheques / bank drafts which can be accounted by the journal entries.

Further, there is no dispute that the impugned journal entries in the respective books were done with the view to raise funds from the sister concerns, to assign the receivable among the sister concerns, to adjust or transfer the balances, to consolidate the debts, to correct the clerical errors etc. In the language of the Hon?ble High court, the said “journal entries? constitutes one of the recognised modes of recording the loan/deposit. The commercial nature and occurrence of these transactions by way of journal entries is in the normal course of business operation of the group concerns. In this regard, there is no adverse finding by the AO in the regular assessment. AO has not made out in the assessment that any of the impugned transactions is aimed at non commercial reasons and outside the normal business operations. Accordingly, the appeal of the assessee was allowed.

The Hon. High Court observed  that the Tribunal has on application of the test laid down for establishment of reasonable cause, for breach of section 269SS of the Act by this Court in Triumph International Finance (supra) found that there is a reasonable cause in the present facts to have made journal entries reflecting deposits.

In the above circumstances, the view taken by the Tribunal in the impugned order holding that no penalty can be imposed upon by the Revenue as there was a reasonable cause in terms of section 271B of the Act for having received loans / deposits through journal entries is at the very least is a possible view in the facts of the case. Accordingly appeal of dept was dismissed.

39. Search and seizure – Assessment u/s. 153A – A. Ys. 2003-04, 2006-07 to 2008-09 – Assessee can claim deduction in return u/s. 153A or first time before appellate authorities

CIT vs. B. G. Shirke Construction Technology P. Ltd.; 395
ITR 371 (Bom):

The assessee was engaged in the execution of construction
contracts. On 18/12/2008, there was a search and seizure action u/s. 132 of the
Income-tax Act, 1961 upon the assessee. Pursuant thereto, notices u/s. 153A
were issued for the A. Ys. 2003-04, 2006-07 to 2008-09. As the assessment for
the A. Ys. 2007-08 and 2008-09 were pending before the Assessing Officer, they
stood abated in view of the second proviso to section 153A(1) of the Act.
Consequently, the assessee filed the returns of income for the subject
assessment years u/s. 153A read with section 139(1) of the Act. In its returns
of income, the assessee had offered the income on account of execution of
contracts but had not excluded the amounts retained by its customers till the
completion of the defect liability period after completion of the contract.
This amount could not be quantified in a short time available to file the
returns of income. Therefore, the assessee had filed a note along with its
returns of income pointing out the aforesaid facts and its seeking appropriate deduction
when completing the assessments. The note also pointed out that the said amount
had inadvertently not been claimed as a deduction in its original returns of
income. During the assessment proceedings, the assessee quantified its claim
year wise placing reliance on relevant clause of the contract with its
customers, so as to claim deduction to the extent the customers have retained
(5–10%). The Assessing Officer quantified the claim amount but did not allow
the claim holding that he does not have power to allow the claim in view of the
judgment of the Supreme Court in Goetze (India) Ltd. vs. CIT 284 ITR 323
(SC). The Tribunal held that although it is undisputed that the computation of
income did not reflect the actual quantification of the amount of retention
money held by the customers which cannot be subject to tax, but the note filed
along with the return of income indicated the claim in principle. The
quantification was explained during the assessment proceedings along with the
relevant clauses of each contract with its customers. The Tribunal held that
the decision of Supreme Court in Goetze (India) Ltd., will not apply to the
present facts as in this case the claim for deduction on account of retention
money had been made along with the return of income, only the quantification of
the amount was made during the assessment proceedings.

The Tribunal held that the claim for deduction was to be
allowed. The Tribunal further held that even if the quantification made during
the assessment proceedings was considered to be a fresh claim and could not
have been entertained by the Assessing Officer, there was no bar/impediment in
raising the claim before the appellate authorities for consideration.
Accordingly, the Tribunal allowed the assessee’s claim for deduction. 

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

“i)  The consequence of notice u/s. 153A(1) of the
Income-tax Act, 1961 is that the assessee is required to furnish a fresh return
of income for each of the six of the assessment years in regard to which a
notice has been issued. Section 153A(1) itself provides that on filing of the
return consequent to notice, the provisions of the Act will apply to the return
of income so filed. Consequently, the return filed u/s. 153A(1) of the Act is a
return furnished u/s. 139 of the Act. Therefore, the provisions of the Act
would be otherwise applicable in the case of a return filed in the regular
course u/s. 139(1) of the Act would also continue to apply in the case of a
return filed u/s. 153A of the Act.

ii)  In
the return of income filed u/s. 139(1) of the Act, an assessee is entitled to
raise a fresh claim before the appellate authorities, even if it was not raised
before the Assessing Officer at the time of filing of the return of income or
filing of revised return. The restriction in the power of the Assessing Officer
will not affect the power of the Appellate Tribunal to entertain a fresh claim.
There is no substantial question of law. Appeal is dismissed.”

10 Unexplained Investment – Section 69 – A. Y. 2008-09 – Addition based on invoices, delivery notes and stock statement submitted before bank – AO not examined suppliers of stock – No corroborative evidence to support AO’s claim – Physical verification of stock tallying with books of account maintained by assessee – Verification made by bank not relevant evidence – Addition cannot be made on ground of undisclosed income

CIT vs. Shib Sankar Das; 396 ITR 39 (Cal)

The assessee was an individual, carrying on
business as wholesaler of grocery items under a trade name. The Department had
discovered four invoices and delivery notes upon carrying out a survey of the
business premises of the assessee. The Assessing Officer added the aggregate
value of the goods in accordance with the invoices as undisclosed business income
and percentage profits on such goods presumed to have been sold. Furthermore,
during scrutiny proceedings, it was noticed that the assessee had submitted a
stock statement on February 29, 2008 before the bank in the matter of obtaining
enhanced credit facilities. The stock statement stood verified and acted upon
by the bank. This stock statement showed value of stock far in excess of the
stock in the statement disclosed to the Department. The Assessing Officer added
the difference also as undisclosed business income. The Tribunal deleted the
additions.

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

 “i)   The Assessing Officer
ought to have examined the suppliers to find out the truth or otherwise of the
claim. The Tribunal directed 5% of the value of goods, under the delivery
chalan bearing acknowledgment of receipt, to be added to the gross profit and
the addition of the other three purchases deleted. There was no attempt to
adduce corroborative evidence to support the Assessing Officer’s rejection of
the claim of the assessee. This view taken by the Tribunal was a plausible
view.

 ii)  At
the time of survey, physical verification of the stock was made and it tallied
with the books of account maintained by the assessee. When the Department
itself could not detect a discrepancy in the stock, a verification made by a
person not concerned with the assessment could not be relevant evidence to
lawfully presume undisclosed income. The correctness of the verification made
by the bank was not determined. The Tribunal was right in deleting the
addition. No substantial question of law arose.”

5 Sections 2(24), 28 – Subsidy in the nature of entertainment tax / duty collected, but not to be paid, constitutes capital receipt as it is meant for promotion of new industries by way of multiplex theatres.

  DCIT vs. Cinemax Properties Ltd. (Mumbai)

   Members : P. K.
Bansal (VP) and Pawan Singh (JM)

    ITA No.
5227/Mum/2015

     A.Y.: 2011-12. 
    
Date of Order: 09th August, 2017

     Counsel for revenue
/ assessee: Saurabh Deshpande / None

FACTS 

The
Assessing Officer, while assessing the total income of the assessee, disallowed
the claim of entertainment tax of Rs. 6,45,79,148 collected and claimed as
capital subsidy.

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

Aggrieved,
the revenue preferred an appeal to the Tribunal.

HELD 

The
Tribunal noted that the similar issue arose in the case of the assessee in the
assessment years 2007-08, 2008-09, 2009-10 and 2010-11.

The
Tribunal in ITA No. 394/Mum/2012 dated 24.01.2014 for AY 2008-09 while dealing
with the same issue held the amount under consideration to be capital in
nature. The Tribunal had while deciding the appeal noted that the Bombay High
Court has in the case of CIT vs. Chaphalkar Brothers (ITA Nos. 1342
& 1443 of 2006), order dated 08.06.2011, held that the subsidy of this kind
constitutes capital receipt as it is meant for promotion of new industries by
way of multiplex theatres. The Tribunal also noted that in the case of
assessee’s sister concern namely Vista Entertainment Pvt. Ltd. (ITA No.
8402/Mum/2011) for AY 2008-09, it has been held that similar additions are not
sustainable, since the same amount is capital in nature. Following these
decisions, the Tribunal had dismissed the revenue’s appeal for AY 2008-09 and
had decided the issue in favour of the assessee. This order for AY 2008-09 was
followed while deciding appeals for AY 2009-10 and AY 2010-11.

Facts
being the same, the Tribunal did not find any illegality or infirmity in the
order of the CIT(A) deleting the addition of Rs. 6,45,79,148.

The
appeal filed by the revenue was dismissed.

4 Section 37 – Expenditure incurred by the assessee in connection with the issue of FCCB is revenue in nature.

 DCIT vs. Reliance
Natural Resources Ltd.
(Mumbai)

Members : B. R. Baskaran (AM) and Ravish Sood (JM)

ITA No. 6712/Mum/2012

A.Y.: 2009-10.         Date
of Order: 11th August, 2017

Counsel for revenue / assessee: Darse S. / Jitendra Sanghavi


FACTS 

The
assessee was engaged in the business of providing fuel and facilitation
services in various forms to power plants and also engaged in the joint venture
operations for exploration and production of coal based Methane blocks.  The assessee incurred expenses aggregating to
Rs. 13,85,96,004 in connection with the issue of foreign currency convertible
bonds (FCCB). These expenses comprised of – Agency Fees (Barclays Bank) : Rs.
10,58,188; Commission & Fronting Fees (Paid to Barclays Bank) : Rs.
13,73,38,456; and   Trustee   Maintenance  
Fees    (Deutsche Bank) :Rs.
1,99,360.

The
Assessing Officer (AO) disallowed the expenses on the ground that identical
expenses incurred in earlier years were treated as capital expenses by the AO.
He held that the expenses have been incurred in connection with increasing the
capital base of the company and not for carrying on day-to-day business
activities. He treated the expenditure of Rs. 13,85,96,004 so incurred by the
assessee as capital expenditure.

Aggrieved,
the assessee preferred an appeal to the CIT(A) who, following the orders passed
in earlier years, allowed the appeal filed by the assessee.

Aggrieved,
the assessee preferred an appeal to the Tribunal.

HELD 

The
Tribunal noted that the co-ordinate Bench had considered identical issue in ITA
No. 1425/Mum/2011 dated 08.07.2016 relating to AY 2007-08 and also in ITA No.
6711/Mum/2012 dated 24.08.2016 relating to AY 2008-09. It observed that while
deciding the appeal filed by the revenue for AY 2007-08, the co-ordinate bench
has followed the decision rendered by the Tribunal in the case of Prime
Focus Ltd. vs. DCIT (ITA No. 836/Mum/2011 dated 04.02.2016). In the case of
Prime Focus Ltd., the Tribunal observed that the FCCB is akin to borrowings
made by issuing debentures and both of them are different types of debt
instruments only.

Accordingly,
in the case of Prime Focus Ltd, the Tribunal held that the expenses incurred in
connection with FCCB are revenue in nature. Further, in the instant case, the
FCCB holders never had any voting rights as the same were not converted into
equity shares during that year.

Since
there was no change in facts as regards claim of the assessee and also
considering that none of the FCCB has been converted into shares during this
year also, the Tribunal, following the view taken in earlier years, held that
the CIT(A) was justified in holding that the expenditure incurred in connection
with the issue of FCCB is deductible as revenue expenditure.

As
regards the second ground of the revenue that the assessee had issued FCCB for
the purpose of meeting its working capital requirement, but the same has been
issued in a manner contrary to the permitted use, the Tribunal held that since
it has already held that the expenses incurred in connection with the issue of
FCCB is revenue in nature, it is not necessary to adjudicate the alternative
contention of the revenue.

This
ground of appeal filed by the revenue was allowed.

11 Section 263 – Fringe Benefit Tax is not “tax” as defined in section 2(43) and cannot be disallowed u/s. 40(a)(v) or added back to “Book Profits” u/s. 115JB. Consequently, even if there is lack of inquiry by the AO and the assessment order is “erroneous” under Explanation 2 to section 263, the order is not “prejudicial to the interest of the revenue”.

Rashtriya Chemicals & Fertilizers Ltd. vs. CIT (Mumbai)
Members : Joginder Singh (JM) and Manoj Kumar Aggarwal (AM)
ITA No.: 3625/Mum/2017
A.Y.: 2012-13.   
Date of Order: 14th February, 2018.
Counsel for assessee / revenue: Ketan K. Ved / Narendra Singh Jangpangi

FACTS

The total income of the assessee, engaged as
manufacturer of fertilizers and chemical products was assessed to be Rs.198.12
crores under normal provisions and Rs.365.02 crores u/s. 115JB as against
returned income of Rs.193.66 Crores & Rs.365.02 Crores under normal
provisions and u/s. 115JB respectively.

 

Subsequently, the said assessment order was
subjected to exercise of revisional jurisdiction u/s. 263 by CIT on the
premises that corresponding adjustment of certain employee benefits expenses of
Rs.11.91 Crores being tax borne by the assessee on deemed perquisites on the
value of accommodation provided to employees and which were not admissible u/s.
40(a)(v), was omitted to be carried out while arriving at book profits u/s.
115JB. Therefore, the order being erroneous and prejudicial to the interest of
the revenue, required revision u/s. 263. After providing due opportunity of
being heard to the assessee, CIT directed the AO to re-compute Minimum
Alternative Tax [MAT] u/s. 115JB and raise demand against the assessee for the
same.

 

Aggrieved by the directions of Ld. CIT, the
assessee has by way of the appeal, challenged invocation of revisional
jurisdiction u/s. 263.

 

HELD 

The Tribunal observed that the said item of
expenditure viz. taxes borne by the assessee on deemed perquisites on the value
of accommodation provided to the employees was not allowable to assessee while
arriving at income under normal provisions in terms of provisions of section
40(a)(v) and the assessee himself, has added the same while computing income
under the normal provisions.

 

The Tribunal noticed that computation of
‘Book Profits’ was neither provided by the assessee during hearing before the
AO nor discussed in any manner. In the quantum order, the AO picked up the
figures of ‘Book Profits’ as per ‘Return of Income’ without applying any mind thereupon
and adopted the same as such without any iota of discussion in the quantum
assessment order. The Tribunal was of the opinion that, prima facie, this is a
case of ‘no inquiry’ by AO and not the case of ‘inadequate inquiry’ or ‘Lack of
Inquiry’ or ‘adoption of one of the possible views’. The statutory provisions
as contained in section 263 including Explanation-2 create a deeming fiction
that the order of Assessing Officer shall be deemed to be erroneous in so far
as it is prejudicial to the interests of the revenue if, in the opinion of CIT
the order is passed without making inquiries or verification which should have
been made.

 

The Tribunal observed that the only question
which survives for consideration is whether the omission to carry out the stated
adjustment in the Book profits as envisaged by CIT has made the quantum order
erroneous and prejudicial to the interest of the revenue and whether the stated
adjustment was tenable in law or not?

 

The Tribunal noted that computation of Book
Profits u/s.115JB has to be in the manner as provided in Explanation-1 to
section 115JB. The Minimum Alternative Tax [MAT] provisions as contained in
section 115JB, as per well-settled law, are a complete code in itself and
create a deeming fiction which is to be construed strictly and therefore,
whatever computations / adjustments are to be made, they are to be made
strictly in accordance with the provisions provided in the code itself. The
clause (a) of Explanation-1 envisages add-back of the amount of Income Tax paid
or payable and the provision therefor while arriving at Book Profits. Further,
in terms of Explanation-2 to section 115JB, the amount of Income Tax
specifically includes the components mentioned therein.  The Tribunal noticed the legislative intent
for introducing Explanation 2 from the Explanatory Memorandum to the Finance
Bill, 2008.

 

Taxes borne by the assessee on non-monetary
perquisites provided to employees forms part of Employee Benefit cost and akin
to Fringe Benefit Tax since they are certainly not below the line items since
the same are expressly disallowed u/s. 40(a)(v) and the same do not constitute
Income Tax for the assessee in terms of Explanation-2. The Tribunal observed
that this view is fortified by the judgment of Tribunal rendered in ITO vs.
Vintage Distillers Ltd. [130 TTJ 79] where the Tribunal has taken the view
that the term ‘tax’ was much wider term than the term ‘Income Tax’ since the
former, as per amended definition of ‘tax’ as provided in section 2(43)
included not only Income Tax but also Super Tax & Fringe Benefit Tax.
Therefore, without there being any corresponding amendment in the definition of
Income Tax as provided in Explanation-2 to section 115JB, Fringe Benefit Tax
was not required to be added back while arriving at Book Profits u/s. 115JB.
Similar view has been expressed in another judgement of Tribunal titled as Reliance
Industries Ltd Vs. ACIT [ITA No. 5769/M/2013 dated 16/09/2015] where the
Tribunal took a view that ‘Wealth Tax’ did not form part of Income Tax and therefore,
could not be added back to arrive at Book Profits since the adjustment thereof
was not envisaged by the statutory provisions.

 

The Tribunal held that the adjustment of
impugned item as suggested by CIT was not legally tenable in law which leads to
inevitable conclusion that the omission to carry out the said adjustment did
not result into any loss of revenue. Therefore, one of the prime condition viz.
prejudicial to interest of revenue to invoke the revisional jurisdiction under
the provisions of section 263 has remained unfulfilled and therefore, the
impugned order could not be sustained in law.

 

The Tribunal set aside the order
passed.  The appeal filed by the assessee
was allowed.

3 Section 263 – Revision – two possible views – the issue is debatable –Revision is not permissible

CIT vs. Yes Bank Ltd. [ Income tax Appeal
no. 599 of 2015 dated : 01/08/2017 (Bombay High Court)].

 [Yes Bank Ltd. vs. CIT [A.Y-2007-08  Mum. ITAT ]

During the FY:2005-06, the assessee had
incurred an aggregate expenditure of Rs.16,39,10,000/- on Initial Public
Offering (“IPO”) of equity shares made. The Issue closed on June 12, 2005. It
has claimed a deduction u/s. 35D for Rs.3,27,82,000/- being one-fifth of the
total expenses incurred. This is the second year of claim for deduction.

The assessee submits that section 35D grants
a deduction / amortisation in respect of expenses incurred by a company in
connection with the issue, for public subscription, of shares or debentures of
a company over a period of five years. Since the foregoing expenses on IPO are
in connection with the issue of shares for public subscription, one fifth of
the total amount thereof is eligible for deduction u/s. 35D.

The A.O had made an inquiry while passing
the assessment order. In return of income, the assessee had made the following
note. Deduction of Rs.3,27,82,000/- claimed u/s. 35D of the Act.

The Assessee submits that the A.O had before
passing the assessment order, called for explanation from the assessee. The
explanation was given for claiming deduction u/s. 35D of the Act, in respect of
expenses incurred by the company in connection with the issue of public
subscription of the shares and debentures of the company for a period of 5
years.

According to the Revenue, the order passed
by the A.O granting benefit u/s. 35D of the Act was erroneous and the same was
prejudicial to the interest of the Revenue. As such, ingredients of section 263
of the Act were attracted.

The assessee submitted that it is an
industrial undertaking for the purpose of section 35D of the Act and relied
upon the judgement of this Court in a case of the CIT vs. Emirates
Commercial Bank Ltd. 262 ITR 55, wherein this Court has held that the
banks are industrial undertakings and eligible for deductions u/s. 32A.

Also in HSBC Securities and Capital
Markets (India) Pvt. Ltd. (1384/M/2000), where the Hon’ble Mumbai ITAT has
held that even a share broking entity is an “industrial undertaking” for the
purpose of section 35D.

Therefore, the claim of assessee for
deduction u/s. 35D is in accordance with law and is allowable. The Tribunal set
aside the order of the Commissioner passed u/s. 263 of the Act.

The Hon. High Court find that the Tribunal
has considered the decision of the Apex Court in the case of Malabar
Industrial Co. Ltd. (supra) and held that when two possible views are
available and the issue is debatable, then, initiation of revision is not
permissible u/s. 263 of the Act.

It appears that the A.O sought clarification
from the assessee about the correctness of the amount of one fifth of the total
expenses incurred u/s. 35D of the Act. The assessee under letter dated
26.10.2004, gave specific explanation on the issue raised by the A.O and
thereafter, the assessment order was passed. Only because the Commissioner
thought that other view is a better view, would not enable CIT to exercise
power u/s. 263 of the Act. In the light of the above, the appeal was dismissed.
_

2 Section 153A – Search and seizure – Assessment would be limited to the incriminating evidence found during the search

CIT vs. SKS Ispat & Power Limited.
[Income tax Appeal no. 1874 of 2014 dated: 12/07/2017 (Bombay High Court)].

[Affirmed SKS Ispat & Power Limited
vs. DCIT . [ITA No. 8746 & 8747/MUM/2010 ; Bench : E ; dated 07/05/2014 ;
A.Y-2002-03 & 2003-04.Mum. ITAT ]

The Assessee raised a legal issue before
ITAT relating to the sustainability of additions which are not supported by the
seized or incriminating material u/s. 153A of the Act.

There was a search and seizure action on the
assessee in the case of SKS Ispat Ltd. Group, which is engaged in the business
of manufacturing and trading of steel products. The assessee filed the return
of income as per the provisions of the section 139(1) of the Act and the
assessments were completed u/s. 143(3) r.w.s. 153A of the Act. Thus, the
assessments for the said AYs have reached finality. In all these four
assessments, AO made a common addition under the heads (i) unexplained sundry
creditors and (ii) share application money. Before the Tribunal, it is the
claim of the assessee that the said additions were made without the assistance
of any incriminating material gathered during the search and seizure operation.

In this regard, the Assessee submitted that
on para 7 of the assessment order and mentioned that the basis for the addition
is the financial statements annexed with the return of income. Otherwise, there
is no seized material in possession of the AO which is incriminating
information that suggests the necessity of making the said additions validly.
Similarly, para 8 of the said order of the AO, Assessee demonstrated that no
seized material is available in support of making the said additions.

The Tribunal observed that, undisputedly,
the impugned quantum additions are made merely based on the entries in the
accounted books and certainly not based on either the unaccounted books of
accounts of the assessee or books not produced to the AO earlier or the
incriminating material gathered by the investigation wing of the revenue.

The Tribunal held that the AO was not justified
in making the addition on account of unaccounted sundry creditors (purchases)
and unexplained share of the money u/s. 153A of the Act, as there was no
incriminating material discovered in the search.

Before the High Court the Revenue contented,
the judgements relied by the Tribunal while limiting the scope of inquiry u/s.
153A of the Act to the extent of discovery of incriminating material during
search only is improper. The said judgements were in respect of assessments
which had taken place u/s. 143(3) of the Act. In the present case, the
assessment has taken place u/s. 143(1) of the Act. The distinguishing feature
in sections 143(1) and 143(3) has not been considered by the Tribunal in an
assessment u/s. 143(3) of the Act a long drawn inquiry is contemplated. It
would also amount to examination of evidence. However, inquiry u/s. 143 (1) of
the Act is limited on the basis of return filed. In view of that, the
judgements  relied on would not be
applicable.

The Assessee submits that this Court has time
and again held that assessment u/s. 153A of the Act would be limited to the
extent of any incriminating articles, incriminating evidence found during the
search. Even in case of The Commissioner of Income Tax vs. Gurinder Singh
Bawa decided by this Court, the assessment was u/s. 143(1) of the Act.
The Assessee relied on the judgment of this Court in The Commissioner of
Income Tax vs. Gurinder Singh Bawa reported in [2016] 386 ITR 483
(Bom) and another Judgment of this Court in the case of The
Commissioner of Income Tax vs. Warehousing Corporation & Anr. reported
in [2016] 374 ITR 645 (Bom).

The Hon. High Court observed that on perusal
of Section 153A of the Act, it is manifest that it does not make any
distinction between assessment conducted u/s. 143(1) and 143(3). This Court had
occasion to consider the scope of section 153A of the Act in case of The
Commissioner of Income Tax vs. Gurinder Singh Bawa [2016] 386 ITR 483 (Bom) and
in the case of The Commissioner of Income Tax vs. Continental Warehousing
Corporation & Anr. reported in [2016] 374 ITR 645 (Bom). It
has been observed that section 153A cannot be a tool to have a second inning of
assessment either to the Revenue or the Assessee. Even in case of The
Commissioner of Income Tax vs. Gurinder Singh Bawa (referred to supra)
the assessment was u/s. 143(1) of the Act and the Court held that the scope of
assessment after search u/s. 153A would be limited to the incriminating
evidence found during the search and no further. In the said Judgment, the
Judgement of this Court in The Commissioner of Income Tax vs. Continental
Warehousing Corporation & Anr. (referred to supra) has been
followed. Considering the authoritative pronouncements of this Court in above
referred cases, one of which is also with regard to assessment u/s. 143(1), the
issue is no longer res integral and stands concluded in the above
referred Judgements. In the above view, the Appeals was dismissed.

1 Section 45 – Capital Gain – assessee not engaged in the business of dealing in land – the profit arising on its sale is assessable as Capital gain only

[Affirmed The Sonawala Company Pvt. Ltd.
vs. ACIT. [ITA No. 4004/MUM/2010 ; Bench : F ; dated 27/08/2014; A Y: 2007-
2008. Mum. ITAT]

CIT vs.The Sonawala Company Pvt. Ltd.
[Income tax Appeal no. 385 of 2015 dated : 11/07/2017 (Bombay High Court)].

The assessee had gross income received as
hoarding charges/compensation consisted of hoarding charges, lease rent,
parking charges etc.

The assessee had sold a plot located in Pune
for a consideration of Rs.2.23 crore. The assessee had acquired the lease hold
rights on it through an agreement dated 11.12.1941. The assessee declared the
profit arising on sale of above said plot as long term capital gain and claimed
deduction u/s. 54EC of the Act. The AO noticed that the assessee had proposed
to construct flat on the above said land about 20 years back and had also
obtained advances from the parties.

The assessee had also prepared plans for construction
of residential premises and also obtained sanction from Pune Municipal
Corporation. However, the project was abandoned and the advances received from
parties excepting a sum of Rs.73,200/- were returned back.

The AO took the view that the assessee had
converted the above said plot as “Business asset” and accordingly
assessed the gain arising on sale of land as business income. Consequently, he
rejected the claim for deduction u/s. 54EC of the Act.  

The Revenue submits that though the open
space was acquired in the year 1941 by the Assessee, it was only in the year
2004, the construction permission was obtained for developing the said flat and
the same was assigned along with construction rights. As such the same will
have to be constituted as business income and not long term capital gain.

The assessee submitted that even a solitary
transaction can amount to business transaction. The attending circumstances are
writ large to come to the conclusion that the sale of a flat along with
construction permission of the project is a business income. The Hon’ble Punjab
& Haryana High Court had considered an identical issue in the case of CIT
vs. Raj Bricks Industry (2010)(322 ITR 625).

The Tribunal observed that in the instant
case, the assessee has been holding the leasehold right in the land since 1941.
It has sold the same after holding it for about 65 years.

About 20 years back, the assessee had
attempted to develop the same, but it was prevented by the order of the Hon’ble
Bombay High Court. Hence, the assessee could not develop the same.
Subsequently, the assessee has obtained permission to construct a residential
premises. All these sequences would show that the assessee has continued to
hold the land as its capital asset. Under these circumstances, the Tribunal
held that the CIT(A) was justified in holding that the gain arising on sale of
land should be assessed as “Long term Capital gain” only.

Consequently it was held that the assessee
can claim deduction u/s. 54EC of the Act, subject to the fulfilment of
conditions prescribed in that section.

The Hon. High Court held that totality of
the facts as were discussed by the CIT (A) and the Tribunal would show that no
error has been committed in treating the income from the sale of land as long term
capital gain.

 In view of that, no substantial questions of
law arise. The appeal as such is dismissed.

 

18 TDS – Karta – HUF – A. Y. 2012-2013 – Erroneous of PAN of Karta – HUF is entitled to benefit of TDS – Revenue has discretion to grant benefit to family

Naresh Bhavani Shah (HUF) vs. CIT; 396 ITR
589 (Guj):

The assessee was a HUF regularly assessed to
tax under the provisions of Income-tax Act, 1961. The funds belonging to the
assessee were invested in RBI taxable bonds. This was, however, done in the
name of N, the karta of the family. Inadvertently, such investment was made in
his individual name and he was not described as the karta of the family. The
PAN given to the RBI also was that of N in his personal capacity and not that
of the family. Therefore, the RBI while deducting tax at source on the interest
income of such bonds issued certificates of tax deducted at source in the name
of N carrying his permanent account number. In the return of income for the A.
Y. 2012-13, the assessee included the interest from the said RBI bonds and also
claimed Rs. 5,42,800/- TDS on such interest. N, in his individual capacity, had
not included the said interest income and also had not claimed the TDS on the
same. The assessee wrote to the Assessing Officer and pointed out that the
amount of Rs. 5,42,800/- represented tax deducted at source on the income
offered by the assessee and that the benefit of such TDS should be granted to
the assessee, particularly when the karta had no claim on such benefit. The
Assessing Officer assessed the interest income, but refused to give credit of
the TDS. The assessee’s revision petition was rejected.

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

“i)   There
was no dearth of power with the Department to grant credit of tax deducted at
source in a genuine case. In the present case, many years had passed since the
event. The facts were not seriously in dispute. The assessee had offered the
entire income to tax. The Depatrment had also accepted such declaration and
taxed the assessee.

ii)   In view of such special facts and circumstances,
the Department    had   to 
give  credit   of 
the  sum     of Rs. 5,42,800/- to the assessee, deducted
by way of tax at source, upon N filing an affidavit before the Department that
the sum invested by the RBI did not belong to him, the income was also not his
and that he had not claimed any credit of the tax deducted at source on such
income for the said assessment year.”

17 Section 245D – Settlement Commission – Settlement of cases – Section 245D – A. Y. 2000-01 to 2006-07 – Order of Settlement Commission after considering facts – Writ by Revenue – No evidence that conclusions of Settlement Commission were perverse – Order valid

CIT vs. Radico Khaitan Ltd.; 396 ITR 644
(Del):

The assessee company R was engaged in the
business of manufacturing and marketing of Indian made foreign liquor, country
liquor, etc. It also generated power for its manufacturing and bottling
plants. R was subjected to a search and seizure operation u/s. 132(1) of the
Income-tax Act, 1961, in its business premises. Search was resorted to also in
the residential premises of its directors, UPDA and at the residence of M,
Secretary General of UPDA. Also, a survey u/s. 133A was conducted at the
business premises of S, one of the core members of the “managing committee” of
UPDA. Many incriminating documents pertaining to the assessee were found and
seized from these premises. Statements of various persons including M were
recorded u/s. 132(4) and 133A of the Act. After collecting all material, the
Assessing Officer issued notices u/s. 153A for A. Ys. 2000-01 to 2006-07
requiring the assessee to file returns. R filed its returns on September 29,
2007 offering an amount of Rs. 4.5 crore for taxation. Thereafter, R filed an
application u/s. 245C of the Act before the Settlement Commission covering all
assessment years and declared additional income for the relevant period to the
extent of Rs. 23 crore. Revenue filed its report under rule 9 of the Income-tax
Settlement Commission Rules, 1987, alleging that concealment of income by the
assessee was Rs. 159,82,92,966/- under various heads. This figure was revised
to Rs. 177,84,16,966/- by a supplementary report dated February 13, 2008. After
hearing the parties and considering the material, the Commission settled the
concealed income of the assessee for all the block years at Rs. 30 crore.

Revenue filed a writ petition and challenged
the order of the Settlement Commission. The Delhi High Court dismissed the writ
petition and held as under:

“i)   The
main thrust of the Revenue’s grievance in these proceedings was with respect to
the amounts said to have been clandestinely given to UPDA as the assessee’s
contribution towards “slush fund” to be used as pay offs to politicians and
public officers in return for favourable treatment. The linkage between the
material seized from the assessee’s premises and those from UPDA’s premises as
well as the statement of M was not established through any objective material.

ii)   It
was now a settled law that block assessments were concerned with fresh material
and fresh documents, which emerged in the course of search and seizure
proceedings; the Revenue had no authority to delve into material that was
already before it and the regular assessments were made having the deposition.
That the assessee’s expenditure claim was bogus, or it had under-reported
income and that it resorted to over invoicing and diversion of funds into the
funds allegedly maintained by UPDA, was not established.

iii)   The
findings of the Commission therefore could not be faulted as contrary to law.
As far as suppression of profits for various financial years, alleged by the
Revenue, the Commission was of the opinion that the documents relied upon were
work estimates and projections that revealed tentative profitability in respect
of the assessee’s activities towards sale of country liquor i.e., that the documents
did not reflect the actual figures. The alleged bogus expenditure to the tune
of Rs. 9,11,41,457/- was claimed in the original assessments as payments made
to F and R. The Revenue alleged that F was involved in entry operations and
that the expenditure claimed by the assessee was bogus and entirely fictitious.
While the expenditure claimed by itself might be suspect, the Revenue had a
further obligation to investigate further having regard to the fact that the
agreement between the assessee and R was disclosed earlier.

The  mere statement  of 
one  employee  of  R
would not have discredited the agreement itself. The
lack of  any particulars to discredit the
services and expenditure claimed by the assessee, justified the
Commission’s   conclusion    that  
the   addition    of  Rs. 9.11 crore demanded by the Revenue or arguments on the basis that the
assessee did not disclose such amount, was not warranted.

iv)  The
Commission’s findings were not contrary to law or unreasonable. The order of the
Settlement Commission was valid.”

16 Section 9(1)(vii) and art 12 of DTAA between India and US – Non-resident – Income deemed to accrue and arise in India – A. Y. 2004-05 – (i) Agreement between resident and non-resident – Non-resident to procure designs and drawings from another non-resident – Designs and drawings supplied and payment received – Transaction one of sale – No royalty accrued to non-resident – tax not deductible at source; (ii) Indian company subsidiary of American company – Expenses incurred on behalf of Indian company by American company – Reimbursement of expenses – No payment for technical services – Amount not assessable u/s. 9 – Tax not deductible at source

CIT vs. Creative Infocity Ltd.; 397 ITR
165(Guj):

The assessee company, a subsidiary company
of C of the USA entered into joint venture undertaking with the Government of
Gujarat for developing and construction of an information technology park at
Gandhinagar, a project awarded to it by the Government of Gujarat. While
carrying out the construction of the project, the assessee entered into a
contract agreement with two non-resident companies, viz., N, and C, for
providing designs and drawings and for marketing and selling services
respectively. During the course of verification of the foreign remittances to
these entities, the Assessing Officer observed from the agreement entered into
between the assessee and N that the services provided by the non-resident
company were rendered towards providing of architectural, structural
engineering designs and drawings services, as mentioned in clause 9 of the
contract. As regards the payments made to C, the Assessing Officer observed
that the payments were made for providing services related to marketing and
selling, projects office administration expenses and promotional expenses and
to design charges which were paid to the employees of C, towards their salary,
travel expenses, etc. Therefore, the Assessing Officer was of the
opinion that since the payments made towards the services rendered by the
foreign companies were taxable as defined in section 9(1)(vii) of the
Income-tax Act, 1961, as well as article 12 of the DTAA between India and US,
the assessee was required to deduct tax at source u/s. 195 of the Act.
Therefore, since the assessee made the payment to the foreign companies without
deducting tax at source, the Assessing Officer passed an order u/s. 201(1) and
(1A) read with section 195 of the Act raising demands. The Commissioner
(Appeals) and the Tribunal deleted the additions/demands.

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

“i)   The
agreement with N was to procure the designs and drawings from architects. In
the agreement, only the assessee and N were the signatories and not the
architects. Thus, N first procured the plans and designs from the architects on
making payment of full consideration and thereafter supplied it to the assessee
as an outright sale. There were concurrent findings by both the Commissioner
(Appeals) as well as the Tribunal holding that (a) the assessee had purchased
drawings from N and not from the architects; (b) that the payment made by the
assessee towards supply of designs and drawings to N was for an outright
purchase and therefore, not taxable as royalty. The payment made towards supply
of designs and drawings to a non-resident was outright purchase and therefore,
not taxable as royalty u/s. 9(1) of the Act.

ii)   The
agreement was for reimbursement of expenses incurred by C for marketing. The
expenses incurred by C were fully supported by the vouchers and certified by
the certified public accountant of the USA as well as the chartered accountant
of India certifying that the expenses were in fact reimbursement. There were
concurrent findings by the Commissioner (Appeals) as well as the Tribunal that
the amount was reimbursed and could not be said to be any amount paid to C for
rendering any service to the assessee. The findings of fact recorded by both
the lower appellate authorities were on appreciation of facts and considering
the material on record, more particularly the agreement entered into between
the assessee and C. It was not alleged that the findings of fact recorded by
lower authorities were perverse or contrary to the evidence on record. C had no
business activity or permanent establishment in India. It was neither working
through any agent nor had any branch in India. Therefore, the provisions of
section 9(1)(vi)(vii) would not have any application as the amount paid was
neither royalty nor fees for technical services.“

15 Section 271(1)(c) – Penalty – Concealment of income – A. Y. 2006-07 – Notice for levy of penalty – Notice should state specific grounds for levy of penalty – Printed form not sufficient

Muninga Reddy vs. ACIT; 396 ITR 398
(Karn)

 For the A. Y. 2006-07, after completing the
assessment, the Assessing Officer imposed penalty of Rs. 1,78,35,511/- for
concealment of income u/s. 271(1)(c) of the Income-tax Act, 1961. The Tribunal
confirmed the penalty.

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

“i)   In
order to levy penalty, the notice would have to specifically state the ground
mentioned in section 271(1)(c) of the Income-tax Act, 1961, namely whether it
is for concealment of income or furnishing incorrect particulars of income that
the penalty proceedings are being initiated. Sending a printed form with the
grounds mentioned in section 271(1)(c) of the Act would not satisfy the
requirement of law. The assessee should know the ground which he has to meet
specifically, otherwise the principles of natural justice would be violated and
consequently, no penalty could be imposed on the assessee if there is no
specific ground mentioned in the notice.

ii)   There
was a printed notice and no specific ground was mentioned, which may show that
the penalty could be imposed on the particular ground for which the notice was
issued. Hence, the notice and the consequent levy of penalty were not valid.”

14 Sections 194A, 194H, 201(1A), 276B and 279(1), and section 482 of Cr PC 1973 – TDS – Failure to deposit – Assessee depositing tax with interest once mistake of its accountant revealed during audit – Reasonable cause – Prosecution initiated three years after such payment – Not permissible

Sonali Auto Pvt. Ltd. vs. State of Bihar
(Patna); 396 ITR 636 (Patna):

A prosecution u/s. 276B of the Income-tax
Act, 1961 was initiated against the assessee on the basis of a complaint filed
by the Deputy Commissioner in accordance with the sanction granted by the
Commissioner u/s. 279(1) of the Act, for failure to deposit the tax at source
for the financial year 2009-10. The complaint also stated that there was a
delay of 481 days without any reasonable cause. The Special Judge, Economic
Offences, took cognisance against the assessee company and its three directors
for the offence u/s. 276B.

The assessee filed writ petition u/s. 482 of
Cr PC 1973 and challenged the prosecution proceedings. The assessee submitted
that due to oversight on the part of its accountant, it could not deposit the
tax deducted at source within the specified time limit, that once the mistake
was found during the audit, the amount had been deposited along with the
interest due u/s. 201(1A) for the delayed payment of tax deducted at source and
that the complaint had been filed after a lapse of three years from the date of
payment of dues. The Patna High Court allowed the petition and held as under:

 “i)   Reasonable
cause would mean a cause which prevents a reasonable person of ordinary
prudence acting under normal circumstances, without negligence or inaction or
want of bonafides. The assessee had been able to prove reasonable cause for not
depositing the amount of tax deducted at source within the prescribed time
limit. Oversight on the part of the accountant, who was appointed to deal with
accounts and tax matters, could be presumed to be a reasonable cause for not
depositing the amount of tax deducted at source within the prescribed time
limit. The assessee immediately after noticing the defects by its auditors had
deposited the amount along with interest as required u/s. 201(1A) for the
delayed payment in 2010 itself.

ii)   Prosecution
had been launched against the assessee after a lapse of about three years from
the date of deposit of the due amount of tax deducted at source along with
interest and that was contrary to the instruction, F. No. 255/339/79-IT(Inv),
dated May 28, 1980 issued by CBDT in that regard. Moreover, according to the
provisions of section 278AA, no person for any failure referred to u/s. 278B
should be punished under the provisions if he had proved that there was a
reasonable cause for such failure.

iii)   Continuance
of criminal proceedings u/s. 276B of the Act, against the assessee was mere
harassment and abuse of process of court. Accordingly, the order passed by the
special judge, Economic Offences, taking cognisance of the offence u/s. 276B of
the Act, along with the entire criminal proceedings against the assessee were
quashed.”

13 Section 206C(1C) – A. Ys. 2005-06 to 2007-08 – Scope of section 206C(1C) – Collection of tax at source from agents who collect toll etc. – No obligation to collect tax at source from agent who collected octroi

CIT(TDS) vs. Commissioner, Akola
Municipal Corporation; 397 ITR 226 (Bom):

The respondent assessee is the Municipal
Corporation for the town Akola. For the A. Ys. 2005-06 to 2007-08, the
assesssee had entered into a contract called agency agreement, by virtue of
which the assessee appointed an agent to provide services of collecting octroi
on its behalf. This octroi was collected at the rates fixed by the assessee,
for which the necessary receipts are also issued in the name of the assessee.
The entire amount collected by the agent is remitted to the assessee and the
agent is entitled to a commission depending upon the quantum of octroi
collected during the year. The ITO(TCS) was of the view that that the assessee
was obliged to collect tax at source u/s. 206C(1C) of the Income-tax Act, 1961
in respect of octroi collection received from the agent. Since the assessee had
not collected and deposited such tax, the ITO(TCS) passed order u/s. 206C and
raised a demand of Rs. 1.09 crore for failure to collect tax at source and
interest of Rs. 15.96 lakh on the same. The Tribunal cancelled the demand.

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

“i)   It
is a settled position of law that fiscal statutes are strictly construed.
Section 206C(1C) of the Income-tax Act, 1961, provides that a person who grants
an agency or licence, or in any other manner transfers his right in respect of
a parking lot, toll plaza or a mine and quarry to another person, while
receiving the amount so collected from the agent or licensee (the transferee of
its right), should also collect tax at source. The above obligation is only
restricted to parking lots, toll plazas or mine or quarry. This obligation does
not extend to octroi.

 ii)   The
Seventh Schedule to the Constitution of India empowers the state to levy octroi
as found in entry 52 of List II thereof, while entry 59 of List II of the
Seventh Schedule to the Constitution empowers the State to collect tolls. Thus,
there is a basic constitutional difference between the two levies. A “toll” is
normally collected on account of use of the roads by animals and humans. As
against which, “octroi” is normally collected on account of goods entering the
corporation limits (area) for use, consumption or sale.

iii)   Section
206C(1C) cannot be extended to collection of octroi. The Legislature when it
brought in section 206C(1C) of the Act, has not authorised the collection of
tax at source in respect of octroi. It specifically restricted its obligation
to only three categories namely parking, toll plaza, mining and quarrying. No
fault can be found with the impugned order of the Tribunal.”

10 Section 54 – If agreement for purchase of residential flat is made and the entire amount is paid within three years from the date of sale, the basic requirement for claiming relief u/s. 54(1) of the Act is taken as fulfilled.

Seema Sabharwal vs. ITO (Mumbai)
Members : Sanjay Garg (JM) and Annapurna Gupta (AM)
ITA No. 272/Chd/2017
A.Y.: 2013-14.                              Date of Order: 5th February, 2018.
Counsel for assessee / revenue: M. S. Vohra / Manjit Singh

In a case where agreement is entered into
and amount paid within the period mentioned in section 54, the claim for relief
cannot be denied on the ground that as per the agreement with the builder, the
house was to be completed within 4 years, whereas, as per provisions of section
54 of the Act, the house should have been constructed within 3 years from the
date of transfer of original asset.

 

The procedural and enabling provisions of
s/s. (2) cannot be strictly construed to impose strict limitations on the
assessee and in default thereof to deny him the benefit of exemption
provisions.  If assessee at the time of
assessment proceedings proves that he has already invested the capital gains on
the purchase / construction of the new residential house within the stipulated
period, the benefit under the substantive provisions of section 54(1) cannot be
denied to the assessee.

 

FACTS  

The assessee sold a residential flat on
17.9.2012 for a consideration of Rs. 5,20,00,000.  Long term capital gain arising on sale of
this flat was Rs. 2,97,78,977.  The
Assessing Officer (AO) noticed that the assessee had claimed exemption for Rs.
3,00,00,000 on account of investment in another flat on 11.9.2014.  On perusal of the purchase deed, the AO
noticed that the assessee was to get possession of the flat on or before
August, 2016.  The AO concluded that the
assessee had only purchased the right to purchase the flat which was proposed
to be given after 4 years from the date of transfer in August 2016.  He held that the conditions of section 54 had
not been complied with and, therefore, he denied the claim of Rs. 2,97,78,977.

 

Aggrieved, the assessee preferred an appeal
to the CIT(A) where it contended that in various cases it has been held that if
assessee invests capital gains in a house which is under construction and due
to some reasons, the possession is delivered late to the assessee, even then
the investment of the amount will be considered towards the purchase /
consideration of the house and that the assessee will be eligible to claim
deduction u/s. 54 of the Act.

 

The CIT(A) held that the case laws relied
upon were distinguishable and were relating to claim of deduction u/s. 54F and
not under section 54 as is the present case. 
He held that while section 54F requires that the investment is to be
made, section 54 requires the purchase / construction to be completed. He
further observed that even the assessee was supposed to deposit the proceeds
from the sale of house property in specified scheme / capital gains account,
however, the assessee in this case did not deposit the same in the capital gain
account / scheme with the bank rather the assessee had deposited the amount in
FDRs. The assessee had failed to comply with the conditions stipulated u/s.
54(2) of the Act.  He confirmed the action
of the AO.

 

Aggrieved, the assessee preferred an appeal
to the Tribunal.

 

HELD  

The Tribunal observed that various courts
have held that if the assessee invests the amount in purchase / construction of
building within the stipulated period and the construction is in progress, then
the benefits of exemptions, cannot be denied to the assessee.  Reliance in this respect can be placed on the
decision of the jurisdictional High Court of Punjab & Haryana in the case
of Mrs. Madhu Kaul vs. CIT, ITA No. 89 of 1999 vide order dated 17.1.2014
and further on the decision of the Calcutta High Court in the case of CIT
vs. Bharati C. Kothari (2000) 160 CTR 165 and also on the decisions of the
various co-ordinate Benches of the Tribunal. 

 

On going through the provisions of sections
54 and 54F of the Act, the Tribunal did not find any such distinction as drawn
by CIT(A) or any such dissimilarity in the wordings of the provisions from
which any such conclusion can be drawn that u/s. 54F of the Act the investment
is to be considered and/or that u/s. 54 off the Act, the house must be
completed within the stipulated period of three years or that investment is not
to be considered. 

 

It observed that the decision of the
Calcutta High Court has categorically held that if the agreement for purchase
of residential flat is made and the entire amount is paid within three years
from the date of sale, the basic requirement for claiming relief u/s. 54(1) of
the Act is to be taken as fulfilled.  The
Tribunal held that this issue is squarely covered in favor of the assessee by
the various decisions of the Hon’ble High Court.

 

As regards non-deposit of the amount in
capital gains account scheme before the due date for filing of return u/s.
139(1) of the Act, the Tribunal held that sub-section (1) of section 54 is a
substantive provision enacted with the purposes of promoting purchase /
construction of residential houses. However, sub-section (2) of section 54 is
an enabling provision which provides that the assessee should deposit the
amount earned from capital gains in a scheme framed in this respect by the
Central Government till the amount is invested for the purchase / construction
of the residential house.  This
provision, according to the Tribunal, has been enacted to gather the real
intention of the assessee to invest the amount in purchase / construction of a
residential house.

 

S/s. (2) puts an embargo on the assessee to
casually claim the benefit of section 54 at the time of assessment, without
there being any act done to show his real intention of purchasing / constructing
a new residential unit. S/s. (2) governs the conduct of the assessee that the
assessee should put the amount of capital gains in an account in any such bank
or institution specifically notified in this respect and that the return of the
assessee should be accompanied by submitting a proof of such deposit, hence,
s/s. (2) is an enabling provision which governs the act of the assessee, who
intends to claim the benefit of exemption provisions of section 54. 

 

The enabling provision of s/s. (2) cannot
abridge or modify the substantive rights given vide sub-section (1) of section
54 of the Act, otherwise, the real purpose of substantive provision i.e. s/s.
(1) will get defeated. The primary goal of exemption provisions of section 54
is to promote housing.  The procedural
and enabling provisions of s/s.(2) thus cannot be strictly construed to impose
strict limitations on the assessee and in default thereof to deny him the
benefit of exemption provisions. 

 

The Tribunal held that if the assessee at
the time of assessment proceedings, proves that he has already invested the
capital gains on the purchase / construction of the new residential house
within the stipulated period, the benefit under substantive provisions of
section 54(1) cannot be denied to the assessee. 
Any different or otherwise strict construction of s/s. (2) will defeat
the very purpose and object of the exemption provisions of section 54 of the
Act.  The Tribunal observed that this
view is fortified by the decision of the Karnataka High Court in the case of CIT
vs. Shri K. Ramachandra Rao, ITA No. 47 of 2014 c/w ITA No. 46/2014, ITA No.
494/2013 and ITA No. 495/2013, decided vide order dated 14.7.2014 where the
High Court has directly dealt with this issue while interpreting the identical worded
provisions of section
54F(2) of the Act.

 

Since the assessee had invested the amount
and had complied with the requirement of substantive provisions, the Tribunal
held that the assessee is entitled to the claim of exemption u/s. 54 of the
Act. 

 

The appeal filed by the assessee was
allowed.

12 Section 41(1) – Business income – Deemed income – A. Y. 2000-01 – Remission or cessation of trading liability – Condition precedent for treating sum as deemed profits – Sum should have been claimed as allowance or deduction in earlier year – Advance received from parent company for business purposes to be adjusted against future supplies – Transfer of advances to capital reserve – Capital receipt not liable to tax

Transworld Garnet India Pvt. Ltd. vs.
CIT; 397 ITR 233 (Mad):

The shareholding in the assessee-company was
held to the extent of 74 percent, by a company T which in turn was wholly held
by W, Canada. The assessee was set up completely with the investment from the
parent company W.  Advances were also
received from W towards business needs and the advances were to be adjusted against
future supplies of garnet to W. Due to various logistic and administrative
reasons, the assessee incurred losses. The private sources that were approached
for their participation in the equity insisted upon equal investment to be made
by the foreign company W in order to dilute the losses incurred, as a
pre-condition to their investment. Accordingly, W directed the assessee to
convert the advances made by it into capital, which was complied with by the
assessee. It transferred the amount to general reserve.

The Assessing Officer was of the view that
the amount ought to have been taken to the profit and loss account instead of
the general reserve. He held that the provisions of section 41(1) of the
Income-tax Act, 1961 relating to cessation of liability were attracted and that
the amount was liable to be brought to tax. Accordingly, he passed an order
u/s. 143(3) r.w.s.147 assessing that as income. The Commissioner (Appeals)
accepted the assessee’s submission that the amount constituted a capital
receipt. He recorded a finding to the effect that the conversion of the
advances resulted in wiping out of the losses and paved the way for the entry
of the resident participant. He also held that the provisions of section 41(1)
were attracted only in a situation where the amount in question, in respect of
which liability had ceased, had been claimed as an allowance or a deduction in
any previous year, which fact had not been established in the assessee’s case.

He further held that there was no nexus
between the allowance/deduction in the previous years and the amount in
question to invoke section 41(1). The Appellate Tribunal held that the amounts
were originally received as advances against the supply of garnet and
subsequently, the claim over the amount partook of the character of a revenue
receipt. It further held that the subsequent transfer of the amounts to general
reserve constituted only an application, that would not change the nature of the taxability of the amounts at a stage anterior thereto.

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

“i)  In order for the
provisions of section 41(1) to be attracted, the benefit obtained by the
assessee in the relevant year should have a direct nexus with an allowance or
deduction for any previous year as a claim of loss, expenditure or trading
liability which has not been established in the assessee’s case.

ii)  The findings of the
Commissioner (Appeals) were based upon the financials as well as all the
relevant documents. He also found that there was nothing on record to lead to
the conclusion that the advances from W had been claimed as an allowance or
deduction in any previous year. The circumstances in which the infusion of
capital was made and the findings that related thereto were undisputed. The
amount though received as advances for the supply of garnet had remained static
without depletion of any sort.

iii)  The entire amount had
been converted to shareholding and consequently, benefit could be said to have
accrued to the assessee only in the capital field. The substantial questions of
law are answered in favour of the assessee and the appeal allowed.”

35. Charitable purpose – Exemption u/s. 11 – A. Ys. 2006-07 and 2009-10 – Education main activity of assessee – Publishing and printing books and selling them at subsidised rates or distributing them at free of cost – Profit earned thereby utilised for education – Denial of exemption erroneous-

Delhi Bureau of Text Books vs. DIT(Exemption); 394 ITR 387
(Del):

The assessee was registered as a charitable institution u/s.
12A(a) of the Act, 1961. It printed and published text books for Government
schools and sold them at subsidised rates with nominal profits. It also
distributed free books, reading material and school bags to needy students. Its
income was exempt from tax u/s. 11 of the Act, during the A. Ys. 1971-72 to
2005-06. It was denied the benefit of exemption for the A. Ys. 1975-76 and
1976-77, but the Commissioner (Appeals) restored the exemption and the same was
confirmed by the Tribunal. For the A. Ys. 2006-07 to 2009-10, the Assessing
Officer denied the exemption and the same was confirmed by the Appellate
Tribunal. The Tribunal held that the asessee’s activities were in the nature of
business, that compliance with the requirement of section 11 could be examined
in every assessment year, that in its earlier order for the A. Ys. 1975-76 and
1976-77, it had not considered the assessee’s income and expenditure statements
or other relevant evidence, that the assessee had not maintained separate books
of account for its activities of sale and purchase of books thereby violating
the provisions of section 11(4A), and that the assessee had made accumulation
in excess and ”without specifying any purpose” and “was not wholly for
charitable purposes”.

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

“i)  The preparation and distribution of text books
contribute to the process of training and development of the mind and the
character of students. There does not have to be a physical school for an
institution to be eligible for exemption. What is important is the activity. It
has to be intrinsically connected to “education”.

ii)  The Appellate Tribunal was incorrect in
denying exemption to the assessee u/ss 11 and 12 of the Act. It erred in
holding that the activities carried out by the assessee fell under the fourth
limb of section 2(15), “the advancement of any other object of general public
utility” and that its activities were not solely for the purpose of advancement
of education. It came to the erroneous conclusion merely because the assessee
had generated profits out of the activity of publishing and selling text books
that it had ceased to carry on the activity of “education”.

iii)  It failed to consider the issue in the
background of the setting up of the assessee, its control and management and
the sources of its income and the pattern of its expenditure and that its
surplus amount was again utilised in its main activity of “education”. The
assessee contributed to the training and development of the knowledge, skill,
mind and character of the students.

iv) The exemption had been granted to the assessee
u/s. 11 and 12 from the A. Ys. 1971-72 to 2005-06 consistently for 34 years.
For the A. Ys. 1975-76 and 1976-77, grant of exemption had been restored by the
Appellate Tribunal which was not contested by the Department. Apart from the
fact that the assessee had earned more profits from its essential activity of
education, there was no change in the circumstances concerning its activity of
publishing and selling books during the A. Ys. 2005-06 to 2009-10. There was no
justification to warrant a different approach. Appeals are allowed.”

34. Capital gains- Exemption u/s. 54F – A. Y. 2012-13 – Assessee getting more than one residential house in several blocks – All flats product of one development agreement on same piece of land – Flats located in same address – Assessee is entitled to benefit of exemption u/s. 54F

CIT vs. Gumanmal Jain; 394 ITR 666 (Mad):

The assessee and his two sons owned certain contiguous
extents of land. The assessee along with his two sons entered into a joint
development agreement with a builder to develop the land by constructing 16
flats therein with a total built up area of 56,945 sq. ft. The assessee and two
sons on the one hand and the builder on the other hand agreed to share in 70:30
ratio between them. The land was developed, 16 flats with separate kitchens and
37 car parks were put up. In lieu of the 70:30 ratio set out in the builder’s
agreement, the assessee got 9 flats and the sons got 3 flats each. For the A.
Y. 2012-13, the Assessing Officer rejected the assessee’s claim for exemption
u/s. 54F of the Act, 1961 on the ground that the assessee owned more than one
residential house and assessed the long term capital gain of Rs. 2,31,56,430 to
tax. The Commissioner (Appeals) allowed the assessee’s claim for exemption and
the same was upheld by the Tribunal.

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

“i)  The assessee having got flats along with his
two sons would not disentitle him from getting the benefit u/s. 54F of the Act
only on the ground that all the flats were not in the same block, particularly
in the light of the admitted factual position that all the flats were located
at the same address. As long as all the flats were in the same address, even if
they were located in separate blocks or towers it would not alter the position.

ii)  After all, all the flats were a product of one
development agreement of the same piece of land. Therefore, the assessee was
entitled to get the benefit of section 54F of the Act.”

33. Business expenditure – Exempt income- Disallowance u/s. 14A- A. Y. 2011-12 – If no exempt income is earned in the assessment year in question, there can be no disallowance of expenditure in terms of section 14A read with Rule 8D even if tax auditor has indicated in his tax audit report that there ought to be such a disallowance

Principal CIT vs. IL & FS Energy Development Company
Ltd.; [2017] 84 taxmann.com 186 (Delhi)

Assessee is a company engaged in provision of consultancy
services. On 26th September 2011, the Assessee filed its return at a
loss of Rs. 2,42,63,176/- for the A. Y. 2011-12. The Assessee had not earned
any exempt income in the relevant year. The assessee had not made any
disallowance u/s. 14A of the Act, 1961. The Assessing Officer computed the
disallowable amount u/r. 8D and made disallowance. The Tribunal held that since
the assessee had not earned any exempt income in the relevant year there can be
no disallowance u/s. 14A of the Act and allowed the assessee’s claim.

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

“i)  The key question in the present case is
whether the disallowance of the expenditure will be made even where the
investment has not resulted in any exempt income during the AY in question but
where potential exists for exempt income being earned in later AYs.

ii)  Section 14A does not particularly clarify
whether the disallowance of the expenditure would apply even where no exempt
income is earned in the AY in question from investments made, not in that AY,
but earlier AYs.

iii)  The words “in relation to income which
does not form part of the total income under the Act for such previous year”
in the above Rule 8D(1) indicates a correlation between the exempt income
earned in the AY and the expenditure incurred to earn it. In other words, the
expenditure as claimed by the Assessee has to be in relation to the income
earned in ‘such previous year‘.

iv) This
implies that if there is no exempt income earned in the AY in question, the
question of disallowance of the expenditure incurred to earn exempt income in
terms of section 14A read with Rule 8D would not arise.

v)  The mere fact that in the audit report for the
AY in question, the auditors may have suggested that there should be a
disallowance cannot be determinative of the legal position. That would not
preclude the assessee from taking a stand that no disallowance u/s. 14A of the
Act was called for in the AY in question because no exempt income was earned.”

32. ALP – Computation- Sections 92 and 92C – A. Y. 2011-12 – Determination of operating costs- Agreement between parties – Reimbursement of costs received from AEs – Finding that reimbursement of cost of infrastructure was without a mark up- Claim of assessee to exclude cost of infrastructure to be allowed

Principal CIT vs. CPA Global Services Pvt. Ltd.; 394 ITR
473 (Del):

The assessee is a wholly owned subsidiary of CPA Mauritius
Ltd., which in turn is a subsidiary of CPA Jersey. It offers a range of legal
support services to its associated enterprises (AEs) as well as to independent
third party customers. During the A. Y. 2011-12, the assessee received an
amount from its associated enterprises as “cost recharge on account of spare
capacity” which was not reflected in its profit and loss account. The Transfer
Pricing Officer (TPO) was of the view that the assessee had not produced any
evidence in support of its claim that the expenditure was towards maintenance
of spare capacity at the instance of the AEs.

The Dispute Resolution Panel (DRP) held that the arm’s length
price (ALP) of the receipts from the AEs included all the costs and that the
assessee did not give sufficient reasons to exclude certain costs for the
purposes of computing the ALP. While the application filed by the assessee u/s.
154 of the Income-tax Act, (hereinafter for the sake of brevity referred to as
the “Act”) 1961 was pending before the DRP, a draft assessment order
was passed by the Assessing Officer based on the decision of the DRP. Before
the Appellate Tribunal, the assessee referred to the agreement with its AEs and
submitted that the reimbursement towards the cost of service with a mark up had
been accounted for in working out the ALP in the transfer pricing study and the
other reimbursement it sought to exclude from the operating costs was towards
the cost of infrastructure on which there was no mark up. The Appellate
Tribunal held that the reimbursement cost should be excluded as they did not
involve any functions to be performed so as to consider it for profitability
purposes and directed the TPO to exclude the reimbursement costs while working
out the operating costs.

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

“i)  The Appellate Tribunal after examining the
agreement between the assessee, and its AEs had agreed with the assessee that
the reimbursement of the infrastructure cost had no mark up. Unless there was a
specific plea by the Department to the effect that such a factual finding was
perverse, on a general plea of perversity, the appeal could not be entertained.
Also, it should be accompanied by a reference to the relevant document which
formed part of the record of the case before the Appellate Tribunal.

ii)   No
substantial question of law arises from the order of the Tribunal. Appeal is
dismissed.”

Applicability of Section 14A – Interest To Partners

Issue for Consideration

Section 14A(1) of the Income-tax Act, 1961 provides that for
the purposes of computing the total income, under the chapter (Chapter IV –
Computation of Total Income), no deduction shall be allowed in respect of an
expenditure incurred by the assessee in relation to the income which does not
form part of the total income under the Act.

Under the scheme of taxation of partnership firms, a
partnership firm is entitled to deduction of interest paid to partners, and
such interest paid is taxable in the hands of the partners, under the head
‘profits and gains of business and profession, vide section 28(v) of the Act. The
deduction of such interest to partners, in the hands of the firm, is governed
by the restrictions contained in section 40(b)(iv), which section provides that
payment of interest to any partner, which is authorised by, and is in
accordance with, the terms of the partnership deed and relates to any period
falling after the date of such partnership deed in so far as such amount
exceeds the amount calculated at the rate of 12% simple interest per annum,
shall not be allowed as deduction.

A question has arisen before the Tribunal in various cases as
to whether interest paid to partners, which is allowable as a deduction to the
partnership firm, can be regarded as an ‘expenditure incurred’ by the assessee
firm, and can therefore form part of the disallowance u/s.14A, to the extent
that it has been incurred in relation to the income arising on investment made
out of the funds received from the partners and on which interest is paid by
the firm, which income does not form part of the total income of the partnership
firm.

While the Ahmedabad and Mumbai benches of the Income Tax
Appellate Tribunal have held that such interest, in the hands of the firm,
would be regarded as an expenditure subject to disallowance u/s. 14A, the Pune
bench of the Tribunal has taken a contrary view holding that interest paid by a
partnership firm on its partners’ capital cannot be regarded as an expenditure amenable to section 14A.

Shankar Chemical Works’ case

The issue first came up before the Ahmedabad bench of the
Tribunal in the case of Shankar Chemical Works vs. Dy CIT 47 SOT 121.

In this case, relating to assessment year 2004-05, the
assessee was a partnership firm carrying on the business of manufacturing of
chemicals. It had invested in various financial assets, such as debentures,
bonds, mutual funds and shares to the extent of Rs. 1.93 crore, the income from
some of which investments was exempt from tax to the extent of Rs. 43.48 lakh.
The assessing officer noted that the assessee had borrowings to the extent of
Rs. 15.57 lakh, on which an interest of Rs. 1.54 lakh had been paid. Besides,
the firm had paid interest on partners’ capital. The assessing officer
concluded that investments in all these mutual funds, shares and securities had
been made out of the funds of the firm, which were either out of the partners’
capital or from borrowings from others. The interest payment on these funds
were made either to partners or to the persons from whom borrowings were made.
He therefore disallowed an amount of Rs. 17.04 lakh out of the total interest expenses of Rs. 23.23 lakh u/s. 14A.

On appeal before the Commissioner(Appeals), the disallowance
of interest u/s. 14A was upheld. The Commissioner(Appeals) held that the
capital was employed for the purpose of investment in mutual funds, shares and
debentures and bonds, and not for the business of the assessee firm for which
the partnership was formed. He also held that the provisions of section 40(b)
were not applicable, and the funds were utilised for the purpose of investment
rather than the business. He upheld the working of the disallowance of interest
made by the assessing officer in proportion to the amount of investment and
total funds employed, and held that the partners of the firm were entitled to
relief under the explanation to section 10(2A) in respect of the that part of
interest of the firm which was not allowed as a deduction to the firm.

Before the Income Tax Appellate Tribunal, on behalf of the
assessee, it was argued that no nexus had been established between the interest
payment and the earning of the exempt income. It was further argued that as per
section 28(v), interest paid to a partner of a firm was chargeable to tax in
the hands of the firm. Therefore, disallowance of such interest u/s. 14A, in
the hands of the firm, would amount to a double taxation. It was further argued that the
firm and the partners were not different entities.

Reliance was placed on paragraph 48 of the CBDT Circular No.
636 dated 31st August 1992, where the provisions of the Finance act,
1992, regarding assessment of the firm were explained. In the circular, it was
stated that share of a partner in the profits of the firm would not be included
in computing, his total income u/s. 10(2A). However, interest, salary, bonus,
commission or any other remuneration paid by the firm to the partner would be
liable to tax as business income in the partner’s hands. An explanation has
been added to section 10(2A) to make it clear that the remuneration or
interest, which was disallowed in the hands of the firm, would not suffer
taxation in the hands of the partner. It was further pointed out that in the
case of the assessee, the partners to whom interest was paid were taxable at
the maximum rate.

It was further argued on behalf of the assessee that the
amendment to the scheme of assessment of a firm had been made to avoid double
taxation of the income. Interest paid to partners was distribution of profit
allocated to the partners in the form of interest and as such it could be taxed
once either in the hands of the firm or in the partners’ hands, but could not
be taxed in both places. Since the partners had paid tax on interest received
from the firm, and all the conditions laid down in section 40(b) had been
fulfilled, no portion of interest paid to partners could be disallowed, and if
it was disallowed it would amount to double taxation.

On behalf of the revenue, it was contended that no interest
free funds were available to the assessee, and therefore disallowance had
rightly been made. The investments were made from capital of the partners, on
which interest at the rate of 10.5% per annum was paid.

The Tribunal rejected the contention of the assessee that
there was no nexus between the exempt income and partners’ capital, since no
interest-free funds were available with the firm. Importantly, in respect of
the assessee’s argument that any disallowance of interest u/s. 14A would amount
to double disallowance, the Tribunal noted that as per the provisions contained
in section 14A(1), an expenditure incurred for earning exempt income was not to
be considered for computing total income under chapter IV. This implied that
such expenditure was to be allowed as deduction while working out the exempt
income under chapter III. In case of expenditure which was incurred for earning
exempt income, a specific treatment was to be given, that such expenses should
be disregarded for computing total income under chapter IV and should be
reduced from exempt income under chapter III. Hence, according to the Tribunal,
there was no double addition or double disallowance.

The Tribunal observed that partners had a share in all the
incomes of the firm. As per the above treatment in the hands of the firm,
regarding expenses incurred for earning exempt income, taxable income of the firm
would increase and exempt income of the firm would go down by the same amount,
total of both remaining the same. The total share of profit of the partner in
the income of the firm would also remain the same, but his share in income
which was exempt in the hands of the firm would be less, and his share in
income which Is taxable in the hands of the firm would be more. However, the
entire share of profit receivable by a partner from a firm was exempt, and
hence there was no impact in the hands of a partner. According to the Tribunal,
since there was no disallowance as such in the hands of the firm, but the
expenditure incurred for earning exempt income was not allowed to be reduced
from taxable income, and instead was to be reduced from exempt income, there
was no effective disallowance in the hands of the firm of the expenses incurred
for earning exempt income, and hence there was no question of any double
allowance or double disallowance.

It also noted that under the proviso to section 28(v), where
there was a disallowance of interest in the hands of the firm due to the
provisions of section 40(b), then and only then the income in the hands of the
partner had to be adjusted to the extent of the amount not so allowed to be
deducted in the hands of the firm. Hence, the proviso to section 28(v) would
come into play only if there was some disallowance in the hands of the firm
u/s. 40(b). According to the Tribunal, in the case before it, the disallowance
was u/s. 14A, and not u/s. 40(b), and therefore, the proviso to section 28(v)
was not applicable and therefore, the partner of the firm was not entitled to
any relief under the said proviso. In any case, since the appellant before the
Tribunal was the firm, and not the partners, the Tribunal did not give any direction
on this aspect of taxability of the partners.

Examining section 10(2A) and the explanation thereto, the
Tribunal rejected the assessee’s argument that if any interest was disallowed
in the hands of the firm, the same could not form part of the total income in
the hands of the partner. According to the Tribunal, the explanation to section
10(2A) did not support such a contention, as the total income of the firm, as
assessed, should alone be considered, and the share of the concerned partner in
such assessed income should be worked out as per the profit sharing ratio as
specified in the partnership deed, and it was such share of the relevant
partner, which only would be considered as exempt u/s. 10(2A).

The Tribunal next addressed the assessee’s argument that
interest paid to partners was distribution of profits allocated to the partners
in the form of interest and hence interest to partners could be taxed once,
either in the hands of the firm or in the hands of the partner, and could not
be taxed in both hands. It also considered the argument of the assessee that
since the partners had paid tax on interest received by them from the firm, no
portion of interest paid to partners could be disallowed, and if disallowed, it
would amount to double taxation. According to the tribunal, such arguments were
devoid of any merit, because interest paid to partners by the firm was not
distribution of profit by the firm, since interest was payable to the partners
as was prescribed in the partnership deed, even if there was no profits in the
hands of the firm. If a firm had a loss and paid interest to the partners, the
loss of the firm would increase to that extent, which would be allowed to be
carried forward in the hands of the firm. Therefore, according to the Tribunal,
interest, to partners was not a distribution of profits by the firm to the
partners and there was no double taxation.

Addressing the assessee’s argument that interest paid to
partners was not an expenditure at all, but was a special deduction allowed to
the firm u/s. 40(b), the tribunal observed that there was no deduction allowed
under section 40(b). According to the Tribunal, section 40(b) was a restricting
section for various deductions allowable under sections 30 to 38. Analysing the
provisions of section 40(b), the Tribunal was of the view that this section was
really restricting and regulating deduction allowable to the firm on account of
payment of interest to partners, and was not an allowing section. According to
the Tribunal, the section allowing the deduction of interest remained section
36(1)(iii), and therefore payment of the interest to partners was also an
expenditure, which was hit by the provisions of section 14A, if it was incurred
for earning exempt income.

The Tribunal accordingly rejected the assessee’s appeal, and
thereby upheld the disallowance of interest to partners u/s. 14A.

This decision of the Tribunal was followed by the Mumbai
bench of the Tribunal in the case of ACIT vs. Pahilajrai Jaikishin 157 ITD
1187, where the Tribunal held that such interest paid to partners on their
capital was an expenditure subject to disallowance u/s. 14A, if it was incurred
in relation to exempt income.

Quality Industries’ case

The issue again came up for consideration before the Pune
bench of the Tribunal in the case of Quality Industries vs. Jt CIT 161 ITD
217.

In this case, relating to assessment year 2010-11, the
assessee firm was engaged in the business of manufacture of chemicals, and had
earned tax-free income of Rs. 24.64 lakh from investment in mutual funds of Rs.
4.42 crore. The assessee had claimed deduction for interest of Rs. 75.64 lakh,
consisting of interest to partners of Rs. 74.88 lakh and interest on bank loans
of Rs. 0.76 lakh.

The assessing Officer, observing that investment in mutual
funds was made out of interest-bearing funds, which included interest-bearing
partners capital, was of the view that the assessee had incurred expenditure,
including interest expenses, which was attributable to earning income from
investment in mutual funds, which was exempt. He, therefore, disallowed
estimated expenditure incurred in relation to such income from mutual funds in
terms of the formula under rule 8D amounting to Rs. 29.25 lakh, including
interest of Rs. 27.85 lakh.

The Commissioner(Appeals) observed that the main source of
investment in mutual funds was partners’ capital, which bore interest at 12%
per annum. According to the Commissioner(Appeals), such interest was relatable
to income from mutual funds, which did not form part of the total income.
Therefore, the Commissioner(Appeals) upheld the disallowance made by the
assessing officer observing that the provisions of section 14A were attracted
to such expenditure.

Before the Tribunal, it was argued on behalf of the assesse,
that the assessee had fixed capital of Rs. 6.24 crore, received from the
partners, on which interest at the rate of 12% per annum had been charged to
the partnership firm. The firm also had current capital from partners that was
received from time to time, which amounted to Rs. 1.14 crore at the end of the
year, on which no interest was paid. It was argued that interest payable on
fixed capital from partners did not bear the characteristic of expenditure per
se as contemplated u/s. 14A. It was pointed out that as per the scheme of
taxation of firms, the payment to the credit of partners in the form of
interest and salary was chargeable to tax in the respective hands as business
income by operation of law.

Reliance was placed on behalf of the assessee on the decision
of the Supreme Court in the case of CIT vs. R M Chidambaram Pillai 106 ITR
292 for the proposition that payment of salary represented special share of
profits, and was therefore taxable as business income. On the same footing, it
was argued that interest on partners’ capital was a return of share of profit
by the firm to the partners. Both interest and salary to partners were not
subjected to TDS, and both fell for allowance under section 40. It was argued
that section 40(b) was not just a limiting section, notwithstanding the fact
that some fetters on the rate of interest had been put thereunder. Salary to
partners and interest paid on partners’ capital was made allowable in the hands
of the firm only from assessment year 1993-94, subject to limits and
restrictions placed u/s. 40(b), and was not allowable prior thereto and
supported the view that section 40(b) was not merely meant for limiting the
deduction, as had that been the case, interest would have been allowable in the
hands of the partnership firm since the birth of the income tax law.

It was further submitted that section 14A was applicable only
where an expenditure was incurred, and not in respect of any and every
deduction or allowance. It was argued that an expenditure was needed to be
incurred by the party, which was absent in view of the mutuality present in a
partnership firm between the firm and its partners. The firm had no separate
existence from its partners, and it was a separate assessable entity only for
the purposes of the Income-tax Act. The Partnership Act, 1932 did not recognise
the firm as a separate entity.

It was further argued on behalf of the assessee that any
disallowance of interest of capital would lead to double disallowance of the
same expenditure, as the partners were already subjected to tax on interest on
capital in their respective personal returns.

The Tribunal analysed the nuances of the scheme of taxation
of partnership firms. It noted that prior to assessment year 1993-94, the
interest charged on partners’ capital was not allowed in the hands of the partnership
firm, while it was simultaneously taxable in the hands of the respective
partners. The amendment by the Finance Act, 1992 by insertion of section 40(b)
was to enable the firm to claim deduction of interest outgo payable to partners
on the respective capital subject to some upper limits. Therefore, according to
the tribunal, as per the present scheme of taxation, the interest payment on
partners’ capital in a sense was not treated as an allowable business
expenditure, except for the deduction available u/s. 40(b).

The Tribunal noted that partnership firms, on complying with
the statutory requirements, were allowed deduction in respect of interest to
partners, subject to the limits and conditions specified in section 40(b), and
in turn those items would be taxed in the hands of the partners as business
income u/s. 28(v). Share of partners in the income of the firm was exempt from
tax u/s. 10(2A). Therefore, the share of income from a firm was on a different
footing from the interest income, which was taxable as business income.

The Tribunal also noted that interest and salary received by
the partners were treated on a different footing by the Act, from the ordinary
sense of the terms. Section 28(v) treated interest as also salary received by a
partner of the firm as a business receipt, unlike different treatment given to
similar receipts in the hands of entities other than partners. It also noted
that under the proviso to section 28(v), the disallowance of such interest was
only with reference to section 40(b), and not with reference to section 36 or
section 37. According to the tribunal, it gave a clue that deduction towards
interest to partners was regulated only u/s. 40(b), and that the deduction of
such interest was out of the purview of sections 36 or 37.

The Tribunal observed that there was no amendment to the
general law provided under the Partnership Act, 1932. The amendment to section
40(b) had only altered the mode of taxation. The partnership firm continued not
to be a separate legal entity under the Partnership Act, and it was not within
the purview of the Income-tax Act to change or alter the basic law governing
partnership. Therefore, interest or salary paid to partners remained the
distribution of business income. The tribunal referred to the decision of the
Supreme Court in the case of R. M. Chidambaram Pillai (supra) for this
proposition. The tribunal also referred to the decision of the Supreme Court in
the case of CIT vs. Ramniklal Kothari 74 ITR 57, for the proposition
that the business of the firm was business of the partners of the firm. Hence,
salary, interest and profits received by the partner from the firm was business
income, and therefore expenses incurred by the partner for the purpose of
earning this income from the firm was admissible as deduction from such share
of income from the form in which he was a partner. Thus, even for taxation
purposes, the partnership firm and partners have been seen collectively, and
the distinction between the two was blurred in the judicial precedents.

Since the firm and partners of the firm were not separate
persons under the Partnership Act, though they were a separate unit of
assessment for tax purposes, according to the Tribunal, there could not be a
relationship inferred between the partner and firm as that of lender of funds
(capital) and borrowal of capital from the partners. Therefore, section
36(1)(iii) was not applicable at all. According to the Tribunal, section 40(b)
was the only section governing deduction towards interest to partners. In view
of section 40(b), according to the Tribunal, the assessing officer had no
jurisdiction to apply the test laid down under section 36, to find out whether
the capital was borrowed for the purposes of business or not. Thus, the
question of allowability or otherwise of the deduction did not arise, except
for section 40(b).

According to the Tribunal, the interest paid to partners
simultaneously getting subjected to tax in the hands of the partners was merely
in the nature of contra items in the hands of the firm and partners.
Consequently, interest paid to partners could not be treated at par with the
other interest payable to outside parties. Thus, in substance, the revenue was
not adversely affected at all by the claim of interest on capital employed with
the firm by the partnership firm and partners put together. Capital diverted to
mutual funds to generate alleged tax-free income did not lead to any loss in
revenue due to the action of the assessee. In view of the inherent mutuality,
as per the Tribunal, when the partnership firm and its partners were seen
holistically and in a combined manner, with interests paid to partners
eliminated in contra, the investment in mutual funds, generating tax-free
income bore the characteristic of an expenditure that was attributable to its own capital, where no disallowance
u/s. 14A read with rule 8D was warranted.

The Tribunal therefore held that the provisions of section
14A read with rule 8D were not applicable to interest paid to partners, but
applied only to interest payable to parties other than partners.

Observations

The logic of the Pune bench of the Tribunal, that the amount
introduced by the partners into the partnership firm is not a borrowing of
capital by the partnership firm but is an introduction of capital by the
partners for constituting the partnership firm and carrying on its business,
does seem fairly attractive at first sight.

The scheme of taxation of the partnership firm and its
partners under tax laws is also relevant. It is only by an artificial provision
that the entire income of the partnership firm is divided into two components
for convenience of taxation – one component taxable in the hands of the firm,
and the second component taxable in the hands of the partners. Section 40(b) read
with the proviso to section 28(v) clearly brings out this intent that what is
taxable in the hands of the firm, is not taxable in the hands of the partners,
while what is taxable in the hands of the partners is not taxable in the hands
of the firm. Therefore, viewed from that perspective, the view of the Pune
Tribunal that the interest to partners was not an expenditure, but was a mere apportionment of the income of the firm, also seems attractive.

This view is also supported by the fact that though salaries
and interest are subjected to tax deduction at source, remuneration and
interest to partners are not so subject to the provisions of tax deduction at
source. In a sense, the tax laws now recognise the fact that such remuneration
and interest to partners stands on a different footing from the normal
expenditure of salaries and interest.

However, to a great extent, the answer to this question is to
be found in the decision of the Supreme Court in the case of Munjal Sales
Corpn vs. CIT 298 ITR 298. In this case, relating to assessment years
1993-94 to 1997-98, the Supreme Court was considering a situation where
interest free loans had been granted to sister concerns in August/September
1991, and interest paid had been disallowed u/s. 36(1)(iii) by the Assessing
Officer. The Tribunal had deleted the disallowance for assessment years 1992-93
and 1993-94, holding that interest free loans had been given out of the
assessee’s own funds. The disallowances for assessment years 1994-95 to 1996-97
were however upheld by the Tribunal.

Before the Supreme Court, the assessee contended that section
40(b) was a standalone section having no connection with the provisions of
section 36(1)(iii), and that section 36(1)(iii) did not apply, as it was a case
of payment of interest to a partner on his capital contribution, which could
not be equated to monies borrowed by the firm from third parties.

In this case, while holding that since the loans were
advanced for business purposes, the interest on such loans would not be subject
to any disallowance under section 36(1)(iii) read with section 40(b)(iv), the
Supreme Court observed as under:

“Prior to the Finance Act,
1992, payment of interest to the partner was an item of business disallowance.
However, after the Finance Act, 1992, the said section 40(b) puts limitations
on the deductions under sections 30 to 38 from which it follows that section 40
is not a stand-alone section. Section 40, before and after the Finance Act,
1992, has remained the same in the sense that it begins with a non obstante clause.
It starts with the words ‘Notwithstanding anything to the contrary in sections
30 to 38’ which shows that even if an expenditure or allowance comes within the
purview of sections 30 to 38, the assessee could lose the benefit of deduction
if the case falls under section 40. In other words, every assessee, including a
firm, has to establish, in the first instance, its right to claim deduction
under one of the sections between sections 30 to 38 and in the case of the
firm, if it claims special deduction, it has also to prove that it is not
disentitled to claim deduction by reason of applicability of section 40(b)(iv).
Therefore, in the instant case, the assessee was required to establish in the
first instance that it was entitled to claim deduction under section 36(1)(iii
), and that it was not disentitled to claim such deduction on account of
applicability of section 40(b)(iv). It is important to note that section 36(1)
refers to other deductions, whereas section 40 comes under the heading ‘Amounts
not deductible’. Therefore, sections 30 to 38 are other deductions, whereas
section 40 is a limitation on those deductions. Therefore, even if an assessee
is entitled to deduction under section 36(1)(iii), the assessee-firm will not
be entitled to claim deduction for interest payment exceeding 18/12 per cent
per se. This is because section 40(b)(iv) puts a limitation on the amount of
deduction under section 36(1)(iii). 

It was vehemently urged on
behalf of the assessee that the partner’s capital is not a loan or borrowing in
the hands of a firm. According to the assessee, section 40(b)(iv) applies to
partner’s capital, whereas section 36(1)(iii) applies to loan/borrowing.
Conceptually, the position may be correct, but in the instant case, the scheme
of Chapter IV-D was in question. After the enactment of the Finance Act, 1992,
section 40(b)(iv) was brought to the statute book not only to avoid double
taxation, but also to bring on par different assessees in the matter of
assessment. Therefore, the assessee-firm, in the instant case, was required to
prove that it was entitled to claim deduction for payment of interest on
capital borrowed under section 36(1)(iii), and that it was not disentitled
under section 40(b)(iv). There was one more way of answering the above contention.
Section 36(1)(iii) and section 40(b)(iv) both deal with payment of interest by
the firm for which deduction can be claimed. Therefore, keeping in mind the
scheme of Chapter IV-D, every assessee, who claims deduction under sections 30
to 38, is also required to establish that it is not disentitled under section
40. The object of section 40 is to put limitation on the amount of deduction which the assessee is entitled to under sections 30 to 38. Section 40
is a corollary to sections 30 to 38 and, therefore, section 40 is not a
stand-alone section.”

The Supreme Court has therefore held that
interest on partner’s capitals is primarily to be considered for allowance u/s.
36(1)(iii), and that section 40(b) puts a restriction on the quantum of interest
so allowable. That being the view taken by the Supreme Court, the view taken by
the Ahmedabad and Mumbai benches of the Tribunal seems to be the better view,
that interest on capitals to partners would be an expenditure, which would also
need to be considered for the purposes of disallowance u/s. 14A.

15 Section 37, CBDT Circular No. 5 of 2012 – Expenditure incurred on AMP by a pharma company, on organising conferences and seminars of doctors, with the main object of updating the doctors of latest developments and to create awareness about new research in medical field which is beneficial to the doctors, cannot be disallowed.

[2018] 89 taxmann.com 249 (Mumbai – Trib.)

Solvay Pharma India Ltd. vs. Pr.CIT

ITA No. : 3585 (Mum) of  2016

A.Y.: 2011-12      Date of Order: 11th January, 2018



Medical Council of India Regulations do not
apply to pharma companies.

 

FACTS

The assessee company incurred Advertisement
expense of Rs. 25,02,929 and Publicity and Propaganda Expense of Rs.
15,94,99,360.  The assessee in his letter
informed the Assessing Officer (AO) that Advertisement expenses are in
compliance with CBDT Circular No. 5/2012 dated 1.8.2012 but did not furnish any
further details.  The AO neither called
for the books of accounts nor called for any evidence such as invoices,
vouchers, etc.  The assessee was neither asked
to file by the AO nor did it suo moto file any corroborative details in respect
of Publicity and Propoganda Expenses.

 

The CIT was of the view that if any
expenditure incurred is claimed u/s. 37 especially those expenditure which the
business entity incurs on items which may broadly be classified as
`Advertisement, Marketing and Business Promotion’ (in short AMP), the
possibility of incurring expenditure on prohibited items as per Explanation
below section 37(1) of the Act exists which must be ruled out by some
examination of corroborative evidence called for and produced before the
AO.  Since the AO did not make any
inquiry, the CIT held the assessment order to be erroneous and prejudicial to
the interest of the revenue.  He rejected
the contentions of the assessee that the MCI regulations are not applicable to
pharma companies but only to medical practitioners.  He also rejected the contention that
expenditure so incurred is not in the nature of freebies to the doctors.

 

Aggrieved, the assessee preferred an appeal
to the Tribunal.

 

HELD 

The Tribunal held that the MCI Regulations
are not applicable to the assessee, the question of assessee incurring
expenditure in alleged violation of the regulation does not arise. 

 

CBDT Circular No. 5 of 2012 seeks to
disallow expenditure incurred by pharmaceutical companies interalia in providing
`freebies’ to doctors in violation of the MCI Regulations.  The term “freebies” has neither been defined
in the Income-tax Act nor in the MCI Regulations.  However, the expenditure so incurred by
assessee does not amount to provision of `freebies’ to medical
practitioners.  The expenditure incurred
by it is in the normal course of its business for the purpose of marketing of
its products and dissemination of knowledge etc. and not with a view to giving
something free of charge to the doctors. 
The act of giving something free of charge is incidental to the main
objective of product awareness. 
Accordingly, it does not amount to provision of freebies.  Consequently, there is no question of
contravention of the MCI Regulations and applicability of Circular No. 5 of
2012 for disallowance of the expenditure.

 

Explanation to section 37(1) provides an
embargo upon allowing any expenditure incurred by the assessee for any purpose
which is an offence or which is prohibited by law.  This means that there should be an offence by
an assessee who is claiming the expenditure or there is any kind of prohibition
by law which is applicable to the assessee. 
Here in this case, no such offence of law has been brought on record, which
prohibits the pharmaceutical company not to incur any development or sales
promotion expenses.

 

CBDT Circular
dated 1.8.2012 in its clarification has enlarged the scope and applicability of
`Indian Medical Council Regulation, 2002’ by making it applicable to the
pharmaceutical companies or allied health care sector industries.  Such an enlargement of scope of MCI
regulation to the pharmaceutical companies by the CBDT is without any enabling
provisions either under the provision of the Income-tax Law or by any
provisions under the Indian Medical Council Regulations. The CBDT cannot
provide casus omissus to a statute or notification or any regulation
which has not been expressly provided therein.

 

The beneficial circular may apply
retrospectively but a circular imposing a burden has to be applied
prospectively only. Here, in this case the CBDT has enlarged the scope of
`Indian Medical Council Regulation, 2002’ and made it applicable for the
pharmaceutical companies.  Therefore,
such a CBDT circular cannot be reckoned to have retrospective effect. The free
sample of medicine is only to prove the efficacy and to establish the trust of
the doctors on the quality of the drugs. This again cannot be reckoned as
freebies given to the doctors but for promotion of its products. 

 

The pharmaceutical company, which is engaged
in manufacturing and marketing of pharmaceutical products can promote its sale
and brand only by arranging seminars, conferences and thereby creating
awareness among doctors about the new research in the medical field and
therapeutic areas, etc. Every day there are new developments taking
place around the world in the area of medicine and therapeutic, hence in order
to provide correct diagnosis and treatment of patients, it is imperative that
the doctors should keep themselves updated with the latest developments in the
medicine and the main object of such conferences is to update the doctors of
the latest developments, which is beneficial to the doctors in treating the
patients as well as the pharmaceutical companies. 

 

The Tribunal did not find any merit in the
order passed u/s. 263. It allowed the appeal filed by the assessee.

 

14 Section 56(2)(vi) – Amount received by the assessee, at the time of her retirement, from the firm, after surrendering her right, title and interest therein, is for a consideration and therefore, not taxable u/s. 56(2)(vi).

2017] 89 taxmann.com 95 (Pune-Trib.)

Smt. Vasumati Prafullachand Sanghavi vs.
DCIT

ITA No. : 161/Pune/2015

A.Y.: 2008-09 Date of Order:  13th December, 2017


FACTS 

For the assessment year under consideration,
the assessee filed her return of income declaring therein a total income of Rs.
88,330. The Assessing Officer (AO) issued a notice u/s. 147 of the Act on the
ground that the amount of Rs. 21,52,73,777 received by her on relinquishing her
share in the partnership firm Deepak Foods (DF) has escaped assessment.

 

During the year under consideration, the
assessee retired as a partner from Deepak Foods and received an amount of Rs.
21,66,52,000. This amount was claimed in the return of income and was accepted
by the AO in the regular assessment as exempt. 

 

The capital balance of the assessee, on the
eve of retirement from the firm, was Rs. 13,78,223. In the return of income,
the assessee furnished a note stating that the credit balance in capital
account of the assessee includes share of Goodwill received from Deepak Foods
on retirement from the firm.  While
assessing the total income in reassessment proceedings, the Assessing Officer
(AO), by relying upon the decision of the Pune Tribunal in the case of Shevantibhai
C. Mehta vs. CIT [2004] 4 SOT 94 (Pune) taxed Rs. 21,52,73,777 as income
from long term capital gains.  Further,
the AO, alternatively, assessed the amount of Rs. 21,52,73,777 as income from
other sources. 

 

Aggrieved, the assessee preferred an appeal
to CIT(A) where it was contended that the similar addition was made in the
assessment of Smt. Shakuntala S. Sanghavi, the other retiring partner, who also
received identical amount.  In her case,
upon completion of the assessment, the CIT in revision proceedings set aside
the order passed by the AO and taxed the amount in an order passed u/s. 263 of
the Act. The Tribunal quashed the revision order of CIT both on facts and on
merits. Consequential order passed by AO u/s. 143(3) r.w.s. 263 was also
quashed and original order restored by the Tribunal in the case of Smt.
Shakuntala S. Sanghavi. The assessee relied on the order of the Tribunal in the
case of Shakuntala S. Sanghavi vs. ACIT [ITA No. 956(Pn) of 2013) relating to
AY 2008-09, order dated 22.3.2014] regarding finality of the issue by the
Tribunal on the taxability of the said receipts.However, the CIT(A) held that
the amounts received by the assessee from Deepak Foods constitute a gift
taxable u/s. 56(2)(vi) of the Act.

 

Aggrieved, the assessee preferred an appeal
to the Tribunal.

 

HELD  

The Tribunal observed that the ratio of the
decision of Pune Bench of the Tribunal in the case of Smt. Shakuntala S.
Sanghavi (supra) and order of the Tribunal in the case of ITO vs.
Rajnish M. Bhandari [IT Appeal No. 469 (PN) of 2011, dated 17.7.2012] and
the judgment of the Bombay High Court in CIT vs. Riyaz A. Sheikh [2014] 221
Taxman 118 (Bom.) suggest that the receipts of this kind are not to be
taxed under the head `Income from Capital Gains’ as well as under the head
`Income from Other Sources’ in general. 
In view of the order of the Tribunal in the case of Smt. Shakuntala S.
Sanghavi, on similar facts, the non-taxability of the said receipt under the
head `Capital Gains’ as well as under the provisions of section 56 of the Act,
i.e. under the head `Income from Other Sources’ has reached finality.

 

As regards taxability of the said receipt
under the specific provision of section 56(2)(vi) of the Act, the Tribunal
noted that     the     assessee     received   
compensation      of  Rs. 21,66,32,000 from Deepak Foods on her
retirement when she surrendered her right, title, interest in the said
firm.  Therefore, the amount of
compensation cannot be said to have been received without consideration.  It observed that it is not the case of the
revenue that the assessee continues to be a partner even after receipt of the
consideration and that the assessee has not surrendered the rights of every
kind in the firm. 

 

The Tribunal decided the appeal in favour of
the assessee.

 

45 Section 92C – Transfer pricing Computation of arm’s length price (ALP) – A. Y. 2006-07 – Comparable and adjustment – There is no provision in law which makes any distinction between a Government owned company and a company under private management for purpose of transfer pricing audit and/or fixation of ALP – A company cannot be excluded as a comparable only on ground that company has far higher turnover – Where both comparable and assessee were in segment of manufacture of tractors and power tillers and all functions of comparable company and assessee were same, said company should not be rejected as a comparable only because of its higher turnover

CIT vs. Same Deutz – Fahr India (P.)
Ltd.; [2018] 89 taxmann.com 47 (Mad):

 

The assessee-company was in the segment of
manufacture of tractors and power tillers. It entered into international
transactions with its associated enterprise (AE). The Transfer Pricing Officer
(TPO) had rejected the comparable companies selected by the assessee except one
VST Tillers in the transfer pricing documentation on the ground that the said
company recorded huge turnover whereas the turnover of assessee was very small
and, hence, not comparable. TPO had selected HMT Limited as one of the
comparables on functional similarity, but while determining the ALP, he had not
included HMT Limited as a comparable. The Tribunal found, on facts, that both
were comparable and the assessee was in the segment of manufacture of tractors
and power tillers and all the functions of HMT Limited and the assessee were
the same and that TPO ought not to have rejected said company as a comparable
only because of its higher turnover, as it would be impossible to find out
comparables with all similarities, including similarity of turnover.

 

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

 

“i)  The Tribunal very rightly
observed and held that refusal to include a company as a comparable only on the
ground that the company had far higher turnover was not justified. The Tribunal
also very rightly observed that no comparable could have exactly the same
turnover. The Tribunal found, on facts, that both comparable and the assessee
was in the segment of manufacture of tractors and power tillers and all the
functions of HMT Limited and the assessee were the same and that TPO ought not
to have rejected said company as a comparable only because of its higher
turnover, as it would be impossible to find out comparables with all
similarities, including similarity of turnover.

 

ii)  In the grounds of appeal,
it is urged that the Tribunal failed to appreciate that HMT Limited was a
Government owned company and the functions performed under Government
management were altogether different from a private company. There is no provision
of law which makes any distinction between a Government owned company and a
company under private management for the purpose of transfer pricing audit
and/or fixation of ALP. There is no reason why a Government owned company
cannot be treated as a comparable.

 

iii)           It
is reiterated that the Tribunal found, on facts, that the functionality of HMT
Limited and the assessee were the same. In our considered opinion, the decision
of the Tribunal does not warrant interference of this court.”

44 TDS – Fees for technical services or payment for work – Sections 194C and 194J – Fees for technical services or payment for work – Sections 194C and 194J – A. Ys. 2008-09 to 2011-12 – Broadcasting of television channels – Placement charges, subtitling, editing expenses and dubbing charges – Are part of production of programmes – Not fees for professional or technical services – Amounts paid falling u/s. 194C and not section 194J

CIT vs. UTV Entertainment Television
Ltd.; 399 ITR 443 (Bom):

 

The assessee company carried on the business
of broadcasting of television channels. It paid certain amounts on account of
carriage/placement fees, editing/subtitling expenses and dubbing charges. Tax
at source was deducted by the assessee on these amounts u/s. 194C of the Act,
at the rate of 2%. The relevant period is A. Ys. 2008-09 to 2011-12. The
Assessing Officer was of the view that the amounts were in the nature of fees
payable for technical services and, therefore, tax should have been deducted
u/s. 194J. Accordingly he passed orders u/s. 201(1)/201(1A) and raised demand.
The Commissioner (Appeals) and the Tribunal accepted the assesee’s claim and
held that the tax has been rightly deducted at 2% u/s. 194C of the Act.
Accordingly, they set aside the order of the Assessing Officer.

 

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

 

“i)  When
services are rendered as part of the contract accepting placement fees or
carriage fees, they were similar to services rendered against the payment of
standard fees paid for broadcasting of channels of any frequency. The placement
fees were paid under a contract between the assessee and the cable operators or
multi system operators. Considering the nature of transactions, the payments
were not in the nature of commission or royalty.

 

ii)  Commissioner (Appeals) had
found that by agreeing to place the channel on any preferred band, the cable
operator did not render any technical service to the distributor or television
channel. He had rightly found that if the contract was executed for
broadcasting and telecasting the channels of the assessee, the payment was
covered by section 194C as it fell within clause (iv) of the definition of
“work”. Therefore, when placement charges were paid by the assessee to the
cable operators and multi system operators for placing the signals on a
preferred band, it was a part of work of broadcasting and telecasting covered
by sub-clause (b) of clause (iv) of the Explanation to section 194C. It was
found that by an agreement to place the channel on a prime band by accepting
placement fees, the cable operator or multi system operator did not render any
technical services. The Commissioner (Appeals) had recorded detailed findings
on the basis of material on record.

 

iii)  Regarding subtitling
charges also, the finding of fact recorded by the Commissioner (Appeals), which
was confirmed by the Tribunal, was that the work of subtitling was also covered
by the definition of “work” in sub-clause (b) of clause (iv) of the Explanation
to section 194C which covered the work of broadcasting or telecasting including
production of programmes for such broadcasting and telecasting and that the
work of subtitling was part of production programmes.

 

iv) The findings of fact
recorded by the appellate authorities and the view taken by the Tribunal were
justified. No question of law arose.”

43 Section 271(1)(c) – Penalty – Concealment of income – A. Y. 2014-15 – Condition precedent – No specific finding that conduct of assessee amounted to concealment of particulars of income or furnishing inaccurate particulars of income – Assessee not found to have furnished inaccurate particulars but making incorrect claim of rebate – Voluntary withdrawal of claim pursuant to notice – No concealment of income – Order imposing penalty unsustainable

Gopalratnam Santha Mosur vs. ITO; 399 ITR
155 (Mad):

 

The relevant year is A. Y. 2014-15. The
assessee sold an immovable property and paid the entire capital gains tax
applicable in respect of the transaction. Thereafter she claimed 50% of the
capital gains tax as rebate under DTAA between India and Canada. The Assessing
Officer issued a notice proposing to disallow the claim for rebate. In
response, the assessee submitted a revised income computation statement,
withdrawing the claim to the rebate and requesting the Assessing Officer to
give effect to the revised tax payable and issue the refund. The assessment
order was passed considering the revised statement. The Assessing Officer also
imposed a penalty of Rs. 23,31,787 u/s. 271(1)(c) of the Act for concealment of
income.

 

The assessee filed a writ petition
challenging the order of penalty. The Madras High Court allowed the writ
petition and held as under:

 

“i)  Until and unless the
authority had rendered a specific finding that the conduct of the assessee
amounted to concealment of particulars of her income or had furnished
inaccurate particulars of such income, the provisions of section 271(1)(c)
could not be invoked. The Assessing Officer had to form an opinion that it was
a case where penalty proceedings had to be initiated and reasons were required
to justify and order imposing penalty.

 

ii)  The basic parameters had
not been fulfilled. In response to the notice, the assessee had submitted a
reply stating that after she was served notice u/s. 143(2), she had furnished
all the required documents called for during the course of assessment and that
the Assessing officer had asked for the details on the rebate claimed by her
according to the DTAA and in response to the show-cause notice, the assessee
had mentioned that she had inadvertently claimed a rebate of 50% on the total
tax payable and had submitted a revised computation withdrawing the rebate
claimed. The assessee had filed a revised computation statement and
accordingly, the assessment was completed.

 

iii)  Thus, the withdrawal of
the rebate claim was voluntary and could not be brought within the expression
concealment of particulars or furnishing inaccurate particulars. There was no
concealment of income nor submitting of inaccurate information, as all the
relevant details were furnished by the assessee. There had been no
misrepresentation of the facts to the Assessing Officer and that the
inadvertent claim to rebate on the tax liability which had admittedly been paid
in the other country showed that the intention of the assessee was not to
furnish inaccurate particulars or conceal her income.

 

iv) The Assessing Officer had
not rendered any finding that the details supplied by the assessee in her
return were erroneous or false or that a mere claim for rebate amounted to
furnishing of inaccurate particulars. Thus the order passed u/s. 271(1)(c)
levying penalty was unsustainable.”

 

42 Section 144C – International transactions – Assessment – A. Y. 2009-10 – Draft assessment order – Final assessment order giving effect to directions of DRP – AO not entitled to introduce new disallowance not contemplated in draft assessment order

CIT vs. Sanmina SCI India P. Ltd.; 398
ITR 645 (Mad):

 

Pursuant to a reference u/s. 92CA(1) of the
Act, an order of transfer pricing determining the arm’s length price (ALP) of
international transactions was passed by the Transfer Pricing Officer (TPO)
culminating in an order of draft assessment u/s. 143(3) r.w.s. 144C(1) of the
Act. The assessee filed objections before the Dispute Resolution Penal (DRP)
against the draft assessment order. The DRP issued directions in relation to
the transfer pricing adjustment as well as claim to relief u/s. 10A of the Act.
Effect was given to the directions of the DRP. While doing so the Assessing
Officer introduced a new disallowance not contemplated in the draft order of
assessment being the aggregation of income or loss from variations, sources
under the same head of income prior to allowance of relief u/s. 10A and since
the aggregation resulted in a loss, he did not allow relief u/s. 10A of an
amount of Rs. 2.98 crore. The returned loss of an amount of Rs. 19,14,03,268
was thus reduced to the extent of deduction u/s. 10A of an amount of Rs. 2.98
crore. The Tribunal set aside the adjustment effected by the Assessing Officer
in relation to treatment of brought forward losses prior to allowance of
deduction u/s. 10A of the Act. The Department was directed to grant deduction
prior to effecting adjustment of brought forward losses.

 

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

 

“i)  The scheme of section 144C
would be wholly violated if the Assessing Officer takes it upon himself to
include in the final order of assessment additions, disallowances or variations
that do not form part of the order of draft assessment. The powers of an Assessing
Officer u/s. 144C(13) have clearly been limited to giving consequence to the
directions of the DRP and cannot extend any further. Any attempt by the
Assessing Officer to delve beyond would result in great prejudice to an
assessee in the light of the express stipulation that no opportunity is to be
provided and an interpretation to further such a conclusion would be wholly
unacceptable and contrary to law.

 

ii)  Acceptance of the
proposition advanced by the Department would amount to giving leave to the
Assessing Officer to pass more than one order of assessment in the course of a
single proceeding, which was not envisaged in the scheme of the Act. Subsequent
assessments either rectifying, revising or reopening the original assessment
were permitted by exercising specified powers under different statutory
provisions. The order of draft assessment u/s. 144C(1) was for all intents and
purposes is an order of original assessment though in draft form.

 

iii)  The order of Tribunal to
this effect was right in law and called for no interference. The variation in
the order of final assessment relating to the priority of set off of losses was
purely misconceived and was in excess of jurisdiction by the Assessing Officer
in terms of section 144C(13) of the Act.”

41 u/s. 80-IA(4) – Infrastructure project – Deduction- A. Y. 2003-04 – Development of infrastructure facility – Effect of section 80-IA(4) – Person developing infrastructure facility and person operating it may be different – Both entitled to deduction u/s. 80-IA(4) on portion of gains received

Principal CIT vs. Nila Baurat Engineering
Ltd.; 399 ITR 242 (Guj):

 

The assessee was engaged in the business of
civil construction and installation of various infrastructure projects. For the
A. Y. 2003-04, the assessee had claimed deduction u/s. 80-IA(4) of the Act, and
the same was allowed by the Assessing Officer. Subsequently, the Assessing
Officer issued notice u/s. 148 for reassessment on the ground that after
completion of the construction work, the assesee had assigned the task of
maintenance and toll collection of the road to one RTIL and hence the deduction
u/s. 80-IA(4) had been granted erroneously. Accordingly, the deduction was
disallowed in the reassessment order. The Tribunal held that the assessee was
entitled to deduction u/s. 80-IA(4).

 

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

 

“i)  Under sub-section (4) of
section 80-IA of the Act, an enterprise carrying on the business of developing,
or operating and maintaining, or developing, operating and maintaining
infrastructure facility would be eligible for deduction. Thus, this provision
itself envisages that in a given project the developer and the person maintains
and operates may be different. Merely because the person maintaining and
operating the infrastructure facility is different from the one who developed
it, that would not deprive the developer of the deduction under the section on
the income arising out of such development.

 

ii)  By virtue of the operation
of the proviso, the developer would not be deprived of the benefit of deduction
under sub-section (1) of section 80-IA on the profit earned by it from its
activity of developing the infrastructure. The proviso does not operate to
deprive the developer of the benefit of the deduction even after the facility
is transferred for the purpose of maintenance and operation but the profit
element would be split into one derived from the development of the
infrastructure and that derived from the activity of maintenance and operation
thereof.

 

iii)  The assessee having
transferred the facility for the limited purpose of maintenance and operation
to RTIL, it would receive a fixed payment of Rs. 328 lakh per annum
irrespective of the toll collection by RTIL. This profit element therefore
would be relatable to the infrastructure development activity of the assessee
and would qualify for deduction u/s. 80-IA of the Act. RTIL would have a claim
for deduction on its profit arising out of maintenance and operation of
infrastructure facility which apparently would exclude the pay out of RS. 328
lakh to the assessee.”

40 U/s. 80-IB(10)(a) – . Housing project – Deduction – Completion certificate – Assessee completing construction and applying for certificate of completion before stipulated date – Delay in issuance of completion certificate beyond control of assessee – Assessee entitled to deduction

Principal CIT vs. Ambey Developer P.
Ltd.; 399 ITR 216 (P&H):

 

The assessee was a builder. For the A. Y.
2010-11, the assesee claimed deduction u/s. 80IB(10)(a) of the Act,  in respect of the housing project completed
by it in the relevant year. The assessee had filed a completion certificate
from the Municipal Town Planner dated 30/12/2011 with a letter written to the
Commissioner dated 29/03/2010 for completion certificate. The Assessing Officer
held that the housing project approved on 01/04/2005 should have been completed
within five years from the end of the month in which it was approved, i.e.
31/03/2010. The Assessing Officer disallowed the claim for deduction u/s.
80IB(10) of the Act and added it back to the assessee’s taxable income. The
Commissioner (Appeals) allowed the deduction holding that delay in issuance of
the completion certificate was beyond the control of the assessee and was not
attributable to him. The Tribunal confirmed this.   

 

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

 

“i)  Though the words used in
clause (ii) of the Explanation to section 80-IB(10)(a) is “shall”, but it would
not necessarily mean that in every case, it shall be taken to be a mandatory
requirement. It would depend upon the intent of the Legislature and not the
language in which the provision is clothed. The meaning and the intent of the
Legislature would be gathered not on the basis of the phraseology of the
provision but taking into consideration its nature, its design and the
consequences which would follow from interpreting it in a particular way alone.

 

ii)  The purport of clause (ii)
of the Explanation to section 80-IB(10)(a) of the Act is to safeguard the
interests of the Revenue wherever the construction has not been completed
within the stipulated period. Thus, it cannot mean that the requirement is
mandatory in nature and would disentitle an assessee to the benefit of  section 80-IB(10)(a) of the Act even where
the assessee had completed the construction within the stipulated period and
had made an application to the local authority within the prescribed time. The
issuance of the requisite certificate is within the domain of the competent
authority over which the assessee has no control.

 

iii)  The construction was
completed before the stipulated date, i.e., 31/03/2010 and the certificate of
completion was applied on 29/03/2010 and was issued to the assessee on
31/12/2011. The assessee in such circumstances could not be denied the benefit
of section 80-IB(10)(a) of the Act.”

39 U/s. 80-IC – Deduction An ‘undertaking or an enterprise’ established after 07/01/2003, and carried out ‘substantial expansion’ within specified window period, i.e., between 07/01/2003 and 01/04/2012, would be entitled to deduction on profits at rate of 100 per cent, u/s. 80-IC post said expansion

Stovekraft India vs. CIT; [2017] 88
taxmann.com 225 (HP)

 

The assessee started its business activity
with effect from 06/01/2005 and treating the F. Y. 2005-2006 (A. Y. 2006-2007),
as initial assessment year, claimed deduction on profits at the rate of 100 per
cent u/s. 80-IC of the Act.  Sometime in
the F. Y. 2009-10, the assessee carried out ‘substantial expansion’ of the
‘Unit’ and by treating the said Financial Year to be the ‘initial assessment
year’, further claimed deduction at the rate of 100 per cent, instead of 25 per
cent, u/s. 80-IC. The Assessing Officer denied the claim of deduction at the
rate of 100 per cent with effect from Financial Year 2009-10 after undertaking
‘substantial expansion’, so carried out holding that the assessee was not
entitled to deduction not at the rate of 100 per cent but on reduced basis at
the rate of 25 per cent, as provided u/s. 80-IC. He concluded that only such of
those units, existing prior to incorporation of section 80-IC in the statute,
i.e. 07/01/2003, could undertake substantial expansion and units established
subsequent to the said date being termed as ‘new industrial units’ were
ineligible for exemption u/s. 80-IC, even though they might had carried out any
expansion, substantial or otherwise. He held that, for the purpose of section
80-IC, the assessee can have only one assessment year as initial assessment
year. The Tribunal upheld the decision of the Assessing Officer.

 

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

 

“i)  What is of importance is
the stipulation under sub-clause (ii) of clause (b) of sub-section 2 of section
80-IC, insofar as State of Himachal Pradesh is concerned. If between 07/01/2003
and 01/04/2012, a ‘Unit’ has ‘begun’ or ‘begins’ to manufacture or produce any
article or thing, specified in the Fourteenth Schedule or commences any
operation ‘and undertakes substantial expansion’ during the said period, then
by virtue of sub-section (3), it shall be entitled to deduction at the rate of
100 per cent of profits and gains for five assessment years, commencing from
‘initial assessment year’ and thereafter at the rate of 25 per cent of the
profits and gains. The only restriction being that such substantial expansion
is not formed by splitting up, or reconstruction, of the business already in
existence. At this stage, it is noted that under sub-section (6) of section
80-IC, there is a cap(10 years) with regard to the total period for which a
‘Unit’ is entitled to such deduction.

 

ii)  Can there be more than one
‘initial assessment year’, as the authorities below have held it not to be so?
Clause (v) of sub-section (8) of section 80-IC, defines what is an ‘initial
assessment year’. It is only for the purpose of this section. Now, ‘initial
assessment year’ has been held to mean the assessment year relevant to the
previous year in which the ‘Unit’ begins to manufacture or produce article or
thing or commences operation or completes substantial expansion. Significantly,
the Act does not stipulate that only units established prior to 07/01/2003
shall be entitled to the benefits u/s. 80-IC. The definition of ‘initial
assessment year’ is disjunctive and not conjunctive. The initial assessment year
has to be subsequent to the year in which the ‘Unit’ completes substantial
expansion or commences manufacturing etc., as the case may be.

 

iii)  A bare look at Explanation
(b) of section 80-IB (11C) and section 80-IB(14)(c) would reflect that, earlier
[till section 80-IC was inserted with effect from 01/04/2004], ‘substantial
expansion’ was not included in the definition of ‘initial assessment year’.
Earlier definition had used words ‘starts functioning’, ‘company is approved’,
‘commences production’, ‘begins business’, ‘starts operating’, ‘begins to
provide services’. But section 80-IC (8)(v) changed wordings [of ‘initial
assessment year’] to ‘begins to manufacture’, ‘commences operation’, or
‘completes substantial expansion’. Thus, legislature consciously extended the
benefit of ‘initial assessment year’ to a unit that completed substantial
expansion.

iv) This is absolutely in
conjunction and harmony with clause (b) of sub-section (2) of section 80-IC,
which postulates  two things – (a) an
undertaking or an enterprise has ‘begun’, it is in the past tense or (b)
‘begins’, which is in presenti. Significantly, what is important is the
word ‘and’ prefixed to the words ‘undertakes substantial expansion’ during the
period 07/01/2003 to 01/04/2012.

 

v)  Words ‘commencing with the
initial Assessment Year’ are relevant. It is the trigger point for entitling
the unit, subject to the fulfillment of its eligibility for deduction at the
rate of 100 per cent, for had it not been so, there was no purpose or object of
having inserted the said words in the section. If the intent was only to give
100 per cent deduction for the first five years and thereafter at the rate of
25 per cent for next five years, the Legislatures would not have inserted the
said words. They would have plainly said, ‘for the first initial five years a
unit would be entitled to deduction at the rate of 100 per cent and for the
remaining five years at the rate of 25 per cent’.

 

vi) Thus, the question, which
further arises for consideration, is as to whether, it is open for a ‘Unit’ to
claim deduction for a period of ten years at the rate of 100 per cent or not.
It is legally permissible. The statute provides for the same.

 

vii) Also, ‘substantial
expansion’ can be on more than one occasion. Meaning of expression ‘substantial
expansion’ is defined in clause (8(ix)) of section 80-IC and with each such
endeavour, if the assessee fulfils the criteria then there cannot be any
prohibition with regard thereto. For what is important is not the number of
expansions, but the period within which such expansions can be carried out
within the window period [07/01/2003 to 01/04/2012], and it is here the words
‘begun’ or ‘begins’ and ‘undertakes substantial expansion’ during the said
period, as stipulated under clause (b) sub-section 2 of section 80-IC, to be of
significance. The only rider imposed is by virtue of sub-section (6) of section
80-IA, which caps the deduction with respect to assessment years to which a
unit is entitled to.

 

viii)The Act does not create distinction between the old units,
i.e., the units which stand established prior to 07/01/2003 (the cutoff date),
and the new units established thereafter. Artificial distinction sought to be
inserted by the revenue, only results into discrimination. The object, intent
and purpose of enactment of the section in question is only to provide
incentive for economic development, industrialisation and enhanced employment
opportunities. The continued benefit of deduction at higher rates is available
only to such of those units, which fulfil such object by carrying out
‘substantial expansion’.

 

ix) Both the Assessing Officer
as well as the Appellate Authority(s)/Tribunal erred in not appreciating as to
what was the intent and purpose of insertion of section 80-IC. Thus, in view of
the above discussion, these appeals are allowed and orders passed by the
Assessing Officer as well as the Appellate Authority and the Tribunal, in the
case of each one of the assessees, are quashed and set aside, holding as under:

 

a)  Such of those undertakings
or enterprises which were established, became operational and functional prior
to 07/01/2003 and have undertaken substantial expansion between 07/01/2003 upto
01/04/2012, should be entitled to benefit of section 80-IC, for the period for
which they were not entitled to the benefit of deduction u/s. 80-IB.

 

b)  Such of those units which
have commenced production after 07/01/2003 and carried out substantial
expansion prior to 01/04/2012, would also be entitled to benefit of deduction
at different rates of percentage stipulated u/s. 80-IC.

 

c)  Substantial expansion
cannot be confined to one expansion. As long as requirement of section
80-IC(8)(ix) is met, there can be number of multiple substantial expansions.

 

d)  Correspondingly, there can
be more than one initial assessment years.

 

e)  Within the window period of
07/01/2013 upto 01/04/2012, an undertaking or an enterprise can be entitled to
deduction at the rate of 100 per cent for a period of more than five years.

f)   All this, of course, is
subject to a cap of ten years. [Section 80-IC(6)].”

38 Sections 2(15) and 11 – Charitable trust – Exemption – A. Ys. 2010-11 and 2011-12 – Charitable purpose – Effect of insertion of proviso in section 2(15) – Trust running educational institutions – purchase of land for charitable purposes – inability to utilise land for charitable purpose – Sale of land in plots – sale consideration utilised for charitable purposes – Assessee entitled to exemption –

CIT vs. Sri Magunta Raghava Reddy
Charitable Trust; 398 ITR 663 (Mad):

 

The assessee was a trust running educational
institutions. It purchased lands to an extent of 71.89 acres in the year
1986-87 for the purpose of setting up a medical college and old age home. The
assessee could not obtain the necessary permissions from the competent
authorities and accordingly the said land could not be utilised for the said
purpose. Therefore, the assessee divided the land into plots and sold the plots
and received profits in different years. The profit was utilised for the
charitable purposes. For the A. Ys. 2010-11 and 2011-12, the Assessing Officer
brought to tax, a sum under the head, ”income from business”. The Tribunal held
that the assessee was entitled to exemption u/s. 11.

 

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

 

“i)  Merely because the lands
were sold from 1994 onwards, and fetched a higher value, it could not be said
that it was only for profit motive. When there was no prohibition in the
Income-tax Act, 1961, restraining unutilised land to be sold in smaller extent,
such activity of the assessee, could not be construed as predominant business
activity.

 

ii)  The material on record
further disclosed that the sale proceeds of the lands were utilised only for
charitable purposes and not diverted. Even going by the subsequent conduct of
the assessee in utilizing the profits earned, only for charitable purposes, it
was evident that the intention of the assessee was not to engage continuously
in business or trade or commerce. The assessee was entitled to exemption u/s.
11.”

37 Sections 10A, 10B, 254 and 263 – Appellate Tribunal Power to direct consideration of alternative claim – A. Y. 2010-11 – Revision – Commissioner directing withdrawal of exemption u/s. 10B – Appeal against order of Commissioner refusing to consider claim u/s. 10A – Tribunal has power to direct consideration of alternative claim of assessee to exemption u/s. 10A

CIT vs. Flytxt Technology P. Ltd.; 398
ITR 717 (Ker):

 

For the A. Y. 2010-11, the Assessing Officer
had allowed the assessee’s claim for exemption u/s. 10B of the Income-tax Act,
1961 (Hereinafter for the sake of brevity referred to as the “Act”).
The Commissioner invoked his jurisdiction u/s. 263 of the Act and held that the
assessee was not entitled to exemption u/s. 10B of the Act and directed the
Assessing Officer to withdraw the exemption granted u/s. 10B. The assessee
raised an alternative claim for exemption u/s. 10A of the Act. The commissioner
refused to consider the assessee’s claim. The Tribunal directed the Assessing
Officer to decide the issue afresh including the claim of the assessee for the
benefit of section 10A. 

 

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

 

“i)  Section 254 of the Act
obliged the Tribunal to consider the appeal and pass such orders thereon as it
thinks fit. Even if the power conferred on the Commissioner u/s. 263 only
authorised him to examine whether the order passed by the Assessing Officer was
erroneous and prejudicial to the interest of the Revenue, that restriction of
the power could not affect the powers of the Tribunal which was bound to
exercise u/s. 254 of the Act.

 

ii)  Therefore, there was no
illegality in the order passed by the Tribunal.”

4 Section 80P – Interest earned by a co-operative society from deposits kept with co-operative bank is deductible u/s. 80P.

Marathon Era Co-operative Housing Society Ltd. vs. ITO
Members : B. R. Baskaran, AM and Pawan Singh, JM
ITA No. : 6966/Mum/2017
A.Y.: 2014-15    Dated:  06.03.2018
Counsel for assessee / revenue: Ajay Singh /
V. Justin


FACTS

The assessee, a co-operative housing
society, derives income from subscription, service charges, etc. from
members and interest income from savings and fixed deposits kept with various
banks.  In the return of income filed,
the assessee claimed that interest of Rs. 88,70,070, earned on fixed deposits
with co-operative banks as deductible u/s. 80P(2)(d) of the Act. The Assessing
Officer (AO) while assessing the total income of the assessee denied the claim
for deduction of Rs. 88,70,070 made u/s. 80P of the Act on the ground that
section 80P(4) has withdrawn deduction u/s. 80P to co-operative banks. 

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

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal observed that an identical
issue was considered in the case of ITO vs. Citiscape Co-operative Housing
Society Ltd. (ITA No. 5435 & 5436/Mum/2017 dated 8.12.2017). In the
said case the Tribunal has noted that there are divergent views on this
matter.  The Karnataka High Court has in
the case of Pr. CIT vs. The Totagars Co-operative Sale Society & Others
(ITA No. 100066 of 2016  dated 16.6.2017)
has held that interest income earned by a co-operative society from a
co-operative bank is not deductible u/s. 80P(2)(d) of the Act.  The  
Himachal   Pradesh   High 
Court has in the case of CIT vs. Kangra Co-operative Bank
(2009)(309 ITR 106)(HP) has held that interest
income from investments made in any co-operative society would also be entitled
for deduction u/s. 80P. Having noted the divergent decisions, the Tribunal in
the case of ITO vs. Citiscape Co-operative Housing Society Ltd. (supra)
held that if two reasonable constructions of a taxing statute are possible that
construction which favors the assessee must be adopted. The Tribunal held that
interest income earned by assessee from co-operative banks, which are basically
co-operative societies carrying on banking business, is deductible u/s.
80P(2)(d) of the Act.

Consistent with the view taken by the
co-ordinate bench in ITO vs. Citiscape Co-operative Housing Society (supra),
the Tribunal set aside the order passed by CIT(A) and directed the AO to allow
deduction of interest earned by the asseessee from co-operative banks u/s.
80P(2)(d) of the Act.

 

The appeal filed by the assessee was
allowed.

3 Section 69C – There is subtle but very important difference in issuing bogus bills and issuing accommodation bills to a particular party. The difference becomes very important when a supplier in his affidavit admits supply of goods. In a case where the assessee has proved the genuineness of the transactions and the suppliers had not only appeared before the AO but they had also filed affidavits confirming the sale of goods, addition cannot be sustained.

Shantivijay Jewels Ltd. vs. DCIT (Mumbai)

Members : Rajendra, AM and Ram Lal Negi, JM

ITA No. : 1045 (Mum) of  2016

A.Y.: 2011-12  Dated: 
13.04.2018

Counsel for assessee / revenue: R. Murlidhar
/

V. Justin


FACTS 

Assessee company, engaged in the business of
manufacturing of jewellery, filed its return of income declaring the total
income of Rs.60.56 lakh. During the assessment proceedings, the AO called for
details / evidences of purchases from three parties namely (i) M/s. Aadi Impex;
(ii) M/s. Kalash Enterprises and (iii) M/s. Maniprabha Impex Pvt Ltd, which all
essentially were controlled and managed by Rajesh Jain Group. He observed that
Dharmichand Jain (DJ) had admitted during the search and seizure proceedings
carried out u/s. 132 of the Act, that the group was merely providing
accommodation entries. He invoked the provisions of section 133(6) of the Act.
All the three suppliers relied on the book entries, bills, bank statements in
support of their claim of genuine sales made to the assessee.  However, the AO rejected the said explanation
and proceeded to make addition of Rs. 14.00 Crore to the income of the
assessee.

Aggrieved, the assessee preferred an appeal
to the CIT(A) and during the appellate proceedings, the assessee filed copies
of the affidavits of the suppliers and relied on various decisions against the
said additions on account of bogus purchases. After obtaining the remand report
of the AO on the said affidavits, the CIT (A) held that the addition of entire
purchases is not sustainable and relied on the jurisdictional High Court
judgment in the case of Nikunj Eximp Enterprises (372 ITR 619).  Relying on the decision of the Gujarat High
Court in the case of Simit P Sheth (356 ITR 451), he restricted the addition to
12.5% of the said purchases.  Thus, he
confirmed the addition of Rs. 1,75,04,222/- being 12.5% of Rs. 14,00,33,775/-
and deleted the balance of Rs. 12,25,29,553/-.

Aggrieved with the said decision of CIT(A),
the assessee filed appeal before the Tribunal with regard to bogus purchases. While
deciding the appeal the Tribunal restored back the issue of bogus purchase to
the file of the AO for fresh adjudication. In an order u/s. 254 of the Act, the
Tribunal held as under.

 

HELD  

The Tribunal noted that the assessee engaged
in the business of manufacturing of studded gold jewellery and plain gold
jewellery, had during the year under consideration exported its manufactured
goods, it did not sell goods locally, the AO had not doubted the sales, the
suppliers had appeared before the AO and admitted that they had sold the goods
to the assessee, and they had filed affidavits in that regard.  The Tribunal found that DJ had admitted of
issuing bogus bills.  But, nowhere he had
admitted that he had issued accommodation bills to assessee.  The Tribunal held that in its opinion, there
is a subtle but very important difference in issuing bogus bills and issuing
accommodation bills to a particular party. 
The difference becomes very important when a supplier in his affidavit
admits supply of goods. 

The Tribunal noted that the assessee had
made no local sales and goods were exported. 
There is no doubt about the genuineness of the sales.  It is also a fact that suppliers were paying
VAT and were filing their returns of income. 
In response to the notices issued by the AO, u/s. 133(6) of the Act, the
supplier had admitted the genuineness of the transaction.  The Tribunal referred to the order in the
case of Smt. Romila M. Nagpal (ITA/6388/Mumbai/2016-AY.2009-10, dated
17/03/17), wherein in similar circumstances, addition confirmed by the first
appellate authority were deleted. It observed that in that order, the Tribunal
had referred to the case of M/s. Imperial Imp & Exp.(ITA No.5427/Mum/2015
A.Y.2009-10) in which case also the assessee was exporting goods.  After referring to the portions of the
decision of the Tribunal in Imperial Imp & Exp., the Tribunal held that the
CIT(A) was not justified in partially confirming the addition.  It held that the assessee has proved the
genuineness of the transactions and the parties suppliers had not only appeared
before the AO but they had also filed affidavits confirming the sale of
goods.  The Tribunal reversed the
decision of the CIT(A) and decided this ground in favour of the assessee.

 

This ground of appeal filed by the assessee
was allowed.

2 Section 80IB(10) – Amendments made to s. 80IB(10) w.e.f. 1.4.2005 cannot be made applicable to a housing project which has obtained approval before 1.4.2005. Accordingly, time limit prescribed for completion of project and production of completion certificate have to be treated as applicable prospectively to projects approved on or after 1.4.2005.

Mavani & Sons vs. ITO (Mumbai)

Members : B. R. Baskaran, AM and Pawan
Singh, JM

ITA No. 1374/Mum/2017

A.Y.: 2007-08.   Dated: 16.03.2018.

Counsel for assessee / revenue: Ajay Singh /

V. Justin


FACTS 

During the previous year relevant to the
assessment year under consideration, assessee filed its return of income
claiming a deduction of Rs. 52,91,537 u/s. 80IB(10) of the Act, in respect of a
housing project, known as Maruti Mahadev Nagar. The housing project undertaken
by the assessee was approved by the local authority on 9.1.2003 but the project
commenced in October 2003. As per sanctioned plans, the project consisted of
four wings – Wing Nos. 1 to 3 consisted of Blocks A to G and Wing No. 4
consisted of blocks H to K.  The first
phase of completion certificate was issued vide occupation certificate dated
14.3.2007 and second completion certificate was issued on 26.3.2009. The
deduction of Rs. 52,91,537 was in respect of Blocks F and G under Building (sic Wing) No. 3.


The Assessing Officer (AO) while assessing
the total income u/s. 143(3) r.w.s. 147 of the Act denied the claim for
deduction u/s. 80IB(10) on the ground that the project was not completed within
a period of five years from the date of approval of the project and for this
purpose the period of five years has to commence with the date of approval of
the project and not from the date of commencement of work on the project.  The project was partially completed on
14.3.2007 and was finally completed on 26.3.2009.  According to the AO, partial completion was
not final completion as per provisions of section 80IB(10). 


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


Aggrieved, the assessee preferred an appeal
to the Tribunal where it was contended, on behalf of the assessee, for grant of
deduction u/s. 80IB(10), the conditions prevalent at the time of commencement
of the project need to be satisfied.


HELD  

The Tribunal noted that the Madras High
Court has in the case of CIT vs. Jain Housing Construction Co [2013] 30
taxmann.com 131 (Mad.) while considering similar issues held that
furnishing of completion certificate to be produced as a condition for grant of
deduction u/s. 80IB(10) was introduced by Finance Act, 2004 w.e.f. 1.4.2005 and
prior thereto there was no such requirement and in the absence of any requirement
u/s. 80IB(10)(a) of the Act and going by the proviso as it stood during the
relevant year 2004-05, it is difficult to accept the contention of revenue that
claim for deduction rested on production of completion certificate.  It also noted that the Delhi High Court has
in the case of CIT vs. CHD Developers Ltd. 362 ITR 177 (Del.) held that
when approval related to the project was granted prior to 2005 i.e. before
amendment, the assessee was not required to produce the completion certificate
to avail deduction u/s. 80IB.  Similarly,
Hyderabad Bench of the Tribunal has in the case of ITO vs. Kura Homes (P.)
Ltd. [2004] 47 taxmann.com 161 held that furnishing of completion
certificate in respect of housing project was brought into statute only w.e.f.
1.4.2005 and would apply prospectively. The Apex Corut in CIT vs. Akash
Nidhi Builders & Developers [2016] 76 taxmann.com 86 (SC) has held that
assessee was entitled for proportionate profit in respect of different wings of
the project.

 

Considering the ratio of the decisions of
the Delhi High Court in CHD Developers (supra), Madras high Court in
Jain Housing & Construction Ltd. (supra) and Hyderabad Bench in
ITO vs. Kural Homes (P.) Ltd. (supra), the Tribunal held that condition
precedent for grant of deduction for seeking completion within the time
prescribed has to be treated as applicable prospectively and accordingly, the
assessee is not required to produce completion certificate as the project was
approved before the amendment to section 80IB(10).

 

The appeal filed by the assessee was
allowed.

7 Sections 71, 72, 73 and Circular No. 23D dated 12.9.1960 issued by the Board – Business losses brought forward from earlier years can be adjusted against speculation profits of the current year after the speculation losses of the current year and also speculation losses brought forward from earlier years have been duly adjusted.

[2018] 92 taxmann.com 133 (Mumbai-Trib.)

Edel Commodities Ltd. vs. DCIT

ITA Nos. : 3426 AND 356 (Mum) OF 2016

A.Y.: 2011-12        Dated: 
06.04.2018


FACTS 

The assesse company engaged in the business
of trading in securities, physical commodities and derivative instruments filed
its return of income wherein against the speculation profit of Rs. 4,77,37,754
brought forward business loss of AY 2010-11 of Rs. 1,92,98,587 was set
off.  The Assessing Officer (AO) on
examination of clause 25 of the Tax Audit Report and also the relevant schedule
of the return of income as also the assessment record of AY 2010-11 observed
that the loss of AY 2010-11 which has been set off against speculation profit
of the current year was not a speculation loss but was a business loss other
than loss from speculation business.  The
AO denied the set off of non-speculation business loss brought forward from
earlier years against speculation profit of the current year.

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

Aggrieved, the assessee preferred an appeal
to the Tribunal where relying on the provisions of sections 71 and 72 of the
Act relating to carry forward of losses. it was submitted that there is no bar
in the Act for adjustment of brought forward non-speculation losses against the
speculation profit of the current year. 
Reliance was placed on CBDT Circular No. 23D dated 12.9.1960 and also on
the decisions of the Calcutta High Court in the case of CIT vs. New India
Investment Corporation Ltd. 205 ITR 618 (Cal); and of Allahabad High Court
in the case of CIT vs. Ramshree Steels Pvt. Ltd. 400 ITR 61 (All.).

 

HELD  

The Tribunal noted that the Allahabad High
Court has in the case of Ramshree Steels Pvt. Ltd. (supra) held that
loss of current year and brought  forward
losses of earlier year from non-speculation income can be set off against
profit of speculation business of current year. 
It also noted that the Calcutta High Court in the case of New India
Investment Corporation Ltd. (supra) referred to the Bombay High court
decision in the case of Navnitlal Ambalal vs. CIT [1976] 105 ITR 735 (Bom.)
and also to the CBDT Circular which has held that if speculation losses for
earlier years are carried forward and if in the year under consideration  speculation profit is earned by the assessee
then such speculation profits for the year under consideration should be
adjusted against the brought forward speculation loss of the previous year
before allowing any other loss to be adjusted against these profits. 

 

The Tribunal held that a reading of sections
71, 72 and 73, Circular and case laws makes it clear that there is no blanket
bar as such on adjustment of brough forward non-speculation business loss
against current years speculation profit. 
These provisions provide that loss in speculation business can neither
be set off against income under the head “Business or profession” nor against
income under any other head, but it can be set off only against profits, if
any, of another speculation business. Section 73 effects complete segregation
of speculation losses, which stand distinct and separate and can be mixed for
set off purpose, only with speculation profits. 
The said circular of the Board (which has been held by the Hon’ble
Bombay High Court to be still holding the field) provide that if speculation
losses for earlier years are carried forward and if in the year of account a
speculation profit is earned by the assessee, then such speculation profits for
the current accounting year should be adjusted against brought forward  speculation losses of the earlier year,
before allowing any other losses to be adjusted against these profits.  Hence, it is clear that there is no bar in
adjustment of unabsorbed business losses against speculation profit of current
year provided the speculation losses for the year and earlier has been first
adjusted from speculation profit.

 

The Tribunal noted that in the present case
no case has been made out by the revenue that the current or earlier
speculation losses have not been adjusted from the speculation profit.  In view of the aforesaid decision of  Hon’ble jurisdictional High Court and CBDT
Circular mentioned above, the Tribunal set aside the order of lower authorities
and decided the issue in favour of the assessee.

6 Sections 200, 201 – Since no retrospective effect was given by the legislature while amending sub-section (3) by Finance Act, 2014, it has to be construed that the legislature intended the amendment made to sub-section (3) to take effect from 1st October, 2014 only and not prior to that.

[2018] 92 taxmann.com 260 (Mumbai-Trib.)
Sodexo SVC India (P.) Ltd. vs. DCIT
ITA No. : 980 (Mum) OF 2018
A.Y.: 2012-13  Dated:  28.03.2018

FACTS 

The assessee, an Indian company, is engaged
in the business of issuing meal, gift vouchers, smart cards, to its clients who
wish to make benefit in kind for their employees. The employees use these
vouchers / smart cards at affiliates of the assessee company across India and
who are engaged in different business sectors such as restaurants, eating
places, caterers, super markets. For this purpose, the assessee has entered
into an agreement with the affiliates who accept the vouchers/smart cards
towards payment for goods or services provided by them. Further, the assessee also
enters into agreement with its clients/customers for issuance of vouchers/cards
for which it charges in addition to face value certain amount towards service
and delivery charges.  The entire amount
paid by client/customer is deposited in an escrow account of the assessee kept
with Reserve Bank of India as per guidelines of Payment and Settlement Systems
Act, 2007 and Revised Consolidated Guidelines 2014.  The assessee, in turn, after deducting
certain amounts as service charges and applicable taxes makes payments to
affiliates as per the terms and conditions of agreement towards cost of
goods/services provided by them.

In the course of a survey, u/s. 133(2A) of
the Act, conducted in the business premises of the assessee on 21.01.2016, it
was found that assessee was deducting tax at source only in respect of payments
made to caterers whereas no tax was deducted at source on payments made to
other affiliates. Therefore, the AO issued a notice to assessee directing it to
show cause why it should not be treated as assessee in default u/s. 201(1) for
non-deduction of tax at source on such payment. The assessee responded by
stating that the provisions of section 194C are not applicable in respect of
payments made by it to other affiliates (other than caterers).  The AO did not agree with the submissions made
by the assessee.  He held the assessee to
be an assessee in default for not having deducted tax at source and accordingly
passed an order u/s. 201(1) and 201(1A) raising demand of Rs. 36,97,34,000
towards tax and Rs. 20,09,04,420 towards interest.

Aggrieved, the assessee preferred an appeal
to the CIT(A) interalia on the ground that the order passed u/s. 201(1)
and 201(1A) is barred by limitation as per section 201(3) as was applicable for
the relevant period.  The CIT(A) held
that the amendment to section 201(3) being clarificatory in nature will apply
retrospectively.

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD  

The Tribunal noted that Finance Act, 2009
with a view to provide time limit for passing an order u/s. 201(1) introduced
sub-section (3) of section 201.  The time
limit was two years for passing an order u/s. 201(1) from the end of the
financial year in which the statement of TDS is filed by the deductor and in a
case where no statement is filed the limitation was extended to before expiry
of four years from the end of financial year in which the payment was made or
credit given. 

Subsequently, the Finance Act, 2012 amended
section 201(3) with retrospective effect from 1.4.2010 and the time period of
four years was extended to six years in case where no statement is filed.  However, the time period of two years, in
case where statement is filed, remained unchanged. 

Finance Act, 2014 once again amended
sub-section (3) with effect from 1.10.2014 to provide for a uniform limitation
of seven years from the end of the financial year in which the payment was made
or credit given.  The distinction between
cases where statement has been filed or not was done away with. 

The issue before the Tribunal was whether
the un-amended sub-section (3) which existed before the amendment by the
Finance Act, 2014 applies to the case of the assessee.  The Tribunal noted that by the time the
amended provisions of sub-section (3) was introduced by the Finance Act, 2014,
the limitation period of two years as per clause (i) of sub-section (3) of
section 201 (the unamended provision) has already expired.

The Tribunal held that on a careful perusal
of the objects for introduction of the amended provision of sub-section (3) it
does not find any material to hold that the legislature intended to bring such
amendment with retrospective effect.  If
the legislature intended to apply the amended provision of sub-section (3)
retrospectively it would definitely have provided such retrospective effect
expressing in clear terms while making such amendment.  It observed that this view gets support from
the fact that while amending sub-section (3) of section 201 by the Finance Act,
2012, by  extending the period of
limitation under sub-clause (ii) to six years, the legislature has given
retrospective effect from 1st April, 2010.  Since, no such retrospective effect was given
by the legislature while amending sub-section (3) by Finance Act, 2014, it has
to be construed that the legislature intended the amendment made to sub-section
(3) to take effect from 1st October, 2014, only and not prior to
that.

The Tribunal noted that the principles
concerning retrospective applicability of an amendment have been examined by
the Supreme Court in the case of CIT vs. Vatika Township Pvt. Ltd. [2014]
367 ITR 466 (SC). It observed that the decision of the Gujarat High Court
in the case of Tata Teleservices Ltd. vs. Union of India [2016] 385 ITR 497
(Guj.) is directly on the issue of retrospective application of amended
sub-section (3) of section 201.  The
court in this case has held that the amendment to sub-section (3) of section
201 is not retrospective.  Following the
decision in the case of Tata Teleservices (supra), the Gujarat High
Court in the case of Troykaa Pharmaceuticals Ltd. vs. Union of India [2016]
68 taxmann.com 229(Guj.) once again expressed the same view.

Considering the principle laid down by the
Supreme Court as well as the ratio laid down by the Gujarat High Court in the
decisions referred to above which are directly on the issue, the Tribunal held
that the order passed u/s. 201(1) and 201(1A) having been passed after expiry
of two years from the financial year wherein TDS statements were filed by the
assessee u/s. 200 of the Act, is barred by limitation, hence, has to be
declared as null and void.

The Tribunal kept the question of
applicability of section 194C of the Act open.

This ground of appeal filed by the assessee
was allowed.

 

5 Section 56(2)(viia), Rule 11UA – As per Rule 11UA, for the purposes of section 56(2)(viia), fair market value of shares of a company in which public are not substantially interested, is to be computed with reference to the book value and not market value of the assets.

[2018] 92 taxmann.com 29 (Delhi-Trib.)
Minda S. M. Technocast Pvt. Ltd. vs. ACIT
ITA No.: 6964/Del/2014
A.Y.: 2014-15.  Dated: 07.03.2018.

FACTS  

During the previous year relevant to the
assessment year under consideration, the assessee, a private limited company,
having rental income and interest income acquired 48% of the issued and paid up
equity share capital of Tuff Engineering Private Limited from 3 private limited
companies for a consideration of Rs. 5 per share.  The assessee supported the consideration paid
by contending that the purchase was at a price determined in accordance with
Rule 11UA. The assessee produced valuation report of Aggrawal Nikhil & Co.,
Chartered Accountants, valuing the share of Tuff Engineering Private Limited
(TEPL) @ Rs. 4.96 per share.

The Assessing Officer (AO) in the course of
assessment proceedings observed that while valuing the shares of TEPL the
assets were considered at book value. He was of the view that the land
reflected in the balance sheet of TEPL should have been considered at circle
rate prevailing on the date of valuation and not at book value as has been done
in arriving at the value of Rs. 4.96 per share. The AO substituted the book
value of land by the circle rate and arrived at a value of Rs. 45.72 per equity
share. He, accordingly, added a sum of Rs. 11,84,46,336 to the income of the
assessee on account of undervaluation of shares. The amount added was arrived
at Rs. 40.72 (Rs. 45.72 – Rs. 5) per share for 29,08,800 shares acquired by the
assessee.

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

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD 

The Tribunal noted that the issue for its
consideration is as to whether the land shown by the TEPL should be taken as
per the book value or as per the market value while valuing its shares. The
Tribunal having noted the provisions of section 56(2)(viia) and the definition
of “fair market value” in Explanation to section 56(2)(viia) and Rule 11UA
observed that on the plain reading of Rule 11UA, it is revealed that while
valuing the shares the book value of the assets and liabilities declared by the
TEPL should be taken into consideration. There is no whisper under the
provision of 11UA of the Rules to refer the fair market value of the land as
taken by the Assessing Officer as applicable to the year under consideration.

The Tribunal relying on and finding support
from the decision of the Bombay High Court in the case of Shahrukh Khan vs.
DCIT reported in 90 taxmann.com 284 held that the share price calculated by
the assessee of TEPL for Rs. 5 per share has been determined in accordance with
the provision of Rule 11UA. The Tribunal reversed the orders of the lower
authorities and allowed the appeal filed by the assessee.

The Tribunal decided the appeal in favour of
the assessee.

Please note: The provision of law has
since changed.

8 Method of accounting – Section 145(3) – AO cannot reject the accounts on the basis that the goods are sold at the prices lower than the market price or purchase price – the law does not oblige/compel a trader to make or maximise its profits

The
Pr. CIT vs. Yes Power and Infrastructure. Pvt. Ltd. [AY 2005-06] [Income tax
Appeal no. 813 of 2015 dated:20/02/2018 (Bombay High Court)].  [ACIT vs. Yes Power and Infrastructure. Pvt.
Ltd.[ITA No.7026/Mum/2012; dated 17/12/2014 ; Mum.  ITAT ]

The assessee is engaged in
trading of steel and other engineering items. The A.O during year found that
the assessee had sales of Rs. 52.17 crore while gross profit was only Rs. 26.08
lakh. This led the A.O. to call for an explanation for such low profits from
the Assessee.


In response, the Assessee
pointed out that the company, is a concern mainly engaged in trading of steel
& engineering products. The company 
purchase and sale these goods on very competitive low margin but our
volume are very high. Normally, company purchases the goods and resale them at
the minimum time gap. It is a known fact that rates of steel keep fluctuating
and it is a very volatile item. To avoid any risk due to market price
fluctuation, company  has to take the
fast decision to sell at the available rate received from the market, some time
it may be sold on a low price or some times at a higher price. During the year,
some of the transactions are sold at lower price because of the expectation of
the rate of steel going lower and lower. Moreover, due to fact that assessee
works with a very small capital and no borrowing from banks, assessee does not
have capacity to hold stock for longer periods. Hence, company has to take
decision to sell and purchase, keeping the time gap at the minimum.


However, the A.O. did not
accept the explanation for low profits and rejected the books of accounts. This
on the ground that the purchase price of goods was much higher than the selling
price of those very items. On rejection of the books of accounts, the A.O.
estimated the gross profit on the basis of 2 percent of the sales. This
resulted in enhancement of gross profits from Rs. 26.08 lakh to Rs. 1.18 crore.


Being aggrieved with the
order, the assessee filed an Appeal to the CIT(A). The CIT(A) dismissed the
assessee’s appeal.


On further Appeal, the
Tribunal allowed the assessee’s Appeal. This inter alia on the ground
that it found that the assessee had along with return of income filed audited
accounts along with audit report for the subject assessment year. Moreover,
during the course of scrutiny, complete books of accounts with item-wise and
month-wise purchase and sales in quantitative details were also furnished. It
found that the A.O. did not find any defect in the books of accounts nor with
regard to quantity details furnished by the assessee. In the above
circumstances, it held that merely because the assessee being a trader has sold
goods at prices lower than the purchase price and/or the prevailing market
price would not warrant rejection of the books of accounts.


Being aggrieved with the
order, the revenue filed an Appeal to the High Court. The grievance of the
Revenue with the impugned order is that the assessee has sold goods at price
lower than its purchase price. Therefore, the books of accounts cannot be relied
upon. Thus, the rejection of the books of accounts and estimation of profits in
these facts should not have been interfered with.

The High Court held  that it is not the case of the Revenue that
the amounts reflected as sale price and/or purchase price in the books do not
correctly reflect the sale and/or purchase prices. In terms of section 145(3)
of the Act, the A.O. is entitled to reject the books of accounts only on any of
the following condition being satisfied.


(i) Whether he is not
satisfied about the correctness or completeness of accounts; or

(ii) Whether the method of
accounting has not been regularly followed by the Assessee; or

(iii) The income has been
determined not in accordance with notified income and disclosure standard.


 It is not the case of the Revenue that
any of the above circumstances specified in section 145(3) of the Act are
satisfied. The rejection of accounts is justified on the basis that it is not
possible for the assessee who is a trader to sell goods at the prices lower
than the market price or purchase price. In fact, as observed by the Apex
Court, Commissioner of Income Tax, Gujarat vs. A. Raman & Co. and in
S.A. Builders vs. Commissioner of Income Tax – 2, the law does not
oblige/compel a trader to make or maximise its profits. Accordingly, the
revenue Appeal was dismissed.

7 Unexplained expenditure – Section 69C – payment made to parties – the assessee filed details of all parties with their PAN numbers, TDS deducted, details of the bank – assessee could not be held responsible for the parties not appearing in person – No disallowance

The Pr. CIT vs. Chawla Interbild Construction Co. Pvt.
Ltd. [AY: 2009-10] [Income tax
Appeal no. 1103 of 2015 dated:28/02/2018 (Bombay High Court)].  [ACIT, Circle-9(1) vs. Chawla
Interbild Construction Co. Pvt. Ltd.[ITA No.7026/Mum/2012;  Bench:C ; dated 11/03/2015 ; Mum. ITAT]


The assessee is a firm
engaged in Civil Engineering and execution of the contracts. During the course
of the assessment proceedings, the A.O doubted the genuineness of payments made
to 13 parties and claimed as expenditure. The notices issued to 13 parties by
the A.O were returned by the postal authorities. Consequently, on the above
ground, the A.O made adhoc disallowance of 40% on the total payment made i.e.
Rs. 4.88 crore out of Rs.12.20 crore and added the same to the assessee’s
income.


Being aggrieved by the assessment
order, the assessee preferred an appeal to the CIT(A). In appeal, the assessee
filed details of all 13 parties with their PAN numbers, addresses, TDS
deducted, date of bill, date of cheque and its number, details of the bank etc.
The CIT(A) after taking the additional evidence on record sought a remand
report from the A.O. The A.O in his remand report submitted that out of 13
parties, 8 parties had appeared before him and the payments made to them stood
satisfactorily explained. However, the remand report indicates that out of 13
parties, 5 parties had not appeared before him. On the basis of the remand
report and the evidence before it, the CIT(A) while allowing the assessee
appeal held that the assessee had done all that was possible to do by giving
particulars of the parties and their PAN numbers. In these circumstances, the
CIT(A) held that the  assessee could not
be held responsible for the parties not appearing in person and allowed the
appeal. Thus, holding that the payments made to all 13 parties were genuine and
the addition on account of disallowance was deleted.


Being aggrieved by the
order, the Revenue carried the issue in appeal to the Tribunal. In appeal, the
Tribunal observed  that all the details
including the dates of payments, net amounts paid, cheque numbers, details of
the bank branches, amount of TDS deducted, details of the bills, including the
details of the TDS made etc. have been furnished in the tabular form
before the CIT(A). Thus, the assessee discharged the initial onus cast upon him
in respect of the payments made to all 13 parties. The order further records
that thereafter, the responsibility was cast upon the A.O if he still doubted
the genuineness of the payments made to those 13 parties. In the aforesaid
circumstances, the appeal of the Revenue was dismissed. 


Being aggrieved by the ITAT
order, the Revenue  preferred an appeal
to the High Court. The Court held that the A.O while passing the assessment
order has disallowed 40% of the total payments made on the basis of the
payments made to 13 parties, who were not produced before him during the
assessment proceedings. This on the ground that payments are not genuine. The
court observed that the assessee had done everything to produce necessary
evidence, which would indicate that the payments have been made to the parties
concerned. The details furnished by the assessee were sufficient for the A.O to
take further steps if he still doubted the genuineness of the payments to
examine whether or not the payments were genuine. The A.O on receipt of further
information did not carry out the necessary enquiries on the basis of the PAN
numbers, which were available with him to find out the genuineness of the
parties. The CIT(A) as well as the Tribunal have correctly held that it is not
possible for the assessee to compel the appearance of the parties before the
A.O. In the above circumstances, the view taken by the Tribunal is a reasonable
and possible view. Consequently,  the
appeal of revenue was dismissed.

6 Business Expenses – Section 37 – loss/ liability arising on account of fluctuation in rate of exchange in case of loans utilised for working capital of the business – allowable as an expenditure

The Pr. CIT-20 vs. Aloka Exports.
[ AY 2009-10] [Income tax  Appeal no. 806 of 2015 dated: 26/02/2018 (Bombay High Court)].    
[ACIT, Circle-17(2) vs. Aloka Exports.[ITA No. 4771/Mum/2012;  Bench : A ; dated 27/08/2014 ; Mum.  ITAT ]

The assessee is engaged in
the business of manufacture and export of readymade garments, imitation
jewellery, handicrafts etc. The AO noticed that the assessee claimed deduction
of expenses relating to foreign exchange rate difference.

The assessee submitted that
the term loan was availed  for working
capital purposes. At the year end, the assessee worked out the foreign exchange
difference and claimed the loss arising thereon as deduction.


The AO noticed that the
EEFC account is maintained in foreign currency and accordingly held that the
assessee could not have incurred loss on account of foreign exchange difference.
The assessee explained before the AO about the method of accounting of “foreign
exchange loss/gain”. However, the assessing officer took the view that the loss
accounted by the assessee is against the accounting principles. Accordingly he
disallowed the foreign exchange difference loss claimed by the assessee.


The Ld CIT(A) deleted the
disallowance of loss arising on foreign exchange difference by following the
decisions rendered by Hon’ble Supreme Court in the followingcases:-


(a) Sutlej
Cotton Mills Ltd vs. CIT (116 ITR 1)(SC)

(b) CIT
vs. Woodward Governor India Pvt Ltd (312 ITR 254)(SC).


On further appeal by the
Revenue, the Tribunal upheld the order of the CIT(A). It held that the foreign
exchange term loan was utilised for working capital requirements. Thus, the
loss on account of foreign exchange difference is allowable as a revenue loss.


The Hon. High Court
observed that  both the CIT(A) as well as
the Tribunal have on perusal of the record, come to a conclusion that the loan
taken was utilised only for working capital requirements. Therefore, loss on
account of foreign exchange variation would be allowable as a trading loss. In
fact, even the Assessing Officer has held that term loan was not utilised for
purchase of plant and machinery.


The Court held that this
issue stands covered by the decisions of the Supreme Court in Sutlej Cotton
Mills Ltd., vs. CIT 116 ITR 1 (SC) that loss arising during the process of
conversion of foreign currency is a part of its trading asset i.e. circulating
capital, it would be a trading loss. Further, as held by the Apex Court in CIT
vs.Woodward Governor India Pvt. Ltd., 312 ITR 254 – that loss/liability
arising on account of fluctuation in rate of exchange in case of loans utilised
for revenue purposes, is allowable as an expenditure. Accordingly, the question
of law  raised in the appeal of revenue
was dismissed.

11 Section 37(1) – Business expenditure – Capital or revenue – A. Ys. 2008-09 and 2009-10 – Assessee obtaining mining lease from Government – Writ petitions to quash lease – Legal expenditure to defend and protect lease – Is revenue expenditure

Dy. CIT vs. B. Kumara Gowda; 396 ITR 386
(Karn):

The assessee was in the business of mining
iron ore in lands taken on lease from the State Government. In the year 2006,
the Department of Geology had leased out certain lands to the assessee for the
purpose of mining iron ore. The assessee was working on the lease as a lessee
of the State Government. The grant of lease to the assessee was challenged by
third parties in writ petitions. In the A. Ys. 2008-09 and 2009-10, the
assessee incurred expenditure by way of legal fees to defend and sustain the
lease. The assessee claimed deduction of the expenditure as revenue
expenditure. The Assessing Officer disallowed the claim. The Tribunal allowed
the assessee’s claim.

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

 “i)  The test to decide whether
a particular expenditure is capital or revenue in nature, is to see whether the
expenditure in question was incurred to create any new asset or was incurred
for maintaining the business of the company. If it is former, it is capital
expenditure; if it is later, it is revenue expenditure.

 ii)  The legal expenditure
incurred by the assessee to defend the writ petitions filed to quash the
Government notification and lease deed was not a capital expenditure and
deduction was allowable.”

Applicability of Section 68 to Cash Credits in Absence of Books of Account

Issue for Consideration

Section 68 of the Income-tax Act, 1961 deems
unexplained cash credits to be the income of the assessee under certain
circumstances. Section 68 reads as under:

 “Where any sum
is found credited in the books of assessee maintained for any previous year,
and the assessee offers no explanation about the nature and source thereof or
the explanation offered by him is not, in the opinion of the Assessing Officer,
satisfactory, the sum so credited may be charged to income tax as the income of
the assessee of that previous year.”

The section, for its application, apparently
requires that a sum is found credited in the books of account of the assessee. An
issue has arisen before the courts as to whether unexplained receipts or
credits can be deemed to be the income of the assessee u/s. 68, even in a
situation where books of account are not maintained or the sum is not credited
in the books of account of the assessee. In an earlier decision, the Bombay
High Court (followed by the Gauhati High Court and the Madras High Court) has
taken the view that such amounts, not found credited in the books of account,
cannot be treated as cash credits taxable u/s. 68. Recently, the Bombay High
Court has however, taken a contrary view that such amounts can be taxed under
section 68.

Bhaichand N. Gandhi’s case

The issue first arose before the Bombay High
Court in the case of CIT vs. Bhaichand N. Gandhi 141 ITR 67.

In this case, pertaining to assessment year
1962-63, where the previous year was Samvat year 2017, the assessing officer was
not satisfied with the explanations offered by the assessee regarding the
genuineness of certain cash credits totalling to Rs. 30,000 found recorded in
certain books, which, according to the assessing officer, were the books of
account of the assessee. He, therefore, treated the amount of such credits as
income from undisclosed sources. The Appellate Assistant Commissioner confirmed
the addition of such credits as income of the assessee.

Before the Tribunal, an argument was put
forward on behalf of the assessee that in respect of one of the deposits of Rs.
10,000 included in the amount of Rs. 30,000, that it was not an amount credited
in the books of the assessee maintained by the assessee for the previous year,
but was only a deposit in the bank account of the assessee. It was contended
that the bank passbook was not a book maintained by the assessee, and that
therefore, even if such amount was treated as undisclosed income of the
assessee, it  could only be assessed in
the financial year of the deposit (as applicable to unexplained
investments/money u/s. 69/69A), and not in the previous year.

The Tribunal accepted the assessee’s
argument holding that the bank passbook could not be treated as a book of the
assessee, and that it was not a book maintained by the assessee for any
previous year as referred to in section 68.

On an appeal by the Revenue, the Bombay High
Court analysed the provisions of section 68. It took note of the decision of
the Supreme Court in the case of Baladin Ram vs. CIT 71 ITR 427, where
the court had held that it was only when an amount was found credited in the
books of an assessee that the new section would be attracted. It further
observed that it was well settled that the only possible way in which income
from an undisclosed source could be assessed or reassessed, was to make an
assessment during the ordinary financial year. The Supreme Court had noted that
even under the provisions embodied in section 68, it was only when any amount
was found credited in the books of the assessee for any previous year that the
section would apply, and the amount so credited might be charged to tax as the
income of that previous year, if the assessee offered no explanation or the
explanation offered by him was not satisfactory.

The Bombay High Court noted with approval
the observations of the Tribunal that it was fairly well settled that when
monies were deposited in a bank, the relationship that was constituted between
the bank and the customer was one of debtor and creditor and not of trustee and
beneficiary. Applying this principle, the passbook supplied by the bank to its
constituent was only a copy of the constituent’s account in the books
maintained by the bank. The passbook was not maintained by the bank as the
agent of the constituent, nor could it be said that the passbook was maintained
by the bank under the instructions of the constituent. The Bombay High
Court, therefore, held that the Tribunal was justified in holding that the
passbook supplied with the bank to the assessee could not be regarded as a book
of the assessee, i.e. a book maintained by the assessee or under his
instructions.

The Bombay High Court, therefore,
confirmed the conclusions of the Tribunal, holding that the provisions of
section 68 did not apply to the credit in the passbook, which was not recorded
in the books of account of the assessee.

In the case of Anand Ram Raitani vs. CIT
223 ITR 544, the Gauhati High Court took a view that existence of books of
account was a condition precedent for the invocation of power by the assessing
officer u/s. 68. Since a partnership firm was a separate entity, books of
account of a partnership could not be treated as those of individual partners.
Therefore, addition to an assessee’s income on account of unexplained cash
credit u/s. 68, on the basis of cash credit found in books of accounts of a
firm in which the assessee was a partner was not justified. The court in
deciding the case followed the decision in the case of Smt. Shanta Devi vs.
CIT, 171 ITR 532(P& H).

Similarly, in the case of CIT vs. Taj
Borewells 291 ITR 232, the Madras High Court, considered a case of the
first year of assessment of a partnership firm, where no books of account were
maintained, but accounts were presented in the form of profit and loss account
and balance sheet. The Madras High Court held that the profit and loss
account and balance sheet were not books of account as contemplated u/s. 68. It
held that since there were no books of account, there could be no credits in
such books, and therefore the provisions of section 68 could not be invoked to
tax capital contributions of partners in the hands of the firm.

Arunkumar J. Muchhala’s case

Recently, the issue again came up before the
Bombay High Court in the case of Arunkumar J. Muchhala vs CIT 85 taxmann.com
306.

In this case,
the assessee had income from rent, share of profit from a partnership firm,
salary income and income from other sources. The assessee had taken loans from
various parties totalling to Rs. 79.06 lakh. Since no loan confirmations were
provided in respect of these amounts, the assessing officer treated them as
unexplained cash credits and added them to the total income of the assessee.

In appeal before the Commissioner (Appeals),
explanations were given in respect of some of the loan amounts, for which
additions were deleted. However, no relief was given in respect of the other
amounts for which no further explanations or details were filed. The further
appeal of the assessee was dismissed by the tribunal.

Before the Bombay High Court, on behalf of
the assessee, it was argued that books of account had not been maintained by
the assessee, and therefore the provisions of section 68 would not apply. It
was claimed that though it was a fact that certain amounts had been taken by
the assessee from those persons, yet, when entries of these amounts were not
taken in the books of account, they could not be added to the income of the
assessee. These entries were only found by the assessing officer in the bank
statement, and no other document was considered by him while passing the
assessment order.

Reliance was placed on behalf of the
assessee on the decisions of the Supreme Court in the case of Baladin Ram
(supra), of the Bombay High Court in the case of Bhaichand H Gandhi
(supra), of the Gauhati High Court in the case of Anand Ram Raitani(supra)
and of the Delhi High Court in the case of CIT vs. Usha Jain 182 ITR 487. It
was argued that section 68 was a charging section and was also a deeming
provision. Further reliance was placed on the decision of the Madras High Court
in the case of Taj Borewells (supra). It was further argued that the
amounts were received by cheques, and that some of them were in respect of flat
bookings, which did not materialise, and therefore, cheques were returned and
there was no credit at the end of the year.

On behalf of the Revenue, it was argued that
many opportunities were given to the assessee to produce relevant documents in
order to substantiate and prove his version, but that the assessee had failed
to give the further details of the persons from whom the loans were allegedly
taken. It was argued that it was the bounden duty of the assessee to explain
the nature and source of cash deposits, and that it had therefore rightly been
held that the assessee could not take advantage of the fact that he had not
kept any books of account.

Reliance was placed on behalf of the Revenue
on the decision of the Punjab & Haryana High Court in the case of Sudhir
Kumar Sharma (HUF) vs. CIT 224 Taxman 178, the special leave petition
against which decision had been rejected by the Supreme Court.239 Taxman
264(SC).

The Bombay High Court observed that the
assessee had not denied that he had received the loan amounts/cash deposits
from those persons whose names had been given in the assessment order and that
those names had been taken from the bank account of the assessee. The High Court
observed that the assessee’s case was that since he had not maintained books of
account, those amounts could not be considered. The Bombay High Court observed
that when the assessee was doing business, it was incumbent on him to maintain
proper books of account. Such books could be in any form. According to the
Bombay High Court, if he had not maintained the books which he was required to,
then he could not be allowed to take advantage of his own wrong. The Bombay
High Court observed that the burden lay on the assessee to show from where he
had received the amounts, and what was their nature and the onus was on the
assessee to explain those facts.

The Bombay High Court noted that huge
amounts had been credited in the account of the assessee, and he had not
explained the nature of those credits. The fact of those amounts was discovered
by the assessing officer from the bank passbook. When the source and nature had
been held to have been explained, certain amounts had been deleted by the
appellate forums. In respect of the balance amounts of Rs. 58 lakh, no document
was produced in respect of those transactions, nor amounts had been confirmed
from those persons who were shown to have lent them. Therefore, according to
the Bombay High Court, the authorities below had rightly held that the nature
of the transaction had not been properly shown by the assessee.

According to the Bombay High Court, the
ratio of the decisions relied upon on behalf of the assessee were not
applicable to the case before it. In those cases, either the entries were
confirmed by the parties in whose name they were standing, or books of account
were showing the cash credits.

The court observed that in the case before
it, at no earlier point of time had a firm stand been taken by the assessee
that he had not maintained the books of account. Whenever a direction had been
given to produce the same in any form, the assessee had replied that he wanted
time to prepare. Many opportunities were given by the assessing officer for the
production of relevant documents, including books of account. However, such
documents were never produced. The assessee had raised the point of books of
accounts not being maintained for the first time before the Bombay High Court.
The Bombay High Court observed that non-production of documents was different
from non-maintenance of books of account. The Bombay High Court observed that
the facts in Sudhir Kumar Sharma’s case (supra) were almost similar, and
that case was, therefore, binding. It also noted that the special leave
petition of the assessee in that case to the Supreme court was dismissed by the
court.

The Bombay High Court, therefore, upheld the
addition made by the assessing officer of such amounts as unexplained cash
credits u/s. 68.

Observations

Section 68 while referring to the books
of account requires that (i) such books of account are ‘maintained’ (ii) by the
‘assessee’ and (iii) the assessee is ‘found’ (iv) to have ‘credited’ any sum
therein and (v) such finding, needless to say, is by the assessing officer.
Each of these requirements, are to be fulfilled for a valid charge u/s. 68. The terms referred to have their own meanings and their import
cannot be wished away in applying the provisions. The onus is heavy on the
assessing officer to establish strict compliance of each of the conditions
stated herein, before invoking and applying section 68 for an addition of the
deemed income. In a few cases, the courts have concurred that a pass book of a
bank cannot be construed to be maintained by the assessee and the bank cannot
be held to be an agent of the assessee.   

There has been a special significance
attached to the books of account in the Act and the requirement for recording a
transaction or a write off with reference to the books of account has been
subjected to the examination by the courts, which have held that a deduction
based on the condition of an entry in the books of account would be conferred
only where the assessee has recorded the entry in the books and not otherwise;
a debit in the profit and loss account without supporting books would
disentitle an assessee from claiming the deduction. Please see National
Syndicate, 41 ITr 225(SC), S. Rajagopala Vandayar, 184 ITR 450(Mad.) and P.
Appuvath Pillai,58 ITR 622(Mad.), as a few examples. 

Section 2(12) of the Income-tax Act defines
the term ‘books or books of account’ as including ledgers, day-books, cash
books, account-books and other books, whether kept in the written form or as
print-outs of data stored in a floppy, disc, tape or any other form of
electro-magnetic data storage device. Accordingly, a reference in section 68 to
books of account has to be given a meaning that is due to it keeping in mind
the definition of the term contained in the provisions of section 2(12)of the
Act. There is nothing in section 2(12) that indicates that a recording outside
the books would be construed to be the books of account.

The Bombay High Court in Bhaichand H.
Gandhi’s case, has said and confirmed what has been said above in so many words
and we do not think that there is any reason to differ from the ratio of the
said decision. Importantly, the court in Arunkumar J. Muchala’s case has
not expressly dissented from its earlier decision; it has rather chosen to
highlight the following distinguishing facts in the latter case;

u   The
assessee was a businessman and was required to maintain the books of account,

u   The
assessee had not maintained the books of account which he was required to
maintain,

u   The
assesee was claiming the benefit of his own action which was not permissible in
law,

u   The
assessee had at times pleaded that he was in the course of preparing the books
of account and would produce the same when ready, indicating that he was
otherwise required to maintain the books of account,

u   The
assessee had for the first time taken a fresh plea before the high court that
the provisions of section 68 were not applicable, as he was not maintaining the
books of account and as a result, the lower authorities were deprive of
examining the facts and the merits of a fresh plea.

In Arunkumar J. Muchhala’s case, the
Bombay High Court has not entertained or has ignored the contention raised by
the assessee that he had not maintained the books of account. The Bombay High
Court’s decision seems to have been based on its disbelief of the assessee’s
arguments as on this aspect, and there was no fact-finding by the lower
authorities.

The main basis of the decision of the Bombay
High Court in Arunkumar J. Muchhala’s case, was that an assessee had
committed a wrong by not maintaining the books when he was required by law and
hence, cannot take advantage of his own wrong. The Bombay High Court has
observed that it was incumbent on the assessee to maintain proper books of
account when he was doing business. From the facts as stated earlier, it
appears that the assessee was not carrying on business himself, but was a
partner of a partnership firm. In that event, there was no statutory obligation
for the assessee to maintain his books of account. That being the position, it
cannot be said that the assessee was wrong in not maintaining books of account.
This aspect could have been explained to the court by the assessee with a
little more precision.

The Bombay High Court, while rejecting the
cases cited in support of inapplicability of section 68 including its own
decision before it in Arunkumar J. Muchhala’s case, has observed that in
those cases, either the entries were confirmed by the parties in whose name
they were standing, or books of account were showing the cash credits. It is
very respectfully pointed out that in all those cases, when one reads the
facts, no books of account were maintained by the assessee, nor were
confirmations available, and therefore, those decisions were delivered purely
on the principle that, where, admittedly books of account were not maintained
by the assessee, the provisions of section 68 would not apply.

The Bombay High Court in Arunkumar J.
Muchhala’s case, has decided the issue largely based on the decision of the
Punjab & Haryana High Court in the case of Sudhir Kumar Sharma (HUF)
(supra). If one examines the facts of that case, it is gathered that it was
not the case where books of accounts were not maintained. In response to
various questions by the assessing officer, the assessee’s representative had
replied that records were as per books of account, that details would be
checked with the books of accounts and provided, etc. The assessing
officer had observed that books of account were not produced. According to the
Commissioner (Appeals), the answer by the assessee to these questions of
assessing officer clearly showed that the assessee had maintained books of
accounts. Though the assessing officer made the additions on the basis of
deposits in the bank account, the Commissioner (Appeals) had held that this
would be tantamount to additions made on the basis of entries in the books of
account, since such deposits/credits would also appear in the books of account
of the assessee, which were not produced before the assessing officer. Accordingly,
the provisions of section 68 were held to be applicable in that case, on a
clear cut finding by the authorities that the assessee had maintained the books
of account. In the circumstances, the exclusive reliance on a decision with
contrary facts by the court in Arun Muchala’s case seems to be a case of
misunderstanding of the facts which understanding of facts could have been
provided by the assessee with  a little
application in his own interest. 

It is therefore appropriate to hold that
the decision of the court in Arunkumar J. Muchala’s case, should be
considered as one of its kind, delivered on the facts of the case, and not
laying down the rule of law.

In Baladin Ram vs. CIT (supra), a case decided under the Income-tax Act, 1922, but delivered after
the Income-tax Act, 1961, was enacted, the Supreme Court in the context of
section 68 observed:

 “Even under the
provisions embodied under the new Act, it is only when any amount is found
credited in the books of an assessee that the section will apply. On the other
hand, if the undisclosed income was found to be from some unknown source or the
amount represents some concealed income which is not credited in his books, the
position would probably not be different from what was laid down in the various
cases decided when the Act was in force.”

In Taj Borewell’s case (supra), the
Madras High Court held as under:

“Unless the following circumstances
exist, the revenue cannot rely on section 68 of the Act:

(a) credit in the books of an
assessee maintained for the year;

(b) the assessee offers no
explanation or if the assessee offers explanation and if the assessing officer
is of the opinion that the same is not satisfactory, the sum so credited is
chargeable to tax as “Income from Other Sources”.

From these decisions as well as the language
of the section, it is clear that in the absence of books of account, section 68
would not apply.

The applicability of section 68 vis-à-vis
books of account was examined in the cases of Smt. Shanta Devi Jain, 171 ITR
532(P&H), Smt.Usha Jain,  182 ITR
487(Delhi) and Sundar Lal Jain, 117 ITR 316(All), in favour of
assessee besides the above referred and discussed cases. The Third Member of
the Tribunal in the case of Smt. Madhu Raitani, 45 SOT 23(Gau.) also
held that the provisions of section 68 were applicable in cases where the
assessee had maintained the books of account.

Therefore, the view appearing from the two
apparently conflicting decisions of the Bombay High Court is that in a case
where, admittedly, books of account are not maintained or the entry is not
appearing in the books of account, the provisions of section 68 would not
apply; however, in a case where the facts indicate that books of accounts are
maintained, but are not produced before the authorities, the provisions of
section 68 can be invoked on the assumption that entries in the bank statements
must have been recorded in the books of account.

Therefore, the principle laid down by the
Bombay High Court in Bhaichand H. Gandhi’s case would still continue to
be applicable. _

 

Section 2 (22)(e) – Amount contributed by a company, in which assessee is substantially interested, towards capital contribution in a firm in which such company and the assessee is a partner, cannot be regarded as dividend in the hands of the assessee, though the capital contribution by the company was disproportionate to its profit sharing ratio.

17.  Lala Mohan
Ramchand vs. ITO (Mumbai)

Members : G. S. Pannu (AM) and Ravish Sood (JM)

ITA No. 5778/Mum/2012

A.Y.: 2006-07.                                                                    
Date of Order: 14th June, 2017.

Counsel for assessee / revenue: Hiro Rai / Durga Dutt

FACTS 

The assessee was holding 25.5% of share capital of M/s Elite
Housing Development Pvt. Ltd. (EHDPL) and was also a partner in M/s Elite
Corporation with 37.5% share in profits. EHDPL was also a partner in M/s Elite
Corporation (“the firm”) and was having 5% share in profits of the firm.

In the course of reassessment proceedings, the Assessing
Officer (AO) observed that EHDPL was having accumulated profit of Rs.
1,07,11,103 had made an investment of Rs. 73,75,221 in the firm, which
investment according to him was substantially excessive as compared to the
share of profits of EHDPL in the firm. Since the assessee had 37.5% share in
profits of the firm, the firm was characterised by the AO as an eligible
‘concern’ u/s. 2(22)(e) of the Act. The AO had a strong conviction that EHDPL
in the garb of `capital contribution’ had made available its accumulated
profits to the firm and he therefore called upon the assessee to show cause as
to why the investment of Rs. 73,75,221 made by EHDPL in the firm, of which
investment of Rs. 3,00,000 was made during the year under consideration, may
not be assessed as `deemed dividend’ in his hands. The assessee submitted that
EHDPL in its status as a partner of the said firm, had invested an amount of
Rs. 3 lakh on 1.4.2005 by way of its capital contribution and had neither given
any loan or advance to the firm nor the said amount was paid on behalf of the
individual benefit of the assessee, and therefore the provisions of section
2(22)(e) were not applicable. The AO rejected the submissions of the assessee
and assessed the sum of Rs. 3 lakh invested by EHDPL with the said firm as
deemed dividend in the hands of the assessee.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD 

The Tribunal observed that now when it is alleged by the
revenue that the `capital contribution’ by EHDPL as a partner with M/s Elite
Corporation is a farce, then it is for the revenue to establish on the basis of
irrebuttable material that what is apparent is not real and thus dislodge and
disprove the claim of the assessee by proving to the contrary.

The Tribunal concurred with the submissions made on behalf of
the assessee viz. that there is no provision in the Indian Partnership Act,
1932, which therein contemplates that the partners’ `capital contributions’ in
the firm is required to be in proportion of their profit sharing ratios. It
held that in the absence of any such embargo on the capital contributions by
the partners having been placed on the statute, it was not persuaded to
subscribe to the adverse inferences drawn by lower authorities, who the
Tribunal found had observed that the substantial contribution by EHDPL as a
partner in the said firm when pitted against the latter’s meagre 5% share in
profit of the said firm was not found to be justifiable. It found merit in the
reasons furnished on behalf of the assessee as to why the capital contribution
by the partners in the firm was mentioned in clause 6 of the partnership deed
at Rs. 25 lakh. It held that it would be absolutely illogical and rather
impossible to expect that EHDPL could have managed to freeze its capital in the
firm at Rs. 25 lakh or any other figure, even if it would have resolved not to
introduce any fresh capital in the firm or withdraw any part of the same. The
Tribunal held that `capital contribution’ by a partner in a firm is differently
placed as against a loan or an advance to the firm. Loans and advances given by
a partner to the firm are substantially different from their `capital
contributions’. It observed that a perusal of section 48 of the Indian
Partnership Act, 1932 which contemplates the mode of settlement of the accounts
of the partners in the case of dissolution of a firm, in itself categorises the
same under different clauses. The Tribunal held that in the backdrop of
substantial turnover and income offered for tax by the firm, viz. Elite
Corporation, it would be incorrect to hold that the same was a dummy concern
which had been brought into existence with the intent to bypass the deeming
provisions contemplated u/s. 2(22)(e) of the Act. It observed that the funds
introduced by EHDPL by way of its capital contribution were utilised by the
firm in the normal course of its business and were not utilised for the
personal benefit of the assessee. It held that this fact supplements and
supports its view that the capital introduced by EHDPL as a partner in the said
firm cannot be characterised as `deemed dividend’ in the hands of the assessee.
The Tribunal set aside the order of CIT(A).

The appeal filed by the assessee was allowed.

5 Expenses or payments not deductible-Section 40A(3) -the payment is made to producer of meat in cash in excess of Rs.20,000/– Circular issued by the CBDT cannot impose additional condition to the Act and / or Rules adverse to an assessee – No disallowance can be made

Pr. CIT – I, Thane vs. Gee Square
Exports.     

[AY
2009-10] [Income tax Appeal no. 1224 of 2015 dated : 13/03/2018 ; (Bombay High
Court)]. 

[Affirmed
Gee Square Exports vs.  I.T.O.

[dated
: 31/10/2014 ; Mum.  ITAT ]


The assessee is a
partnership firm engaged in the business of exporting frozen buffalo meat and
veal meat to countries like Oman, Kuwait and Vietnam etc. The assessee
purchases raw meat from various farmers and after processing and packaging in
cartoons, exports the same. The assessee had in the course of its above
activity, made its purchases of meat in cash in excess of Rs.20,000/-. The AO
disallowed payments made in cash for purchases of meat in excess of Rs.20,000/-
i.e. Rs.26.79 crore in the aggregate u/s. 
40A(3) of the Act. Thus, the AO rejected 
the appellant’s contention that in view of the proviso to sec. 40A(3) of
the Act read with Rule 6DD(e) and (k) of the Income Tax Rules, they would not
be hit by section 40A(3) of the Act. This rejection was primarily on the ground
that in view of CBDT Circular No.8 of 2016, wherein in paragraph 4 thereof, one
of the conditions for grant of benefit of section 6DD of the Income Tax Rules
was certification from a Veterinary Doctor certifying that the person certified
in the certificate is a producer of meat and slaughtering was done under his
supervision.


Being aggrieved by the
order of AO, the assessee filed appeal before CIT(A). The CIT(A) upheld the
Assessment order.


Being aggrieved by the order
of CIT(A), the assessee filed appeal before ITAT. The Tribunal observed  that section 40A(3) of the Act provides that
no disallowance thereunder shall be made if the payment in cash has been made
in the manner prescribed i.e. in circumstances provided in Rule 6DD of the
Rules. The Tribunal held that the payment is made to producer of meat in cash
and would satisfy the requirement of Rule 6DD(e) of the Rules, which is as
under :


“(e) Where the payment
is made for the purchase of (i) ……. (ii) the produce of animal husbandry
(including livestock, meat, hides and skins) or dairy or poultry farming; or”


There were no other
conditions to be satisfied in terms of the above Rules. This Tribunal further
helds that neither the Act nor the Rules provides that the benefit of Rule 6DD
of the Rules would be available only if the further conditions / requirements
set out by the board in its Circular are complied with.


The Tribunal also observed
that the power of the board to issue circulars u/s. 119 of the Act is mainly to
remove hardship caused to the assessee. In the above view, it was held by the
Tribunal that the scope of Rule 6DD of the Rules cannot be restricted and/or
fettered by the CBDT Circular No.8 of 2016. 


Before the High Court, the
Revenue states that the assessee had failed to satisfy the conditions of CBDT
Circular. Therefore, the  order of the
Tribunal could not have allowed the assessee’s appeal. 


The Court observed that the
basis of the Revenue seeking to deny the benefit of the proviso to section
40A(3) of the Act and Rule 6DD(e) of the Rules is non satisfaction of the
condition provided in CBDT Circular No.8 of 2016. In particular, non furnishing
of a Certificate from a Veterinary Doctor. The proviso to section 40A(3) of the
Act seeks to exclude certain categories/classes of payments from its net in
circumstances as prescribed. Section 2(33) of the Act defines “prescribed”
means prescribed by the Rules. It does not include CBDT Circulars. It is a
settled position in law that a Circular issued by the CBDT cannot impose
additional condition to the Act and / or Rules adverse to an assessee. In UCO
Bank vs. Commissioner of Income Tax, 237 ITR 889, the Apex Court has
observed “Also a circular cannot impose on the taxpayer a burden higher than
what the Act itself, on a true interpretation, envisages”.

Thus, the view of the
Tribunal that the CBDT Circular cannot put in new conditions for grant of
benefit which are not provided either in the Act or in the Rules framed
thereunder, cannot be faulted. More particularly so as to deprive the assessee
of the benefit to which it is otherwise entitled to under the statutory
provisions. Needless to state, it is beyond the powers of the CBDT to make a
legislation so as to deprive the respondent assessee of the benefits available
under the Act and the Rules. The assessee having satisfied the requirements
under Rule 6DD of the Rules, cannot, to that extent, be subjected to
disallowance u/s. 40A(3) of the Act. Besides, we may in passing point out that
the impugned order of the Tribunal holds that a Certificate of Veterinary
Doctor was rejected by the Authorities under the Act, only because it was not
in proper form. In the above facts, the revenue appeal was dismissed.

3 Section 50C – Non-compliance of provisions of section 50C(2) cannot be held valid and justified even if no request was made by the assessee before the authorities below to refer the matter to the DVO for valuation u/s. 50C(2) of the Act.

Smt. Y. Hameeda Banu vs. ACIT (Bangalore)

Member : A. K.
Garodia

ITA No.
1681/Bang./2016

A.Y.: 2008-09.           Date of Order: 24th
August, 2017.

Counsel for
assessee / revenue: K. Mallaharao / Padma Meenakshi

FACTS 

The
assessee, in her return of income, computed capital gains by adopting actual
consideration received / receivable to be the full value of consideration. The
stamp duty value of the property transferred was greater than the consideration
accrued / arising to the assessee. The assessee, in the course of assessment
proceedings, did not request for a reference to be made to DVO. The Assessing
Officer (AO) completed the assessment and computed capital gains by adopting
stamp duty value to be the full value of consideration.

Aggrieved,
the assessee preferred an appeal to the CIT(A) and in the course of appellate
proceedings filed an affidavit requesting a reference to be made to DVO. The
CIT(A) without considering the affidavit and without making a reference to DVO
decided the appeal against the assessee.

Aggrieved,
the assessee preferred an appeal to the Tribunal where, on behalf of the
assessee, it was submitted that in view of the ratio of the decision of Delhi
Bench of the Tribunal in the case of ITO vs. Aditya Narain Verma (HUF)
(ITA No. 4166/Del/2013 dated 7.6.2017), non-compliance of provisions of section
50C(2) cannot be held to be valid and justified. It was also mentioned that the
Delhi Bench of the Tribunal had followed the judgement of the Allahabad High
Court in the case of Dr. Shashi Kant Garg vs. CIT (285 ITR 158), wherein
it is held that it is well settled that if under the provisions of the Act, an
authority is required to exercise powers or to do an act in a particular
manner, then that power has to be exercised and the act has to be performed in
that manner alone and not in any other manner. It was submitted that the issue
should go back to the file of the AO for a fresh decision after obtaining
report from DVO as required u/s. 50C(2) of the Act.

HELD

The
Tribunal following the ratio of the Delhi Bench of Tribunal in the case of ITO
vs. Aditya Narain Verma (HUF) (supra) set aside the order of CIT(A) and
restored the matter back to the file of the AO for fresh decision with the
direction that he should obtain valuation report from DVO u/s. 50C(2) and then
decide the issue afresh after affording adequate opportunity of being heard to
the assessee.

The
appeal filed by the assessee was allowed.

33. Export – 100% export oriented unit – Exemption u/s. 10A – A. Y. 2002-03- Electronic transmission of software developed in India branch to head office outside India at markup 15% over cost – Is export eligible for exemption u/s. 10A-

Dy DIT vs. Virage Logic International; 389
ITR 142 (Del):

The assessee was a 100% export oriented unit
which developed software and electronically transmitted to its head office
located abroad at a markup of 15% over the cost. For the A. Y. 2002-03 the
assessee’s claim for deduction u/s. 10A of the Act was rejected by the
Assessing Officer holding that the transfer of software by the assessee did not
amount to export. The Tribunal allowed the assessee’s claim.

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

“i)   Mere omission of a
provision akin to section 80HHC(2), Explanation 2 or the omission to make a
provision of a similar kind that encompassed Explanation 2(iv) to section 10A
of the Income-tax Act, 1961 by itself did not rule out the possibility of
treatment of transfer or transmission of software from the branch office to the
head office as an export.

ii)   According to section
80IA(8) the transfer of any goods “for the purpose of eligible business” to
“any other business carried on by the assessee” was covered. The incorporation
in its entirety without any change in the provision of section 80IA(8) in
section 10A through sub-section (7) was for the purpose of ensuring that inter
branch transfers involving exports were treated as such, as long as the other
ingredients for a sale were satisfied.

iii)   The absence of a “deemed
export” provision in section 10A similar to the one in section 80HHC did not
logically undercut the amplitude of the expression “transfer of goods” u/s.
80IA(8) which was part of section 10A. Such an interpretation would defeat section
10A(7). The transfer of computer software by the Indian branch to the head
office was entitled to claim benefit of section 10A of the Act.”

32. Co-operative society – Deduction u/s. 80P – A. Ys. 2008-09, 2009-10 and 2011-12 – Effect of amendment w.e.f. 01/04/2007 – Deduction denied to co-operative banks – Difference between co-operative bank and primary agricultural credit society – Primary agricultural credit society is entitled to deduction u/s. 80P

CIT vs. Veerakeralam Primary Agricultural
Co-operative Credit Society; 388 ITR 492 (Mad):

Assessee is a primary agricultural
co-operative credit society. For the A. Ys. 2008-09, 2009-10 and 2011-12, the
Assessing Officer disallowed the assessee’s claim for deduction u/s. 80P on the
ground that assessee is a co-operative bank. The Tribunal allowed the assesee’s
claim.

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

“i)   The benefit of section
80P is excluded for co-operative banks, whereas the primary agricultural credit
societies are entitled to the deduction.

ii)   The primary object of the
assessee-society was to provide financial accommodation to its members to meet
all the agricultural requirements and to provide credit facilities to the
members, as per the bye-laws and as laid down in section 5(cciv) of Banking
Regulation Act, 1949.

iii)   The assessee society was
admittedly not a co-operative bank but a credit co-operative society. It was
entitled to deduction u/s. 80P.”

31. Charitable purpose – Computation of income- Depreciation – Sections 11 and 32 – A.Y. 2009 -10 – Asset whose cost allowed as application of income u/s. 11- Depreciation allowable – Section 11(6) denying depreciation on such assets inserted w.e.f. 01/04/2015 – Amendment not retrospective- Depreciation allowable for A. Y. 2009-10

CIT vs.
Karnataka Reddy Janasangha; 389 ITR 229 (Karn):

Dealing with the amendment inserting section
11(6) of the Income-tax Act, 1961 w.e.f. 01/04/2015, the Karnataka High Court
held as under:

“For assessment years prior to the
introduction of section 11(6) of the Income-tax Act, 1961. i.e. prior to April
1, 2015, depreciation is allowable on assets, where cost of such assets has
already been allowed as application of income in the year of
acquisition/purchase of asset.”

30. Charitable purpose – Computation of Income- Depreciation – Sections 11 and 32(1) – A. Y. 2004-05 – Assets whose cost allowed as application of income to charitable purposes in earlier years – Depreciation is allowable on such assets

CIT vs. Krishi Upaj Mandi Samiti; 388 ITR
605 (Raj):

The assessee was a charitable trust eligible
for exemption u/s. 11. The assessee had availed exemption u/s. 11 in respect of
an asset being building. In the A. Y. 2004-05, the Assessing Officer disallowed
the assessee’s claim for depreciation on the said building on the ground that
exemption has been availed u/s. 11 on investment in the said building. The
Tribunal allowed the assessee’s claim.  

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

“i)   In computing the income
of a charitable institution or trust depreciation of assets owned by such
institution is a necessary deduction in commercial principles, hence the amount
of depreciation has to be deducted to arrive at the income.

ii)   The Appellate Tribunal
rightly allowed depreciation claimed by the assessee on capital assets for
which capital expenditure was already allowed in the year under consideration.

iii)   The income of a
charitable trust derived from the depreciable heads was also liable to be
computed on commercial basis. The assessee was a charitable institution and its
income for tax purposes was required to be determined by considering the
provisions of section 11 of the Act, after extending normal depreciation and
deductions from its gross income.

iv)  In computing the income of
a charitable institution depreciation of assets owned by it was a necessary
deduction on commercial principles, hence, the amount of depreciation had to be
deducted to arrive at the income.”

29. Capital gain – Section 47 – Where no gain or profit arises at time of conversion of partnership firm into a company, in such a situation, notwithstanding non-compliance with clause (d) of proviso to section 47(xiii) by premature transfer of shares, transferee company is not liable to pay capital gains tax

CIT vs. Umicore Finance Luxemborg; [2016]
76 taxmann.com 32 (Bom):

The assessee was a non-resident company
incorporated under the laws of Luxembourg. It purchased entire shareholding of
an Indian company ‘A’. The company ‘A’ was incorporated as a private limited
company succeeding erstwhile firm ‘AZ’. On the date of the conversion, the
partners of the erstwhile firm continued as shareholders having shareholding
identical with profit sharing ratio of the partners. The assessee filed an
application before the AAR seeking a ruling on question as to whether
notwithstanding the non-compliance with clause (d) of proviso to
section 47(xiii), it was liable to pay capital gain tax. The AAR noted
that the assessee had clarified that whilst converting the partnership firm
into a company, there was no revaluation of the assets and the assets and
liabilities of the firm as also the partners, capital and current accounts were
taken at their book value in the accounts of the company. It was in such
circumstances the AAR ruled that notwithstanding premature transfer of shares
as specified in clause (d) of proviso to section 47(xiii),
the assessee-company was not liable to pay capital gain tax.

On a writ petition filed by the Department
challenging the said order of the AAR, the Bombay High Court held
as under:

“i)   The AAR noted that
section 47(xiii) specifically excludes different categories of transfers
from the purview of capital gains taxation but it is subject to fulfilling the
conditions laid down in clauses (a) to (d). The fact that
conditions (a) to (c) are satisfied, is not in dispute but,
however, the question is whether clause (d) requires to be satisfied.
The AAR has rightly pointed out that the first part of clause (d) has
been satisfied but, however, it is noted by the AAR the requirements of second
part of clause (d) i.e. the shareholding of 50 % or more should continue
to be as such for the period of five years from the date of succession, has not
been fulfilled in the instant case by reason of the transfer of shares by the
Indian Company to the assessee before the expiry of five years.

ii)   The AAR has also noted
that the consequences of violation of those conditions have been specifically
laid down in sub-section (3) of section 47A which was also introduced by the
same Finance Act. It is further pointed out that if no profit or gains arose
earlier when the conversion of the firm into a Company took place or if there was no transfer at all of the capital assets of the firm at
the point of time, the deeming provision u/s. 47A(3) cannot be inducted to levy
the capital gain tax.

iii)   The AAR further found
that the shares allotted to the partners of the existing firm consequent upon
the registration of the firm as a Company, did not give rise to any profit or
gains. It is further noted that by such reconstitution of the Company under
part IX of the Companies Act, the assets automatically gets vested in the newly
registered Company as per the statutory mandate contained u/s. 575 of the
Companies Act. It is further found that it cannot be said that the partners
have made any gains or received any profits assuming that there was a transfer
of capital assets. It was also noted that worth of the shares of the company
was not different from the interest of partners in the existing firm.

iv)  On perusal of the said
observations, it is opined that AAR in a very reasoned order, has taken a view
that no capital gains accrued or attracted at the time of conversion of the
partnership firm into a private limited company. In part IX of the Companies
Act, therefore, notwithstanding the non-compliance with clause (d) of
the proviso to section 47(xiii) by premature transfer of shares, the
said Company is not liable to pay capital gains tax. These findings have been
arrived at essentially looking into the fact that there was no revaluation of
assets at the time of conversion of the firm ‘AZ’.

v)   The said finding of fact
has not been disputed by the revenue and, as such, the finding of the AAR that
there was no capital gains in the transaction in question cannot be faulted. It
is also to be noted that even immediately after such conversion in question
from the partnership firm into a private limited company, the assessment with
regard to the income of the new company as well as of the respective partners
were carried out and there was no objection or grievances raised by the
Assessing Officer that any capital gains tax had to be paid on account of the
incorporation of the company in terms of the said provisions.

vi)  The transfer of shares in
favour of the assessee by the erstwhile partners who were shareholders of ‘A’
Ltd. and such partners/shareholders are liable to pay capital gains even if
acceptable, would not affect the decision passed by the AAR whilst coming to
the conclusion that there were no capital gains at the time of incorporation of
the new company by the said partnership firm.

vii)  The contention of the
revenue that in view of the violation of clause (d) of section 47(xiii),
the exemption from capital gains enjoyed by the assessing firm upon conversion
into a private limited company, ceases to be in force cannot be accepted. There
are no capital gains which have accrued on account of such incorporation. In
such circumstances, the said contention of the revenue that in view of the
transfer of the capital assets or intangible assets, there are capital gain tax
payable by the transferee company, cannot be accepted. As pointed out
hereinabove, there was no capital gains payable at the time of the
incorporation of the company from the erstwhile partnership firm.

viii) The next contention of
the revenue is that the application u/s. 245N of the assessee itself was not
maintainable. The main submission on that aspect is that the assessee not being
parties to the transaction, the question of seeking an advance ruling at the
instance of the assessee is not covered under clauses (i), (ii)
and (iii) of section 245N(a). Looking into the question as to whether
capital gains are liable to be paid or not in terms by the transferee company
being a non-resident company, the respondent herein, would be a matter which
would come within the scope of advance ruling.

ix   Considering the aforesaid
observations and taking note of the findings of the AAR, it is held that there
is no case made out for interference by the Court under article 226 of the
Constitution of India. As such, the petition stands rejected.”

12. Penalty – Year of taxability of income – u/s.271 (1) (c)

The CIT, vs. M/s. Otis Elevator Co.(I) Ltd. [ Income tax
Appeal no 758 of 2014, dt : 15/11/2016 (Bombay High Court)].

[DCIT, vs. M/s. M/s. Otis Elevator Co.(I)
Ltd,. [ITA No. 4509/MUM/2012,; Bench : C ; dated 21/08/2013 ; 2007-2008 . Mum.
ITAT ]

The assessee is engaged in manufacturing and
sale of elevators / lifts. In the subject AY, the assessee had declared an
income of Rs.89.04 crore. The AO added a sum of Rs. 7.35 crore on account of
advances received on dormant contracts prior to 2004. Finally, the AO
determined the taxable income of the assessee at Rs.156.05 crore in his order in quantum proceedings and also initiated
penalty proceedings u/s. 271(1)(c) of the Act.

In the penalty proceedings, the assessee
explained that the amounts of Rs.7.35 crore shown as advances in respect of
dormant contracts were in fact offered to tax in the subsequent AYs 2008-09 and
2009-10. Consequently, the assessee contended that no penalty u/s. 271(1)(c) of
the Act is imposable. However, the AO did not accept the above contention and
imposed a penalty of Rs. 2.47 crore u/s. 271(1)(c) of the Act upon the assessee
for concealing income by filing inaccurate particulars.

Being aggrieved, the assessee preferred an
appeal to CIT(A). By order the CIT(A) held that the amounts received as
advances in respect of dormant contracts and shown as current liability were in
fact offered to tax during the subsequent AYs i.e. Assessment Years 2008-09 and
2009-10 even before the proceedings for assessment of the subject AY i.e. AY
2007-08 were initiated in November, 2010. The CIT(A) in his order records the
fact that the return of income for AY’s 2008-09 and 2009-10 were filed on 29th
September, 2008 and 30th September, 2009 that is much before
November, 2010. In these circumstances, the CIT(A) allowed the appeal of the
assessee and deleted the penalty of Rs.2.47 crore u/s. 271(1)(c) of the Act
imposed by the AO.

Being aggrieved, the Revenue carried the
issue of penalty in appeal to the Tribunal. On consideration of the facts, the
Tribunal held that the advances relating to the dormant contracts were offered
to tax in the subsequent assessment years even before any inquiry was initiated
by the AO to complete the assessment for the subject AY. Consequently, the
Tribunal held that it was not a case of concealment of income but rather the
dispute was only with regard to in which year the income was taxable. The
Tribunal dismissed the Revenue’s appeal.

In Revenue appeal, the High court note that
the basis for imposition of penalty is non payment of tax on the amount
received on dormant accounts in the subject assessment year. Both the CIT(A)
and the Tribunal have rendered a finding of fact that these amounts / advances
relating to dormant contracts have already been offered to tax for the
subsequent AY’s i.e. Assessment Years 2008-09 and 2009-10. In the present
facts, undisputedly the income has been declared in the subsequent assessment
years before the assessment proceedings for the subject AY 2007-08 was
initiated. Thus, the only issue which arises is about the year of taxability of
income and it is certainly not a question of concealment of income and / or
filing of inaccurate particulars of income by the assessee.

The above concurrent finding of facts as well as
the acceptance of the assessee’s explanation by CIT(A) and the Tribunal has not
been shown to be perverse. Therefore, the question as proposed does not give
rise to any substantial question of law. Thus, not entertained. Accordingly,
the appeal is dismissed.

11. TDS – ‘Work’ – include all work carried right from planning the schedule to post production processes, which would make the programme fit for telecasting – Thus, the payments made for dubbing as well as print processing were held to be fall within the ambit of section 194C.

The CIT, TDS vs. M/s. Sahara One Media
and Entertainment Ltd. [ Income tax Appeal no 894 of 2014, with 1031 of 2014 dt
: 23/10/2013 (Bombay High Court)].

[ACIT, TDS vs. M/s. Sahara One Media and
Entertainment Ltd,. [ITA No. 4548/MUM/2012, 4549/MUM/2012, 4550/MUM/2012 ;
Bench : E ; dated 23/10/2013 ; 2008-2009, 2009-2010 & 2010-11. Mum. ITAT ]

The assessee is engaged in the business of
production of cinematographic motion features and small screen programmes. In
the process of carrying on its business, the assessee made payments to others
on account of production, print processing fees and dubbing. At the time of
making these payments, the assessee deducted tax at source (TDS) u/s. 194C at
2% as the payment was made for carrying out work pursuant to a contract.

The AO was of the view that the print
processing fees and dubbing expenses paid were in the nature of fees of
technical services and tax had to be deducted u/s. 194J at 10%. Resultantly,
the DCIT (TDS) held that there was short deduction of tax in respect of the
dubbing expenses and fees paid for print processing. Consequently, the assessee
was deemed to be an assessee in default u/s. 201 (1) to the extent of short
deduction of tax.

In appeal, the ld. CIT(A), observed that it
was evident from the sample Agreement that the assessee used to hire the
producers (who first approach the assessee) for producing TV programmes for it,
on a commissioned work basis and pay consideration to such assigned producer
for producing the programmes. He further observed that under the provisions of
section 194C of the Act, it has been provided that expression ‘work’ shall
include, inter alia, broadcasting and telecasting including production
of programmes for such broadcasting and telecasting. Therefore, where the
payment was made for production of TV programmes, it was covered by provisions
of section 194C. He further observed that the principal purpose of entering
into the Agreements was to get the programmes produced through the assigned
producers on a commissioned work basis. The assessee was the exclusive owner of
the programmes to be produced by the producer. He therefore held that the
payment for carrying out the work of producing programmes on behalf of assessee
was in the nature of ‘work’ as defined in section 194C and the same could not
be treated as ‘fees for technical services’ or ‘royalty’ u/s. 194J of the Act.
While holding so he relied upon the judgement of the Hon’ble Delhi High Court
in the case of ‘CIT vs. Prasar Bharti Broadcasting Corpn. Of India’ [292
ITR 580]. In the said case, the assessee was a government
corporation engaged in controlling various TV channels of Doordarshan. It was
held that the payments made by it to various producers of programmes were
covered under Explanation III(b) to section 194C, as a contract for production
of programmes for broadcasting or telecasting and not as a fee for professional
services or royalty; hence the tax deduction at source was required to be made
@2% u/s 194C and section 194J was not applicable. He therefore accepted the
contention of the assessee that tax was deductable @2% u/s. 194 C of the act and
not @ 10% u/s.194 J.

Being aggrieved, the Revenue carried the
issue in appeal to the Tribunal. The Tribunal upheld the view taken by the
CIT(A) and observed that the definition of ‘work’ as provided u/s. 194C would
include all work carried right from planning the schedule to post production
processes, which would make the programme fit for telecasting. Thus, the
payments made for dubbing as well as print processing were held to be fall within the ambit of section 194C.

Being aggrieved, the Revenue filed a appeal
before High Court and contended that the payments made for dubbing and print
processing would be the payments in the nature of technical fees. Therefore,
tax would be deductible u/s. 194J and not as contract for work u/s.194C.

The Hon. High
Court noted that definition of ‘work’ as provided in section 194C, which reads
as under :

“ Explanation – For the purposes of this
section – (i) …. (ii) …. (iii) …. “(iv) “work” shall include – (a) ….. (b)
Broadcasting and telecasting including production of programmes for such broadcasting
or telecasting; (c) ….. (d) …. (e) ….” (f) .

The definition of ‘work’ as provided in the
Explanation to section 194C of the Act is itself inclusive. It include all work
necessary for preparation / production of any programme so as to put it in a
state fit for broadcasting and / or telecasting. In view of the self evident
position in law, by virtue of the definition of “work” as provided in section
194C of the Act.

In view of the self-evident position in law,
no substantial question of law arises for consideration . Thus, the appeal was
dismissed. 

10. Business expenditure – Service tax – The Assessee was obliged under the law to pay service tax to the Government and paid when such payment is not forthcoming from the client/customer – Allowable : Section 37 of the Act

CIT vs. Prime Broking Company (I) Ltd. [
Income tax Appeal no 847 of 2014 dt : 14/10/2016 (Bombay High Court)].

[ACIT vs. Prime Broking Company (I) Ltd.
[ITA No. 5632/MUM/2012 ; Bench : C ; dated 31/10/2013 ; A Y: 2009- 2010. MUM.
ITAT ]

The Assessee is engaged in the business of
broking in Government and other securities. The Assessee raises an invoice on
its clients for the transaction done on its behalf in respect of its broking
services. The total amount of bill in the invoice is the aggregate of brokerage
and applicable service taxes thereon. During the subject assessment year, some
of the clients of the Assessee did not pay the service tax as required in terms
of the invoice for onward payment to the Government of India. In these
circumstances, the Assessee paid the service tax payable out of its own
resources and claimed the same as deduction u/s. 37(1).

The AO disallowed the claim for deduction
holding that the obligation to pay the service tax is on the customer /client
and the same cannot be shifted to the Assessee.

The CIT (A) allowed the Assessee’s appeal.
This is on the ground that in terms of section 68 of the Finance Act, 1994, the
obligation to pay the service tax into the treasury is of the service provider,
i.e. the Assessee. The failure of its client/customer to pay service tax to the
Assessee would not absolve the obligation of the Assessee to pay the same to
the Government of India. The CIT (A) held that the deduction of the service tax
paid to the Assessee was a business expenditure incurred on account of
commercial expediency and deductible u/s. 37(1).

Being aggrieved, the Revenue carried the
issue in appeal to the Tribunal. The Tribunal upheld the view of the CIT
(Appeals).

On further appeal, the High Court held that
the Assessee was obliged under the law to pay service tax to the Government
even when such payment is not forthcoming from the client/customer. Therefore,
it would be a deductible business expenditure u/s. 37(1). It is undisputed that
the obligation under the Finance Act, 1994 to pay the service tax is on the
Assessee being the service provider. This obligation has to be fulfilled by the
service provider whether or not it receives the service tax from its
clients/customers. Non-payment of such service tax into the treasury would
normally result in demand and penalty proceedings under the Finance Act, 1994.
Therefore, the payment is on account of expediency, exclusively and wholly
incurred for the purposes of business, therefore, deductible u/s. 37(1).

The High Court dismissed the above appeal on
the ground that the same did not give rise to any substantial question of law.
The appeal is dismissed.

36. Housing project – Deduction u/s. 80IB(10) – A. Y. 2006-07 – Ceiling on built up area – terrace in pent house is not part of built up area – Finding that assessee was developer and built up areas were within specified limits – Assessee entitled to deduction u/s. 80IB(10)

CIT vs. Amaltas Associates; 389 ITR 175
(Guj):

The assessee had developed a housing
project. In the A. Y. 2006-07, the assessee claimed deduction u/s. 80IB(10) in
respect of the profits from the said housing project. The Assessing Officer
disallowed the claim on two grounds. Firstly, he held that the assessee is not
a developer but a contractor. Secondly, he held that the condition for built up
area is not satisfactory. He included the terrace area into the built up area.
The Tribunal held that the assessee was a developer and that the terrace area
is not to be included into the built up area. The Tribunal accordingly held
that the condition of built up area is satisfactory. Accordingly, the Tribunal
allowed the claim for deduction u/s. 80IB(10) of the Act.

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

“i)   The Tribunal had found
that the assessee was a developer. The assessee had undertaken full
responsibility of constructing the residential units and had also been
responsible for the resultant profit or loss arising out of such venture. The
assessee, thus, had undertaken full risk.

ii)   The Tribunal had rightly held
that the open space attached to a pent house cannot be included in the term
“balcony”. The Tribunal was right in law and on facts in allowing deduction
claimed by the assessee u/s. 80IB(10) of the Act.”

35. Salary – Voluntary retirement – Exemption u/s. 10(10C) – Where assessee who had opted for voluntary retirement under Early Retirement Option Scheme on coming to know and on being advised that pursuant to a decision of Supreme Court would be entitled to exemption u/s. 10(10C) filed a revised return claiming deduction u/s. 10(10C), he would be entitled to exemption even though revised return had been filed beyond period stipulated u/s. 139(5) as default in complying with requirement being due to circumstances beyond control of assessee, Board would be entitled to relax requirement contained in Chapter IV or Chapter VI

S. Sevugan Chettiar vs. Princ. CCIT;
[2016] 76 taxmann.com 156 (Mad):

The petitioner is a retired employee of the
ICICI Bank and was aged 68 years. He was constrained to approach this Court in
terms of the proceedings dated 04/08/2016 issued by the third respondent. The
petitioner, upon retirement, filed his return of income for the relevant year
and the assessment was finalized. Subsequently, the petitioner came to know
that the Hon’ble Supreme Court, in the case of S. Palaniappan vs. I.T.O.
[Civil Appeal No. 4411 of 2010 dated 28/09/2015] held that a person, who has
opted for voluntary retirement under the Early Retirement Option Scheme shall
be entitled to exemption u/s. 10(10C). Following the said decision, the CBDT
issued a circular dated 13/04/2016 stating that the judgment of the Hon’ble
Supreme Court be brought to the notice of all officials in the respective
jurisdiction so that relief may be granted to such retirees of the ICICI Bank
under Early Retirement Option Scheme, 2003. The petitioner, on coming to know
of the same, filed a revised return by referring to the said decision and
stating that only after the said decision came to his notice, he had been
advised to file the revised return. However, this has been rejected vide
the impugned proceedings dated 04/08/2016 by the third respondent by referring
to section 139(5) of the Act. In other words, the revised return was refused to
be accepted as it is beyond the time stipulated u/s. 139(5). Assailing the
correctness of the order of the third respondent, the petitioner writ petition
before the Madras High Court. 

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

“i)   After hearing the learned
counsel for the parties and perusing the materials placed on record, this Court
is of the view that the technicality should not stand in the way while giving
effect to the order passed by the Hon’ble Supreme Court. The Board also issued
a circular on 13/04/2016 with a view to grant relief to the retirees of the
ICICI Bank under the Early Retirement Option Scheme. Several persons, who had
filed writ petitions before the Madurai Bench of this Court, have been granted
the relief. In fact, in those orders, the Court took into consideration the
decision of the Hon’ble Supreme Court and granted the relief.

ii)   The circular issued by
CBDT is in exercise of the powers conferred u/s. 119 of the Act. The said
provision deals with instructions to Subordinate Authorities. Sub-section (1)
of section 119 of the Act states that the Board may, from time to time, issue
such orders, instructions and directions to other Income Tax Authorities, as it
may deem fit, for the proper administration of the provisions of the Act and
such Authorities and all other persons employed in the execution of this Act
shall observe and follow such orders, instructions and directions of the Board.
The Proviso carves out certain exceptions, under which circumstances, the Board
will not issue instructions.

iii)   Admittedly, the case,
which was considered by the Hon’ble Supreme Court related to an individual
employee namely S. Palaniappan, who was also a similarly placed person as that
of the petitioner. Thus, the Board, in its wisdom, while implementing the judgement
in the case of S. Palaniappan, took a decision that such a benefit
should be extended to the similarly placed persons treating them as class of
cases. Therefore, the Board observed that the order should be communicated to
all the Commissioners, so that relief can be granted to such retirees of the
ICICI Bank. Thus, the petitioner cannot be non-suited solely on the ground that
he had filed a revised return well beyond the period stipulated u/s. 139(5) of
the Act.

iv)  It is relevant to point
out that Clause (c) to sub- section (2) of section 119 of the Act states that
the Board may, if it considers it desirable or expedient so to do for avoiding
genuine hardship in any case or class of cases, by general or special order,
relax any requirement contained in any of the provisions contained in Chapter
IV or Chapter VI-A of the Act, which deal with computation of total income and
deductions to be made in computing the total income and such power is
exercisable where the petitioner failed to comply with any requirement
specified in such provision for claiming deduction thereunder, subject to the
conditions that (i) the default is due to circumstances beyond the control of
the assessee and (ii) the assessee has complied with the requirement before the
assessment in relation to previous year, in which, such deduction is claimed.

v)   Thus, if the default in
complying with the requirement was due to circumstances beyond the control of
the assessee, the Board is entitled to exercise its power and relax the
requirement contained in Chapter IV or Chapter VI-A. If such a power is
conferred upon the Board, this Court, while exercising jurisdiction under
Article 226 of The Constitution of India, would also be entitled to consider as
to whether the petitioner’s case would fall within one of the conditions
stipulated u/s. 119(2)(c).

vi)  Considering the hard
facts, the petitioner, being a senior citizen, cannot be denied of the benefit
of exemption u/s. 10(10C) of the Act and the financial benefit that had accrued
to the petitioner, which would be more than a lakh of rupees. Therefore, this
Court is of the view that the third respondent should grant the benefit of
exemption to the petitioner.

vii)  Accordingly, the writ
petition is partly allowed, the impugned order is set aside and the third
respondent is directed to grant the benefit of exemption u/s. 10(10C) of the
Act and refund the appropriate amount to the petitioner, within a period of
three months from the date of receipt of a copy of this order. Considering the
facts and circumstances of the case, the prayer for interest is rejected.”

2. Quick Flight Limited vs. ITO (Ahmedabad) Members: R.P. Tolani (J. M.) & Manish Borad (A. M.) ITA No.: 1204/Ahd/2014 A.Y.: 2011-12. Date of Order: 4th January, 2017

Counsel for Assessee / Revenue:  Urvashi Shodhan / Rakesh Jha

Section 206AA – Payments to a non-resident in terms of section 115A(1)(b) can be made after deducting tax at source @ 10% plus surcharge and cess even where the deductee has no PAN.
 
FACTS
The assessee was engaged in the business of chartering, hiring and leasing aircraft. During the year payment was made to a non-resident not having PAN. Tax was deducted at source @ 10% + surcharge and education cess on the payment of fees for technical services as per provisions of section 115A.  However, the Assessing Officer was of the view that tax was required to be deducted @ 20% in view of the provisions of section 206AA, as the payee was not having PAN and accordingly raised demand of Rs.30,250/- towards short deduction and Rs.5750/- towards interest on short deduction. Being aggrieved, the assessee went in appeal before the CIT(A) and contended that the payment made towards fees for technical services was u/s. 115A and the assessee has rightly deducted TDS @ 11.33% and provisions of section 206AA of the Act cannot be applied to the assessee. However, according to the CIT(A), the rates prescribed in section 115A apply when the agreement pertains to a matter included in Industrial Policy. However, since no such evidence had been produced to show that agreement with the payee falls under the Industrial policy, he confirmed the order of the Assessing Officer.
HELD
The Tribunal noted that the assessee was able to show that the agreement pertains to a matter included in Industrial Policy.  Further, relying on the decision of the Ahmedabad tribunal in the case of Alembic Ltd. vs. ITO (ITA No.1202/Ahd/2014), the Tribunal held that the provisions of section 206AA cannot be invoked by the Assessing Officer and he cannot insist to deduct tax @ 20% for non-availability of PAN.