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Category: Direct Taxes

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.

1.Kumari Kumar Advani vs. Asstt. CIT (Mum) Members: G.S.Pannu (A. M.) and Ram Lal Negi (J. M.) ITA No.: 7661 /MUM/2013 A.Y.: 2012-13.

Counsel for Assessee / Revenue:  Ajay R. Singh / A. K. Kardam Section 234C – Shortfall in payment of advance tax on account of impossibility to estimate income – Assessee not liable to pay interest.

FACTS
The assessee, an individual, had filed her return of declaring income of Rs. 13.91 crore.  While processing such return u/s. 143(1), interest u/s. 234C of the Act was levied on account of shortfall in payment of advance tax on first and second installments, due on 15/09/2011 and 15/12/2011, in respect of gift of Rs.10.00 crores claimed to have been received on 17/12/2011. On such deferment in payment of instalments, interest of Rs.7.66 lakh was charged. On appeal, the levy was confirmed by the CIT(A).  

Before the Tribunal, the assessee argued that the income in question, namely gift of Rs.10.00 crore received on 17/12/2011 was in the nature of a windfall gain and, therefore, it was not possible for the assessee to estimate its accrual or receipt at any time when the payment for first and second installments of advance tax were due.  However, the revenue justified the orders of the lower authorities on the ground that the charging of interest u/s. 234C of the Act was mandatory in nature and relied on the judgment of the Delhi High Court in the case of Bill and Peggy Marketing India Pvt. Ltd. vs. ACIT (350 ITR 465).

HELD
The Tribunal noted that section 209 provides the computational mechanism of calculating advance tax to be paid. According to it, section 209 envisages calculation of advance tax based on the ‘estimate of current income’. A reading of section 209 would reveal that in order to calculate the amount of advance tax payable, an assessee is liable to estimate his income. Considered in this light, the facts of the present case clearly show that the gift of Rs. 10 crore, which has been received by the assessee on 17/12/2011 could not have been foreseen by the assessee so as to enable him to estimate such income for the purpose of payment of advance tax on an anterior date viz., 15/09/2011 or 15/12/2011. In such a situation, according to the Tribunal, the decision of the Hyderabad Bench of the Tribunal in the case of ACIT vs. Jindal Irrigation Systems Ltd. (56 ITD 164) relied upon by the assessee clearly militates against charging of interest u/s. 234C. As per the Hyderabad Bench of the Tribunal, an assessee could not be defaulted for a duty, which was impossible to be performed. To the similar effect is the decision of the Chennai Bench of the Tribunal in the case of Express Newspaper Ltd (103 TTJ 122). Therefore, the Tribunal held that the levy of interest u/s. 234C was untenable.  

As regards the plea of the Revenue that charging of interest u/s. 234C is mandatory in nature, the Tribunal observed that the same cannot be allowed to lead to a situation where levy of interest can be fastened even in situations, where there is impossibility of performance by the assessee. Charging of interest would be mandatory, only if, the liability to pay advance tax arises upon fulfilment of the parameters, which in the present case is not fulfilled on account of the peculiar fact-situation. Thus, according to the Tribunal such plea of the Revenue was untenable. According to it, the judgment of the Delhi High Court in the case Peggy Marketing India Pvt. Ltd., relied on by the revenue, stands on its own facts and is not attracted to the facts of the present case.

4. [2017] 79 taxmann.com 170 (Pune – Trib.) Asara Sales & Investments (P.) Ltd. v. ITO ITA No. 1345 (Pune) of 2014 A.Y.: 2009-10 Date of Order: 8th March, 2017

Section 10(38) – Long term loss arising on sale of equity shares of a listed company, in an off market transaction, can be set off against long term capital gain arising on sale of unquoted shares since 10(38) does not apply to sale of listed shares in an off market transaction as STT is not required to be paid on such a sale.

FACTS  
For the assessment year under consideration, the assessee company filed its return of income declaring therein a business loss of Rs. 13,54,362 and long term capital gain of Rs. (-) 3,85,58,664.  

In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee had, during the year under consideration, shown long term capital gain of Rs. 4,53,98,376 on sale of shares of unlisted group companies and a long term capital loss of Rs. 8,39,57,040 on sale of shares of listed company i.e. G. G. Dandekar Machine Works Ltd. (GGDL). The assessee had set off the long term capital gains of Rs. 4.53 crore against long term capital loss of Rs. 8.39 crore.  Thus, the long term capital loss in the return of income was Rs. 3.85 crore which was carried forward to subsequent assessment years.

The AO was of the view that since the shares of GGDL were acquired through a stock exchange after payment of STT, the long term capital gain arising on their sale, after holding them for a period of more than one year, would be exempt u/s. 10(38) of the Act.  According to the AO, the fact that the shares were sold in off market transaction without paying any STT would not take away or change the nature of shares, because the shares were listed on Stock Exchange and were otherwise eligible for levy of STT. He also held that the sale of shares of GGDL after 12 months to a 100% subsidiary in an off market transaction without payment of STT was a colorable device to enable the assessee to set off loss on sale of listed shares against profit on sale of unlisted shares. He also noted that the sale was on 18.3.2009 at a loss of Rs. 48 per share whereas the book value on the same date was Rs. 59.60 and on the same date unlisted shares of KSL have been sold @ Rs. 225 per share whereas the book value was only Rs. 134 per share which resulted in long term capital gain.  Both the transactions were made on the same date and with the same entity i.e. BVHPL which is again a 100% subsidiary of the assessee. The AO held that the long term capital loss of Rs. 8.39 crore on sale of shares of listed companies would not be set off in the current year against the long term capital gains of sale of listed shares nor it would be allowed to be carried forward to be set off in future and the long term capital gains of Rs. 4.53 crore on sale of shares of unlisted group company would be chargeable to tax in the year itself as long term capital gain @ 20%.

Further, since the shares of GGDL were sold for a price which was lower than their book value whereas the sale of shares of other unlisted companies was for a price higher than their book value, the AO held that the amount of loss to the extent of Rs. 2.75 crore (to the extent it was lower than the book value of the shares sold) would be ignored while setting it off against other income, if any, in the current year or for carry forward and set off in subsequent years.

Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the order of the AO and also treated the transaction to be a colorable device where the transaction was made on the same day in respect of  listed shares and sale of shares of unlisted group companies. He also rejected the contention with regard to off market transaction between the group companies.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD   
Applying the rule of literal interpretation to the provisions of the Act i.e. section 10(38) of the Act and section 88 of the Finance (No. 2) Act, 2004, it is clear that STT is to be paid on such transaction which are entered into through recognised Stock Exchange. The section does not provide that each transaction of sale of listed shares is to be routed through Stock Exchange. Applying the said principle, to the facts of the case, where the shares of a group entity which was a listed company i.e. GGDL were sold in off market transaction, then no STT is to be paid and the provisions of section 10(38) of the Act are not to be applied and consequently, set off of loss arising on sale of GGDL against the income from long term capital gains arising on sale of unquoted shares cannot be denied.

The Tribunal noted that while selling the shares of listed company GGDL, the assessee opted to transact on off market trade since the said shares were of Kirloskar group concern and the group did not want the shares to be picked up by any stranger, if traded on Stock Exchange.  Such business decision, according to the Tribunal, taken by the assessee cannot be doubted and called as colorable device to set off profits arising on sale of unquoted shares.

As regards the contention of the AO that the transaction was a colorable device since the shares were sold at Rs. 48 per share to another group concern whereas the book value of shares as on 31.3.2008 was Rs. 59.61 per share and these shares were acquired by the assessee in December 2006 @ Rs. 74.25 per share, the Tribunal held that the shares have not been sold to a subsidiary of the assessee but to a concern from whom the assessee has raised a loan to the extent of Rs. 18 crore and the decision was taken to sell the shares in an off market transaction to repay the loan and arrest the payment of interest on such loans. It also noted that the assessee had sold the shares at a market price prevailing on the date of the sale. It held that no fault can be found with such transactions undertaken by the assessee.  Accordingly, the total loss arising on the said transaction can be adjusted and set off against any other gain arising in the subsequent year.

The appeal filed by the assessee was allowed.

3. [2017] 79 taxmann.com 67 (Mumbai – Trib.) Anita D. Kanjani vs. ACIT ITA No.: 2291 (Mum) of 2015 A.Y.: 2011-12Date of Order: 13th February, 2017

Section 2(42A) – Holding period of an office premises commences from the date of letter of allotment since that is the point of time from which it can be said that assessee started holding the asset on a de facto basis.  

FACTS  
In the return of income for AY 2011-12, the assessee included in the total income long term capital gain arising on transfer of her office unit. The chronology of relevant events, with respect to the office unit sold during the previous year, were as under –

1    Date of allotment of office unit to the assessee    11.04.2005
2    Date of signing of the agreement to sell        28.12.2007
3    Date of registration with the Registrar        24.04.2008
4    Date of sale                    11.03.2011

The Assessing Officer (AO) computed the holding period with reference to date of registration of the agreement and held that the office unit was held for a period of less than 36 months before the date of transfer and was therefore, a short term capital asset. He rejected the contention of the assessee that the holding period should be computed from the date of letter of allotment of office.

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 relying on various decision it was contended that the period of holding should be computed from the date of allotment of the property as per section 2(42A).  It was alternatively contended that in case holding period is to be computed from the transfer of the property, in that case, ‘date of execution’ of the sale agreement should be taken as date of transfer of the property because the document registered on a subsequent date operates from the ‘date of execution’ and not from the ‘date of registration’ in view of clear provisions of section 47 of the Registration Act, 1908.  If holding period was computed from the date of execution of the agreement, then, the impugned property shall be ‘long term capital asset’ in the hands of the assessee.

HELD  
The Tribunal observed that Karnataka High Court has in the case of CIT vs. A. Suresh Rao [2014] 223 Taxman 228 (Kar.) dealt with similar issue wherein the significance of the expression ‘held’ used by the legislature has been analysed and explained at length.  From the said judgment it is clear that for the purpose of holding an asset, it is not necessary that the assessee should be the owner of the asset based upon a registration of conveyance conferring title on him.  

It also noted that the ratio of the decisions of Punjab & Haryana High Court in the case of Madhu Kaul vs. CIT [2014] 363 ITR 54 (Punj. & Har.) and Vinod Kumar Jain vs. CIT [2014] 344 ITR 501 (Punj. & Har.) and of Delhi High Court in the case of CIT vs. K. Ramakrishnan [2014] 363 ITR 59 (Delhi) and of Madras High Court in the case of CIT vs. S. R. Jeyashankar [2015] 373 ITR 120 (Mad.).  

The Tribunal, following various decisions of the High Courts, held that the holding period should be computed from the date of issue of allotment letter. Upon doing so, the property sold by the assessee would be long term capital asset and the gain on sale of the same would be taxable as long term capital gains.  

This appeal filed by the assessee was allowed by the Tribunal.

2. [2017] 78 taxmann.com 242 (Delhi – Trib.) EIH Ltd. vs. ITO ITA Nos.: 2642 to 2645 (Delhi) of 2015 A.Ys.: 2004-05 to 2007-08 Date of Order: 14th February, 2017

Sections 15 r.w.s. 17, 192 – U/s. 192 there is no liability on the assessee to deduct tax at source on ‘TIPS’ recovered by the assessee from guests and paid to employees.

FACTS  
The assessee company was engaged in the business of a chain of hotels (The Oberoi Group). A survey u/s. 133A was carried out at the business premises of the assessee company at Hotel – The Oberoi, New Delhi. In the course of the survey proceedings, it was noticed that the assessee company was in receipt of extra amount known as “TIPS” paid by the guests in cash or through credit cards at the time of settlement of bills in appreciation of good services provided by the service staff. On disbursal of this amount, by the assessee to the employees, no tax was deducted.

The Assessing Officer (AO) was of the view that since TIPS are paid to the employees in lieu of rendering prompt services for their employer, hence these accrued to the employees for services rendered as employees for their employer. He, accordingly, held that the assessee has failed to deduct tax and passed separate orders holding the assessee to be an assessee in default and passed orders u/s. 201(1) / 201(1A) for each of the assessment years.

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 Apex Court in the case of ITC Ltd. vs. CIT (TDS) [2016] 384 ITR 14 (SC) has on analysis of section 15 has held that for the said section to apply, there should be a vested right in an employee to claim any salary from an employer or former employer. It held that since TIPS were received from the customers and not from the employer these would be chargeable in the hands of the employee as income from other sources and section 192 would not get attracted on the facts of the case. The Tribunal observed that the facts as considered by the Apex Court in the case of ITC Ltd.’s case (supra) would fully apply to the present case.  It also noted that the cognisance of the judicial precedence has already been taken by the co-ordinate “SMC” Bench in its order dated 12.7.2016 in the case of the assessee itself.

The Tribunal held that the assessee cannot be said to be in default of the provisions of section 192 of the Act as there was no liability of the assessee to deduct TDS under the said provision on TIPS recovered from hotel guests. Therefore, it cannot be held to be an assessee in default. Since interest u/s. 201(1A) can only be levied on a person who is declared as an assessee in default the question of interest does not arise. The Tribunal quashed the orders of the AO u/s. 201(1) / 201(1A) for the respective years.

The appeals filed by the assessee were allowed.

1. [2017] 78 taxmann.com 188 (Mumbai – Trib.) Bharat Serum & Vaccines Ltd. vs. ACIT ITA Nos.: 3091 & 3375 (Mum) of 2012 A.Y.: 2008-09 Date of Order: 15th February, 2017

Section 55 – Amount received for assignment of patent is taxable as capital gains u/s. 55(2)(a) and its cost of acquisition has to be taken as Nil.

FACTS  
The assessee company was engaged in the business of research development, manufacturing, wholesale trading and licensing of bio-pharmaceuticals, bio-technology products serums and process related technology. During the year under consideration, the assessee transferred a patent for Rs. 1.50 crore. The entire receipt on assignment of patent was regarded to be not taxable on the ground that the patent was a capital asset and no expenditure was incurred for acquiring the patent.

The Assessing Officer (AO) took the view that it was not possible to develop a process / patent without input from specialised/skilled personnel in a state-of-art research facility, that process of developing a patent was a part of the business of the assessee and that it had claimed all the expenses for skilled personnel and research facility in its P & L  Account.  

The claim made by the assessee that it had not incurred any cost for developing a patent was not accepted by the AO.  He held the amount received to be a revenue receipt.

Aggrieved, the assessee preferred an appeal to CIT(A) who held that the facts of the present case were squarely covered by the provisions of section 55 of the Act and that the receipt had to be taxed as capital gains.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD  
The Tribunal, at the outset, discussed the concept of patent and the history of patents. It mentioned that it is necessary to make a distinction between cases where consideration is paid to acquire the right to use a patent or a copyright and cases where payment is made to acquire patented or copyrighted product or material. In cases where the payment is made to acquire patented or copyrighted products, the consideration paid would have to be treated as a payment for purchase of the product rather than consideration for use of the patent or copyright. It pointed out the distinction between a patent and a trademark. The Tribunal then discussed about the patented medicine ‘Profofal’ which was marketed by the assessee as Diprivan among others and was discovered in 1977. It observed that the medical patents require clinical tests and administering drugs to patients. Clinical tests have to be performed under controlled conditions. For understanding the effective mass and the side-effects of the medicine, large sample survey spread over a reasonable time span is a must.    

The Tribunal held that before getting a patent of medicine like the item under consideration, the assessee has to carry out a lot of research analysis and experimentation. Naturally, it would require incurring of expenditure for both the activities. Such a tedious and cumbersome process was adopted by the assessee to have a right to manufacture / produce / process ‘Profofal’.

Considering the recitals of the agreement for assignment of patent, the Tribunal held that the patent was for the purpose to have right to manufacture/produce/process some article/thing. The patent was registered for commercial exploitation of the same in India as well as in the international market. It was transferred to the assignee for exploiting it commercially. Section 55(2)(a) talks of right to manufacture, produce or process any article or thing. Therefore, as per the amended provisions, the right to manufacture/produce/process would be taxable under the head capital gains and cost has to be taken at Rs. Nil. It upheld the order of the CIT(A).

This ground of appeal filed by the assessee was dismissed.

34. Housing project – Deduction – Sections 40(a)(ia) and 80IB – A. Y. 2006-07 – Disallowance u/s. 40(a)(ia) cannot be treated separately but is to be added to gross total income eligible for deduction u/s. 80IB(10)

CIT vs. Sunil Vishwambharnath Tiwari; 388
ITR 630 (Bom):

The Assessee was eligible for deduction u/s.
80IB(10) and the same was allowed. In the A. Y. 2006-07, the Assessing Officer
made certain disallowances u/s. 40(a)(ia) of the Act, on account of non
deduction of tax at source and also did not allow deduction u/s. 80IB(10) in
respect of the increased income of the project. The Commissioner (Appeals) and
the Tribunal allowed the assessee’s full claim.

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

“i)   In view of the scheme of
section 40 deduction of tax at source was not effected by the assessee and
payment to contractors could not be deducted as the expenditure became
inadmissible. The expenditures were added back to the income being eligible
income. This income eligible for deduction in terms of section 80IB(10) only
increased by the figure of disallowed expenditure.

ii)   The Commissioner(Appeals)
had rightly pointed out that the deduction allowable u/s. 80IB(10) of the Act,
was with reference to assessee’s gross total income. Hence disallowance u/s.
40(a)(ia) cannot be treated separately and it got added back to the gross total
income of the asessee.

iii)   Section 40 pointed out
that due to error of the assessee, such expenditure could not be deducted while
computing the income chargeable under the head ”Profit and gains of business or
profession”. That was the only limited effect of the lapse on the part of the
assessee. The Appellate Tribunal had considered these facts and upheld them. No
substantial question of law arose for consideration.”

46. Appellate Tribunal – Power to enhance – Tribunal has no power to enhance assessment

Fidelity Shares and Securities Ltd. vs. Dy. CIT; 390 ITR
267 (Guj):

Dealing with the scope of the power of the Tribunal under the
Income-tax Act, 1961 the Gujarat High Couirt held as under:

“The Tribunal has no power under
the Income-tax Act, 1961 to enhance assessment.”

Depreciation on Non-Compete Fees

Issue for Consideration

Depreciation is allowable u/s. 32(1) on buildings, machinery,
plant or furniture, being tangible assets, and on know-how, patents,
copyrights, trade marks, licences, franchises or any other business or
commercial rights of similar nature, being intangible assets acquired on or
after 1st April 1998. At times, under an agreement for acquisition
of shares or acquisition of a business or on cessation of employment of an
employee, the seller, its promoters or the employee may be paid a non-compete
consideration, in addition to the sale consideration. The agreement for such
non-compete would generally provide that the payee shall refrain from carrying
on a competing business for a certain number of years.

The issue has arisen before the High Courts as to whether such
non-compete fee constitutes an intangible asset of the payer, which is eligible
for depreciation u/s. 32(1). While the Delhi High Court has held that such
non-compete fee is not an intangible asset eligible for depreciation, the
Karnataka and the Madras High Courts have held that the rights acquired on
payment of a non-compete fee are intangible assets eligible for depreciation.

Sharp Business System’s case

The issue had come up before the Delhi High Court in the case
of Sharp Business System vs. CIT 211 Taxman 576.

In this case, the assessee was a joint-venture between Sharp
Corporation and L & T. It used to import, market and sell electronic office
products and equipments in India. During the relevant year, it paid Rs. 3 crore
to L & T as consideration for the latter not setting up or undertaking or
assisting in setting up or undertaking any business in India of selling,
marketing and trade of electronic office products for a period of 7 years. In
the accounts of the assessee, this amount was treated as a deferred revenue
expenditure and written off over the period of 7 years. In the return of
income, the entire sum paid was claimed as a revenue expenditure, on the ground
that the payment facilitated its business and did not enhance or alter the fixed
capital.

The assessing officer disallowed the deduction on account of
non-compete fee, on the ground that it conferred a capital advantage of
enduring value. The Commissioner(Appeals) rejected the assessee’s appeal, and
also rejected the alternative contention of the assessee for allowance of the
depreciation on such payment.

On further appeal, the Tribunal also rejected the contention
that the non-compete fee constituted revenue expenditure, holding that the
payment made by the assessee was not to increase the profitability, but to
establish itself in the market and acquire market share, as the period of 7
years was quite long, during which any new company could establish its
reputation and acquire a reasonable market share. It held that by keeping L &
T away from the same business, the assessee hoped to acquire a good market
share. The Tribunal also rejected the assessee’s claim for depreciation on
intangible asset.

Before the High Court, on
behalf of the assessee, besides arguing that the expenditure was of a revenue
nature, it was argued that the Tribunal was wrong in concluding that the right
to trade freely in the market was not an asset, and did not qualify for
depreciation u/s. 32. Reliance was placed on section 32(1)(ii) for the
proposition that intangible assets used for the business were eligible for
depreciation. It was argued that once it was held that the assessee had
acquired an advantage in the capital field, denial of depreciation amounted to
an inconsistent approach.

Reliance was also placed on behalf of the assessee on the
decision of the Supreme Court in the case of Techno Shares and Stocks Ltd
vs. CIT 327 ITR 323, where the Supreme Court had held that holding of a
membership card of the stock exchange amounted to acquisition of an intangible
asset, which qualified for depreciation u/s. 32(1)(ii). On a similar reasoning,
it was argued that the right acquired by the assessee for itself after payment
of the non-compete fee was akin to a license or other similar rights, on which
depreciation had to be given. Reliance was also placed on the decision of the
Delhi High Court in the case of CIT vs. Hindustan Coca-Cola Beverages (P)
Ltd 331 ITR 192, where it was held that intangible advantages all assets in
the form of know-how, trade style, goodwill, etc. were depreciable
assets.

On behalf of the revenue, it was argued that the question of
allowability of depreciation did not arise at all, because the business or
commercial rights of similar nature could not be said to arise overnight on
account of payment of non-compete fee. Besides, the payment did not result in
any intangible asset akin to a patent or intellectual property right.
Therefore, it was claimed that the non-compete agreement did not create an
asset of intangible nature or kind which qualified for depreciation.

While holding that the payment amounted to a capital
expenditure, given the fact that the arrangement was to endure for a
substantial period of 7 years, the Delhi High Court considered whether an
expenditure conferring a capital advantage was necessarily depreciable. It
observed that as was evident from section 32(1)(ii), depreciation could be
allowed in respect of intangible assets. Parliament had spelt out the nature of
such assets by explicit reference to know-how, patents, copyrights, trademarks,
licences and franchises. It noted that so far as patents, copyrights,
trademarks, licences and franchises are concerned, though they were intangible
assets, the law recognised through various enactments that specific
intellectual property rights flowed from them.

According to the Delhi High Court, licences were derivatives
and often were the means of conferring such intellectual property rights. The
enjoyment of such intellectual property right implied exclusion of others, who
did not own or have license to such rights, from using them in any manner
whatsoever. Similarly, in the matter of franchises and know-how, the primary
brand or intellectual process owner owns the exclusive right to produce, retail
and distribute the products and the advantages flowing from such brand or
intellectual process owner, but for the grant of such know-how rights or
franchises. In other words, the species of intellectual property like rights or
advantages led to the definitive assertion of a right in rem.

Referring to the Supreme Court decision in the case of Techno
Shares and Stocks(supra), the Delhi High Court was of the view that the
Supreme Court had clearly limited its scope while holding that the right to
membership of the stock exchange was in the nature of any other business or
commercial right, which was an intangible asset, by clarifying that the
judgement of the court was strictly confined to the right to membership
conferred upon the member under the BSE membership card during the relevant
assessment years. According to the Delhi High Court, that ruling was therefore
concerned with an extremely limited controversy, i.e. depreciability of stock
exchange membership. In the view of the Delhi High Court, the membership rights
of a stock exchange was held to be akin to a license, because it enabled the
member to access the stock exchange for the duration of the membership, and
therefore it conferred a business advantage, which was an asset and clearly an intangible asset.

While analysing the question of whether the non-compete right
of the kind acquired by the assessee against L&T for 7 years amounted to a
depreciable intangible asset, the Delhi High Court observed that each of the
species of rights spelt out in section 32(1)(ii), i.e. know-how, patent,
copyright, trademark, license of franchise or any other right of a similar kind
conferred a business or commercial right, which amounted to an intangible
asset. The nature of these rights clearly spelt out an element of exclusivity,
which enured to the assessee as a sequel to the ownership. In other words, if
it was not for the ownership of the intellectual property or know-how or
license or franchise, it would be unable to either access the advantage or
assert the right and the nature of the right mentioned spelt out in the
provision as against the world at large, in legal parlance, in rem.

According to the Delhi High Court, in the case of a
non-compete agreement or covenant, the advantage was a restricted one in point
of time. It did not necessarily, and in the facts of the case before the Delhi
High Court, according to the court, did not confer any exclusive right to carry
on the primary business activity. The right could be asserted in the present
case only against L&T, and was therefore a right in personam.

The Delhi High Court further observed that another way of
looking at the issue was whether such rights could be treated or transferred, a
proposition fully supported by the controlling object clause, i.e. intangible
asset. Every species of rights spelt out expressly by the statute, i.e. of the
intellectual property right and other advantages such as know-how, franchise,
license, et cetera and even those considered by the courts, such as
goodwill, could be said to be transferable. Such was not the case with an
agreement not to compete, which was purely personal.

The Delhi High Court therefore held that the words “similar
business or commercial rights” had to necessarily result in an intangible asset
against the entire world, which could be asserted as such, to qualify for
depreciation u/s. 32(1)(ii). Accordingly, it was held that the non-compete
payment made by the assessee did not result in an intangible asset eligible for
depreciation.

Ingersoll Rand International Ind Ltd.’s case

The issue came up again before the Karnataka High Court in
the case of CIT vs. Ingersoll Rand International Ind. Ltd. 227 Taxman 176
(Mag).

In this case, the assessee was engaged in the business of
security and access control systems integration. During the relevant year, it
entered into a business purchase agreement with another company, Dolphin,
whereby it purchased the business of Dolphin for a consideration of Rs. 11.71
crore. The purchase consideration included a sum of Rs. 54.43 lakh paid to the
promoter as non-compete fees, and a sum of Rs. 43.55 lakh paid to him for
purchase of patents. The promoter was also appointed as the Vice President and
Company Head of the assessee through a contract of employment.

Out of the total consideration of Rs. 11.71 crore,
non-compete fees and patents were shown as assets in the books of account of
the assessee, and the balance amount was shown as goodwill. The payment of
non-compete fee was treated as a revenue expenditure in the computation of
total income, though capitalised in the books of account. The assessee also
claimed depreciation on the patents in the computation of its income, though it
did not claim depreciation on goodwill.

The assessing officer held that the non-compete fee was
capital in nature and disallowed it. The Commissioner(Appeals), while holding
that the non-compete fee was in the nature of capital expenditure, also held
that it was not eligible for depreciation. The Tribunal, while upholding the
view that the non-compete fee was in the nature of capital expenditure, held
that it was in the nature of a business or commercial right, and that depreciation
was allowable on such an asset.

Before the Karnataka High Court, on behalf of the revenue, it
was argued that non-compete fee did not constitute a commercial or a business
right for allowing depreciation u/s. 32(1)(ii). It was argued that in order to
claim depreciation, the assessee should own and use the asset in the business,
and that this user test was not satisfied in this case. It was therefore argued
that non-compete fee could not be classified as an asset, and now depreciation
could be allowed thereon.

On behalf of the assessee, it was argued that by virtue of
payment of the non-compete fee, the assessee could carry on business without
any competition for the limited period, which in turn resulted in an advantage
to the business, and as that advantage conferred on it a commercial and
business right, once it was held to be of the nature of capital expenditure,
the assessee was entitled to depreciation u/s. 32(1)(ii).

The Karnataka High Court referred to the decisions of the
Delhi High Court in the case of Hindustan Coca-Cola Beverages (P) Ltd.
(supra) and Areva T & D India Ltd.vs. Dy CIT 345 ITR 421 to
understand the meaning of the term “any other business or commercial rights of
a similar nature”. It further referred to the decision of the Madras High Court
in the case of Pentasoft Technologies Ltd vs. Dy CIT 222 Taxman 209,
where the Madras High Court had held that a non-compete fee amounted to an
intangible asset eligible for depreciation, and the decision of the Delhi High
Court in the case of Sharp Business System (supra).

The Karnataka High Court, while analysing the provisions of
section 32(1)(ii), noted that in the definition of intangible assets, any  other business or commercial rights of
similar nature were included. Therefore, such rights need not answer the
description of know-how, patents, copyrights, trademarks, licenses, or
franchises, but must be of similar nature as those assets, namely know-how, etc.
According to the Karnataka High Court, the fact that after the specified intangible
assets, the words “business or commercial rights of similar nature” had been
additionally used, clearly demonstrated that the legislature did not intend to
provide for depreciation only in respect of specified intangible assets, but
also to other categories of intangible assets, which were neither feasible nor
possible to exhaustively enumerate.

The Karnataka High Court noted that the words “similar
nature” carried a significant expression. The Supreme Court, in the case of Nat
Steel Equipment (P) Ltd vs. Collector of Central Excise AIR 1988 SC 631,
had held that the word similar did not mean identical, but meant corresponding
to resembling to in many respects, somewhat like or having a general likeness.
According to the Karnataka High Court, therefore, what was to be seen was what
the nature of intangible assets was, which would constitute business or
commercial rights to be eligible for depreciation.

The Karnataka High Court noted that the intangible assets
enumerated in section 32(1)(ii) effectively conferred a right upon an assessee
for carrying on of business more efficiently, by utilising an available
knowledge or by carrying on a business to the exclusion of another assessee. A
non-compete right represented a right, under which one person was prohibited
from competing in business with another for a stipulated period. It would be
the right of the person to carry on the business in competition, but for such
agreement of non-compete. The right acquired under a non-compete agreement was
a right for which a valuable consideration was paid. The right was acquired to
ensure that the recipient of the non-compete fee did not compete in any manner
with the business with which he was earlier associated.

According to the Karnataka High Court, the object of
acquiring a know-how, patent, copyright, trademark, license, or franchise was
to carry on business against rivals in the same business in a more efficient manner,
or in the best possible manner. The object of entering into a non-compete
agreement was also the same, i.e., to carry on business in a more efficient
manner by avoiding competition, at least for a limited period of time. On
payment of non-compete, the payer acquired a bundle of rights, such as
restricting the receiver directly or indirectly from participating in the
business, which was similar to the business being acquired, from directly or
indirectly suggesting or influencing clients or customers of the existing
business or any other person either not to do business with the person to whom
he has paid the non-compete fee, or the person receiving the non-compete fee is
prohibited from doing business with the person who was directly or indirectly in competition with the business, which was
being acquired. The right was acquired for carrying on the business, and
therefore it was a business right.

The right by way of non-compete was acquired essentially for
trade and commerce, and therefore qualified as a commercial right. Such a right
could be transferred to any other person, in the sense that the acquirer got
the right to enforce the performance of the terms of agreement under which a
person was restrained from competing. When a businessman paid money to another
businessman for restraining the other businessman from competing with the
assessee, he got a vested right, which would be enforced under law, and without
that, other businessmen could compete with the first businessman. By payment of
non-compete fee, the businessman got a right which was a kind of monopoly to
run his business without bothering about the competition.

The Karnataka High Court noted that the non-compete fee was
paid for a definite period. The idea behind this was that, by that time, the
business would stand firmly on its own footing, and could sustain later on.
This clearly showed that a commercial right came into existence, whenever the
assessee made a payment of non-compete fee. Therefore, according to the
Karnataka High Court, the right which the assessee acquired on payment of
non-compete fee conferred in him a commercial or business right, which was
similar in nature to know-how, patents, copyrights, trademarks, licenses and
franchises, which unambiguously fell within the category of an intangible
asset. The right to carry on business without competition had an economic
interest and a money value.

In the view of the Karnataka High Court, the doctrine of ejusdem
generis would come into operation. The non-compete fee vested right in the
assessee to carry on business without competition, which in turn conferred a
commercial right to carry on a business smoothly. Once such expenditure was
held to be capital in nature, consequently, the assessee was entitled to the
depreciation provided u/s. 32(1)(ii). The Karnataka High Court therefore held
that the assessee was entitled to depreciation on the non-compete fee.

A similar view was taken earlier by the Madras High Court in Pentasoft
Technologies’ case (supra), though in that case the non-compete payment was
for restraint on use of trade mark, copyright, etc.

Observations

One makes a payment, in the course of business either for
meeting an expenditure or for acquiring an asset or a right. An expenditure can
be either in the revenue field or in the field of capital. Where a revenue
expenditure is incurred, no asset can be said to have been acquired and hence
no depreciation is allowable. When a capital expenditure results in acquisition
of an asset that is eligible for depreciation, the payer will be entitled to
depreciation. Besides, being an owner of the asset, it is essential that the
owner uses the asset and such user is for the purposes of business. On
satisfaction of these tests, a valid claim for depreciation is made that cannot
be frustrated for ambiguous reasons.

Any payment made, in the course of business, not resulting in
acquisition of a tangible asset generally should be for acquiring some right or
removing some disability and when seen to be resulting in to a business or commercial
right should, without hesitation, be classified as an intangible asset, in view
of the two landmark decisions of the apex court in the case of Techno Shares
and Smifs Securites. It is inconceivable that a businessman would make a
payment that does not endow him with business rights or, in the alternative,
saves him from some disability that facilitates the conduct of his business
efficiently.  Looked at from this angle,
any non revenue payment results in acquiring a business right, provided it does
not result in acquisition of a tangible asset.

The principle of user of an asset, in the context of an
intangible asset, will have to be viewed differently. In the context, it will
also include a case of preventing another person from using it against the
assessee and therefore a non-user by the others, on payment, should be viewed
as the user by the assessee. The authorities or the courts should appreciate
this aspect or the character of the intangible asset while dealing with the
concept of user.

A business or commercial right of a similar nature is vast
enough to cover a good number of cases, where the payer, on payment, is seen to
be facilitating the efficient conduct of business, by use or by non-user by the
payee. A know-how, license, franchise, etc. are cases where the payer is
enabled to carry on business with the protection of law or of the payee.
Similarly, on payment of non-compete consideration, the payer acquires a
protection from the payee for carrying on his business without competition. 

Both the Delhi and Karnataka High Courts seem to have adopted
the principle of ejusdem generis, to arrive at diametrically opposite views.
While the Delhi High Court was of the view that a right obtained under a
non-compete agreement was not akin to trademarks, copyrights, licences, etc.,
the Karnataka High Court was of the view that such right is similar in nature,
as both facilitate carrying on of business more smoothly.

The distinction between the right in rem and in personam
perhaps is not relevant or conclusive in deciding the issue whether an
asset is depreciable or not. Neither the law nor the courts require that a
right in an asset should be against the world before a valid depreciation is
allowed. In the case of Techno Shares & Stocks (supra), while the
Bombay High Court had earlier held that the membership rights of the Bombay
Stock Exchange was not an intangible asset eligible for depreciation, not being
similar to other rights specified in section 32(1)(ii), the Supreme Court took
a contrary view on the same principle of ejusdem generis, holding that such
membership right was similar to a licence, since it permitted a member to carry
on trading on the exchange. This was notwithstanding the fact that such right
was a personal permission granted to the member under the bye-laws of the
exchange, and therefore not transferable. In a similar manner, a right of
non-compete, though not strictly transferable, can still be an intangible
asset.

Therefore, though the Supreme Court may have observed that the
ratio of its decision applied only to a case of membership rights of the Bombay
Stock Exchange, the principles on the basis of which the case was decided,
would apply equally for other payments under which a right to carry on a
business is acquired, though non transferable. Interestingly, the Karnataka
High Court has found such rights to be transferable by the payer for a
consideration and has noted that the transferee should be in a position to
enforce such rights against the payee.

Similarly, in the case of CIT vs. Smifs Securities Ltd 348
ITR 302 (SC), the Supreme Court held that goodwill arising on amalgamation
of companies was an intangible asset eligible for depreciation. This was
notwithstanding the fact that such a goodwill arose only to the amalgamated
company, and was not on account of any transferable asset which can be put to
any specific use.

From the two decisions of the Supreme Court on the subject of
depreciable intangible assets, it is therefore clear that the Supreme Court has
taken a broader view of the term, by permitting depreciation on business and
commercial rights, in cases where the payment 
permitted smoother functioning of the business, holding that such rights
were similar to the specified rights, such as trademarks, copyrights, licences,
etc.

Therefore, the better view seems to be that
rights acquired under a non-compete agreement are intangible assets, eligible
for depreciation u/s. 32(1(ii).

Second Income Disclosure Scheme – 2016


      I.  Background

1.1 On 8th
November, 2016, the Central Government demonetised Rs. 500/1000 Currency Notes
(Old Notes).  New Currency Notes of Rs.
500/2000 have been issued to replace the old Currency Notes. Old Currency Notes
of Rs. 500/1000 could be deposited in the bank account of the person holding
such old notes between 10th November to 30th December,
2016. Once the old notes are deposited in the Bank Account of the person he
will have to explain the source of such deposit to the Income tax Authorities
.  The Government has stated in its
public announcements that an Individual or HUF may be holding some such old
notes out of their savings and kept them for household needs. Therefore, a
public assurance has been given that the Income tax Department will not inquire
about the source of such deposits if the total deposit during the above period
is less than Rs.2.5 lakh.

1.2   The
government felt that if large cash in the form of Old Notes was kept by some
persons out of their unaccounted income then they should pay tax at higher
rates and should also pay penalty when they deposit such cash in their Bank
Accounts. To achieve this objective the parliament enacted “The Taxation
(Second Amendment) Act 2016”. The Amendment Act amends some of the provisions
of the Income tax Act and the Finance Act, 2016. The above amendments provide
the Second Income Disclosure Scheme in the form of “Taxation and Investment
Regime for Pradhan Mantri Garib Kalyan Yojna, 2016”.  In this Article some of the important
amendments by this Act and the Second Income Disclosure Scheme are discussed.

2.    The Second Disclosure Scheme:

2.1  First Disclosure Scheme:

The Finance Act, 2016 enacted on 14/5/2016, contained “The
Income Declaration Scheme, 2016”. This Scheme allowed any person to declare his
undisclosed income (Indian assets, including cash) of earlier years during the
period 1/6/2016 to 30/09/2016. Under this Scheme the declarant was required to
file declaration about valuation of undisclosed Indian assets and pay tax of
45% (including surcharge and penalty) in instalments. It is stated that assets
worth about Rs.67000 crore were disclosed under this scheme before 30/09/2016.

2.2   Second Income Disclosure Scheme:

In order to give one more
opportunity to persons holding old currency notes the present scheme is
introduced. Sections 199A to 199R are inserted in the Finance Act, 2016. These
sections provide for a new Scheme called “Taxation and Investment Regime for
Pradhan Mantri Garib Kalyan Yojna, 2016”. The provisions of this Scheme are on
the same lines as the earlier Income Declaration Scheme, 2016, which ended on
30/09/2016. The Scheme has come into force on 17th December, 2016
and will come to an end on 31st March, 2017. Some of the important
provisions of the Scheme are discussed below:-

2.3   Declaration under the Scheme:

(i)  U/s. 199C any person may make a declaration in
the prescribed Form No.1 during the period 17-12-2016 to 31-3-2017 as notified
by Notifications dated 16.12.2016. This declaration is to be made for any
undisclosed income held in the form of cash or deposit in any account
maintained with a specified entity. Thus the benefit of this Scheme can be
taken by an Individual, HUF, Firm, AOP, Company or any person whether Resident
or Non-Resident.

(ii) The
income chargeable to tax under the Income tax can be declared under the Scheme
if it relates to F.Y:2016-17 and earlier years. The above declaration can be
made in respect of the above undisclosed income which is held in cash or
deposit in a specified entity as under –

(a) Reserve Bank of India

(b) Any Scheduled Bank (including Co-operative
Bank)

(c) Any Post Office

(d) Any other Entity notified by the Central
Government.

No deduction will be allowed for any expenditure, allowance,
loss etc. from such income.

(iii) The amount of Undisclosed Income declared in
accordance with the Scheme shall not be included in the income of the declarant
for any assessment year. In other words, immunity is given under the Income-tax
Act and the Wealth Tax Act. In the Press Note issued by the Government on
16.12.2016 it is clarified that the above declaration shall not be admissible
as evidence in any proceedings under the Income tax Act, Wealth tax Act,
Central Excise Act, Companies Act, etc. However, no immunity will be
available under any criminal proceedings under the Indian Penal Code,
Prevention of Corruption Act, prohibition of Benami Property Transactions Act etc.,
as mentioned in section 199.0 of the Finance Act, 2016. 

2.4   Tax Payable on such Income:

Sections 199D and 199E provide for payment of tax, cess,
penalty etc. It is provided that the person making the Declaration u/s.
199C shall have to pay tax, cess and penalty that is an aggregate of 49.90% of
the income declared under the Scheme as under:

(i)     30% of Undisclosed income by way of tax

(ii)    33% of above tax (i.e. 9.9%) by way of
Pradhan Mantri Garib Kalyan Cess.

(iii)   10% of undisclosed income by way of Penalty

2.5   Interest Free Deposit:

The declarant under the Scheme has also to deposit 25% of the
undisclosed income in the “Pradhan Mantri Garib Kalyan Deposit Scheme, 2016” as
provided in section 199F. This deposit will be for 4 years and no interest
shall be paid to the declarant on this deposit.

2.6   Time for payment of Tax and Deposit (Section 199H)

The above Tax, Cess and Penalty is to be paid before filing
the Declaration u/s. 199C. Similarly, the above Interest Free Deposit is to be
made before filing the Declaration u/s. 199C. The Declaration along with proof
of payment of tax etc. and proof of deposit is to be filed before 31st
March, 2017. Any amount of tax, cess or penalty paid under the scheme is
not refundable.

 

2.7   By a Notification dated 16.12.2016, the
CBDT has notified the “Taxation and Investment Regime for Pradhan Mantri Garib
Kalyan Yojana Rules, 2016”. These Rules have come into force on 16.12.2016.
Briefly stated, these Rules provide as under:

(i)  The declaration of undisclosed income for F.Y.
2016-17 and earlier years held in the form of cash or deposit with the
specified entity stated in Para 2.3 above can be made in Form No.1 during the
period. 17.12.2016 to 31.3.2017.

(ii) It may be noted that in Form No.1 the declarant
has to give particulars of Name, Address, PAN, Income declared, the details of
such income held in cash or deposit with specified entity, Tax, cess and
penalty payable, date of such payment, details of Interest free Deposit of 25%
of declared income made u/s. 199 F etc.

(iii) The above tax, cess and penalty is to be paid
and Interest Free Deposit is to be made before filing the declaration in Form No.1.

(iv) The Declaration is to be furnished to the
designated Principal CIT or CIT electronically or in print form physically

(v) If the declarant finds any mistake in the
declaration filed earlier, there is a provision to file a revised declaration
on or before 31.3.2017.

(vi) The Principal CIT or CIT will have to issue a
certificate in Form No.2 within 30 days from the end of the month in which
valid declaration is filed.

2.8  From the above, it
is evident that under this scheme a person can make declaration about the
undisclosed income held in cash or deposits with specified entities. The
declaration cannot be made if the declarant is holding such income in any other
form such as jewellery, ornaments, or immovable properties etc. This
undisclosed income may be relating to any year i.e. F.Y. 2016-17 or earlier
years. Therefore, the Scheme does not refer to only cash in the form of Rs.
500/- and Rs. 1000/- notes deposited in the Bank Account between the period
10.11.2016 to 30.12.2016. Such income may have been deposited in the bank or
with other specified entity prior to 10.11.2016 or even between 31.12.2016 to
31.03.2017. Hence, if a person has earned income in F.Y. 2015-16 or any earlier
year, which has been held in cash or deposited in the bank, but not disclosed
in the Income tax Return, he can make a declaration under this Second Income
Disclosure Scheme on or before 31.3.2017. He will have to pay 49.90% by way of
tax, Cess and penalty and make interest free deposit of 25% of such income for
4 years.

2.9      By another
Notification dated 16.12.2016, the Central Government has issued the “Pradhan
Mantri Garib Kalyan Deposit Scheme, 2016”. This scheme has come into force on
17.12.2016 and is valid upto 31.3.2017. Briefly stated, this scheme provides as
under:

(i)     The Scheme applies to persons making
declaration of undisclosed income under the Second Income Disclosure Scheme.
Under this Scheme 25% of undisclosed income is required to be deposited in the
interest free deposit for 4 years.

(ii)    This deposit is to be made with the
Authorised Bank in Form No.II giving particulars of Name, Address, PAN, etc.
in cash, cheque or by electronic transfer drawn in favour of Authorised Bank.
The amount is to be deposited in multiples of Rs.100/-.

(iii)   The above deposit is to be made before the
declaration of undisclosed income u/s. 199C of the Finance Act, 2016 is filed.

(iv)   The certificate of holding of Deposit will be
issued to the declarant in Form No.1 as holder of Bond Ledger Account with
R.B.I.

(v)    Bond Holder can appoint one or more Nominees
to receive the refund in the event of his death in Form No.III. Such nomination
can be cancelled in Form No.IV and another nominee can be appointed.

(vi)   No interest is payable on the above deposit.
The Bond issued by the RBI for the above Deposit is not transferable and cannot
be traded in the market. In view of this the declarant may not be able to take
a loan against the mortgage of this Bond.

(vii)  The amount of the deposit under the scheme
will be refunded by RBI after 4 years on the date of maturity. 

2.10   Persons who cannot make a Declaration under the Scheme:

Section 199-O provides that the following persons cannot make
the Declaration under the above Scheme.

(i)  Any person in respect of whom an order of detention
has been made under the conservation of Foreign Exchange and Prevention of
Smuggling Activities Act, 1974. Certain exceptions are provided in section
199-O (a).

(ii) Any person in respect of whom prosecution for
an offence punishable under Chapter IX or Chapter XVII of the Indian Penal
Code, the Narcotic Drugs and Psychotropic Substances Act, 1988, the Prohibition
of Benami Property Transactions Act, 1988 and the Prevention of Money
Laundering Act, 2002 has been launched.

(iii) Any person notified u/s. 3 of the Special Court
(Trial of Offence Relating to Transactions in Securities) Act, 1992.

(iv) The Scheme is not applicable to any undisclosed
foreign income and asset which is chargeable to tax under the Black Money
(Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

2.11   Other Procedural Provisions:

Sections 199G, 199J, 199L, 199M, 199N, 199P to 199R deal with
certain procedural matters as under:-

(i)  Person who can sign the declaration (section
199G)

(ii) Undisclosed Income declared under the Scheme
not to affect any concluded assessments (section 199J)

(iii) Declaration not admissible as evidence in other
proceedings (section 199L)

(iv) Declaration will be treated as void if it is
made by misrepresentation of facts (section 199M)

(v) Provisions of Chapter XV, sections 119, 138 and
189 of the Income-tax Act to apply to proceedings under the Scheme (section
199N).

(vi) Benefit, concession, immunity etc. under
the Scheme available to declarant only (section 199P).

(vii)  Central Government will have power to remove
difficulties under the Scheme within 2 years (section 199Q).

(viii) Power to make Rules for administration of the
Scheme given to Central Government (section 199R).

3.  Some Clarifications by CBDT:

By a circular dated 18.1.2017, CBDT has issued some
clarifications about the above Scheme. Some of the important clarifications are
as under:

(i)  Where a notice u/s. 142(1), 143(2), 148, 153A
or 153C of the Income-tax Act is issued by the ITO for any year, the assessee can
make a declaration under the scheme for that year.

(ii) A person against whom a search or survey
operation is initiated will be eligible to file a declaration under the Scheme
in respect of undisclosed income represented in the form of cash or deposits
with Banks, Post Office etc.

(iii) Undisclosed income utilised for repayment of an
overdraft, cash credit or loan account maintained with a bank can be declared
under this scheme.

(iv) Cash sized in any search and seizure action by
the department can be adjusted against payment of tax, surcharge and penalty
(i.e. 49.9%) payable under the scheme. For this purpose the person from whom
cash in seized will have to make application to the department. However, this
seized amount of cash cannot be adjusted against the Deposit of 25% to be made
under the Pradhan Mantri Garib Kalyan Deposit Scheme.

(v) If Mr. “A” has given advance in cash out of
undisclosed income for purchase of goods (other than immovable property) or
services to Mr. B, who has deposited the money in his Bank Account, and later
on “B” has returned the money as goods are not supplied or services are not
rendered, Mr. “A” can declare the undisclosed income under the scheme.

4.  To Sum up

4.1  We should
congratulate the Government for the bold step taken to demonetise old high
value currency notes. This is a right step to deal with the problem of black
money, corruption, fake currency in circulation etc. .

4.2  The Government
recognised that the existing Income tax Act did not permit tax authorities to
levy any penalty on persons who would convert large amount of black money
through banking channel. Therefore, the Taxation (second amendment) Act 2016
was passed and section 115BBE was amended and section 271 AAC for levy of
penalty was introduced.

However, small income earners who had some high value notes
kept at home out of their savings to meet expenditure in emergency cannot be
considered as holding their unaccounted income. The Government had promised
that if such persons deposit in their Bank Account amount upto Rs. 2.50 lakh no
enquiry will be made by the tax Department. This promise has not been honoured
while passing this Amendment Act. It is, therefore, necessary that the CBDT
issues a Circular to the officers not to raise any doubt if an assessee gives
an explanation that amount upto Rs. 2.5 lakh is deposited out of household
savings.

4.3  The Second Income
Disclosure Scheme is welcome. Persons holding unaccounted money in cash will
take advantage of this scheme as the tax rate is 49.9%, and 25% of the amount
is blocked for 4 years in Interest Free Bonds. However, persons who decide to
offer such amount in their Return of Income for the current year will be at a
disadvantage as they will have to pay tax, surcharge and education cess u/s. 115BBE
at 77.25% of such income.

4.4 It may be noted that under the First Income Disclosure
Scheme announced in May, 2016, immunity was granted from proceedings under the
provisions of (i) Benami Transactions (Prohibition) Act, 1988, (ii) Foreign
Exchange Management Act, (iii) Money Laundering Act, (iv) Indian Penal Code etc.

There was also an assurance that the secrecy will be
maintained about the contents of the Declaration under the Scheme. It is
unfortunate that the present Scheme does not provide for such immunity or
secrecy. Therefore, the assessees will have to be very careful while making the
Declaration under the Scheme.

4.5 It appears that the Second Income Disclosure Scheme as
announced by the Government is with all good intentions. It is advisable for
the persons who hold unaccounted money in cash to come forward and take
advantage of the Scheme and buy peace. Let us hope that this Scheme gets the
desired response.

4.6 The amendment in section 115BBE punishes
those assessees in whose cases additions are made for cash credits, unexplained
investments, unexplained expenses etc. Tax rate is now increased from
30% to 60%. Further, there will be additional burden of 15% surcharge and 6%
penalty. Such cases have no relationship with demonetisation of high value
currency. It is difficult to understand the reason for which such additional
burden is put on such assessees.

13. Manish Ajmera vs. ITO ITAT ‘B’ Bench, Mumbai Before Shailendra Kumar Yadav (J. M.) and Rajesh Kumar (A. M.) ITA No.5700/Mum/2013 A.Y.:2010-11. Date of Order: 26th August, 2016 Counsel for Assessee / Revenue: Jayesh Dadia / Chandra Vijay

Section 14 – Income from transfer of shares
and securities taxed under the head short term capital gains based on the Board
circular.

FACTS

The assessee had filed return of income
declaring total income of Rs. 0.68 lakh. The AO in his order passed u/s. 143(3)
assessed at Rs. 83.04 lakh and taxed Rs. 82.36 lakh as business income instead
of as short term capital gains as claimed by the assessee. On appeal, the CIT
(A) confirmed the AO’s order.

HELD

The Tribunal referred to a clarificatory
Circular no. 6/2016 dated 29th February, 2016 wherein the Board had
clarified that where the assessee himself, irrespective of the period of
holding the listed shares and securities, opts to treat them as stock-in-trade,
the income arising from transfer of such shares would be treated as his
business income. Relying on the same, the Tribunal directed  the AO to treat the income in question as short term capital gain instead of as
business income as assessed  by the AO.

12. Y.V. Ramana vs. CIT ITAT Visakhapatnam Bench, Visakhapatnam Before V. Durga Rao (J. M.) and G. Manjunatha (A. M.) I.T.A.No.: 177/Vizag/2015 A.Y.: 2010-11. Date of Order: 9th December 2016 Counsel for Assessee / Revenue: C. Kameswara Rao / G. Guruswamy

Section 2(47) – Mere agreement for transfer
of shares does not cause effective transfer of shares unless it is accompanied
with delivery of share certificate and duly signed and stamped share transfer
form.

FACTS

During the year under appeal, the assessee
had sold 1,33,420 equity shares in Vijay Nirman Company Private Limited (VCPL)
for a consideration of Rs. 199.98 lakh. The transfer was in pursuant to an
investments agreement dated 12-08-2009 between transferee of the shares, VCPL
and its shareholders. The said investment agreement had prescribed certain
terms and conditions of share transfer and completion of statutory formalities
by filing necessary forms under the Companies Act, 1956 with concerned
authorities. As per the said agreement, the assessee received sales
consideration on 10-09-2009 from the transferee of the shares. The assessee
completed share transfer formality on 24-11-2009 by filing valid instrument of
transfer in form no. 7B duly stamped and signed by transferor and transferee
and presented to the company along with share certificates which was endorsed
by the company on 24-11-2009. The assessee invested part of sale consideration
of Rs. 50 lakh in NHAI bonds on 4-5-2010 and claimed exemption u/s 54EC. The
assessee also deposited sum of Rs. 150 lakh on 24-07-2010 in a scheduled bank
under Capital Gain Deposit Scheme (‘the Scheme’) before due date of filing
return of income and proof of which was furnished along with return of income,
and claimed exemption u/s. 54F of the Act. The assessee purchased a house
property on 31-10-2011 out of the amount deposited under the Scheme. The
assessment was completed u/s. 143(3) on 16-01-2013, determining total income as
returned by the assessee.

According to the CIT to claim exemption u/s.
54EC and 54F, the assessee ought to have invested sale consideration within six
months/2 years from the date of receipt of money and not the date of transfer
of shares by signing share transfer form. 
If the period of limitation is computed from the date of receipt of
money, then investments in 54EC and 54F was beyond the time limit specified under
the provisions, accordingly, the assessee was not eligible for exemption.
Accordingly, he held that the order of the AO was erroneous in so far as it is
prejudicial to the interest of the revenue.

According to the assessee, the A.O. had
examined the issue of computation of capital gain towards sale of shares and
exemption claimed u/s. 54EC and 54F of the Act, by specific questionnaire dated
13-12-2012 and 28-12-2012. The assessee had furnished complete details of
shares transfer and proof of investment in 54EC and 54F of the Act. The A.O. having
satisfied with details furnished by the assessee, had chosen to accept
computation of capital gain and hence, the assessment order cannot be termed as
erroneous within the meaning of section 263 of the Act.

According to the revenue, as per the investments
agreement dated 12-08-2009, the transfer got crystallised on the date of
payment of consideration towards transfer of shares by the purchaser to the
seller and subsequent execution of share transfer form and filing such form
with company is only a statutory requirement which is nothing to do with
transfer. It also referred to section 19 of sale of Goods Act, 1930 and
submitted that where there is a contract for the sale of specific or
ascertained goods the property in them is transferred to the buyer at such time
as the parties to the contract intended it to be transferred. The revenue also
referred to CBDT. Circular No. 704, dated 28-04-1995 and argued that in the
case the transactions take place directly between the parties and not through
stock exchanges, the date of contract of sale as declared by the parties shall
be treated as the date of transfer provided it is followed up by actual
delivery of shares and the transfer deeds.

HELD

According to the Tribunal, once, the A.O.
had called for details of the issue which is subject matter of revision
proceedings and the assessee furnished details called for, it is the general
presumption that the A.O. has examined the issue with necessary evidences,
applied his mind and took a possible view of the matter before completion of
assessment. The CIT cannot assume jurisdiction to review the assessment order
by holding the A.O. has conducted inadequate enquiry and also not applied his
mind. Thus, it held that that the assessment order passed by the A.O. is not erroneous
within the meaning of section 263 of the Act.

To examine whether the assessment order is
prejudicial to the interest of revenue – the Tribunal noted that the only
dispute is with regard to date of transfer. The assessee contends that transfer
had taken place on 24-11-2009, when valid instrument of share transfer in form
no. 7B is duly stamped and signed by the both the parties and presented to the
company along with original share certificates. According to the CIT, the
effective transfer took place on 10-09-2009 when sale consideration is passed
on to the seller.

According to the Tribunal, share transfer is
governed by section 108 of the Companies Act, 1956. As per section 108
registration of transfer of shares is possible only if a proper transfer deed
in form no. 7B duly stamped and signed by or on behalf of the transferor and by
or on behalf of the transferee and specifying the name, address and occupation,
if any of the transferee, has been delivered to the company along with share
certificates and endorsed by the Company. In the case of shares of listed
companies, effective transfer would take place when title to share is
transferred from one person to another through demat account in recognised
stock exchange. In the case of shares of unlisted companies, transfer would
take place, only when valid share transfer form in form no. 7B is delivered to
the company and endorsed by the company. Therefore, for effective transfer of
shares, a mere agreement for transfer of shares is not sufficient, unless it is
physically transferred by delivery of share certificate along with duly signed
and stamped share transfer form. The agreement to transfer share can give
enforceable right to the parties, but it cannot be a valid transfer unless it
is followed up by actual delivery of shares. Thus, in the case of the assessee,
the transfer as defined u/s. 2(47) took place on 24.11.2009 and not on the date
of receipt of money from the buyer to the seller, i.e. 0n 10-09-2009. In view
of the same, investments in NHAI bonds on 4-5-2010 and purchase of house
property on 31-10-2011 is well within the period of six months and 2 years from
the date of transfer as specified u/s. 54EC and 54F of the Act, and
accordingly, the assessee is eligible for exemption and thus, there no
prejudice is caused to the revenue from the order of the A.O. within the
meaning of section 263 of the Act. Therefore, it was held that the assessment
order passed by the A.O. u/s. 143(3) is not erroneous in so far as it is
prejudicial to the interest of the revenue.

15. [2016] 75 taxmann.com 270 (Visakhapatnam – Trib.) DCIT vs. Dr. Chalasani Mallikarjuna Rao A.Y.: 2007-08 Date of Order: 21st October, 2016

Section 50C – Provisions of section 50C are
applicable to sale by a registered un-possessory sale-cum-GPA.  

FACTS 

The assessee, a
doctor by profession, filed his return of income for the assessment year 2007-08.
The assessment was completed u/s. 143(3) of the Act. Subsequently, the
assessment was re-opened, after recording reasons, u/s. 148 of the Act. In the
course of re-assessment proceedings, the Assessing Officer (AO) noticed that
the assessee has sold a residential house property at Dr.No.32-7- 3A, P.S.
Nagar, Vijayawada for a consideration of Rs. 60 lakh by way of registered
un-possessory sale-cum-GPA vide document no.52/2007. As per the said
document, the market value of the property for the purpose of payment of stamp
duty has been fixed at Rs. 82,04,000/-. However, since the assessee had
computed capital gains by adopting sale consideration of Rs. 60 lakh and
claimed exemption u/s. 54 of the Act towards construction of another
residential house property, the AO asked the assessee to show cause why
provisions of section 50C should not be applied and capital gain computed with
reference to value determined by Stamp Valuation Authorities. In response, the
assessee submitted that the provisions of section 50C of the Act are not
applicable since the assessee has transferred property by way of registered
un-possessory sale-cum-GPA. According to the assessee, the provisions of
section 50C of the Act apply where the property has been transferred by way of
registered sale deed. The AO rejected the contentions of the assessee and
computed capital gains by applying the provisions of section 50C of the Act.

Aggrieved, the
assessee preferred an appeal to CIT(A) who held that the provisions of section
50C of the Act have no application when the property has been transferred by
way of un-possessory sale-cum-GPA. He further held that the provisions of
section 50C of the Act are applicable when the property has been transferred
for a consideration which is less than that of the guidelines value payable as
per SRO, then the value as per the SRO has to be adopted on which stamp duty is
payable by the transferor. Since, the impugned property was not registered,
value as per SRO is not applicable. He allowed the appeal

Aggrieved, the
revenue preferred an appeal to the Tribunal.

HELD

It is an
admitted fact that the assessee has transferred property by way of registered
sale-cum-GPA has transferred property by way of registered sale-cum-GPA and
that the sale-cum-GPA is registered in the office of the SRO. The stamp duty
authority has determined the market value of the property at Rs. 82,04,000/-
and has collected ad hoc stamp duty of Rs. 50,000/-. The assessee has computed
long-term capital gain by adopting sale consideration of Rs. 60 lakh shown in
the sale deed. The only dispute is that whether the provisions of section 50C
are applicable or not when the property is transferred by sale-cum-GPA. The
Tribunal observed that in this case, the assessee himself has admitted
long-term capital gain on transfer of asset. This clearly shows that the
transfer took place within the meaning of section 2(47)(v) of the Act. The
moment transfer took place within the meaning of section 2(47)(v) the deeming
fiction provided u/s. 50C is applicable, when the sale consideration shown in
the sale deed is less than the market value determined by the stamp duty
authority for the purpose of payment of stamp duty. Since, there is a
difference between consideration shown in the sale deed and the value
determined by the SRO, the deeming provisions of section 50C are clearly
applicable. It observed that it is illogical and improper on the part of the
assessee to say that the transfer within the meaning of section 2(47)(v) takes
place, but the provisions of section 50C are not applicable when the property
has been transferred by way of un-possessory sale-cum-GPA. 

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

14. [2016] 75 taxmann.com 136 (Visakhapatnam – Trib.) B. Subba Rao vs. ACIT A.Ys. : 2004-05 to 2006-07 Date of Order: 8th November, 2016

Sections 139,
153A, 154, 234A – Where a return of income is filed for the first time in response to notice u/s. 153A then interest will be levied u/s. 234A(1)(a) from
the due  date of filing return of income mentioned in section 139 of the Act and not
from the due date of filing return of income mentioned in section 153A of the
Act.

In a case
where interest was leviable u/s. 234A(1) but the AO levied interest u/s.
234A(3), it amounts to non-application of a particular provision of the Act and
is undisputedly a mistake apparent from record, which needs to be rectified
u/s. 154 of the Act.

FACTS 

The assessee,
an individual, derived income from pension and other sources. In connection
with the search of a group of cases of `S’ Limited, search was initiated
against the assessee as well. The Assessing Officer (AO) issued a notice u/s.
153A calling the assessee to file return of income. The assessee, filed his
return of income, for the first time, in response to notice issued u/s.153A.

The AO
completed the assessment u/s. 143(3) r.w.s. 153A and levied interest u/s. 234B
of the Act with effect from the due date of filing return of income mentioned
in notice u/s.153A of the Act till the date of filing of the return of income
by the assessee.

Subsequently,
the AO issued a notice to the assessee proposing to rectify the mistake in the
order and proposed to levy interest u/s. 234B of the Act from the from due date
of filing return of income u/s. 139 of the Act till the date of filing of
return of income by the assessee instead of from due date of filing return of
income mentioned in notice u/s. 153A of the Act. The assessee submitted that
the levy of interest is a debatable issue which involves prolonged discussion
and cannot be rectified u/s. 154 of the Act. The AO rejected the contentions of
the assessee and passed an order u/s.154 rectifying the mistake.

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 where relying upon the decision of
ITAT, Chennai ‘B’ bench in the case of Dr. V. Jayakumar vs. Asstt. CIT
[2011] 46 SOT 68 (URO)/10 taxmann.com 141, it was argued that where a
notice is issued u/s 153A to the assessee, requiring filing return of income
specifying the due date in the notice, because of the word used in the section
“the provisions of this Act shall, so far as may be, apply accordingly as
if such return was a return required to be filed u/s. 139”, the due date
referred to in section139 of the Act gets shifted to the date prescribed in the
notice u/s. 153A of the Act.

HELD 

As regards the
legal contention of the assessee viz. that the mistake under consideration
could not be rectified by invoking the provisions of section 154, the Tribunal
held that since the method of computation of interest u/s. 234A is specifically
provided in the Act, there is no ambiguity in the provisions in as much it is
very clear in terms of section 234A(1) and 234A(3). Section 234A(1) deals with
a situation where return is not filed u/s. 139(1) or 139(4) and 234A(3) deals
with a situation where return is filed after determination of income u/s.
143(1) or computation of income u/s. 143(3) or 147. It noted that the AO
applied the provisions of section 234A(3), which is not applicable to this
case. It held that non-application of a particular provision is undisputedly a
mistake apparent from record, which needs to be rectified u/s. 154 of the Act.
It held that the AO has rightly invoked provisions of section 154, to rectify
the levy of interest u/s. 234A.

Once return is
filed in response to notice u/s. 153A, the provisions of section 139
automatically steps in, accordingly, the due date specified in the said section
comes into operation. If the contention of the assessee is accepted, it would
amount to encouraging the non-filing of returns by the taxpayers, who would
take the chance and file returns as and when notice u/s. 148/153A is issued, so
that they can save interest amount on tax payable to the Govt. exchequer for a
period of four or six years as the case may be.

The method of
computation of interest u/s. 234A is specifically provided. There is no
ambiguity in the provisions. Section 234A(1) deals with a situation where
return of income is filed belatedly and also where no return is filed u/s.
139(1) or 139(4) and section 234A(3) deals with a situation where return is
filed u/s. 148/153A after determination of income u/s. 143(1) or computation of
income u/s. 143(3) or 147 of the Act.

The Tribunal
held that when a return is filed for the first time, the provisions of section
234A(1)(a) are applicable and interest is chargeable for the period commencing
on the date immediately following the due date referred u/s. 139 and ending on
the date of furnishing of the return. Since, the assessee has filed return for
the first time u/s. 153A of the Act, the AO rightly charged interest u/s. 234A
from the due date referred in section 139(1) to the date of filing return u/s.
153A of the Act. The Tribunal upheld the order of the CIT(A).

As regards the
reliance by the assessee upon the decision of ITAT, Chennai ‘B’ bench in the
case of Dr. V Jayakumar (supra) it observed that the bench has upheld
the arguments of the assessee without considering the provisions of sections
153A & 234A of the Act in a right perspective.

The Tribunal
dismissed the appeal filed by the assessee.

13. [2016] 161 ITD 217 (Pune Trib.) Quality Industries vs. JCIT A.Y.: 2010-11 Date of Order: 9th September, 2016.

Section 14A – When an assessee, a
partnership firm, earns tax free income and disallowance u/s. 14A (r.w. Rule
8D) is to be computed then interest paid, towards the use of partner’s capital,
by the assessee to the partners is not amenable to section 14A in the hands of
partnership firm.

FACTS

The assessee, a partnership firm, engaged in
the business of manufacturing of chemicals etc., had during the relevant
assessment year earned tax free dividend income from investment in mutual funds
which was claimed as exempt income u/s. 10(35) of the Act.

The AO next observed that investment in
mutual funds was made out of interest bearing funds which included interest
bearing partner’s capital also.

The interest so paid to the partners was
claimed as deduction by the assessee against taxable income.

The AO was thus of the view that assessee
had incurred interest expenses which were attributable to earning aforesaid tax
free dividend income. Thus, he invoked provisions of section 14A of the Act
r.w. Rule 8D and proceeded to disallow estimated interest expenditure incurred
in relation to dividend income so earned.

It was the assessee’s contention that while
computing disallowance u/s.14A, disallowance of proportionate interest
attributable to interest bearing partners’ capital is not permissible. It was
submitted that section 14A covers amount in the nature of ‘expenditure’ and not
all statutory allowances and that interest on partner’s capital is not an
‘expenditure’ per se but is in the nature of a deduction u/s. 40(b) just
as depreciation on business capital asset is an allowance and not expenditure.

The AO, however, discarded the various pleas
of the assessee.

The CIT(A) took
note of the contents of the Balance Sheet of the assessee firm for relevant
assessment year and noted that main source of investment in mutual funds have
come from partner’s capital. The partners had introduced capital in the
partnership firm which bears interest @12% per annum. This being so, the
provisions of section 14A are attracted and expenses incurred in relation to
income which does not form part of total income requires to be disallowed.

He accordingly confirmed the action of the
AO and his working of disallowance under Rule 8D.

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

HELD

The predominant question that arises is
whether, for the purposes of section 14A of the Act, payment of interest to the
partners by the partnership firm towards use of partner’s capital is in the
nature of ‘expenditure’ or not and consequently, whether interest on partners capital is amenable to
section 14A or not in the hands of partnership firm.

In order to adjudicate this legal issue, we
need to appreciate the nuances of the scheme of the taxation. We note that
prior to amendment of taxation laws from AY 1993-94, the interest charged on
partners capital was not allowed in the hands of partnership firm while it was
simultaneously taxable in the hands of respective partners. An amendment was inter
alia brought in by the Finance Act 1992 in section 40(b) to enable the firm
to claim deduction of interest outgo payable to partners on their respective
capital subject to some upper limits.

Hence, as per the present scheme of
taxation, partnership firms complying with the statutory requirements and
assessed as such are allowed deduction in respect of interest to partners
subject to the limits and conditions specified in section 40(b) of the Act. In
turn, these items will be taxed in the hands of the partners as business income
u/s. 28(v).

Share of partners in the income of the firm
is exempt from tax u/s. 10(2A). Thus, the share of income from firm is on a
different footing than the interest income which is taxable under the business
income.

The section
28(v) treats the passive income accrued by way of interest as also salary
received by a partner of the firm as a ‘business receipt’ unlike different
treatments given to similar receipts in the hands of entities other than
partners. In this context, we also note that under proviso to section
28(v), the disallowance of such interest is only in reference to section 40(b)
and not section 36 or section 37. Notably, there has been no amendment in the
general law provided under Partnership Act 1932. The amendment to section 40(b)
as referred hereinabove has only altered the mode of taxation. Needless to say,
the Partnership firm is not a separate legal entity under the Partnership Act.
It is not within the purview of the Income-tax Act to change or alter the basic
law governing partnership. Interest or salary paid to partners remains
distribution of business income.

Section 4 of the Indian Partnership Act 1932
defines the terms partnership, partner, firm and firm name as under :

“Partnership” is the relation
between persons, who have agreed to share the profits of a business, carried on
by all or any of the partners acting for all. Persons who have entered into
partnership with one another are called individually ‘Partners’ and
collectively a ‘firm’ and the name under which their business is carried on is
called the ‘firm name.”

Thus, it is clear that firm and partners of
the firm are not separate person under Partnership Act although they are
separate unit of assessment for tax purposes.

It is relevant here to refer to decision in
the case of CIT vs. R.M. Chidambaram Pillai (1977-106 ITR 292) wherein
Hon’ble Supreme Court has held that:

“A firm
is not a legal person, even though it has some attributes of personality. In
Income-tax law, a firm is a unit of assessment, by special provisions, but it
is not a full person. Since a contract of employment requires two distinct
persons, viz., the employer and the employee, there cannot be a contract of
service, in strict law, between a firm and one of its partners. Payment of
salary to a partner represents a special share of the profits. Salary paid to a
partner retains the same character of the income of the firm. Accordingly, the
salary paid to a partner by a firm which grows and sells tea, is exempt from
tax, under rule 24 of the Indian Income-tax Rules, 1922, to the extent of 60
per cent thereof, representing agricultural income and is liable to tax only to
the extent of 40 per cent.”

The Hon’ble
Supreme Court has also held in the case of CIT vs. Ramniklal Kothari (1969
-74 ITR 57) that the business of the firm is business of the partners of
the firm and, hence, salary, interest and profits received by the partner from
the firm is business income and, therefore, expenses incurred by the partners
for the purpose of earning this income from the firm are admissible as
deduction from such share income from the firm in which he is partner.

Thus, the ‘partnership firm’ and partners
have been collectively seen and the distinction between the two has been
blurred in the judicial precedents even for taxation purposes.

Therefore, the relationship between partner
and firm cannot be inferred as that of lender of funds (capital) and borrower
of capital from the partners, and hence, section 36(1)(iii) is not applicable
at all. Section 40(b) is the only section governing deduction towards interest
to partners. To put it differently, in view of section 40(b) of the Act, the
Assessing Officer purportedly has no jurisdiction to apply the test laid down
u/s. 36 of the Act to find out whether the capital was borrowed for the
purposes of business or not.

As per the
scheme of the Act, the interest paid by the firm and claimed as deduction is
simultaneously susceptible to tax in the hands of its respective partners. The
interest paid to partners and simultaneously getting subjected to tax in the
hands of its partners is merely in the nature of contra items in the hands of
the firms and partners. Consequently interest paid to its partners cannot be
treated at par with the other interest payable to outside parties. Thus, in
substance, the revenue is not adversely affected at all by the claim of
interest on capital employed with the firm by the partnership firm and partners
put together. Thus, capital diverted in the mutual funds to generate alleged
tax free income does not lead to any loss in revenue by this action of the
assessee. In view of the inherent mutuality, when the partnership firm and its
partners are seen holistically and in a combined manner with costs towards
interest eliminated in contra, the investment in mutual funds generating  tax free income bears the characteristic of and attributable to its own capital
where no disallowance u/s. 14A read with Rule 8D is warranted. Consequently,
the  plea of the assessee is merited in so far as interest attributable to partners.
However, the interest payable to parties other than partners, would be
subjected to provisions of Rule 8D. 

12. [2016] 161 ITD 211 (Ahmedabad Trib. – SMC) Nanubhai Keshavlal Chokshi HUF vs. ITO A.Y.: 2008-09 Date of Order: 1st August, 2016

Section 48 – If an assessee makes payment
to his brother, who was living with him for years, for vacating his house, the
same would be considered as an expenditure incurred for improvement of asset or
title and would be allowed as deduction while computing long term capital gain
arising on sale of said house.

FACTS

During the relevant assessment year, the
assessee had shown income from long term capital gain arising from sale of
house property.

While computing the said capital gains, the
assessee had claimed deduction of certain amount paid by him, to his brother,
for vacating the house.

The AO as well as CIT(A) declined the
deduction on account of the following reasons:

–  Municipal
tax bills submitted by assessee showed that assessee was the sole occupant of
the property.

–   Valuation
of the property was done before sale of the said property and the valuation
report of the property, dated 22-06-2007, stated that assessee was the sole
occupant of the property.

–   Assessee’s
brother had stated in his statement recorded u/s. 133(1) that he was living
with the assessee, not in capacity as a tenant and was not paying any rent, but
was staying in the house as per assessee’s wish and he was not having right
over the property in any capacity.

–   As
per the will of assessee’s father dated 12-06-1957, the different properties
were distributed between the assessee and his brother such that both of them
should get an equal amount of properties valuing Rs. 35,000/- each. That shows
that the assessee had exclusive right over the property on which the assessee
claims that his brother was occupying as tenant.

HELD

Section 48 of the Income-tax Act
contemplates mode of computation of capital gains. It provides that income
chargeable under the head “Capital Gains” shall be computed by
deducting from the full value of the consideration the following amounts, viz.
(i) the expenditure incurred wholly and exclusively in connection with such
transfer, and (ii) cost of acquisition of the asset and the cost of any improvement
thereto.

According to the assessee, his brother was
residing in the house owned by him and while selling the house in order to get
vacant possession, payment of certain sum was made by the assessee’s HUF to
assessee’s brother. As far as payment part is concerned, there is no dispute.
The payment was made through account payee cheque. Assessee’s brother has
confirmed receipt of money and has also filed affidavit to this effect.

The question is whether the payment made by
the assessee to his brother is to be considered as expenditure incurred for
improvement of asset or the title.

On an analysis of the record, I find that
the revenue has approached to the controversy in strictly mechanical way.
Whereas in the present appeal, situation was required to be appreciated,
keeping in mind social circumstances and the relationship of the brothers. What
was their settlement while residing together? What was the feeling of the elder
brother towards their younger brother, when they displaced them from a property
where they were residing for more than 24 years?

Had the controversy been appreciated in a
mechanical manner, and if the brother, who was residing in the house refused to
vacate the house, then, what would be the situation before the assessee. The assessee
might have had to file a suit for possession that might be decided against his
brother and his brother’s ejection from the premises, but that would have
consumed time in our judicial process of at least more than ten to fifteen
years. The prospective buyers may not have been available in such
circumstances. Though the assessee’s brother had not been paying any rent, but
he was paying the electricity bills.

Hence, the payment made by the assessee is
held as made for improvement of title of the property and is allowed as
deduction while computing the long term capital gain.

Taxability of Contingent Consideration on Transfer of Capital Asset

Issue for Consideration

Section 45 provides for the charge of tax in respect of
capital gains. It provides that any profits or gains arising from the transfer
of a capital asset shall be chargeable to income-tax under the head “Capital
Gains”, and shall be deemed to be the income of the previous year in which the
transfer took place.Entire capital gains is chargeable to tax in the year of
transfer of the capital asset, irrespective of the year in which the
consideration for the transfer is received.

Section 48 provides for the mode of computation of the
capital gains. It provides that the income chargeable under the head “Capital
gains” shall be computed by deducting from the full value of the consideration
received or accruing as a result of the transfer of the capital asset, the
expenditure incurred wholly and exclusively in connection with such transfer,
and the cost of acquisition and the cost of improvement of the asset.

In many transactions, particularly transactions of
acquisition of a company through acquisition of its shares, it is common that a
certain consideration is paid at the time of transfer of the shares, while an
additional amount  is agreed to be
payable, the payment of which is deferred to a subsequent year or years, and is
dependant upon the happening of certain events, such as achievement of certain
turnover or profitability targets or obtaining of certain business or approvals
in the years subsequent to sale. Such receipt is contingent, in the sense that
it would not be payable if the targets are not achieved or the contemplated
event does not occur. Such payments are commonly referred to as “earn-outs”,
when they are linked to achievement of certain targets.

Given the fact that such payment may or may not be
receivable, the issue has arisen before the courts as to whether such
contingent consideration is chargeable to tax as capital gains in the year of
transfer of the capital asset. While the Delhi High Court has taken the view
that such contingent consideration is chargeable to income tax in the year of
transfer of the shares, the Bombay High Court has taken the view that such
contingent consideration does not accrue in the year of transfer of the shares,
and is therefore not taxable in that year.

Ajay Guliya’s case

The issue first came up before the Delhi High Court in the
case of Ajay Guliya vs. ACIT, 209 Taxman 295.

In this case, the assessee sold 1500 shares held by him
through a share purchase agreement dated 15 February 2006. The total
consideration agreed upon was Rs. 5,750 per share, out of which Rs. 4,000 was
payable on the execution of the share purchase agreement and the balance was
payable over a period of 2 years. The balance amount of Rs. 1750 per share
depended upon the performance of the company, and fulfilment of the specified
parameters. The assessee considered the sale consideration at Rs. 4,000 per share, while computing the capital gains in
his return of income for assessment year 2006-07.

The assessing officer held that the entire income accruing to
the assessee was chargeable as capital gains, and accordingly considered the
entire consideration of Rs. 5,750 per share for computation of capital gains.
The Commissioner (Appeals) allowed the appeal of the assessee, holding that
such part of the consideration which was payable in future did not constitute
income for the relevant assessment year and that the assessee would become
entitled to it only on the fulfilment of certain conditions, which could not be
predicated.

The Tribunal on being asked to examine the applicability of
the decision of the Authority for Advance Ruling held that the ratio of the
advance ruling in the case of Anurag Jain, in re, 277 ITR 1, was not
applicable, as in that case, the payment for consideration of shares was
interlinked with the performance of the assessee employee, and not the company
whose shares were transferred, and the question before the authority was
regarding the taxation of the capital gains and contingent payments under the
head “Salaries”. According to the tribunal, in the case before it, the issue
was one of transfer of shares simpliciter, and the payment of additional
consideration did not depend upon the performance of the assessee. The Tribunal
further noted that there was no provision for cancellation of the agreement in
case of failure to achieve targets. Considering the deeming fiction of section
45(1), the tribunal held that the whole of the consideration accruing or
arising or received in different years was chargeable under the head capital
gains in the year in which the transfer of shares had taken place. The tribunal
therefore held that the entire consideration of Rs. 5,750 per share was
chargeable to capital gains in the relevant year of transfer.

Before the Delhi High Court, on behalf of the assessee,
reliance was placed on the decision of the Supreme Court in the case of CIT
vs. B. C. Srinivasa Setty 128 ITR 294, for the proposition that the
provisions of the charging section, section 45 were not to be read in
isolation, but had to be read along with the computation provision, section 48.
It was argued that the entire consideration of Rs. 5,750 per share was not
payable at one go, and that the parties had specified conditions which would
have to be fulfilled before the balance of Rs. 1,750 per share became payable.
Even though the valuation had been agreed upon, much depended on the
performance of the company whose shares were the subject matter of the sale.
The balance amount of Rs. 1,750 per share could never be said to have arisen or
accrued during the relevant assessment year, as the assessee became entitled to
it only upon fulfilment of these conditions. The assessee could not claim the
balance amount unless the essential prerequisites had been fulfilled. It was
argued that the Supreme Court in Srinivasa Setty’s case, had held that though
section 45 was the charging section and ordinarily acquired primacy, while
section 48 was merely the computation mechanism, at the same time, in order to
arrive at chargeability of taxation, both the sections had to be looked into
and read together.

The Delhi High Court observed that the reasoning of the
tribunal was based upon the fact that capital assets were transferred on a
particular date, i.e., on the execution of the agreement. It noted that there
was no material on record or in the agreement, suggesting that even if the
entire consideration or part thereof was not paid, the title to the shares
would revert to the seller. According to the High Court, the controlling
expression of “transfer” was conclusive as to the true nature of the
transaction. In the opinion of the Court, the fact that the assessee adopted a
mechanism in the agreement that the transferee would defer the payments, would
not in any manner detract from the chargeability when the shares were sold.

Dealing with the argument that the tribunal’s had not dealt
with the deeming fiction about the accrual required by section 48, the High
Court was of the view that the tenor of the tribunal’s order was that the
entire income by way of capital gains was chargeable to tax in the year in
which the transfer took place, as stated in section 45(1). According to the
High Court, merely because the agreement provided for payment of the balance
consideration upon the happening of certain events, it could not be said that
the income had not accrued in the year of transfer.

The Delhi High Court therefore held that the entire
consideration of Rs. 5,750 per share was to be considered in the computation of
capital gains in the year of transfer.

Mrs. Hemal Raju Shete’s case

The issue again recently came up before the Bombay High Court
in the case of CIT vs. Mrs. Hemal Raju Shete 239 Taxman 176.

In this case, the assessee sold shares of a company under an
agreement, along with other shareholders of the company. Under the terms of the
agreement, the initial consideration was Rs. 2.70 crore. There was also a
deferred consideration which was payable over a period of 4 years following the
year of sale, which was linked to the future profits of the company whose
shares were being sold, and which was subject to a cap of Rs. 17.30 crore.

The assessee filed her return of income, computing the
capital gains by taking her share of only the initial consideration of Rs. 2.70
crore. The assessing officer was of the view that under the agreement, the
shareholders were to receive in aggregate, a sum of Rs. 20 crore, and therefore
proceeded to tax the entire amount of Rs. 20 crore in the year of transfer of
the shares in the hands of all the shareholders.

The Commissioner (Appeals) deleted the addition made by the
assessing officer on the ground that it was notional. He observed that the
working of the formula agreed upon by the parties for payment of the additional
consideration could lead, and in fact had led to a situation, where no amount
on account of deferred consideration for the sale of shares was receivable by
the assessee in the immediately succeeding assessment year. There was no
guarantee that this amount of Rs. 20 crore, or for that matter, any amount,
would be received. The amount to be received as deferred consideration was
contingent upon the performance of the company in the succeeding year.
Therefore, according to the Commissioner (Appeals), no part of the deferred
consideration could be brought to tax during the relevant assessment year,
either on receipt basis or on accrual basis.

The Tribunal upheld the findings of the Commissioner
(Appeals), holding that, as there was no certainty of receiving any amount as
deferred consideration, the bringing to tax of the maximum amount of Rs. 20
crore provided as a cap on the consideration, was not tenable. The Tribunal
further held that what had to be brought to tax was the amount which had been
received and/or accrued to the assessee, and not any notional or hypothetical
income.

Before the Bombay High Court, on behalf of the revenue, it
was argued that transfer of capital asset would attract capital gains tax in
terms of section 45(1), and that the amount to be taxed u/s. 45(1) was not
dependent upon the receipt of the consideration. Attention of the court was
drawn to sections 45(1A) and 45(5), which in contrast, brought to tax capital
gains on amounts received. It was therefore submitted that the assessing
officer was justified in bringing to tax the assessee’s share in the entire
amount of Rs. 20 crore, which was referred to in the agreement as the maximum
amount that could be received on the sale of shares of the company by the
shareholders from the purchaser.

The Bombay High Court noted the various clauses in the
agreement in relation to the deferred consideration, and observed that the
formula prescribed in the agreement itself made it clear that the defer
consideration to be received by the assessee in the 4 years was dependent upon
the profits made by the company in each of the years. Thus, if the company did
not make a net profit in terms of the formula for the year under consideration
for payment of deferred consideration, then no amount would be payable to the
assessee as deferred consideration. The court noted that the consideration of
Rs. 20 crore was not an assured consideration to be received by the selling
shareholders. It was only the maximum that could be received. According to the
High Court, this was therefore not a case where any consideration out of Rs. 20
crore or part thereof (other than Rs. 2.70 crore), had been received or had
accrued to the assessee.

The Bombay High Court noted the observations of the Supreme
Court in the case of Morvi Industries Ltd vs. CIT 82 ITR 835, as under:

“The income can be said to
accrue when it becomes due………. The moment the income accrues, the assessee gets
vested right to claim that amount, even though not immediately”

According to the Bombay High Court, in the relevant
assessment year, no right to claim any particular amount of the deferred
consideration got vested in the hands of the assessee. Therefore, the deferred
consideration of Rs. 17.30 crore, which was sought to be taxed by the assessing
officer, was not an amount which had accrued to the assessee. The test of
accrual was whether there was a right to receive the amount, though later, and
whether such right was legally enforceable. The Bombay High Court noted the
observations of the Supreme Court in the case of E. D. Sassoon & Co.
Ltd. 26 ITR 27:

“it is clear therefore that
income may accrue to an assessee without the actual receipt of the same. If the
assessee acquires a right to receive the income, the income can be said to have
accrued to him, though it may be received later on its being ascertained. The
basic conception is that he must have acquired a right to receive the income.
There must be a debt owed to him by somebody. There must be as is otherwise expressed
debitum in presnti, solvendum in futuro…”

The Bombay High Court noted that the amount which could have
been received as deferred consideration was dependent/contingent upon certain
uncertain events, and therefore it could not be said to have accrued to the
assessee. The Bombay High Court also noted the observations of the Supreme
Court in the case of CIT vs. Shoorji Vallabhdas & Co. 46 ITR 144:

“Income tax is a levy on
income. No doubt, the income tax Act takes into account two points of time at
which liability to tax is attracted, viz., the accrual of its income or its
receipt; but the substance of the matter is income. If income does not result,
there cannot be a tax, even though in bookkeeping, an entry is made about a
hypothetical income, which does not materialise.”

The Bombay High Court also noted the observations of the
Supreme Court in the case of K. P. Varghese vs. ITO 131 ITR 597, to the
effect that one has to read capital gains provision along with computation
provision, and the starting point of the computation was the full value of the
consideration received or accruing. In the case before it, the Bombay High
Court noted that the amount of Rs. 17.30 crore was neither received, nor had it
accrued to the assessee during the relevant assessment year. The Bombay High
Court also stated that it had been informed that for subsequent assessment
years, other than the year in which there was no deferred consideration on
account of the formula, the assessee had offered to tax the amounts which had
been received pertaining to the transfer of shares.

The Bombay High Court also rejected the argument of the
revenue that by not bringing it to tax in the year of transfer on the ground
that it had not accrued during the year, the assessee was seeking to pay tax on
the amount on receipt basis. The High Court observed that accrual would be a
right to receive the amount, and the assessee had not obtained a right to
receive the amount in the relevant year under the agreement.

The Bombay High Court accordingly held that the deferred
consideration of Rs. 17.30 crore could not be brought to tax in the relevant
assessment year, as it had not accrued to the assessee.

Observations

There is not much of a debate possible in cases where the
consideration for transfer is agreed but the payment thereof is deferred. The
facts of Ajay Gulati’s case seemed to suggest that. In that case, a lump sum
consideration was defined and was agreed upon but the payment thereof was
deferred based on happening of the event. The case perhaps could have been
better in cases where the lump sum is not agreed upon at all, but a minimum is
agreed upon, and the additional payment, if any, is made contingent as to
quantum and the time, on the basis of certain deliverables.      

Besides ‘transfer’, the most important thing, for the charge
of capital gains tax, is that there should arise profits and gains on transfer
and it is that profits that has arisen as a result of the transfer that can be
brought to tax. A profit that has not arisen or the one that has yet to arise
may not be termed as having arisen so as to bring it to tax. Another equally
important requirement is that the consideration must have been ‘received or
accrued’ for it to be treated as the ‘full value of consideration’ in terms of
section 48 of the Act. It is only such consideration that can enter in to the
computation of the capital gains. In the case of the additional payments, that
can accrue only on happening of the event and can be received only thereafter.
No right to receive accrues till such time the events happen.

A clause for cancellation may help in minimising the damage
for the assesseee as had been observed by the Delhi high court in Ajay Gulati’s
case. A transfer expressly providing for cancellation, not of the transfer, but
of the right to receive additional compensation, may help the case of the
assessee.

“Full Value of Consideration” is a term that has not been
defined in section 48 of the Act. Its meaning therefore has to be gathered from
a composite reading of the provisions of section 48 of the Act. The term is
accompanied with the words ‘received or accruing’, which words indicate that it
is such a consideration that has been received or has accrued in the least,
failing which it may not enter in to the computation for the time being for the
year of the transfer.

There is a possibility that the additional consideration
would be taxed as income for the independent performance by the transferor in
the subsequent year and be taxed independently in a case where the transferor
is required to perform and deliver certain milestones, subsequent to the
transfer of shares. In such a case, the additional payment accrues to him for
delivering the milestones based on his performance and in such a case the
payment would be construed to be the one for the performance, and not for
transfer of the shares; it would accrue only on performance, and cannot be
taxed in the year of transfer. Please see Anurag Jain’s case (supra).

An alternative to the issue is to read the law in a manner
that permits the taxation of capital gains in different years; ascertained
gains in the year of transfer and the contingent ones only on accrual in the
year thereof and yet better in the year of receipt. It is not impossible to do
so. The charge of section 45 should be so read that it fructifies in two years
instead of one year. There does not seem to be anything that prohibits such a
reading of the law. In taxing the business income, it is usual to come across
cases wherein the additional payments contingent on happenings in future years
are taxed in that year on the ground that they accrue on happening of an event.
It is for this reason that the Bombay high court in Shete’s case has relied
upon the decisions delivered in the context of the real income.

The logic of the Bombay High Court decision does seem
appealing, as a notional income or income, which has not accrued, can never be
taxed under the Income Tax Act. Taxation of such a potential income under the
head “Capital gains” in the year of transfer of the capital asset, merely on
the ground that the charge is linked to the date of transfer, does not seem
justified, where such consideration has not really accrued and there is a
possibility that it may not be recieved.

The peculiar nature of this controversy is on account of the
fact that the charge to capital gains is in the year of transfer, while the
computation is on the basis of accrual or receipt. In the case of earn outs,
there is no accrual in the year of transfer, but in the year of accrual, there
is no transfer of a capital asset.

Therefore, if one follows the Delhi High Court decision, one
may end up paying tax on a notional income which one may never receive. On the
other hand, if one follows the Bombay High Court decision, it may result in a
situation where the deferred consideration is never taxed, as it does not
accrue in the year of transfer, and in the subsequent year when it accrues, the
charge to tax fails on account of the fact there is no transfer of the capital asset.

From the facts of the Bombay High Court decision, it is not
clear as to under which head of income the deferred consideration was offered
to tax in subsequent years when it accrued. However, to a great extent, the
decision of the Bombay High Court may have been influenced by the fact that
such deferred consideration was taxed in subsequent years. Again, the
substantial amount of deferred consideration as against the initial
consideration, and the direct linkage of the formula for determination of
deferred consideration with the profits of the company, may have impacted the
decision of the Bombay High Court.

Therefore, while on principles, the Bombay High Court
decision seems to be the better view of the matter, it is essential that the
law should be amended to bring clarity to the taxation of such deferred
consideration which does not accrue on the transfer of the asset. There are
already specific provisions in the law in the form of section 45(5) in relation
to enhanced compensation received on compulsory acquisition of a capital asset
by the Government, where such enhanced compensation is taxable in the year of
receipt, and is not taxable in the year of transfer of the capital asset.

Pending such amendment to the law, the only option available
to an assessee is to initially offer the capital gains to tax on the basis of
the initial consideration, and subsequently revise the return of income to
reflect the enhanced consideration on account of the deferred consideration as
and when it accrues. Even here, this is not a happy situation, as the time
limit for revision of a return of income under the provisions of section
139(5), is now only one year from the end of the relevant assessment year. If
this time limit has expired, by the time the deferred consideration accrues,
even such a revision would not be possible. Rectification u/s. 154 is yet
another possibility whereunder the additional payment on happening of an event
and on receipt be tagged to the original consideration and be taxed in the year
of transfer.

One therefore hopes that a specific provision is
made to cover such situations of deferred consideration, which are commercially
insisted upon by the purchaser in many transactions. This alone, will put an
end to the litigation on the matter.

Demonetisation – Some Tax Issues

Delegalisation of High Denomination Notes

On 8th November, 2016, the Department of Economic
Affairs, Ministry of Finance, Government of India, issued a notification, SO No
3407(E) [F No 10/03/2016-Cy.I] exercising its powers u/s. 26(2) of the Reserve
Bank of India Act, 1934, notifying that bank notes (currency notes) of the
existing series of the value of Rs.500 and Rs.1,000 (referred to as “the
withdrawn bank notes”) would cease to be legal tender with effect from 9th
November 2016 for transactions other than specified transactions. The
notification also provided a limit for exchange of such notes for any other
denomination notes having legal tender character, and also permitted deposit of
such notes in bank accounts before 30th December 2016, after which
date such notes could be exchanged or deposited at specified offices of Reserve
Bank of India (RBI) or such other facility until a later date as may be
specified by RBI. As announced by the Prime Minister, this date is likely to be
31.3.2017.

Such an action, as stated in the notification, was actuated
by the facts that;

1.  fake currency notes of those denominations
were in circulation,

2.  high denomination notes were used for storage
of unaccounted wealth, and

3.  fake currency was being used for financing
subversive activities, such as drug trafficking and terrorism, causing damage
to the economy and security of the country.

Another Notification No. SO 3408(E) [F No 10/03/2016-Cy.I]
was issued on the same date, notifying that such withdrawn bank notes of Rs.500
and Rs.1,000 would not cease to be legal tender from 9th to 11th
November 2016 (later extended to 24th November 2016 and further
extended to 15th December 2016), in respect of certain transactions.
These transactions include payments to government hospitals and pharmacies in
government hospitals, for purchase of rail, public sector bus or public sector
airline tickets, purchases at consumer co-operative stores and milk booths
operating under Government authorisation, purchase of petrol, diesel and gas at
petrol pumps operating under PSU oil marketing companies, for payments at
crematoria and burial grounds, exchange for legal tender up to Rs.5,000 at
international airports by arriving and departing passengers and exchange by
foreign tourists of foreign exchange or such bank notes up to a value of
Rs.5,000. Some more permissible transactions were added later, such as payment
of electricity bills, payment of court fees, purchase of seeds, etc, and some
of the permissible transactions were modified from time to time. It also
permitted withdrawals from Automated Teller Machines (ATM) within the specified
limits.

On the same date, RBI issued a circular to all banks, specifying
the steps to be taken by them pursuant to such bank notes ceasing to be legal
tender, and giving formats of the request slip for exchange of the withdrawn
bank notes, and for reporting of details of exchanged bank notes. RBI also
issued FAQs on the subject. It has stated, inter alia, as under:

“1. Why is this scheme
introduced? The incidence of fake Indian currency notes in higher
denomination has increased. For ordinary persons, the fake notes look similar
to genuine notes, even though no security feature has been copied. The fake
notes are used for anti-national and illegal activities. High denomination
notes have been misused by terrorists and for hoarding black money. India
remains a cash based economy hence the circulation of Fake Indian Currency
Notes continues to be a menace. In order to contain the rising incidence of
fake notes and black money, the scheme to withdraw has been introduced.

2. What is this scheme?
The legal tender character of the existing bank notes in denominations of ?500
and ?1000 issued by the Reserve Bank of India till November 8, 2016
(hereinafter referred to as Specified Bank Notes) stands withdrawn. In
consequence thereof these Bank Notes cannot be used for transacting business
and/or store of value for future usage. The Specified Bank Notes can be
exchanged for value at any of the 19 offices of the Reserve Bank of India or at
any of the bank branches of commercial banks/ Regional Rural Banks/
Co-operative banks or at any Head Post Office or Sub-Post Office.”

Given the fact that bank notes of these denominations of
Rs.500 and Rs.1,000 constituted 86% of the value of all bank notes in
circulation in India, withdrawal of these bank notes affected almost every
person in India. Pursuant to such notifications, people rushed to exchange the
withdrawn bank notes and to deposit such withdrawn bank notes in their
accounts, as well as to make withdrawals from their bank accounts to meet their
daily expenses.

On account of such forced exchange and deposit of withdrawn
bank notes, various issues relating to taxation in such cases arose. In
particular, issues arose as to the rate of taxation, whether any penalty was
attracted, whether prosecution could be launched against such person, whether
there would be liability to MAT and interest u/s. 234C of the Act, whether
provisions of the BTPA, PMLA, FEMA were attracted, whether the declarant was
liable to Service tax and VAT, etc. 

Some of these issues get answered and addressed by the
amendments proposed in the Income Tax (Second Amendment) Bill, 2016, including
the Pradhan Mantri Garib Kalyan Yojana, 2016 (PMGKY), introduced in Parliament
on 28th November 2016, and passed by the Lok Sabha on the next date
and received the assent of the President on 15th December,
2016. 

In the statement of objects and reasons annexed to the bill,
it has been stated that changes are being made in the Act to ensure that the
defaulting assessees are subjected to tax at a higher rate and stringent
penalty provision. It further  states
that , in the wake of declaring specified bank notes as not legal tender, there
had been representations and suggestions from experts that instead of allowing
people to find illegal ways of converting their black money into black again,
the government should give them an opportunity to pay taxes with heavy penalty
and allow them to come clean so that not only the government gets additional
revenue for undertaking activities for the welfare of the poor, but also the
remaining part of the declared income legitimately comes into the formal
economy. Thus, money coming from additional revenue as a result of the decision
to ban Rs. 1000 and Rs. 500 notes could be utilised for welfare schemes for the
poor. Therefore, an alternative scheme, namely, the Taxation and Investment
Regime for Pradhan Mantri Garib Kalyan Yojna, 2016 (PMGKY) is introduced.

The amendments and PMGKY, like any other legislation,   give rise to some more issues. The major
issues arising out of demonetisation in taxation keeping in mind the amended
law and PMGKY are sought to be discussed in this article.

The issue of validity of demonetization has been referred to
various courts including the Supreme Court. The courts have refused the request
for staying the operation of the notifications issued for demonetization. The
request for extending the time for deposit has also been refused. The courts in
the time to come would be required to address pertinent issues like validity of
the notification particularly in the context of article 14, 19 and 300A of the
Constitution of India, the vires of section 26(2) of the Reserve Bank of India
Act and the powers of the government to restrict the circulation, exchange and
withdrawals of the high denomination notes.

The demonetisation and the Taxation Laws (Second Amendment)
Act, 2016 raised several issues in taxation arising in the varied
circumstances. One of the possibilities is where the cash is deposited in the
bank out of cash on hand as on 08/11/2016 from known or unknown sources of
income or accumulation. Another is where cash has been deposited out of the
receipts on or after 09/11/2016.

In the latter case, the recipient is required to be a person
authorized to receive high denomination notes as per the notifications on or
after 09/11/2016. This permission to receive has ended on 15/12/2016. No person
is authorized to receive such notes thereafter. The person in possession of
such notes is left with no option but to deposit it with specified entities by
30/12/2016 failing which with the special officer of the RBI by 31/03/2017.

In cases of persons authorised to receive cash on or after
09/11/2016, an explanation about genuineness of receipts will be required to be
furnished with evidence of receipt to the satisfaction of the Assessing
Officer. Failure to do so may result in him being taxed as per the provisions
of amended section115BBE of the Income-tax Act.

A question may arise about the possibility of a person opting
for PMGKY in cases where he is in receipt of the currency without any authority
to do so; apparently there does not seem to be any express or implicit
restriction in PMGKY to prevent him from opting for the scheme irrespective of
his authority to receive high denomination notes, post 08/11/2016. The issue of
his authority or otherwise to receive currency will be resolved under the Reserve Bank of India Act and not under the Income Tax Act.

The earlier case of the deposit of cash out of the receipts
up to 08/11/2016 may be dealt with in any one of the following manners;

–   Possession explained out of income of the
year or accumulation over the years

–   Opting for PMGKY and declare the same and
regularise possession on payment of tax, surcharge and penalty and deposits

–  Includes the same in the total income in
filing the return of income for A.Y. 2017-18 and be taxed as per provisions of
the amended section115BBE of the Income-tax Act.

–   Does not include the same in the total
income.

Some of these possibilities are sought to be examined in
greater detail hereafter.

When a person deposits such withdrawn notes into his bank
account, there could be various situations under which this is done. If a
person is maintaining books of account, and after 8th November 2016,
deposits or exchanges withdrawn bank notes equal to or less than the balance in
his cash book as of 8th November 2016, there should be no tax
consequence, as disclosed amounts of cash in hand are being deposited pursuant
to the withdrawal of such notes. Such amount would not be taxable. This view is
supported by the decisions in the cases of Sri Ram Tandon vs. CIT (1961) 42
ITR 689 (All), Gur Prasad Hari Das vs. CIT (1963) 47 ITR 634 (All), Narendra G
Goradia vs. CIT (1998) 234 ITR 571 and Lalchand Bhagat Ambica Ram vs. CIT
(1957) 37 ITR 288 (SC).

In Narendra Goradia’s case, the Bombay High Court held that
where the assessee had sufficient cash balance, there was no requirement of law
to maintain details of receipts of currency notes of various denominations
received by the assessee and failure to furnish detailed particulars of source
of acquisition of high denomination notes could not result in an addition to
the income. A similar view was taken by the Supreme Court in the case of Mehta
Parikh & Co vs. CIT 30 ITR 181.

When books of account are not maintained by the depositor,
how does he prove that such cash deposit does not represent his undisclosed
income?

Consider a situation where the aggregate amount deposited in
a bank account is less than Rs. 2.50 lakh. Advertisements have been issued by
the Ministry of Finance, stating that deposits of up to Rs. 2.50 lakh will not
be reported to the Income Tax Department. This has been followed by amendments
to Rule 114B (which relates to compulsory quoting of PAN) and Rule 114E
[furnishing of annual information returns (AIR) in respect of specified
transactions], vide Income Tax (30th Amendment) Rules, 2016,
Notification No. 104/2016, F.No.370142/32/2016-TPL dated 15th November
2016.

Rule 114B, which applied to transactions of deposit of cash
exceeding Rs.50,000 in a bank or post office, has now been extended to deposits
aggregating to more than Rs.2.50 lakh during the period from 9th
November to 30th December 2016. A new requirement of furnishing
details through AIR by banks and post offices has been inserted in rule 114E,
requiring furnishing of details of cash deposits made during the period 9th
November to 30th December 2016, if such cash deposits amount to
Rs.12.50 lakh or more in a current account, or Rs.2.50 lakh or more in any
other account. It therefore appears that banks would not be required to furnish
details where a person deposits less than Rs.2.50 lakh in aggregate in a bank
during the period from 9th November to 30th December
2016. However, if the amount of deposit is Rs.2.50 lakh, there would be a
requirement to report in the AIR.

It needs to be kept in mind that mere non-reporting in the
AIR does not mean that the amount of deposits (though less than Rs.2.50 lakh)
is not taxable. Such deposits may escape taxation in the case of a person who
is not an assessee, and does not file his tax returns. However, if the
depositor is an assessee, who files his tax return, the position would be quite
different. If his income tax return is selected for scrutiny, and such deposits
come to the notice of the assessing officer, the depositor would necessarily
have to explain the source of such cash deposits, as in the case of any other
cash deposits which may otherwise have come to the notice of the assessing
officer. There is no exemption provided from such scrutiny.

Where the aggregate amount of cash deposits in a bank or post
office during the relevant period is Rs.2.50 lakh or more (or Rs.12.50 lakh or
more, as the case may be), such deposits would obviously be reported to the
Income Tax Department through an AIR, which has to be filed by 31st January
2017. The source of such deposits will have to be proven by the depositor, when
called upon to do so by the tax authorities.

The Bombay High Court, in the case of Gopaldas T Agarwal
vs. CIT 113 ITR 447, in the context of section 69B, has held that the
burden is always on the assessee, if an explanation is asked for by the taxing
authorities or the Tribunal, to indicate the source of acquisition of a
particular asset admittedly owned by the person concerned. It will depend upon
the facts of each case to decide what type of facts will be regarded as
sufficient to discharge such onus.

In Bai Velbai vs. CIT 49 ITR 130, the Supreme Court
considered a case where the assessee received certain amount by encashment of
high denomination notes. The ITO held that only part of the said sum could be
treated as savings of assessee and, therefore, assessed balance as income of
assessee from undisclosed sources. The Supreme Court, while allowing the
appeal, observed:

“Prima facie, the question
whether the amount in question came out of the saving or withdrawals made by
the appellant from her several businesses or was income from undisclosed
sources, would be a question of fact to be determined on a consideration of the
facts and circumstances proved or admitted in the case. A finding of fact does not alter its character as one of fact merely because it is itself an
inference from other basic facts.”

If books of account are not maintained, the following factors
would need to be considered in determining the reasonableness of such amount:

1.  Cash in hand as on 31st March 2016
as declared in the return of income for assessment year 2016-17 (particularly
in Schedule AL or in Balance Sheet details filled in the return).

2.  Cash withdrawals from bank accounts during the
period from 1st April 2016 to 8th November 2016.

3.  Income received in cash during the period from
1st April 2016 to 8th November 2016. It needs to be noted that with
effect from 1st June 2016, the provisions of tax collection at
source u/s. 206C at 1% of the sale consideration are applicable to transactions
where the sale of goods or services in cash exceeds Rs.2,00,000. Besides, with
effect from 1st April 2016, there is a requirement u/s. 114E of
furnishing AIR by any person liable for tax audit u/s. 44AB in respect of
receipt of cash payment exceeding Rs.2,00,000 for sale of goods or services.

4.  Any other cash receipts during the period from
1st April 2016 to 8th November 2016.

5.  Cash deposited in the bank during the period
from 1st April 2016 to 8th November 2016.

6.  Personal and other expenditure in cash of the
person and his family during the period from 1st April 2016 to 8th
November 2016. 

Ideally, a cash flow statement should be prepared to show the
cash in hand with the depositor as at 8th November 2016. Reference
may be made to a decision of the Patna High Court in the case of Manindranath
Dash vs. CIT 27 ITR 522, where the Court held as under:

“The principle is well
established that if the assessee receives a certain amount in the course of the
accounting year, the burden of proof is upon the assessee to show that the item
of receipt is not of an income nature; and if the assessee fails to prove
positively the source and nature of the amount of the receipt, the revenue
authorities are entitled to draw an inference that the receipt is of an income
nature. The burden of proof in such a case is not upon the department but the
burden of proof is upon the assessee to show by sufficient material that the
item of receipt was not of an income character.

In the instant case it was
admitted that the assessee did not maintain any home chest account. It was
further admitted that he did not produce before the income-tax authorities
materials to show what was the disbursement for the various years. Unless the
assessee showed what the amount of disbursement was for the various years, it
was impossible to arrive at a finding that on the material date that is, on the
19-1-1946 the assessee had in his possession sufficient cash balance
representing the value of high denomination notes which were being encashed. It
was necessary that the assessee should have given further material to indicate
what was the disbursement out of the total income and satisfied the authorities
in that manner that on the material date the cash balance in his hand was not
less than the amount of Rs. 28,000 which was the value of the high denomination
notes. It was clear that the income-tax authorities were right in holding that
the assessee had failed to give sufficient explanation of the source and nature
of the high denomination notes which he encashed.

It was therefore, to be held
that the sum of Rs. 13,000 representing high denomination notes encashed on 19-1-1946, was income liable to income-tax.”

How does the depositor prove the reasonableness of the cash
in hand as of 8th November 2016, where the depositor is covered by
the presumptive tax scheme u/s. 44AD, and therefore does not maintain books of
accounts? In such cases, the assessee would in any case be required to maintain
details of turnover, or may be required to maintain books of account under
other laws, such as indirect tax laws. The reasonableness would have to be
judged by the quantum of the turnover of the depositor, in particular, the
turnover in cash, and other cash expenses of the business. Wherever possible, a
cash flow statement should be prepared to prove the reasonableness of the cash
deposited.

If a person covered by section 44AD wishes to offer income
arising from unaccounted sales to tax, it first needs to be verified whether
his turnover would exceed the limits of section 44AD, after including such
unaccounted sales. If so, then normal computation provisions may apply. If his
turnover, after inclusion of such amount, does not exceed the limit u/s. 44AD,
then 8% of the turnover or the actual income, whichever is higher, needs to be
declared. The cash deposits need to be factored in while computing the actual
income for this purpose.

What would be the position of a housewife, who has saved
money out of money received from her husband for household expenses over the
years, and deposits such savings amount in her bank account? Would such deposit
be taxable? If so, in whose hands would it be taxable – of the housewife or her
husband? In such a case, the reasonableness of the amount would have to be
gauged from the quantum of monthly withdrawals for household cash expenses, and
the reasonableness of the period over which the amount is claimed to have been
served. The taxability, if at all, would have to be considered in the hands of
the husband.

In the case of ITO vs. R S Mathur (1982) 11 Taxman
24, the Patna bench of the Tribunal considered a case where the value of
high denomination notes encashed by the assessee’s wife, was included by the
ITO in the assessee’s assessment as income from undisclosed sources, rejecting
the explanation given by her that the notes were acquired out of savings
effected out of amounts given by her husband for household expenses. The
Tribunal held that the assessee was placed in high position and he was having
income from salary and interest. If the total earnings were taken into
consideration, the possibilities of saving to the extent of value of high
denomination note might not be ruled out. It therefore confirmed the deletion
of the addition.

If the depositor is unable to prove the reasonableness of the
cash deposited on the basis of the surrounding circumstances, and has not
offered such excess cash deposited as his income in his return of income, the
cash deposited in excess of the reasonable amount is liable to tax as his
income under the provisions of section 69A. Any amount taxed u/s. 69A is
taxable at an effective rate of 77.25% under the provisions of section 115BBE,
without any deduction in respect of any expenditure or allowance or set off of
any loss, as discussed above.

However, one also needs to keep in mind the common sense
approach adopted by the courts in similar cases in the past. The explanation
for such income needs to be credible and reasonable, given the facts and
circumstances. In this connection, a useful reference may be made to the
decision of the Supreme Court in the case of Sumati Dayal vs. CIT 214 ITR
801 (SC). In that case, the assessee claimed to have won 13 jackpots in
horse races during the year. The first jackpot was won on the first day that
she went to the races. The Supreme Court, while holding that it was possible
that the assessee had purchased the winning tickets in cash from the real
winner, and deciding against the assessee, observed:

“Apparent must be considered
real until it is shown that there are reasons to believe that the apparent is
not the real and that the taxing authorities are entitled to look into the
surrounding circumstances to find out the reality and the matter has to be
considered by applying the test of human probabilities.”

Would there be any other consequences if the amount deposited
is declared as business income of the year? One needs to keep in mind the
applicability of an indirect tax liability in respect of the amount of business
income declared, in the form of VAT, excise duty or service tax, depending on
the nature of business.

In case of a medical professional, one also needs to keep in
mind the requirement of keeping a register of patients. The fees indicated in
such register should match with the fees shown as income. Even for other
professionals, the details of the clients could be called for, for verification
of such details of cash alleged to have been received from clients.

Further, in a situation where the business or professional
income for assessment year 2017-18 is significantly higher than normal, and in
subsequent years, a normal lower income is declared, there is a high risk of a
detailed scrutiny in those subsequent years by the tax authorities to verify
whether the income disclosed in those years is correct or not, or has been
suppressed by the assessee. In particular, businesses or professions with large
cash receipts or large cash expenditures would be at higher risk of adjustments
to declared income in subsequent years.

Deposits out of Past Year’s Income or Additions

There may be cases wherein a person seeks to explain the
deposits in the bank by co-relating the deposits with the income of the past
years or out of the additions made in such years in assessing the total income.
In all such cases, the onus will be on the person depositing the money to
reasonably establish that the money so deposited represented the income of the
past years that had remained in cash and such cash was held in the High
Denomination Notes.

In such cases, the
possibility of a levy of penalty on application of Explanation 2 to section
271(1)(c) and/or section 270A(4) and (5) of the Act and now even section 271AAC
will also have to be considered. This is discussed later in this article. It is
seen that the Income Tax Department has issued notices u/s.133(6) for enquiring
into the source of deposits of the High Denomination Notes and in some cases
have carried out survey action u/s.133A. Many cases of search and seizure
action u/s.132 have also been reported. In all such cases, the issue of penalty
requires to be kept in mind. In ordinary circumstances, concealment or
misreporting is ascertained with reference to the Return of Income unless there
is a presumption running against the assesse. In cases of an enquiry u/s.133(6)
and survey u/s.133A, no such presumption is available for the year of notice or
action and, the liability to penalty will be solely determined with reference
to the income disclosed in the Return of Income. A presumption however, runs
against the assesse in cases of search and seizure u/s.132 by virtue of the
fiction available to the Revenue u/s.270AAB of the Act. To avoid the
application of the fiction and the consequential penalty, the person will have
to establish that the income and the consequential deposit thereof are duly
recorded in the books of account on the date of search.

Taxation of notes seized after 8th November 2016

In a case where withdrawn currency notes are seized by the
tax authorities after 8th November 2016 from an assessee who was in
possession of such notes as on 8th November, 2016 , can the assessee
argue that since such withdrawn currency notes are not legal tender after 8th
November 2016, they are not money or valuable article, and hence not
taxable u/s. 69A?

Support for this argument is sought to be drawn from the
decision of the Karnataka High Court in the case of CIT vs. Andhra Pradesh
Yarn Combines (P) Ltd 282 ITR 490. In this case, the High Court held as
under:

“The expression ‘money’ has
different shades of meaning. In the context of income-tax provisions, it can
only be a currency token, bank notes or other circulating medium in general
use, which has the representative value. Therefore, the currency notes on the
day when they were found to be in possession of the assessee should have had
the representative value, namely, it could be tendered as a money, which has
intrinsic value. In the instant case, the final Fact-finding authority, namely,
the Tribunal, after noticing the ordinance issued by the Central Government,
coupled with the fact of the RBI refusing to exchange the high denomination
notes when they were tendered for exchange, concluded that on the day, when the
assessee was found to be in possession of high denomination notes, they were
only scrap of paper and they could not be used as circulating medium in general
use as the representative value and, therefore, it could not be said that the
assessee was in possession of unexplained money. Therefore, the high
denomination notes which were in possession of the assessee could not be said
as ‘unexplained money’, which the assessee had not disclosed in its return of
income and, therefore, it would not warrant levy of penalty u/s. 271(1)(c).”

However, when one examines the facts of that case, the time
limit for exchanging these withdrawn notes with RBI had expired, and in fact,
RBI had refused to exchange the notes.

So far as the current position is concerned, the withdrawn
currency notes, though ceasing to be legal tender, continue to be legal tender
for the purpose of deposit with banks till 30th December 2016, and
can thereafter be exchanged at notified offices of RBI up to 31st March,
2017. It cannot therefore be said, till 31st March, 2017 that the
withdrawn currency notes are not valuable, since they can be exchanged for
other currency notes up to 31st March, 2017 at the Banks or the
Reserve Bank of India. Therefore, until such time as the option of exchange
exists, such withdrawn currency notes are a valuable thing, though maybe not
money and the provisions of section 69A would apply in cases where it is found
in a search action before 31st March, 2017. The ratio of the
Karnataka High Court decision would apply only after the option of exchange
with RBI or with any other authority ceases to exist. The position however
could be different where the assessee is found to have received such notes on
or after 9th November, 2016 even though he was not authorised to
receive such notes.

Taxation of Receipts of high denomination notes post
08.11.2016

Many businesses have received withdrawn currency notes after
8th November 2016, as consideration for sale of goods or services,
or against payment of their outstanding dues, and subsequently deposited such
currency notes in their bank accounts. Can the businesses claim that the source
of deposit of the withdrawn currency notes was such subsequent sales, and that
therefore there is no undisclosed income?

Certain businesses, such as electricity companies, hospitals,
pharmacies, consumer co-operative stores, etc., were permitted to do so,
by specifically providing in a notification that the specified bank notes would
not cease to be legal tender up to a specified period, to the extent of certain
transactions specified in the notification. Such businesses can therefore
legitimately claim that the source of deposit of the withdrawn currency notes
by them in the bank account is on account of such sales or receipts.

The position is a little more complex when it comes to other
businesses not authorised to receive such currency. Attention is invited to the
demonetization of 1978 where besides providing that high denomination bank
notes of certain denominations would cease to be legal tender with effect from
16th January 1978, section 4 of the High Denomination Bank Notes
(Demonetisation) Act, 1978 specifically provided that, save as otherwise
provided under that Act, no person could, after the 16th day of
January 1978, transfer to the possession of another person or receive into his
possession from another person any high denomination bank note. The current
notification issued by the Ministry of Finance does not have a similar
provision apparently prohibiting transfer or receipt of withdrawn bank notes
after 8th November, 2016 so that such notes cease to be a legal
tender. Instead the notification permits a few persons or businesses to receive
such currency and with that by implication provides that all other persons are
prohibited from receiving such currency.

Given the difference between the provisions of the 1978 law
and the 2016 notification, one view is that there is no prohibition of transfer
or receipt of the currency notes which have ceased to be legal tender, if both
the parties to the transaction are willing to transact in such notes. At best,
the recipient of the withdrawn bank notes can claim that the transaction is
void, since the consideration was illegal. As per this view, a business can
therefore transact in such notes, even after 8th November 2016, and
deposit such notes in its bank account before 30th December 2016.

Given the fact that such notes are no longer legal tender,
use of such notes in settlement of legal obligations is impermissible. This view
also draws support from section 23 of the Indian Contract Act, 1882. Section 23
of the Indian Contract Act reads as under: “23. What consideration and
objects are lawful, and what not. The consideration or object of an
agreement is lawful, unless it is forbidden by law; or is of such a nature
that, if permitted, it would defeat the provisions of any law; or is
fraudulent; or involves or implies, injury to the person or property of
another; or the Court regards it as immoral, or opposed to public policy. In
each of these cases, the consideration or object of an agreement is said to be
unlawful. Every agreement of which the object or consideration is unlawful is
void. 

The consideration of a contract to be settled by exchange of
withdrawn currency notes is opposed to public policy, and the consideration is
therefore unlawful, rendering the agreement as void. Further, under the current
demonetisation, by withdrawal of the currency notes as legal tender,
prohibition on their transfer should be implied. Therefore, one cannot claim
set off of such receipts against the deposit of the withdrawn currency notes.
This is also in accordance with the spirit of the action of withdrawal of the
legal tender status of these currency notes.

As far as the position in the Income-tax Act is concerned, it
is to be appreciated that as per one view discussed above, only a limited
number of persons are authorised to accept the high denomination notes, post
08.11.2016, besides the banks. All other persons are prohibited, expressly or
impliedly, to receive and accept such currencies as a medium of transaction. As
a direct off-shoot of this regulation, a person who has received such a
currency on or after 08.11.2016 is not entitled to deposit such a currency in
the bank. Please see Jayantilal Ratanchand Shah (supra) wherein the Apex
Court has held that the Reserve Bank of India was empowered to refuse to accept
the deposit of such notes. On failure to deposit, such a currency received
after 08.11.2016, loses its value and would have no economic worth. In the
circumstances, the person found in possession of such notes so received cannot
be taxed on the strength of its possession unless such currency is found to be
valuable. Please see the decision in the case of CIT vs. Andhra Pradesh Yarn
Combines (P) Ltd. 282 ITR 490 (Karn.).

Interesting issues may arise in a case of a sale of goods, on
or after 9.11.2016 against demonetised currency where he is not an authorised
person to receive such currency. In such a case, a question arises as to
whether the seller can be construed to have sold goods for no economic
consideration and can accordingly not be taxed on so called sale proceeds. If
so, the question will also then arise whether the purchaser of goods can be
subjected to tax u/s. 56(2)(vii) for having acquired the goods for inadequate
or no consideration, in such a case. The issue is likely to be a subject of
debate.

Trusts

The issue of deposits of High Denomination Notes by a
charitable trust and religious trust also requires consideration. A charitable
trust under the law of section 115BBC is liable to be taxed at the maximum
marginal rate in respect of anonymous donations. Such a trust would be required
to declare the identity of the donors to prevent the donation from being taxed u/s.
115BBC. Even in case of a religious trust, there will be an obligation to
establish that the donation in question was received by the trust on or before
08/11/2016.

In this connection, a decision of the Supreme Court in the
case of Jayantilal Ratanchand Shah vs. Reserve Bank of India, 1997 AIR 370,
in the context of the 1978 demonetisation is relevant. In this case, the
petitioner was the chairman of a society which was running a medical dispensary
at Surat. It was collecting funds to construct a public charitable Hospital,
and for that purpose, it had kept donation boxes at Surat and Bombay. On
demonetisation of 16th January 1978, instructions were given to the
office bearers not to accept any deposit or allow anyone to deposit any high
denomination bank notes in the collection boxes after midnight of 16th
January 1978. The collection box at Bombay was opened on 17th
January 1978, and the high denomination bank notes of Rs. 22.11 lakh found in
that were deposited with State Bank of India for exchange. The collection boxes
at Surat were opened on 20th January 1978, and were found to contain
Rs. 34.76 lakh in high denomination bank notes, which were also deposited with
State Bank of India for exchange.

State Bank of India refused to exchange the notes found in
the collection box at Surat on the ground that the Society had not explained
satisfactorily its failure to open the collection boxes immediately after the
issue of the ordinance, and that it had not been established that the notes had
reached the Society before demonetisation. The Central Government dismissed the
appeal again such rejection, pointing out that in the earlier year, the box
collection was only about Rs. 5,000 per month, and that the appellant had not
been able to prove that even in the past the trust was getting donations in
high denomination notes in the charity boxes and that this was a regular
feature.

The Supreme Court upheld the refusal to exchange the notes,
on the ground that the materials on record showed that the reasons which weighed
with the authorities to refuse payment to the Society in exchange of the high
denomination banknotes were cogent, and that the order was not perverse.

The Prohibition of Benami Transactions Act, 2016

The provisions of the Benami Transactions (Prohibitions)
Amendment Act, 2016 passed, on 10.8.2016, has been made effective from 1.11.
2016. Under this Act, holding of the property in the name of a person other
than the owner is an offence and the property so held is made liable to
confiscation and the owner of the property, in addition, is subjected to a fine
and punishment, too. Similarly, holding of the property in a fictitious name is
subjected to the same fate. This legislation should be a deterrent for the
persons holding properties including bank accounts in the name of a benamidar.
For example, deposits of magnitude in Jan Dhan Yojna Accounts. An exception has
been provided for the properties held in the name of a spouse or children,
amongst a few other exceptions. This law is administered by the Income tax
authorities.

The Government has also issued a press release dated 18th
November 2016, clarifying that such tax evasion activities can be made subject
to income tax and penalty if it is established that the amount deposited in the
account was not of the account holder, but of somebody else. Also, as per the
press release, the person who allows his or her account to be misused for this
purpose can be prosecuted for abetment under the Income Tax Act.

Borrowing from Persons Depositing High Denomination Notes

A person borrowing funds from the person who has deposited
demonetised currency will have to satisfy the conditions of section 68 and the
lender may be required to explain his source of the deposits.

Prevention of Money Laundering Act

Use of any ‘proceeds of crime’, for depositing high
denomination notes, will expose a person to the stringent provisions of the
Prevention of Money Laundering Act. This Act covers various offences under 28
different statutes including economic laws like SEBI and SCRA. Any money
received in violation of the provisions of these enactments may be treated as
the ‘proceeds of crime’ and will be subjected to confiscation and fine and
imprisonment for the offender. Any person indulging in conversion of the
prohibited currency may be considered to have committed an offence under the
Indian Penal Code and may be held to be in possession of the proceeds of crime
and may attract punishment under the PMLA.

Non Resident and FATCA

Like other tax payers, a non-resident in possession of the
demonetised currency shall be eligible for depositing the same in the bank
account subject of course to the compliance of the provisions of FEMA. Such a
deposit may be required to be reported by the bank under FATCA.

Case of non- deposit of High Denomination Notes

A person not depositing the demonetised currency by the
prescribed date shall lose the money forever as his holding shall cease to have
any market value.

Pradhan Mantri Garib Kalyan Yojana, 2016

The Finance Act 2016 has been amended by the Taxation Laws
(Second Amendment) Act, 2016, by the insertion of Chapter IX-A and sections
199A to 199R, containing the Pradhan Mantri Garib Kalyan Yojana, 2016 (PMGKY or
‘Scheme’) which scheme has come into force from 17th December 2016. The Money
Bill introduced on 28/11/2016 received the President’s assent on 15th
December 2016. In pursuance of the scheme, the Rules titled the Taxation and
Investment Regime For Pradhan Mantri Garib Kalyan Scheme Rules, 2016 have been
notified on 16/12/2016 under S.O. No. 4059(E) .

The scheme seeks to provide Taxation and Investment Regime
for PMGKY and introduce Pradhan Mantri Garib Kalyan Deposit Scheme (PMGKDS). A
statement dated 26/11/2016 by the Finance Minister explains the objects and
reasons behind introduction of scheme. It records that the scheme is introduced
on receipt of representations and suggestions from expert for stopping illegal
conversion of High Denomination Notes and to provide an opportunity to the tax
evaders to come clean on payment of taxes and to generate additional revenue
for government to be  utilised for
welfare activities and also for the use of funds in formal economy. The funds
to be deposited under PMGKDS are to be utilised for programmes of irrigation,
housing, toilets, infrastructure, primary education, health, livelihood,
justice and equity for poor.

The scheme is a code by itself and overrides the provisions
of the Income-tax Act, 1961 and any Finance Act. It shall come into force from
the date notified by the Central Government and shall remain in force till such
time is repealed by an Act of Parliament. It provides for filing of a
declaration by a person, latest by a date to be notified by the Central
Government (31st March 2017), with the principal commissioner or
commissioner authorised to receive declaration under the notification issued by
the Central Government. The declaration is to be in the prescribed form and is
to be verified in the manner prescribed and signed by the person in accordance
with section 140 of the Income-tax Act. The rules prescribe the Form for
declaration (Form 1), besides for revision of the declaration, issue of a
certificate by the Commissioner (Form 2) and other related things.

Section 199B defines the terms Declarant, Income-tax Act, and
PMGKDS. The term not defined shall take meaning from the Income-tax Act, 1961.
To opt for the scheme is optional and is at the discretion of the person and is
not mandatory for a person to be covered by it. However, a person opting for
the scheme is assured of certain immunities. Any person, whether an individual
or not resident or not, is entitled to make a declaration under the
scheme. 

Under the scheme, a person can make a declaration as per
section 199C in respect of any income chargeable to tax for AY 2017-18 or an
earlier year, in the form of cash or deposit in an account with a specified
entity (which includes a bank, RBI, post office and any other notified entity).
Such income would be taxed without any deduction, allowance or set off of loss.
The tax payable would be 30% of the undisclosed income, plus a surcharge of 33%
of the tax, the total being 39.99% as per section 199D. Further, a penalty of
10% of the undisclosed income as per section 199E would be payable, the
effective payment of tax, surcharge and penalty being 49.9%. No education cess
would be payable. Such tax, surcharge and penalty is to be paid before filing
the declaration as per section 199H and is not refundable in terms of section
199K. Neither ‘income’ nor ‘undisclosed income’ is defined under Chapter IX-A.
While declaration is for income, charge of tax, etc is on undisclosed income.
Proof of payment is to be filed along with the declaration. Any failure to pay
tax, etc as prescribed would result in declaration to be treated as void and
shall be deemed never to have been filed as per section 199M. There is no provision for part payment, at present.

The scheme vide section199F requires making of a deposit of
25% of the undisclosed income as per section 199H declared in the Pradhan
Mantri Garib Kalyan Deposit Scheme, 2016, before making the declaration. The
deposit would be interest-free, and would be for a period of 4 years before
refund. If one takes the opportunity loss of interest on such deposit at 8% per
annum, the effective loss of interest on a pre-tax basis would be 8% of the
declared income over the period of 4 years, but would be about 5.2% on a
post-tax basis. This raises the effective cost under the scheme to 55.1%, as
against 77.25% payable otherwise under the Act. The scheme is therefore an
effective alternative to disclosure as income in the tax return of AY 2017-18.

Section 199-I provides that the amount of undisclosed income
declared in accordance with the scheme shall not be included in the total
income of the declarant for any assessment year under the Income-tax Act.
Further, section 199L provides that nothing contained in the declaration shall
be admissible in evidence against the declarant for the purpose of any
proceeding under any Act, other than the specified Acts in respect of which a
declaration cannot be made, even if such Act has a provision to the contrary.

A declaration in terms of section 199-O, cannot be made by a
person in respect of whom an order of detention has been made under COFEPOSA,
or by any person notified u/s. 3 of the Special Court (Trial of Offences
Relating to Transactions in Securities) Act, 1992. A declaration cannot be made
in relation to prosecution for any offence punishable under chapter IX or
chapter XVII of the Indian Penal Code, the Narcotic Drugs and Psychotropic
Substances Act, 1985, the Unlawful Activities (Prevention) Act, 1967, the
Prevention of Corruption Act, 1988, the Prohibition of Benami Property
Transactions Act, 1988 and the Prevention of Money Laundering Act, 2002. It
cannot be made in relation to any undisclosed foreign income and asset
chargeable to tax under the Black Money (Undisclosed Foreign Income and Assets)
and Imposition of Tax Act, 2015. Unlike under IDS, there is no prohibition on
making of a declaration for any year for which an assessment or reassessment
notice has been issued or in which a survey or search has taken place.

A declarant as per section 199J is not entitled to seek
reopening of any assessment or reassessment or to claim any set off or relief
in any appeal, reference or other proceeding in relation to any such assessment
or reassessment in respect of the undisclosed income which is declared under
the scheme. The tax, surcharge and penalty paid under the scheme is not refundable, section 199K.

Where a declaration has been made by misrepresentation or
suppression of facts or without payment of tax, surcharge or penalty, or
without making the deposit in the deposit scheme as required, such declaration
as per section 199M is void and is deemed never to have been made under the
scheme.

Section 199-I provides that the amount of undisclosed income,
declared in accordance with section 199C, shall not be included in the total
income of declarant for any assessment year under the Income-tax Act. The
income so declared is eligible for being excluded from the total income for any
assessment year. The immunity here is restricted to the total income of the
declarant and, unless otherwise clarified, will not extend to third parties.
This view is further confirmed by the express provisions of section 199P which
for the removal of doubts clarifies that nothing contained in the scheme shall
be constructed as conferring any benefit, concession or immunity on any person
other than the person making the declaration. The language of section 199-I is
clear enough to support the view that the income declared under PMGKY cannot be
included in the book profit for the purposes of levy of the minimum alternative
tax u/s. 115JB of the Income-tax Act, since such book profit is deemed to be
the total income. The language also supports the view that no penalty can be
levied or a prosecution can be launched under the Income Tax Act simply on the
basis of the income declared under the PMGKY. The provisions of sections 199D
and 199E specifically overrides the provisions of the Income-tax Act and also
of any Finance Act. No express provisions, as under the IDS, 2016, are
contained in PMGKY for conferring specific immunity from penalty or prosecution
under the Income-tax Act.

Another important immunity is provided vide section 199L
which expressly provides that anything contained in the declaration shall be
inadmissible in evidence against the declarant for the purpose of any
proceeding under any Act other than those listed in section 199-O. This is a
wide and sweeping immunity and shall help the declarant in keeping a safe
distance from any declaration based liability under any of the indirect tax
laws and also the civil laws. Denial of immunity for the statutes mentioned in
section 199-O is for the reason that the persons or the offences covered
therein are in any case made ineligible for making declaration of undisclosed
income under the scheme. Section 199L further confirms the understanding that
no penalty can be levied or prosecution be launched on the basis of the
declaration, alone.

A care has been taken u/s.199N to ensure the specific
application of sections 119, 138,159 to 180A and 189 of the Income Tax Act to
the declaration made under the scheme. This provision enables the continuity of
the proceedings by the subordinate authorities besides facilitating the making
and filing of declaration in specified cases of fiduciary relationships and
discontinued and dissolved entities. Application of section 138 shall enable
the authorities to restrict the sharing of information in their possession,
unless it is found to be in the public interest to do so.

The Central Government has been empowered vide section 199Q
to pass any order for removing the difficulty within a period of 2 years
provided such order is placed before each house of the Parliament.
Simultaneously the Board is empowered to make rules, by notification, for
carrying out the provisions of the scheme including for providing the form and
manner and verification of the declaration. Such rules when made are required
to be placed before each house of Parliament, while it is in session, for a
total period of 30 days.

The PMGKY contains many provisions similar to the Income
Disclosure Scheme, 2016 (IDS). There however are some important differences
between the PMGKY and IDS, some of which are listed here under:

–  An income or undisclosed income is not
defined under the PMGKY while under IDS it was specifically defined to include,
a) Income not declared in an return of income filed u/s. 139, b) An income not
included in the return of income furnished, c) An income that has escaped assessment

–  The aggregate rate of tax plus surcharge and
penalty is 49.9% under PMGKY against the aggregate of 45% under the IDS

–   The surcharge under the PMGKY is to be used
for the Kalyan of Garib while under the IDS, it is to be used for Kissan Kalyan

–   The penalty under PMGKY is levied on the
basis of undisclosed income while under the IDS it was levied on the basis of
tax excluding surcharge

–   Under the PMGKY an interest free deposit of
25% or more of undisclosed income is required to be made for a period of 4
years from the date of deposit while IDS did not contain any such provision

–  Under PMGKY the payment of taxes, etc is to
be made before filing the declaration, while under IDS such payment can be made
in 3 installments ending with 30.09.2017

–  Under PMGKY a declaration is rendered void in
cases of misrepresentation or suppression of facts while under IDS only
declaration by misrepresentation are rendered void

–   Under PMGKY a declaration made without
payment of tax, etc is void while under IDS the payment was to be made only on
demand by the Commissioner

–   Under PMGKY no specific immunities have been
conferred from levy of wealth tax, application of Benami Transaction Provisions
Act and penalty and prosecution under the Income Tax Act and the Wealth Tax Act
while IDS contains specific provisions to such effect

–   Under PMGKY a declaration is not possible in
cases of prosecution under the prohibition of Benami Property Transaction Act,
1988 and Prevention of Money Laundering Act, 2002 while under the IDS there is
no such provision to prevent a person making a declaration for prosecution
under said Acts

–  A person in receipt of any notices u/s.
143(2) or 142(1) or 148 or 153A of the Income Tax Act as also a person in
respect of whom a search or survey is carried out or requisition has been made
is not prohibited from making a declaration while under the IDS such a person
was prohibited from making a declaration

–   Under PMGKY a declaration is not admissible
as evidence under any Act other than a few specified Acts while under IDS such
a declaration is not admissible as evidence for imposition of a penalty and
prosecution under the Income-tax Act and Wealth Tax Act.

Given the similarity of the provisions to IDS, 2016 the
clarifications issued from time to time under IDS, to the extent that the
language is similar or identical, can perhaps be utilised for understanding
PMGKY as well.

While a declaration can be made only after commencement of
the scheme and the rules and forms have been notified, a declaration can be
made for any deposits or any cash for any assessment year up to assessment year
2017-18. Therefore, even in respect of cash deposits made before or after 8 November,
but prior to the scheme coming into force, a declaration can be made under the
scheme. 

A reading of the statement of objects and reasons leads a
reader to believe that the scheme has been introduced for the purposes of
giving an opportunity, to come clean, to persons who are in possession of the
high denomination notes, for which they do not have any satisfactory
explanation, at a cost which is higher than the cost of the regular tax.

The use of the terms ‘a declaration in respect of any
income, in the form of cash or deposit in an account maintained by a person
with a specified entity chargeable to tax’ in section 199C, where read in
the context of the statement of objects and reasons, means that it is such cash
or deposit held in the high denomination notes that qualifies for the
declaration under the scheme. The language of section 199C, though not
restricting the scope of a declaration to the high denomination notes, has to
be read in a manner that supports the objects and the reasons for introduction
of the PMGKY. Form no.1 and the contents thereon also supports this view. The
form prescribes for the declaration of the amount of cash and deposits with
specified entities. Even the Notification dt.19.12.2016 issued by the RBI
enabling the person to pay tax, etc. and make deposit under the scheme
by use of the high denomination notes, also supports this view. The other view
is that the meaning and the scope of above captioned words,  used in section 199C(1), should not be restricted
to the high denomination notes in as much as the language is clear and
unambiguous so as to include any cash or deposit of any denomination including
of the new currency. This view is further confirmed by the express provisions
of section 199C(1) which enables a declaration of income for any assessment
year commencing on or before 1st April,2017. Obviously, a person
making a declaration for A.Y.2016-17 or earlier years cannot be holding the
declared income in cash since then and that too in the form of the high
denomination notes.

The language of section 199C makes it difficult for a
declarant wishing to come clean by declaring an unaccounted income which had
been used for payment of any expenditure, etc made at any time prior to the
date of commencement of the scheme; the payments might have been made in the
high denomination notes even after 08.11.2016 to authorised persons; even to
unauthorised persons, out of the unaccounted income held in the high
denomination note after 08.11.2016 and the declarant wishes to make a
declaration thereon irrespective of the legality of such payment. The question
also arises about the eligibility of the unauthorised recipient to declare cash
under the scheme and about the value of such cash.

In many a case of undisclosed income received up to
08.11.2016 in cash or by deposit, it is likely that such unaccounted income has
been utilised in acquiring some other asset or in advancing loan and is
therefore not in the form of cash or deposits as on the date of commencement of
the scheme.

The eligibility of such a person to make a declaration under
the scheme becomes contentious and debatable. This difficulty is further
confirmed by a reading of Form 1 which has no space for any such investments
and instead requires the declarant to specify the amount of cash and the
deposits, only. The above difficulties concerning the most important aspect of
declaration i.e. the scope of 
undisclosed income, is best resolved by the Government of India by issue
of appropriate clarification at the earliest.  

Section 115BBE and Amendment

Provisions and Scope

Section 115BBE was introduced by the Finance Act, 2012 w.e.f.
01.04.2013 and applied to assessment year 2013-14 and onwards. It was further
amended by the Finance Act, 2016. The section provided that;

–   in computing the total income of a person,
the income referred to in sections 68, 69, 69A, 69B, 69C and 69D (‘specified
income’) no deduction shall be allowed,

–   no set-off of loss shall be allowed against
the specified income,

–   the specified income so included in the total
income shall be taxed at the rate of thirty per cent, and

–   surcharge and the education cess, where
payable, shall be paid at the rate prescribed in the Finance Act of the
respective year.

No separate provisions were made for levy of penalty for the
specified income that are taxed at the rates prescribed u/s.115BBE of the Act.
Accordingly, penalty for concealment, etc where leviable, was leviable as per
section 271(1)(c) or section 270A, as the case may be. Likewise, no separate
provisions for prosecution were specifically prescribed for the specified
income and the provisions for initiating prosecution in regular course were
invoked, where applicable.

The provision did not enable an assessee to voluntarily
include the specified income in filing the return of income and pay tax
thereon.

A view has been prevailing for sometime, which view got
momentum in the wake of demonetisation, holding that an assessee can include an
amount in his total income without specifying the source of income or even the
head of income and voluntarily pay tax thereon; no penalty for concealment, etc
can be levied u/s. 270A of the Act; the provisions for prosecution were
inadequate for prosecuting such a person; such amount when included in the
return of income cannot be assessed u/s.68 to 69D of the Act and as such cannot
be taxed at the rates prescribed u/s.115BBE of the Act.

This view found a great favour with the tax experts during
the period commencing 9th November, 2016, post demonetization. It
is/was believed that any assessee, relying on the view, can deposit the
demonetized currency and offer the amount as his income in filing the return of
income for the assessment year 2017-18 without attracting any penalty and/or
prosecution.

It appears that the Government could not but concur with the
view. Realizing the lacuna in the law, it has amended the provisions of section
115 BBE and simultaneously introduced section 271AAC w.e.f. 1st April,
2017, vide enactment of the Taxation Laws (Second Amendment) Act, 2016 which
received the assent of the President of India on 15th December,
2016. The objects and reasons for amending section 115BBE are found in the
paragraph 2 of the Statement dt. 26th November, 2016 issued by Arun
Jaitley at the time of introducing the Bill. It reads as under; “concerns have
been raised that some of the existing provisions of the Income-tax Act, 1961
could possibly be used for concealing black money. It is, therefore, important
that, the Government amends the Act to plug these loopholes as early as
possible so as to prevent misuse of the provisions. The Taxation Laws (Second
Amendment) Bill, 2016, proposes to make some changes in the Act to ensure that
defaulting assessees are subjected to tax at a higher rate and stringent
penalty provisions.”

The    amendment      has 
the effect of substituting sub-section (1) of section 115BBE w.e.f
01.04.2016 and has application to A.Y 2017-18 and onwards. It inter alia ropes in, in its sweep, the
transactions from 1st April, 2016 to 14th December, 2016
and therefore has a retroactive if not retrospective effect.

The implication of amendment is that;

–   it applies to any assessee, resident or
otherwise,

–   it applies to assessment year 2017-18 and
onwards,

–   it enables an assessee to reflect the
specified income in filing the return of income,

–   it seeks to tax the specified income at the
rate of sixty per cent and included and reflected in the return of income
furnished u/s.139.

Simultaneously, section 2(9) of Chapter II of the Finance
Act, 2016 has been amended by inserting the Seventh proviso to provide for a
levy of surcharge at the rate of twenty five per cent of tax u/s.115BBE in
payment of advance tax. Education cess at the rate of three per cent will
continue to be levied.

The provision for taxing income at a flat rate, where it is
so assessed by the A.O as per sections 68 to 69D, are retained with the change
that the rates of tax would be sixty percent instead of thirty percent. No
deduction shall be allowed in computing such income and no set-off of loss will
be permissible in view of the provision of sub-section (2) of section 115BBE,
which are retained. No change is made in these provisions.

The amended section 115BBE, read with the Finance Act 2016 as
amended, now provides that, where an assessee, includes the specified income by
reflecting it in his return of income furnished u/s. 139, tax shall be payable
at 60% of such income, plus a surcharge of 25% of such tax (15% of income). The
effective tax rate, including 3% education cess, would therefore be 77.25%

The amendment of section 115BBE is neither restricted to the
high denomination notes nor to A.Y. 2017-18, only. It applies to even that part
of financial year 2016-17 consisting of the period during 01/04/2016 to
14/12/2016. It applies not only to deposits of withdrawn notes on or after
09.11.2016 but any such deposits during the current year, which an assessee has
no explanation for, and to all incomes covered by sections 68, 69, 69A, etc.
Therefore, the new rates of tax, surcharge and penalty would apply to items
such as loans treated as undisclosed cash credits, unexplained jewellery, etc.,
for assessment years 2017-18 and subsequent years.

The provision is wide enough to include a return of income
furnished u/s. 139(1), 139(3), 139(4), 139(4A), 139(4B), 139(4C) and 139(5). A
belated or a revised return can also enable an assessee to reflect the
specified income in his return of income. The option to reflect the specified
income in filing the return of income shall not be available in cases where
return is furnished in response to notice u/s. 142, or 148 or 153A of the Act.

In case the amount is not offered to tax in the return of
income, but the amount is added u/s. 68, 69A, etc by the Assessing Officer,
besides the tax, surcharge and cess of 77.25%, a penalty, at the rate of 10% of
the tax payable u/s. 115BBE(1)(i), would also be payable under the newly
inserted section 271AAC.

To include the specified income in total income is at the
discretion of the assessee. It is not mandatory for an assessee to do so and
pay tax voluntarily on such income. He may not do so where he is of a belief
that he will be able to explain to the satisfaction of the A.O that a
particular credit, money, investment, etc. does not represent any income.

Obviously, these provisions can apply only if the deposit is
in the nature of income, which is chargeable to tax. In other words, all such
deposits are not taxable. It is clear that such deposits can be regarded as
income only under certain circumstances.

Penalty u/s. 271AAC

Section 271AAC has been introduced simultaneously to provide for a levy of penalty at the rate of ten percent of the tax payable u/s.115BBE. The new section provides that;

–  income referred to in sections 68 to 69D
shall be liable to penalty on its determination as income,

–   penalty will be levied at the rate of ten
percent of the tax payable u/s.115BBE,

–  levy of penalty is at the discretion of the
A.O,

–  provisions of section 271AAC are applicable
for assessment year 2017-18, onwards,

–   the provisions override any provisions of the
Act other than the provisions of section 271AAB which deal with the levy of
penalty in search cases,

–   no penalty shall be levied u/s.270A in cases
where a penalty is levied u/s.271AAC,

–  provision of section 274 shall apply
requiring the A.O.to follow the procedure prescribed therein,

–  provision of section 275 shall apply
requiring the A.O to pass an order of penalty within the prescribed time,

–    importantly no penalty shall be levied where
an assessee has reflected the specified income in the return of income
furnished u/s.139 and has paid taxes on such income as per section 115BBE, on
or before the end of the relevant year,

–   provisions of section 273B are not
specifically made applicable to the case of an income assessed as per section
115BBE. The said section provides that no penalty shall be imposable on a
person where he proves that there was a reasonable cause for the failure for
which the penalty is sought to be levied. In view of the fact that the levy of
penalty u/s. 271AAC is discretionary, it appears that no penalty will be levied
in the presence of a reasonable cause, and

–   an assessee would not have the benefit of
waiver u/s. 270AA or 273A of the Income-tax Act.

Would the amount of such penalty be 6% of such income, or
7.725% of such income? The view that the amount of penalty would be 6%, draws
support from the fact that the reference in section 271AAC is to a specific
clause of the Act, namely section 115BBE(1)(a) where the rate of tax provided
for is flat 60%. Effective outgoing would be 83.25% in this case. The other
view is based on the fact that the term “tax” has been defined in section 2(43)
to mean tax chargeable under the provisions of the Act. Section 2 of the
Finance Act increases the amount of tax by a surcharge (which includes a cess),
but the nature of the entire amount remains a tax. Under this view, the tax
payable u/s. 115BBE(1)(i) is 77.25%, and therefore the penalty would be 10% of
this rate. Outgoing would be 84.97% in this case.

In the context of demonetisation, the applicability of the
above discussed provisions of section 115BBE and section 271AAC requires
consideration. As noted, the Government has introduced the provisions with the
object of plugging the loophole used for concealing black money and to prevent
misuse of the existing provisions. With this object in mind, an alternative has
been provided to the assesses to come clean, in cases where a declaration has
not been filed under PMGKY, by including the cash or deposits in the total
income and pay tax thereon by 31.03.2017 and reflect such income in furnishing
the return of income u/s. 139 of the Act.

The amended section 115BBE r.w.s. 271AAC surely provides a
way for the holders of unexplained high denomination notes to come clean
without penalty and prosecution on payment of taxes. No deposits are to be made
for any period as is required under the PMGKDS.

Strangely, any person is entitled to opt for being taxed as
per section 115BBE irrespective of the legality or otherwise of the source of
his income. Any of the persons, otherwise considered to be ineligible for
filing a declaration under the BMA 2015, IDS 2016 or PMGKY, 2016 can claim to
be taxed u/s. 115BBE without any limitation as to the nature and source of his
income. Again, the right to opt for section 115BBE is not limited by any
inquiry or investigation or the resulting detection, other than the one in
consequence of a search action u/s. 132 of the Act.

In many cases, one might find the rate of taxation u/s.
115BBE to be beneficial even where one were to take into consideration the
penalty u/s. 271AAC. The maximum rate together would be 84.97% and the minimum
would be 77.25%. Now in an ordinary case, this rate can be 102% of the income
(34% tax, etc plus 68% penalty) involving cases of misreporting otherwise
liable to a penalty at the rate of 200% of the tax sought to be evaded. This
surely is providing for a beneficial treatment to persons being taxed as per
section 115BBE.

Not all income is taxable u/s. 68 to Section 69D

If the value of such notes deposited exceeds the cash in hand
as per books of account as of 8th November 2016, the difference
would be taxable as the income of the depositor. If the depositor on his own
offers the income to tax as his income, would tax be payable thereon at the
rate specified under the amended section 115BBE? Section 115BBE applies when
provisions of sections 68, 69, 69A, 69B, 69C or 69D are applicable.

If an assessee offers such amount to tax in his return of
income and pays tax thereon at normal rates of tax, but is unable to explain
the source of such income to the satisfaction of the assessing officer, can an
assessing officer invoke the provisions of section 68 or 69A read with section
115BBE, and levy the tax on such amount at the flat rate of 60% plus applicable
surcharge and cess? Do the provisions of section 68 or 69A, which deem certain
amounts to be income of the assessee, apply to amounts which have already been
disclosed as income of the assessee?

It needs to be emphasized that provisions of section 68 to
section 69D are apparently invoked in cases where an assessee is unable to
explain the source of a particular receipt, money, investment, expenditure, etc
or part thereof to the satisfaction of the Assessing Officer. These provisions
have no application in cases where an assessee has been able to explain the
source of his receipt, etc. and in such cases the income reflected in filing
the return of income shall not be taxed at 77.25% of such income.

Sections 68 and 69A create certain deeming fictions, whereby
certain amounts which are not considered as income by the assessee, are deemed
to be income of the assessee. A deeming fiction of income cannot apply to an
item which is already treated as income by the assessee himself. The question
of deeming an item to be income can only arise if the item is not otherwise an
income.

The Delhi High Court, in the case of DIT(E) vs. Keshav
Social and Charitable Foundation (2005) 278 ITR 152, considered a situation
where the assessee, a charitable trust, had disclosed donations received by it
as its income, and claimed exemption u/s. 11. The Assessing Officer, on finding
that the assessee was unable to satisfactorily explain the donations and the
donors were fictitious persons, held that the assessee had tried to introduce
unaccounted money in its books by way of donations and, therefore, the amount
was to be treated as cash credit u/s. 68. The Delhi High Court held that
section 68 did not apply, as the assessee had disclosed such donations as its
income.

This view is also supported by the income tax return forms,
where Schedule SI – Income Chargeable to Tax at Special Rates, does not include
section 1115BBE, though it includes section 115BB. In addition, a useful
reference may be made to Schedule OS, Entry 1(d) and Guidance (iii) thereto and
Instruction 7(ii)(29) appended to the Return of Income.

In our considered opinion, the language of the amended
provision of section 115BBE does not cover the case of a person declaring his
income voluntarily for explaining a deposit or cash on hand. The legislature,
for taxing a voluntarily declared income, is required to amend the provisions
of sections 68 to 69D so as to cover any income for which a satisfactory
explanation as to its source is not furnished by the assessee. It is only on
inclusion of such an income that the provisions of section 115BBE, can be made
applicable for taxing such income at the rate of 77.25%; till such time the
provisions of section 68 to section 69D are not amended, the issue in our
humble opinion would remain at the most debatable.

Other Important aspects

One needs to examine the following where an assessee includes
an income, otherwise unexplained, in filing his return of income and pays tax
as per section 115BBE of the Act.

–   Whether the specified income so offered for
tax as per section 115BBE will be accepted by the A.O. without any inquiry and
additions for the year or for any other year,

–   Whether any penalty be levied for tax on
additions,

–   Whether the person offering such income be
prosecuted under the Income-tax Act,

–   Whether there is any immunity from sharing
information with other authorities,

–  Whether there is any immunity from
applicability of provision of other laws including indirect tax laws,

–   Whether there is any saving from
applicability of the MAT, and

–   Whether a person can include the specified
income in the return of income even inquiry and investigation.

Estimation And Assumption; A person in cases where
income is offered under Return of Income voluntary offering to be covered by
amended section 115BBE for A.Y. 2017-18 onwards depositing the high
denomination notes should pass appropriate accounting entries in the book of
accounts maintained by him besides making appropriate noting in the bank slips.
Entries supporting the income, received in high denomination notes, would be
independent of the entries supporting the deposit of such high denomination
notes in the bank. In cases where these entries are found to be false, the
Assessing Officer would be entitled to reject the books of account and estimate
the income, on application of s.145 of the Act. Such a possibility is not
altogether ruled out. Even in cases where a person is unable to explain the
source of income or produce satisfactory evidences in support thereof, there
may be a possibility of estimation of income for preceding previous years.
Please see Anantharam Veerasinghaiah 123 ITR 457 (SC) wherein the Court
held that “There can be no escape from the proposition that the secret
profits or undisclosed income of an assessee earned in an earlier assessment
year may constitute a fund, even though concealed, from which the assessee may
draw subsequently for meeting expenditure or introducing amounts in his account
books. But it is quite another thing to say that any part of that fund must
necessarily be regarded as the source of unexplained expenditure incurred or of
cash credits recorded during a subsequent assessment year. The mere
availability of such a fund cannot, in all cases, imply that the assessee has
not earned further secret profits during the relevant assessment year. Neither
law nor human experience guarantees that an assessee who has been dishonest in
one assessment year is bound to be honest in a subsequent assessment year. It
is a matter for consideration by the taxing authority in each case whether the
unexplained cash deficits and the cash credits can be reasonably attributed to
a pre-existing fund of concealed profits or they are reasonably explained by
reference to concealed income earned in that very year. In each case, the true
nature of the cash deficit and the cash credit must be ascertained from an
overall consideration of the particular facts and circumstances of the case.
Evidence may exist to show that reliance cannot be placed completely on the
availability of a previously earned undisclosed income. A number of
circumstances of vital significance may point to the conclusion that the cash
deficit or cash credit cannot reasonably be related to the amount covered by
the intangible addition but must be regarded as pointing to the receipt of
undisclosed income earned during the assessment year under consideration. It is
open in to the revenue to rely on all the circumstances pointing to that
conclusion”.

Can an assessing officer question the year of taxability of
the income, and seek to tax the income in earlier years, on the ground that
based on the past years’ tax returns, it was impossible for the depositor to
have earned such a large amount within the short period of 7 months from 1st
April to 8th November 2016?

In Gordhandas Hargovandas vs. CIT 126 ITR 560, in the
context of section 69A, the Bombay High Court held that section 69A merely
gives statutory recognition to what one may call a commonsense approach. It
does not bring on the statute book any artificial rule of evidence, a presumption
or a legal fiction. It contains an approach which, if applied, to any
particular assessment cannot be regarded as contravening any principle of law
or any rule of evidence. In that case, there was no material on record to show
that the said amounts related to the income of the assessees for any earlier
year or any year other than the year under consideration. If there was no
material on record, then, the High Court held that the amounts which
represented the sale proceeds of the gold must be regarded as the assessee’s
income from undisclosed sources in the years in question, in as much as they
were introduced in the books at the relevant time. 

If the assessing officer contends that the income should not
be wholly added as income for a particular year, and that it should be spread
over or that it should be liable to be considered as income for another year,
the onus will be upon the assessing officer to point out the material or
circumstance which supports the argument. In the absence of any material or
circumstance, the income cannot be treated as the income of another year.

Further, in a situation where the business or professional
income for assessment year 2017-18 is significantly higher than normal, and in
subsequent years, a normal lower income is declared, there is a high risk of a
detailed scrutiny in those subsequent years by the tax authorities to verify
whether the income disclosed in those years is correct or not, or has been
suppressed by the assessee. In particular, businesses or professions with large
cash receipts or large cash expenditures would be at higher risk of adjustments
to declared income in subsequent years.

Penalty; Needless to say that in cases of estimation
of income, the difference between the returned income and the assessed income
may be exposed to the penalty unless it is established that no penalty shall be
levied in as much as neither there was any under reporting of the income by
virtue of clauses (b) and (c) of sub-section (6) of section 270A of the Act nor
there was an addition as that could be said to have been made u/s. 68 to 69D
read with section 115BBE so as to attract the penalty under newly introduced
section 271AAC of the Income-tax Act.

In cases wherein a person seeks to explain the deposits in
the bank by co-relating the deposits with the income of the past years or out
of the additions made in such years in assessing the total income, as discussed
earlier, the onus will be on the person depositing the money to reasonably
establish that the money so deposited represented the income of the past years
that had remained in cash and such cash was held in the high denomination
notes.

One will also have to examine the possibility of a levy of
penalty on application of Explanation 2 to section 271(1)(c) and/or section
270A(4) and (5) of the Act. A person, supporting the deposits on the basis of
additions made in the preceding previous years, would be exposed to penalty
under a deeming fiction of Explanation 2 to section 271(1)(c). The Explanation
provides that a penalty would be levied, in the year of addition, once a person
is found have correlated his deposit or investment in any other year with the
additions so made. Of course, no penalty would be levied second time in a case
where a penalty was already levied on the basis of addition made in the
preceding previous year. The provisions of sub-sections (4) and (5) of the
newly inserted section 270A will also have to be kept in mind, which
provisions, if not negotiated out of, may cause avoidable trouble for A.Y
2017-18 or thereafter, as well.

Can penalty be levied for concealment u/s. 270A, in a
situation where the assessee himself has disclosed such income in his return of
income but not u/s. 115 BBE? Penalty u/s. 270A is leviable if there is
under-reporting of income or misreporting of income. Section 270A(2) defines
what is under-reporting of income. A person is considered to have
under-reported his income, inter alia, if the income assessed is greater
than the income determined in the return processed u/s. 143(1)(a), or the
income assessed is greater than the maximum amount not chargeable to tax, in a
case where no return of income has been furnished. Therefore, where an item of
income is included in the return of income, such an item would also be part of
the income determined in the return processed u/s. 143(1)(a). When such item of
income is again assessed as part of the total income in an assessment u/s.
143(3), since the item of income is included in both the intimation u/s.
143(1)(a) as well as in the assessment order u/s. 143(3), it would not result
in a difference between the two incomes. Therefore, in effect, such income
reported in the return of income cannot be regarded as under-reporting of
income.

Section 270A(9) lists out cases of misreporting of income. It
includes, inter alia, misrepresentation or suppression of facts, failure
to record investments in the books of account, recording of any false entry in
the books of account, and failure to record any receipt in books of account
having a bearing on total income. However, sub-section (9) of section 270A
refers to sub-section (8) of the same section. It provides that the cases of
misreporting of income referred to in s/s. (8) shall be the following. If one
examines the provisions of s/s. (8), it provides that where under-reported
income is in consequence of any misreporting thereof by any person, the penalty
shall be equal to 200% of the amount of tax payable on underreported income.
Therefore, for an item to amount to misreporting of income, it has first to be
in the nature of under-reporting of income. It is only then that one can say
that it is a case of misreporting of income. Further, the computation of the
penalty would also fail if there is no under-reported income, since the penalty
is equal to 200% of the amount of tax payable on under-reported income.

From the above, it is clear that no penalty u/s. 270A can be
levied in a situation where the excess amount of withdrawn notes deposited into
a bank account are disclosed in the return of income filed for assessment year
2017-18 unless such amount is assessed to tax as per the provisions of sections
68 to 69 D, in which case the penalty will be leviable u/s. 271AAC, alone.

Prosecution; Doubts have been raised about the
possible application of the provisions of section 276C, section 277, section
277A and section 278 for initiating the prosecution in cases where an income is
included in the total income by filing ROI for A.Y 2017-18 for supporting the
deposit of the high denomination notes. The doubts arise in both the cases;
where return is filed in accordance with the provisions of section 115BBE or
where it is not so filed but in both the cases the income is included in the
total income in filing the return of income.

Section 276C deals with the offense of the willful attempt to
evade any tax, penalty or interest chargeable or imposable under the Act or
where he under reporting of income. This provision is independent of levy of
penalty. An Explanation to section 276C expands the scope of the provision to
cover the cases of a false entry or statement or omission to make an entry
besides causing circumstances for enabling evasion of tax. The person convicted
of offense in such a case is punishable with rigorous imprisonment for a term
ranging between 6 months to 7 years depending upon the quantum of evasion of
tax. In addition such a person is liable to a fine of an unspecified amount.
While the scope of the provision is wide so as to it cover a range of cases,
the provisions in our opinion would not be attracted in a case where the
assesse has included an income corresponding to the amount of deposit of High
Denomination Notes in filing the Return of Income in as much as no tax, etc.
could be said to have been evaded by him and in the absence of any evasion, the
provisions including the deeming fiction should fail to apply.

A person consciously making a statement, in any verification
or delivering an account which is false, is punishable u/s.277 for a term
ranging between 6 months to 7 years. In addition such a person is liable to
fine of an unspecified amount. This provision is not specifically made
independent of levy of penalty. The prosecution under clause (i) here (like
section 276C) is based on the quantum of the tax sought to be evaded. Hence in
cases where the assessee has included the income in the Return of Income and
paid tax thereon, there would not be any basis for initiating prosecution.
However, under cl. (ii) of section 277 a prosecution may still be possible for
the reason that the said clause permits the punishment independent of the
quantum of tax sought to be evaded. Needless to say that the burden of proof
for establishing the falsity of the statement, etc. shall always be on the
Revenue.

 Section 277A provides
for prosecuting a person who is found guilty of making an entry or a statement
which is false with the intent to enable other person to evade any tax, etc.
and on being proved guilty is liable for an imprisonment for a term ranging
between 3 months to 2 years. In addition, such a person is liable to fine of an
unspecified amount. This provision, unlike section 276C is not specifically
made independent of levy of penalty. Again the provision of section 277A is
related to the evasion of tax and in the absence of any evasion of tax, etc. in our opinion, the provisions might not apply unless the
Revenue establishes an evasion of tax by the other person.

Unlike section 276C, prosecution u/s. 277, 277A and 278 is
not specifically made without prejudice to levy of penalty. In the
circumstances, it may be possible to contend that a prosecution is not possible
in a case where no penalty is leviable under the Act. Please see the decision
of the Supreme Court in the case of K. C. Builders vs. ACIT, 265 ITR 562
(SC).

Abetting or inducing another person to make an account or a
statement or a declaration, relating to an income chargeable to tax, which is
false is liable for prosecution u/s.278 of the Act. Similarly, abetting a
person to commit an offense of willful evasion of tax, etc. u/s.276C is
also liable for prosecution u/s.278. In both the cases the punishment ranges
for a term of 6 months to 7 years. In addition such a person is liable to fine
of an unspecified amount. This provision, unlike section 276C is not
specifically made independent of levy of penalty. Once again the prosecution
under clause (i) here is based on the quantum of the tax sought to be evaded
and in cases where the assesse has included the income in the Return of Income
and paid tax thereon, in our opinion there would not be any basis for
initiating prosecution. However, under cl. (ii) of section 278 a prosecution
may still be possible for the reason that the said clause permits the
punishment independent of the quantum of tax sought to be evaded. Needless to say
that the burden of proof for establishing the falsity of the statement, etc.
shall always be on the Revenue. Section 138 protects a person for
confidentiality for the information declared in the Return of Income unless it
is in public interest to do so. Obviously, the protection here is not
comparable to the one available under IDS 1 and IDS 2.

Indirect tax laws and confidentiality: No immunity of
any nature is available under any of the other laws, including indirect tax
laws, in respect of the specified income. Neither is any special immunity
available for the confidentiality of the declaration other than the one
available u/s. 138 of the Income-tax Act.

MAT and High Denomination Notes: In case of a company,
the Income declared in the Return of Income for A.Y. 2017-18, representing the
demonetised currency, shall also be a part of the book profit and will be
subjected to MAT u/s. 115JB of the Act.

Enquiry and Investigations before filing Return of Income:
It is seen that the Income-tax Department has issued notices u/s.133(6) for
enquiring into the source of deposits of the High Denomination Notes and in
some cases have carried out survey action u/s.133A. A few cases of search and
seizure action u/s.132 have also been reported. In all such cases, the issue of
penalty u/s. 270A and for section 271AAC requires to be kept in mind. In
ordinary circumstances, concealment or misreporting is ascertained with
reference to the Return of Income unless there is a presumption running against
the assesse. In cases of an enquiry u/s.133(6) and survey u/s.133A, no such
presumption is available for the year of notice or action and, the liability to
penalty will be solely determined with reference to the income disclosed in the
Return of Income.

A presumption however, runs against the assessee
in cases of search and seizure u/s.132 by virtue of the fiction available to
the Revenue u/s. 271AAB of the Act. To avoid the application of the fiction and
the consequential penalty, the person will have to establish that the income
and the consequential deposit thereof are duly recorded in the books of account on the date of search.

19. Appellate Tribunal – Power to consider new ground etc. – Sections 142(2A) and (2C) – A. Y. 2005-06 – Tribunal has power to consider the question of validity of extension of time u/s. 142(2C) of the Act – Amendment by Finance Act, 2008 is prospective and not retrospective

Principal CIT vs. Nilkanth Concast P.
Ltd.; 387 ITR 568 (Del):

The relevant year is the A. Y. 2005-06. In
the appeal filed by the Revenue before the Delhi High Court, the following
questions were raised:

“i)  Whether the ITAT is
competent to adjudicate the order of the AO under proviso to section
142(2C), which is not provided u/s. 146A 
or 153?

ii)  Whether the ITAT is
competent to admit an issue for the first time where there is no material in
the assessment order or in the order of the Commissioner of Income-tax
(Appeals) on the basis of quite the issue of validity of the order of the
Assessing Officer under the proviso to section 142(2C) could be raised
and considered?”

iii)  Whether the AO is
competent to extend the period of filing the audit report on the express
request of the nominated auditor under proviso to section 142(2C) r.w.s.
142(2A) ?”

The High Court held as under:

“i)  The powers of the Tribunal
are wide enough to consider a point which may not have been urged before the
Commissioner(Appeals) as long as the question requires to be examined in the
interest
of justice.

ii)  The Tribunal had not
exceeded its jurisdiction in examining the question whether the Assessing
Officer was justified in extending the time for the auditor nominated u/s.
142(2C), to submit the audit report.

iii)  Under proviso to
section 142(2C) of the Act, there was no power with the Assessing Officer to suo
moto extend the time for filing audit report prior to April 1, 2008. The
power was subsequently provided by amending the proviso by the Finance
Act, 2008 and the amendment was prospective in nature.

iv) The Assessing Officer was
not competent to extend the period for filing the audit report on the request
of the nominated auditor. It could be done only on the request made on behalf
of the assessee.”

15 Section 54 – Investment made in purchase of residential property outside India – Exemption can be claimed till 31.03.2015.

Income-tax Officer vs.
Nishant Lalit Jadhav

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

ITA No.: 6883/MUM/2014

A. Y.: 2011-12.    Date
of Order: 26th April, 2017

Counsel for Revenue / Assessee:  Suman Kumar / Hari S. Raheja

FACTS 

The assessee is a
Non-resident Indian (NRI) and during the year under consideration he, inter-alia,
earned a long term capital gain of Rs.67.07 lakh from sale of residential
property located at Mumbai. He claimed exemption u/s. 54 on the ground that the
capital gain arising on the sale of property was utilised in the purchase of a
residential property at New York, USA. The Assessing Officer denied the claim
of exemption as the property  was
acquired outside India. For the purpose he relied upon the decision of the Ahmedabad
Tribunal in the case of Smt. Leena J. Shah, (6 SOT 721). According to the
CIT(A), the requirement of making the investment in a property in India was
inserted by the Finance (No.2) Act, 2014 w.e.f. 01./04./2015 and, therefore, in
the instant assessment year the claim of exemption u/s. 54 could not be denied.
In coming to such conclusion, the CIT(A) also relied upon the decision of the
Mumbai Tribunal in the case of  Mrs.
Prema P. Shah & Sanjiv P. Shah vs. ITO (100 ITD 60), ITO vs. Girish
M. Shah in ITA No.3582/Mum/2009 and Vinay Mishra vs. CIT, in ITA
No.895/(Bang) of 2012.

Before the Tribunal, the revenue contended that even prior to amendment
by Finance (No.2) Act, 2014, it was to be implicitly understood that the
requirement of section 54 was to make investments in a new residential house
within India only.  The assessee pointed
out that the decision of the Ahmedabad Tribunal in the case of Smt. Leena J.
Shah, which was relied upon by the Assessing Officer has since been reversed by
the Gujarat High Court in its judgment in ITA No. 483 of 2006 dated
14./06./2016.

HELD

According to the Tribunal,
prior to the amendment made by Finance (Nos.2) Act, 2014 w.e.f. 01./04./2015,
the language of section 54 required the assessee to invest the capital gain in
a residential property.  It is only
subsequent to the amendment, which has come into effect from 01.04.2015, that
such investment is required to be made in a residential property in India.  Since the appeal was pertaining to the
assessment year which is prior to 01.04.2015, the amendment would not be
applicable. The Tribunal also relied on the decision of the Gujarat High Court
in the case of Smt. Leena J. Shah (supra).The Tribunal set aside the
finding of the CIT(A) and directed the AO to consider the allotment letter
dated 30.3.205 to determine the long term/short term capital gain and
accordingly the entitlement of exemption u/s. 54 of the Act.

14 Section 153A – Factum of gift which was already disclosed in the returns of income which was filed before the search took place cannot be assessed as income u/s. 153A

Nenshi L. Shah and 10
others  vs.
Dy. Commissioner of Income TaxIT

Mahavir Singh  (J. M.) and N.K. Pradhan (A.M)

ITA Nos.: 3735 to
3737,3575 to 3577, 3580 to 3584 /Mum/2011 and 7382 to 7385, 7387 to
7390/Mum/2013

A. Y: 2003-04.  Date of Order: 24th May, 2017

Counsel for Assessee /
Revenue:  Jignesh R. Shah and Haresh
Kenia / H.N. Singh

FACTS  

All these eleven assessees
had filed their returns of income on even date 11-08-2003 for the AY 2003-04.
All the assessees’ had received gift of Rs. 10 lakh each from one Gayanchand
Jain. This gift was declared in the original returns filed by the respective
assessees’ on 11.08.2003 in the form of capital accounts filed, wherein each of
the assessee had declared this gift. The assessment / processing of return of
income for the year under consideration was concluded much before the search,
which took place on 03-08-2006 and could not therefore abate as the returns
were filed by the respective assessees’ on 11-08-2003 and therefore, the last
date for issuing notices u/s. 143(2) of the Act were on 31-08-2004. The AO
during the course of assessment proceedings in consequence to search u/s.153A
read with section 143(2) of the Act noticed the factum of gift was already
disclosed in the capital accounts filed along with the returns of income by the
respective assessees’ and this is not the income discovered or unearthed during
the course of search by the department u/s.132 of the Act. But the AO assessed
the gifts as income from undisclosed sources of the assessees and CIT(A) also
confirmed the same. Aggrieved, all the assessees came in second appeal before
Tribunal.

Before the Tribunal, the
assessee contended that the assumption of jurisdiction by the AO and making
addition while framing assessment u/s.153A read with section 143(3) was without
jurisdiction in respect to assessment of gifts already disclosed.

HELD  

The Tribunal noticed that
notice u/s. 143(2) had become time barred on 31.08.2004 while the search took
place on 03.08.2006. As on the date of search, the assessments or processing of
return of income of the assessee u/s. 143(1) were completed. The A.O. brought
to tax a sum of Rs. 10 lakh, being the amount of gift, without any
incriminating material found during the course of search. Therefore, relying
on  the decision of the Bombay High Court
in the case of Continental Warehousing Corporation (Nhava Sheva) Ltd. (374 ITR
645), the Tribunal held that the gift of Rs. 10 lakh received by each of the
eleven assesses and disclosed in the return of income and which has not been
abated, the same cannot be added. Accordingly, the Tribunal reversed the orders
of the CIT(A) as well as that of the AO and deleted the addition in all the
eleven appeals of the assessee.

13 Section 272A(2)(k) – Delay in filing of e-TDS return on account of requirement to mention PAN – No loss to the Revenue attributable to the delay in filing of the e-TDS returns – No penalty can be imposed.

Argus Golden  Trades vs. JCIT

Kul Bharat (J. M.)  and Vikram
Singh Yadav
(A. M.)

ITA No.: 522/JP/16

A. Y. : 2011-12.                  

Date of Order: 24th May, 2017

Counsel for Assessee / Revenue: 
Rajeev Sogani / Rajendra Jha

FACTS  

The AO imposed penalty u/s.
272A(2)(k)   holding that the assessee
has delayed  in filing  quarterly 
e-TDS return within the stipulated time frame.  The CIT(A) upheld the order of the AO as
according to him  the provisions of
section 272A(2)(k) uses the word “shall” indicating that if there is violation
of these provisions, the imposition of penalty is mandatory.  Also, the assessee was not having any genuine
ground or the compelling circumstances for not filing of TDS return in
time.  Before the Tribunal, the revenue
justified the order of the CIT(A).

HELD  

The Tribunal 
noted that the AO hads levied penalty u/s. 272A(2)(k)  which talks about the failure to deliver a
copy of the statement within the time specified in section 200(3) or proviso to
section 206C (3).  In the instant case, there
is a delay in filing of quarterly e-TDS returns which is covered under the
provisions of section 272A(2)(c). On this ground itself, the Tribunal held that
the levy of penalty cannot be sustained. 
On merit also, the Tribunal noted that during the financial year 2010-11
which is under consideration, a change was brought about in filing of e-TDS
returns and it was necessary to mention Permanent Account Numbers of all the
payee in the e-TDS return and thereafter only the e-TDS return could be
validated and uploaded. In assessee’s case, there were large numbers of
deductees scattered throughout India. 
The taxes were deducted and deposited at the prescribed rate with delay
of few days.  Thus, there was no loss to
the Revenue which could be attributed to the delay in filing of the e-TDS
returns.  Relying on the decision of the
Cuttack bench of Tribunal in the case of CIT Branch Manager (TDS), UCO Bank
vs. ACIT  (35 taxmann.com 45), the
Tribunal held that the assessee had a reasonable cause for delayed filing of
its e-TDS returns in terms of section 273B and hence, the penalty u/s. 272(A)(k)
was deleted.

15 Section 12A(2) : Proceeding pending in appeal before the CIT (A) should be deemed to be assessment proceedings pending before the AO for the purposes of first proviso to section 12A(2)

(2017) 152 DTR (Coch) (Trib) 137

SNDP Yogam vs. ADIT (Exemption)

A.Ys.: 2006-07 to 2009-10 & 2011-12                         

Date of Order: 1st
March, 2016

Section 12A(2) :
Proceeding pending in appeal before the CIT (A) should be deemed to be
assessment proceedings pending before the AO for the purposes of first proviso
to section  12A(2)

Facts

The assessee was not
registered under section/s 12AA for the AYs under dispute. Accordingly, the AO
invoked the provisions of section 167B thereby taxing the whole income at the
maximum marginal rate for all the AYs under dispute. The assessments for the
AYs 2006-07 to 2009-10 were completed on 19th March 2013.

The assessee had applied
for registration u/s.12AA vide letter dated 30th January 2013 and
the registration was granted vide order dated 29th July 2013.

The CIT(A) held that since
the registration was granted on 29th July 2013, it can be treated as
applicable only from the AY 2013-14. It was not applicable to the assessee for
AYs under dispute and, therefore, it could not be taken that this institution
was registered u/s. 12AA. Accordingly, the order of the Assessing Officer was
confirmed.

On appeal before the ITAT, the assessee submitted that section 12A was
amended recently by the Finance Act 2014 by introducing new provisos to
sub-section (2) of section 12A with .effect .from 1st October 2014.
As per the first proviso to section 12A(2), once a registration u/s. 12AA is
granted to a charitable organisation in a financial year, then the provisions
of sections 11 and 12 shall apply even for the assessment proceedings which
were pending before the AO on the date of registration. As per the amendment,
no action shall be taken u/s. 47. Following the said amendment, the entire income
of the trust is eligible for exemption u/s. 11 for the AYs under dispute.

However, on the date on which the assessee was
granted registration u/s. 12AA, the proceedings were pending before the CIT(A)
and not the AO.

Held

The first proviso to section 12A(2) was brought in
the statute only as a retrospective effect, with a view not to affect genuine
charitable trusts and societies carrying on genuine charitable objects in the
earlier years and substantive conditions stipulated in section 11 to 13 have
been duly fulfilled by the said trust. The benefit of retrospective application
alone could be the intention of the legislature and this point is further
strengthened by the Explanatory Notes to Finance (No.2) Act, 2014 issued by the
Central Board of Direct Taxes vide its Circular No. 01/2015 dated
21.1.2015

When section 12A of the Act
was amended by introducing new provisos to sub-section (2) of section 12A by
Finance Act, 2014 with effect from 01.10.2014, the assessment orders passed by
the assessing officer in respect of the present assessee were pending in appeal
before the first appellate authority. During such pendency, the assessee was
granted registration u/s. 12AA of the Act on 29.07.2013 with effect from the
assessment yearAY 2013-14. Those appeals were the continuation of the original
proceedings and that the power of the Commissioner of Income-tax was
co-terminus with that of the assessing officer were two well established
principles of law. In view of the above and going by the principle of purposive
interpretation of statues, an assessment proceeding which is pending in appeal
before the appellate authority should be deemed to be ‘assessment proceedings
pending before the assessing officer’ within the meaning of that term as
envisaged under the proviso;. it follows there-from that the assessee
whoich obtained registration u/s. 12AA of the Act during the pendency of appeal
was entitled for exemption claimed

u/s. 11 of the Act.

14 Section 37(1) – Licence fee paid by assessee, a partnership law firm; to a private limited company for use of goodwill, which was gifted to private limited by an individual for perpetuity, is an allowable deduction u/s. 37(1) and cannot be disallowed on the grounds that the gift of goodwill by individual, of his profession of law, to a company would possibly be violating the Advocates Act, 1961 or the Bar Council Rules.

([2017)] 162 ITD 324 (Delhi – Trib.)

Remfry & Sagar vs. JCIT

A.Y.s:  2003-04 &
2010-11                                                              

Date
of Order :– 6th September, 2016

FACTS

The assessee, is a
partnership law firm, specializing in intellectual property and corporate laws.

Dr. ‘V’, a practicing
attorney, was the sole and absolute proprietor of the business of a famous law
firm ‘Remfry & Son’ along with the goodwill attached to it. With an
intention of segregating the goodwill in ‘Remfry & Sagar’ from the
attorney’s, and for institutionalising the goodwill in perpetuity by way of
corporatisation, a gift deed was executed by Dr. ‘V’ in favour of ‘RSCPL’, a
private limited entity, whereby the goodwill in “Remfry & Sagar”
was gifted to a newly incorporated juridical/legal entity  “RSCPL”.

Thereafter, Dr. V. entered into a partnership with four other partners.
This partnership firm (the assessee) entered into an agreement with RSCPL for
grant of license for the use of goodwill of “Remfry & Sagar”
subject to payment of license fee @ 25% of the amount of bills raised. The
agreement was valid for the term of 5 years. This agreement was later on
renewed and under as per the renewal, license fee was payable @ 28% of the
amount of bills raised.

The assessee claimed
deduction of the aforesaid license fee paid u/s. 37(1).

The
AO disallowed license fee paid by the assessee to RSCPL for the use of goodwill
on the ground that the entire transaction was colourable device adopted to
transfer profits of the assessee-firm to the family members of V, who held
majority shares in RSCPL and to evade tax. The CIT-(A) upheld order of the AO.

On appeal by the assessee
before ITAT-

HELD

It has been demonstrated by
the assessee that the revenue has accepted that both the entities, i.e., the
assessee as well as RSCPL, pay taxes, at the maximum rate and that there is no
loss of revenue on account of this arrangement. Thus, the disallowance made by
the revenue on the ground of diversion of profits is devoid of merit.

Though the revenue has
argued that goodwill of a profession cannot be sold to a company which does not
have a right to carry on practice, no specific law or section is pointed out in
support of the argument. Only several submissions have been made. Certain
judgments of Foreign Courts are cited, which are based on “ethical
considerations” and not legal prohibition. In any event, the Tribunal has
no power or authority to adjudicate the issue as to, whether; the gift of
goodwill by Dr. V, of his profession of law, to a company is violating the Advocates
Act, 1961 or the Bar Council Rules. No authority has held that this arrangement
violates any Act or law of the land, though the assessee firm has been carrying
on its profession of Attorneys at law under this arrangement for the last many
years.

Another important fact that
has to be considered is that, Dr. V had the sole and exclusive rights to the
said goodwill. The goodwill was held by him. Without legal authorisation from
him, the assessee firm could not use the name and style of “Remfry &
Sagar” along with its goodwill and other assets and rights. The
assessee-firm had to seek permissions and licences to continue and carry on
this profession under this name as it is run. Hence obtaining a license is a
must for assessee firm to continue and carry on its profession as the goodwill
is not owned by it. The payment made in pursuance of an agreement which enables
the assessee firm to carry on its profession, in the manner in which it is now
doing, is definitely an expenditure laid down wholly and exclusively for the
purpose of business or profession. The argument of the Special Counsel that the
purpose test contemplated u/s. 37 is not satisfied is devoid of merit.
Irrespective of whether the gift of Dr. V to RSCPL is ethical or not and
irrespective of the fact whether the gift is legally valid or not, from the
view point of the assessee firm, as it could not have continued and carried on
the profession of Attorneys-at-Law in the name of “Remfry &
Sagar” and use its goodwill and all its associated rights without the
impugned agreement with RSCPL. Hence the payment has to be held as that which
is incurred wholly and exclusively for the purpose of business or profession.

For all the aforesaid
reasons the deduction claimed by the assessee, of license fee paid by it to
RSCPL, has to be allowed u/s. 37.

13 Section 45 – Where conduct of an assessee reveals that he was into the business of real estate, merely because the books of account did not record conversion of capital asset to stock-in-trade or that such a conversion was not mentioned in the tax audit report will not change the characteristics of the income arising from the transactions in question.

[2017] 83 taxmann.com 97
(Visakhapatnam – Trib.)

DCIT  vs. Chennupati
Kutumbavathi

ITA No.  45 (Vizag) of
2013

A. Y.: 2007-08                                                    

Date of Order: 9th June, 2017

FACTS  

The assessee purchased agricultural land in the year 1980. He
claimed that the said land was converted into stock-in-trade in the year 2006
with an intention to commercially exploit the same.  The assessee divided the said land into plots
of different sizes and sold them to a large number of buyers.  In the return of income filed, the profit
arising from sale of such plots was shown u/s. 45(2) and under the head
`Profits and gains of business or profession’. 

The Assessing Officer (AO) observed that the assessee had
never traded in land and that in the accounts and financial statements of the
assessee for the financial year 2005-06, there was no conversion recorded and
the tax auditor had clearly mentioned that during the year under consideration
(financial year 2005-06), there was no conversion of capital asset into
stock-in-trade.  The AO, therefore, held
that the activity carried on by the assessee was not in the nature of adventure
in the nature of trade or commerce.  The
AO, accordingly, charged to tax profit arising on sale of plots as Long Term
Capital Gains and while computing long term capital gains he applied the
provisions of section 50C of the Act.

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

Aggrieved, the revenue preferred an appeal to the Tribunal
where it claimed that merely because the books of account did not disclose the
conversion of capital asset into stock-in-trade, the characteristics of the
transaction would not change.

HELD 

The
Tribunal observed that the only question that needs to be examined is whether
on the facts and circumstances of the case the profit from sale of land is
assessable as capital gains or as business income.  It held that in order to find whether a
transaction of purchase and subsequent sale amounts to an adventure in the
nature of trade, the initial intention is an important factor, but not a
conclusive one. The subsequent events and the assessee’s conduct are also
important factors and the facts to be considered are firstly whether the
transaction was in the line of the assessee’s business and secondly whether it
was an isolated transaction or there was a series of similar transactions. It
is not necessary that in order to constitute trade, there should be a series of
transactions, both of purchase and of sale. Even a single and isolated
transaction can be held to be capable of falling within the definition of
business. The activity or the transaction said to be an adventure in the nature
of trade must be with the object of earning profit.

The
Tribunal noted that the assessee purchased an agricultural land in the year
1980. The assessee has sold the impugned land in the financial year relevant to
assessment years 2007-08. The assessee claimed to have converted said
investment into stock-in-trade as on 31-3-2006, developed the said land into
various plots before it was sold.  On
these facts, the Tribunal held that it is very clear that the intention of the
assessee was to purchase the land, divide them into plots and sell the plots
within the period established. Therefore, it clearly indicates that the
intention of the assessee was to carry out adventure in the nature of trade to
commercially exploit the said land. The assessee was involved in the business
of real estate which is evident from the fact that the assessee has computed
resultant profit from sale of impugned land by applying the provisions of
section 45(2) of the Act.

Insofar as application of
the provisions of section 50C since the activity carried out by the assessee
was held to be in the nature of adventure in the nature of trade or commerce
and the resultant profit assessable under the head ‘income from business’, the
Tribunal held that the provisions of section 50C have no application, when the
income is computed under the head ‘income from business or profession’.

The Tribunal dismissed the
appeal filed bythe revenue.

Section 271(1)(c) – Penalty imposed on account of omission to offer correct income and the wrongful deduction deleted on the ground that auditors also failed to report.

9.  Wadhwa Estate &
Developers India Pvt. Ltd. vs.  Asstt.
Commissioner of Income Tax (Mumbai)

Members: Saktijit Dey (J. M.) and Rajesh Kumar (A. M.)

ITA no.: 2158/Mum./2016

A.Y.: 2011–12. Date of Order: 24th February, 2017

Counsel for Assessee / Revenue:  Jitendra Jain /  Pooja Swaroop

FACTS

In respect of the year under appeal, the assessee had filed
return of income declaring loss of Rs. 2.49 lakh. On the basis of AIR
information available on record, the AO found mismatch in the interest income
as per books of account and as per Form–26AS. The assessee submitted that due
to over sight the assessee had offered interest income on fixed deposit at Rs.
18.90 lakh (on the basis of audited accounts) as against actual interest
received of Rs. 24.83 lakh. Further, the AO noticed that the assessee had
debited the sum of Rs. 1.82 lakh on account of fixed asset written–off. Since
the same was of capital in nature, it was disallowed u/s. 37(1) of the Act. The
assessee accepted the aforesaid decision of the AO and did not contest the
additions. On the basis of these two additions, the AO initiated proceedings
for imposition of penalty u/s. 271(1)(c). Rejecting the explanation of the
assessee, the AO imposed the penalty which was confirmed by the CIT(A). 

Before the Tribunal, the assessee contended that the lapse
was due to oversight on the part of the accountant.  It was also submitted that, though the
assessee’s accounts were subjected to tax audit as well as statutory audit, the
mistake was not pointed out by either of the auditors. Further, it was pointed
out that the AO, in the order passed, had not recorded his satisfaction whether
the assessee had concealed the particulars of its income or had furnished
inaccurate particulars of income. Also, in the notice issued u/s. 274 r/w
271(1)(c), the AO had not specified which limb of section 271(1)(c) was attracted
by striking–off one of them.

HELD

According to the Tribunal, the assessee’s explanation that
non–disclosure of two items of income was on account of omission due to
oversight was believable since the auditors had also failed to detect such
omission in their audit reports. 
Therefore, relying on the ratio laid down by the Supreme Court in Price
Water House Coopers Pvt. Ltd. vs. CIT (348 ITR 306), it was held that
imposition of penalty u/s. 271(1)(c) was not justified.

The Tribunal also agreed
with the assessee that neither the assessment order nor the notice issued u/s.
274 indicated the exact charge on the basis of which the AO intended to impose
penalty u/s. 271(1)(c). Therefore, in the light of the principles laid down by
the Supreme Court in Dilip N. Shroff vs. JCIT (291 ITR 519), the
Tribunal held that the AO having failed to record his satisfaction, while
initiating proceedings for imposition of penalty u/s. 271(1)(c) as to which
limb of the provisions of section 271(1)(c) is attracted, the order imposing
penalty was invalid.

Section 14A read with Rule 8D – disallowance should be computed taking into consideration only those shares which yielded dividend income.

8.  Kalyani Barter Private Limited
vs. ITO (Kolkata)

Members: Waseem Ahmed (A. M.) S.S.Viswanethra Ravi (J. M.)

I .T.A. No.: 824 / Kol / 2015. 

A.Y.: 2010-11. Date
of Order: 3rd March, 2017

Counsel for Assessee / Revenue: 
Subash Agarwal / Tanuj Neogi

FACTS

The assessee is engaged in the business of trading in shares
& securities.  During the year the
assessee had earned dividend income of Rs. 0.41 lakh. In his assessment order
passed u/s. 143(3) the AO disallowed the following sum u/s. 14A read with rule
8D:

– Direct expenses Rs. 3.08 lakh;

– Interest expenses Rs. 34.42 lakh; and

– Administrative expenses Rs. 2.4 lakh
(restricted to actual expense incurred).

On appeal, the CIT(A), relying on the decision of DCIT vs.
Gulshan Investment Company Ltd. (31 taxman.com 113) (Kol), deleted the
addition made by the AO under the provisions of rule 8D(2)(ii) and (iii) by
observing that the assessee is engaged in the business of shares trading and
the shares were classified as stock in trade in its books of accounts.
Therefore, according to him, the assessee was entitled for the deduction of
interest expenses and administrative expenses. 

Before the Tribunal the revenue relied on CBDTs Circular No.
5/2004 dated 11.02.2014, wherein it has been clarified and emphasized that
legislative intent behind introduction of section 14A is to allow only that
expenditure which is relatable to earning of income.  Therefore, the revenue contended that the
expenses, which are relatable to exempt income, are to be considered for
disallowance. Thus, according to the revenue, the disallowance of expenses was
required u/s. 14A of the Act even in relation to the investment held as stock
in trade.

The assessee on the other hand, without prejudice to his main
argument and as an alternative, contended that the disallowance u/s. 14A had
been wrongly worked out by the AO under Rule 8D by taking the entire value of
stock-in-trade, instead of taking the value of only those shares, which
actually yielded dividend income during the year under consideration

HELD

The Tribunal relying on the decision of the
Calcutta High Court in the case of Dhanuka & Sons vs. CIT (339 ITR 319)
held that the provisions of section 14A are applicable to even those
investments which are held as stock in trade. However, the Tribunal by relying
on the decision of the Coordinate Bench in the case of REI Agro Ltd. vs. Dy.
CIT (35 taxmann.com 404 /144 ITD 141), (affirmed by the Calcutta High Court
vide its order dated 19.04.2014 in ITAT No. 220 of 2013) agreed with the
assessee that the disallowance as per Rule 8D should be computed by taking into
consideration only those shares which have yielded dividend income in the year
under consideration.

Section 37(1) – Loss on account of export proceeds realised short in subsequent year allowed as deduction in current year.

7.  ACIT vs. Allied
Gems Corporation (Bombay)

Members: G.S. Pannu (A. M.) and Ram Lal Negi (J. M.)

ITA No.: 2502/Mum/2014

A.Y.: 2009-10. Date
of Order : 20th January, 2017

Counsel for Revenue / Assessee:  A. Ramachandran / Jignesh A. Shah

FACTS

The assessee was engaged in the business of dealing in cut
and polished diamonds and precious and semi precious stones. During the course
of assessment proceedings, the AO noticed that assessee had claimed a loss of
Rs. 49.64 lakh on account of short realisation of export proceeds, which was
outstanding as on 31.03.2009.  According
to the AO, though the said loss pertained to export proceeds receivable as on
31.03.2009, but the actual realiation of the export proceeds took place in the
subsequent financial year, corresponding to assessment year 2010-11.  Hence, such loss could not be allowed. 

On appeal, the CIT(A) noted that the AO did not doubt the
amount short realied from the debtors. 
Therefore, relying on the decision of the Mumbai Tribunal in the case Voltas
Limited vs. DCIT, 64 ITD 232, he agreed with the assessee that applying the
principle of prudence, claim for was allowable.

Before the Tribunal, the revenue contended that the said loss
had not accrued as on 31.03.2009, since as on that date, the corresponding
export receivables were not actually realised, and that such realization
happened in the subsequent year and, therefore, it was only at the time of
actual realisation that said loss could be accounted for allowed.

HELD

The Tribunal noted that the
assessee was maintaining its accounts on mercantile system and that the Revenue
also did not dispute the short realisation from debtors of Rs. 49.64
lakhs.  Therefore, referring to the
principle of prudence as emphasised in the Accounting Standard -1 notified u/s.
145(2), it agreed with the assessee that though the export proceeds was
realised in the subsequent period, the loss could be accounted for in the
instant year itself, applying the principle of prudence. The Tribunal also
referred to a decision of the Allahabad high court in the case of CIT vs.
U.B.S. Publishers and Distributors (147 ITR 144).  In the said case, the issue related to the
A.Y. 1967-68 (previous year ending on 31.05.1966). In the assessment
proceedings, it was found that assessee therein had claimed expenditure by way
of purchases of a sum of Rs. 6.39 lakh representing additional liability
towards foreign suppliers in respect of books imported on credit up to the end
of 31.05.1966. The said additional claim was based on account of devaluation of
Indian currency, which had taken place on 06.06.1966 i.e. after the close of
the accounting year.  According to the
High Court, since the actual figure of loss on account of devaluation was
available when the accounts for 31.05.1966 ending were finalised, the same was
an allowable deduction in assessment year 1967-68 itself.  Applying the ratio of the said decision, the
Tribunal dismissed the appeal of the revenue.

Section 2(42A) – The holding period of an asset should be computed from the date of allotment letter.

6. Anita D. Kanjani vs. ACIT (Mumbai)

Members : D. T. Garasia (JM) and Ashwani Taneja (AM)

ITA No. 2291/Mum/2015

A.Y.: 2011-12. Date
of Order: 13th February, 2017.

Counsel for assessee / revenue: Viraj Mehta & Nilesh
Patel / Omi Ningshen

FACTS 

During the previous year
relevant to the assessment year under consideration, the assessee sold an
office unit located in Mumbai vide agreement dated 11.3.2011.  The office unit was allotted to the assessee
on 11.4.2005, the agreement to sell was executed on 28.12.2007 and was
registered on 24.4.2008. The capital gain arising on transfer of this office
unit (flat) was returned by the assessee as long term capital gain. The
Assessing Officer (AO) relying on the decision of the Supreme Court in the case
of Suraj Lamps & Industries Ltd. vs. State of Haryana 304 ITR 1 (SC),
held that the flat transferred was a short term capital asset and therefore,
the gain arising on transfer was assessed by him as short term capital gain.

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

Aggrieved, the assessee preferred an appeal to the Tribunal
where two-fold arguments were made viz. that the holding period should be
computed with reference to the date of allotment of the property and
alternatively, the same should be computed with reference to date of execution
of the agreement and not the date of registration of the agreement because the
document on registration operates from the date of its execution.

HELD 

The Tribunal noted that the allotment letter mentioned the
identity of the property allotted, the consideration and the part payment made
by cheque before the date of allotment. 

The Tribunal held that issue before the Apex Court in the
case of Suraj Lamps & Industries Ltd. (supra) was different from the
issue in the present case.

It noted that the ratio of the following cases where this
issue has been examined, by various High Courts –

i)    CIT vs. A Suresh Rao 223 Taxman 228
(Kar.) – in this case, the court held that for the purposes of holding an
asset, it is not necessary that the assessee should be the owner of the asset
based upon a registration of conveyance conferring a title on him;

ii)   Madhu Kaul vs. CIT 363 ITR 54 (Punj. &
Har.) – in this case, the Court analysed various circulars and provisions
of the Act and held that on allotment of a flat and making first instalment the
assessee would be conferred with the right to hold a flat which was later
identified and possession delivered on a later date. The mere fact that the
possession was delivered later would not detract from the fact that the
assessee was conferred a right to hold the property on issuance of an allotment
letter. The payment of balance amount and delivery of possession are
consequential acts that relate back to and arise from the rights conferred by
the allotment letter upon the assessee;

iii)   Vinod Kumar Jain vs. CIT  344 ITR 501 (Punj. & Har.) – in this
case, the Court held that the holding period of the assessee starts from the
date of issuance of the allotment letter;

iv)  CIT vs. K. Ramakrishnan 363 ITR 59 (Delhi)
– in this case, it was held that the date of allotment is relevant for the
purpose of computing the holding period and not date of registration of
conveyance deed;

v)   CIT vs. S. R. Jeyashankar 373 ITR 120
(Mad.) – in this case also the Court held that the holding period shall be
computed from the date of allotment.

Following the ratio of the abovementioned decisions of
various High Courts, the Tribunal held that the holding period should be
computed from the date of issue of the allotment letter. Upon doing so, the
holding period becomes more than 36 months and consequently, the property sold
by the assessee would become long term capital asset and the gain arising on
transfer thereof would be long term capital gain.

The Tribunal decided the appeal in favor of the assessee.

Section 250 – When addition made is on account of non-furnishing of sales-purchase bills, etc, if assessee comes forward and furnishes them as additional evidences, they deserve to be examined in proper perspective as the entire addition hinges on non-furnishing of evidences and that being the case, the evidences furnished by the assessee may have a crucial bearing on the issue.

5.  Devran N. Varn vs.
ITO (Mumbai)

Members : Saktijit Dey (JM) and N. K. Pradhan (AM)

ITA No.: 1874/Mum/2014

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

Counsel for assessee / revenue: Dinkle Hariya / J Saravanan

FACTS  

The assessee, an individual, was a proprietor of M/s Moon
Apparel carrying on business of manufacture and sale of ready-made
garments.  In the course of assessment
proceedings, the Assessing Officer (AO) found that the assessee had made cash
deposits aggregating to Rs. 25,66,423 in his savings account with ICICI Bank.
The AO called upon the assessee to furnish the source of these cash
deposits.  The AO alleged that in spite
of repeated opportunities, the assessee could not furnish documentary evidence
to substantiate the source of cash deposits. 
He treated the amount of cash deposit of Rs. 25,66,423 as undisclosed
income and added the same to the total income.

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
where it was contended that the AO did not afford adequate opportunity to the
assessee to furnish evidence and that before the CIT(A) copies of sales and
purchase bills, vouchers, etc. were furnished as additional evidences
but the CIT(A) without examining the evidences on their own merit rejected to
admit the same and proceeded to confirm the addition.

HELD 

The Tribunal noted that the assessee had submitted before the
AO that the cash deposits came from cash sales and earlier withdrawals from the
bank. However, the AO rejected the explanation of the assessee by stating that
he has failed to furnish the sale / purchase bills, etc.  It also noted that the CIT(A) without examining
the evidences, refused to admit them as additional evidences and proceeded to
confirm the addition.

When the addition made is on account of non-furnishing of
sale/purchase bills, etc., if before the first appellate authority the assessee
comes forward and submits the same as additional evidences, they deserve to be
examined in proper perspective as the entire addition hinges upon
non-furnishing of such evidences and that being the case, the evidences
submitted by the assessee may have a crucial bearing on the issue. Therefore,
without properly verifying the authenticity / genuineness of the evidences
produced, they cannot be brushed aside / rejected.

The Tribunal restored the matter back to the
file of the AO for examining the assessee’s claim in the light of evidences
produced by the assessee with a direction that the AO must afford a reasonable
opportunity of being heard to the assessee on the issue.

Section 69C – Mere non-attendance of the supplier in the absence of any other corroborative evidence cannot be a basis to justify the stand of the revenue that the transaction of purchase is bogus.

4.  Beauty Tax vs. DCIT (Jaipur)

Members : Kul Bharat (JM)
and Vikram Singh Yadav (AM)

ITA No. 508/Jp/2016

A.Y.: 2007-08 Date of
Order: 10th April, 2017.

Counsel for assessee /
revenue: Dinesh Goyal / R A Verma

FACTS  

The assessment for AY 2007-08 was re-opened based on the
finding of the CIT(A), in his order for AY 2008-09, deleting the addition of
bogus purchases from M/s Mahaveer Textiles Mills of Rs. 13,39,969 on the ground
that the said purchases were for AY 2007-08 and not AY 2008-09.

In the assessment order passed u/s. 143(3) r.w.s. 147 of the
Act, the AO observed that during the year purchases have been made by the
assessee from Mahaveer Textiles on six occasions from January to March but no
payment has been made till the end of the year. 
The assessee was asked to produce the party for examination so that the
genuineness of the transaction can be ascertained.  On behalf of the assessee it was submitted to
the AO that the purchases from the said party are genuine and that the assessee
is not in a position to present the party for verification.  The AO drew reference to the assessment order
for AY 2008-09 and finally held that the assessee was accorded ample
opportunity to produce the party to establish the genuineness of the
transaction claimed to have been made. 
He held that in view of the conclusive evidence brought on record, it
can be safely held that the expenses of Rs. 13,39,969 debited as payable to
Mahaveer Textile Mills are bogus and deserve to be disallowed and the same are
being added back to the declared income of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
confirmed the disallowance.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that –

(i)  the AO has blindly followed the findings given
in the assessment proceedings for AY 2008-09 while bringing the subject
transaction with Mahaveer Textiles to tax in the year under consideration;

(ii) the co-ordinate bench has deleted the addition
made in respect of other transactions which were held to be bogus in nature by
the AO in AY 2008-09;

(iii) the AO has referred to certain conclusive
evidences brought on record to treat the subject transaction as bogus but no
such evidence has been brought on record by the AO either during the assessment
proceedings for AY 2008-09 or during reassessment proceedings for AY 2007-08;

(iv) the only grievance of the AO is that the
assessee has failed to produce the party so as to establish genuineness of the
transaction and secondly, no payment has been made to the party till the year
end. 

It also observed that the CIT(A) has noted that the
confirmation was obtained from the party but has held that simple confirmation
is not sufficient to establish the fact of purchase.  However, the CIT(A) has not elaborated what
more is required to justify the claim.  
It further noted that the assessee had stated that since the supplier
was based in Delhi, he denied coming to Jaipur but submitted the confirmation
directly to the department.  The payment
outstanding on 31st March, was made in April by account payee
cheques and now there was no outstanding amount against the supplier.  As regards other details furnished by the
assessee, there is no finding by the AO as to reason for non-acceptance of the
said documents. 

The Tribunal held that merely non-appearance of the supplier
in absence of any other corroborate evidence cannot be a basis to justify the
stand of the Revenue that the transaction of purchase is bogus.  It held that the purchases made by the
assessee from M/s Mahaveer Textiles have not been proved to be bogus by the
Revenue and the said additions cannot be sustained in the eyes of law in
absence of any conclusive evidence brought on record.

The appeal filed by the assessee was allowed.

Section 263 – There is a distinction between “lack of enquiry” and “inadequate enquiry”. If the totality of facts indicate that assessment was made after obtaining necessary details from the assessee and further the same were examined, then, even if the same has not been spelt elaborately in the assessment order, it cannot be said that there is a “lack of enquiry” or `prejudice’ has been caused to the Revenue.

3.  Small Wonder Industries vs. CIT (Mum)

Members : Joginder Singh
(JM) and Ramit Kochar (AM)

ITA No.: 2464/Mum/2013

A.Y.: 2009-10.   Date
of Order: 24th February, 2017.

Counsel for assessee /
revenue: Prakash Jotwani / Debasis Chandra

FACTS  

The assessee, engaged in the business of manufacturing
feeding bottles and accessories, filed its return of income showing total
turnover of Rs. 2,40,72,048 and offered gross profit of Rs. 99,20,394, at the rate
of 41.21% of the total turnover. The assessee claimed deduction u/s. 80IB of
the Act at the rate of 25% of the total profit of Rs.65,39,181 after reducing
brought forward losses of Rs. 3,44,910. The assessee declared income of Rs.
49,04,386. 

The case of the assessee was selected for scrutiny.  Various details were called for vide
questionnaires issued which were complied with by the assessee.  The Assessing Officer (AO) in the assessment
order made an elaborate discussion with respect to disallowance of deduction
u/s. 80IB on interest income, disallowance out of interest u/s. 36(1)(iii), set
off of unabsorbed losses, etc. 

Subsequently, the CIT invoked revisional jurisdiction u/s.
263 with respect to commission of Rs. 2,12,136 @ Rs. 25 per piece to Rajendra
Jain and Kiran Jain by observing that no such commission was paid in earlier
year for similar sales.  The assessee
explained that commission was paid to these parties for looking after logistic
issues. 

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD  

The Tribunal noted that the assessee vide letter dated
11.7.2011, addressed to the DCIT, in response to notice u/s. 142(1) clarified
the factual matrix and again vide letter dated 26.7.2011, addressed to
DCIT, furnished the party-wise details of commission paid with name, address
and purpose.  The photocopies of the
agreements and credit notes were also enclosed along with the MOU dated 19.4.2008. 

The Tribunal observed that it is expected to ascertain
whether the AO had investigated / examined the issue and applied his mind
towards the whole record made available by the assessee during assessment
proceedings.  It held that since the
necessary details were filed / produced and the same were examined by the AO,
it is not a case of lack of enquiry by the AO. 

The Tribunal observed that the provisions of section 263
cannot be invoked to correct each and every type of mistake or error committed by
the AO.  It is only when the order is
erroneous and also prejudicial to the interest of the revenue that the
revisional jurisdiction is attracted.  It
noted that it is not the case that the assessment was framed without
application of mind in a slipshod manner. 

It held that there is a distinction between “lack of enquiry”
and “inadequate enquiry”. In the present case, the AO collected the necessary
details examined the same and framed the assessment u/s. 143(3) of the
Act.  Therefore, in such a case, the
decision of the Delhi High Court in CIT vs. Anil Kumar Sharma [2011] 335 ITR
83 (Delhi) comes to the rescue of the assessee. 

The Tribunal held that it was satisfied that the assessment
was framed after making due enquiry and on perusal / examination of documentary
evidence. It held that in such a situation, invoking revisional jurisdiction
u/s. 263 cannot be said to be justified. 
The Tribunal set aside the order of the CIT and decided the appeal in
favor of the assessee and observed that, by no stretch of imagination, the
assessment order can be termed as erroneous and prejudicial to the interest of
the revenue.

The Tribunal allowed the appeal filed by the
assessee.

Section 54 – Deduction u/s. 54 is available even if land, which is appurtenant to residential house, is sold and it is not necessary that whole of residential house should be sold.

[2017] 80 taxmann.com 223 (Delhi – Trib.)

Adarsh Kumar Swarup vs. DCIT

ITA No.: 1228 (Delhi) of 2016

A.Y.: 2011-12  Date
of Order: 28th March, 2017

FACTS

During the previous year relevant to the assessment year
under consideration, the assessee sold a plot of land in two parts, the value
as per circle rate of this property was Rs. 91,39,000 including value of trees
of Rs. 16,000. This property was inherited by the assessee from his mother in
1994 who in turn had inherited it from her mother in 1985. In the return of
income filed by the assessee, no income was shown in respect of this transfer.
Upon being asked to show cause, the assessee in the course of assessment
proceedings furnished a reply stating that for the purpose of computing long
term capital gain arising on transfer of this property, the cost of acquisition
of this property was taken @ Rs. 730 per sq. yard in 1985 as per valuation
report of an approved valuer. The Assessing Officer (AO) asked assessee to show
cause why in view of provisions of section 
49(1) of the Act, the market value as on 1.4.1981 be not adopted instead
of that on 1985. The assessee then made a claim of deduction of Rs. 60,70,000
u/s. 54 of the Act on the ground that the amount was invested in purchase of a
residential house and therefore claim for deduction u/s. 54 is allowable. The
Assessing Officer computed capital gain by considering cost of acquisition of
the property sold to be its fair market value on 1.4.1981, granted the
deduction u/s. 54 of the Act and assessed long term capital gain of Rs.
24,60,130. 

Aggrieved, the assessee preferred an appeal to CIT(A) who
enhanced the assessment by denying the claim for deduction u/s. 54 of the Act
by holding that the asset sold by the assessee is `land appurtenant to the
building’ and not a residential house.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that the land, which was sold by the
assessee, was forming part of the residential house No. 64, Agrasen Vihar (Ram
Bagh), Muzaffarnagar (having a Municipal No. 65, Bagh Kambalwala) and all the
property was duly assessed to house-tax and was self-occupied by the occupants
viz. the assessee and other family members. Section 54 of the Act uses the
expression “being buildings or lands appurtenant thereto and being a
residential house”.

It noted that the Hon’ble Karnataka High Court had examined
these expressions while construing the provision of section 54 of the Act in
the case of C.N. Anantharam vs. ACIT [2015] 55 taxmann.com 282/230 Taxman 34
(Kar.) has held that the deduction u/s. 54 of the Act is also available
even if the land, which was appurtenant to the residential house, is sold and
it is not necessary that the whole of the residential house should be sold
because the legislature has used the words “or” which is distinctive
in nature.

It further observed that it is not the case of AO and CIT
(Appeals) that the land was not appurtenant to the residential house. The case
of the CIT (Appeals) is that the assessee has sold only the land appurtenant to
the house and not residential house which, according to the Karnataka High
Court, is not a requirement under the law and exemption u/s. 54 of the Act is
also available to the land which is appurtenant to the house. The front page of
the sale deed itself shows that the land was part of residential house No. 64,
Agrasen Vihar, Muzaffarnagar.

The Tribunal upheld the exemption as claimed and allowed by
the Assessing Officer and the enhancement made by the CIT (Appeals) was held to
be not sustainable in the eyes of law and was deleted.

This ground of appeal filed by the assessee was
allowed.

Section 15 – Actual salary received after deduction of notice period pay, as per agreement with the employer, is taxable in the hands of the employee.

7.  [2017] 80
taxmann.com 297 (Ahmedabad – Trib.)

Nandinho Rebello vs. DCIT

ITA No.: 2378 (Ahd) of 2013

A.Y.: 2010-11    Date
of Order: 18th April, 2017

FACTS

The assessee, an individual, deriving income chargeable under
the head salaries, house property and other sources, filed his return of income
on 16.3.2011 declaring total income of Rs. 11,45,880. Subsequently, on
4.7.2012, the Assessing Officer (AO) issued a notice u/s.148 of the Act on the
ground that the assessee has not disclosed salary received from his previous
two employers viz. Videocon Tele Communication Ltd. and Reliance Communication
Ltd.

The details of employment of the assessee, during the
previous year and also amount of salary due to him and notice pay recovered
from his salary were as under-

 

During the year worked

 

 

Name of the employer

From

upto

Salary

Rupees

Notice pay

Deducted

Rupees

Reliance
Communication Ltd.

1.4.2009

9.5.2009

164636

1,10,550

Sistema Shyam
Teleservices Ltd.

18.5.2009

24.2.2010

1395880

1,66,194

Videocon Tele
Communication Ltd.

3.3.2010

31.3.2010

546060

 

 

 

 

2106576

2,76,744

The AO noted that the assessee has declared salary income of
Rs. 11,45,880 received by him from Sistema Shyam Teleservices Ltd. The
allegedly undisclosed salary income of Rs. 1,64,636 received from Reliance
Communication Ltd. and Rs. 5,46,000 received from Videocon Tele Communications
Ltd. was added to the returned income declared by 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 noted that the amount of notice pay of Rs.
2,76,744 was claimed by the assessee in the return of income as deduction which
was recovered from the salary by the assessee’s previous employers. It observed
that the CIT(A) was of the view that no such deduction is available u/s. 16 of
the Act and the salary income is taxable on due basis or on paid basis. The
Tribunal held that the employers have made deduction from the salary which was
paid to the assessee during the year under consideration because of leaving the
services as per agreement made by the assessee and the respective employer. It
observed that this is a case of recovery of the salary which is already made to
the assessee for which reference to section 16 of the Act is not required.  It observed that the assessee has actually
received the salary from his previous employers after deducting the notice
period as per the job agreement with them. The Tribunal held that the actual
salary received by the assessee is only taxable.

The appeal filed by the assessee was allowed.

Section 54 – Assessee is entitled to deduction u/s. 54 in respect of the entire entire payment for purchase of new residential house though the new residential house is purchased jointly in the name of the assessee and his brother.

10.  [2017] 81 taxmann.com 16
(Mumbai – Trib.)

Jitendra V. Faria vs. ITO

A.Y.:2010-11
Date of Order: 27th April, 2017

FACTS 

The assessee jointly with
his wife was the owner of a flat in Jai Mahavir Apartment at Andheri (West).
During the previous year relevant to the assessment year under consideration,
the said flat was sold for Rs.1,02,55,000/-.The assessee computed long term
capital gains at Rs. 43,01,665/- being 50% share in the property. The assessee
invested Rs. 42,01,665/- (sic Rs. 42,65,858) in another residential property
i.e., flat in “Parag” at Andheri (West). The assessee claimed
exemption u/s. 54 of Rs. 42,01,665/- (sic Rs. 42,65,858) plus stamp duty and registration
charges and offered capital gains at Rs. 35,809/-. The name of the assessee’s
brother was added in the Agreement of new property purchased, for the sake of
convenience. However, the entire investment for the purchase of new property
i.e. Parag, along with stamp duty and registration charges were paid by the
assessee.  Since, the new house was
purchased by the assessee by incorporating name of his brother, the Assessing
Officer (AO) restricted deduction u/s.54 to the extent of 50% of the value of
new property. He restricted exemption u/s. 54 to Rs.21,32,929/- i.e., 50% of
the cost of the new flat.

Aggrieved, the assessee
preferred an appeal to the CIT(A) who directed the AO to tax the entire capital
gains in assessee’s hands by disregarding the fact that 50% of the old house
was owned by his wife.

Aggrieved, the assessee
preferred an appeal to the Tribunal.

HELD 

The Tribunal noted that
the wife has already offered her share of capital gains in her return of income
filed with the Department. Thus, there is no justification in the order of
CIT(A) for taxing the entire capital gains in the hands of the assessee. It
held that only 50% of the capital gain is chargeable to tax in the hands of the
assessee.

As regards the allegation
of the AO that since assessee has incorporated name of his brother, he is
entitled to only 50% of the investment so made in the new house, the Tribunal
noted that the AO has in the assessment order categorically stated that the
entire cost of the new property was borne by the assessee though the property
was purchased in joint name of the assessee with his brother. The Tribunal
observed that the issue is covered by the decision of Hon’ble Delhi High Court
in the case of CIT vs. Ravinder Kumar Arora [2012] 342 ITR 38/[2011] 203
Taxman 289/15 taxmann.com 307 (Delhi) wherein the High Court held that the
assessee was entitled to full exemption u/s. 54F when the full amount was
invested by the assessee even though the property was purchased in the joint
names of the assessee and his wife. It noted that this decision of the Delhi
High Court was subsequently followed by Delhi High Court itself in case of CIT
vs. Kamal Wahal [2013] 351 ITR 4/214 Taxman 287/30 taxmann.com 34 (Delhi).
Following the ratio of the decision of the Delhi High Court in the case of CIT
vs. Ravinder Kumar Arora (supra), the Tribunal held that the AO was not
justified in restricting the exemption u/s. 54 to 50% of the investment in
purchase of new residential house.

The Tribunal allowed the
appeal filed by the assessee.

Section 145 – An assessee who follows mercantile system of accounting can, at the time of finalisation of accounts of any relevant assessment year, claim deduction of actual figure of loss on account of short realisation of export proceeds even though such export proceeds are outstanding as receivable as on the end of the relevant year and are actually realised in the subsequent assessment year.

9. [2017] 163 ITD 56 (Mumbai – Trib.) Assistant CIT vs.
Allied Gems Corporation (Bombay)A.Y.: 2009-10         Date
of Order: 20th January, 2017     

FACTS

The assessee was a
partnership firm engaged in the business of dealing in cut & polished
diamonds and precious & semi-precious stones.

In the course of
assessment proceedings, it was noticed that assessee had claimed a loss of Rs.
49,64,937/- on account of realisation of export proceeds, which was outstanding
as on 31.03.2009.

The AO disallowed the
aforesaid claim of loss on the ground that the realisation of outstanding
export receivables was an event which took place in the subsequent assessment
year i.e. AY 2010-11 and, therefore, such loss could not be allowed while
computing the income for the relevant assessment year.

The CIT-(A) noted that the
AO had not doubted the short realisation of the debtors and, hence, following
the principle of prudence, CIT-(A) allowed assessee’s claim of loss.

On appeal by the revenue
before the Tribunal.

HELD

The dispute relates to the
income chargeable under the head ‘profits and gains of business or profession’;
which is liable to be computed in accordance with the methodology prescribed in
section 145(1) of the Act i.e. either in terms of cash or mercantile system of
accounting regularly employed by the assessee. The claim of the assessee is
that the mercantile system of accounting adopted by the assessee justifies
deduction of loss of Rs. 49,64,937/- and for that matter, reference is made to
the principle of prudence, which has been emphasised in the Accounting
Standard-1 notified u/s. 145(2) of the Act also. The principle of prudence
seeks to ensure that provision ought to be made for all known liabilities and
losses even though there may remain some uncertainty with its determination.
However, it has to be appreciated that what the principle of prudence signifies
is that the probable losses should be immediately recognised. In the present
context, the stand of the assessee is that though realisation of export receivables
took place in the subsequent period, but the loss could be accounted for in the
instant year itself as it would be prudent in order to reflect the correct
financial results.

Factually speaking,
Revenue does not dispute the short realisation from debtors to the extent of
Rs. 49,64,937/- and, therefore, insofar as the quantification of the loss is
concerned, the claim of the assessee cannot be assailed on grounds of
uncertainty.

In the case of U.B.S.
Publishers and Distributors [1984] 147 ITR 144; the assessee following
mercantile system of accounting, for AY 1967-68 (previous year ending on
31/05/1966), had claimed an expenditure by way of purchases of a sum of Rs.
6,39,124/- representing additional liability towards foreign suppliers in
respect of books imported on credit up to the end of 31.05.1966. The said
additional claim was based on account of devaluation of Indian currency, which
had taken place on 06.06.1966 i.e. after the close of the accounting year. The
Hon’ble Allahabad High Court noted that liability to pay in foreign exchange
accrued with the import of books and was not as a result of devaluation.
According to the High Court, since the actual figure of loss on account of
devaluation was available when the accounts for 31/5/1966 ending were
finalized, the same was an allowable deduction in assessment year 1967-68
itself. The parity of reasoning laid down by the Hon’ble Allahabad High Court
is squarely applicable in the present case. In the present case also, short
realization of export proceeds to the extent of Rs. 49,64,937/-, took place in
next year but it related to export receivable for the relevant assessment year,
and at the time of finalisation of accounts for the relevant assessment year,
the actual figure was available, and therefore, the assessee made no mistake in
considering it for the purposes of arriving at the taxable income.

Even otherwise, it has to
be appreciated that income tax is a levy on income and that what is liable to
be assessed is real income and while computing such real income, substance of
the matter ought to be appreciated. Quite clearly, the assessee was aware while
drawing up its accounts for the previous year relevant to the assessment year
under consideration that the export receivables, outstanding as at the year-
end were short recovered by a sum of Rs. 49,64,937/-and, therefore, the real
income for the instant year could only be arrived at after deduction of such
loss.

Therefore, considering the
entirety of facts and circumstances, the Tribunal held that the CIT (A) had
made no mistake in allowing the claim of the assessee and appeal of the revenue
was dismissed.

Special Leave Petitions – An Update

 1.      
Income deemed
to accrue or arise in India – Agent of the assessee in India carried out only
incidental or auxiliary/ preparatory activity under the direction of principal
– will not be considered as independent agent – It is dependent agent –
Remuneration at arm’s length – : SLP Granted 

Director of Income Tax (IT) – II vs. M/s. B4U
International Holdings Limited (2016) S.L.P.(C). No.16285 of 2016; [ (2016) 385
ITR (Statutes) 46]

[ SLP Granted in respect of Director of Income Tax (IT) –
II vs. M/s. B4U International Holdings Limited, [(2015) 374 ITR 453 (Bom)(HC)]

Assessee is a Mauritius based company. The Revenue proceeded
against it on the footing that it is engaged in the business of telecasting of
TV channels such as B4U Music, MCM etc. It is the case of the Revenue
that the income of the assessee from India consisted of collections from time
slots given to advertisers from India through its agents. The assessee claimed
that it did not have any permanent establishment in India and has no tax
liability in India. The AO did not accept this contention of the assessee and
held that affiliated entities of the assessee are basically an extension in
India and constitute a permanent establishment of the assessee within the
meaning of Article 5 of the Double Taxation Avoidance Agreement (DTAA).

The CIT(A) held that the entity in India cannot be treated as
an independent agent of the assessee. Alternatively, and assuming that it could
be treated as such if a dependent agent is paid remuneration at arm’s length,
further proceedings cannot be taxed in India.

The Revenue preferred an appeal to the Tribunal. The Tribunal
having dismissed the Revenue’s appeals, the matter was carried before High
Court. The Revenue urged that Tribunal misapplied and misinterpreted the
decision of the Hon’ble Supreme Court in the case of Director of Income Tax
(International Taxation) vs. Morgan Stanley & Company Inc. (2007) 292 ITR
416. The Revenue submitted that the transfer pricing analysis was not
submitted and mere reliance on a circular of the Revenue / Board would not
suffice. If the transfer pricing analysis did not adequately reflect the
functions performed and the risks assumed by the agent in India, then, there
would be need to attribute profits of the permanent establishment for those
functions/risks. That had not been considered and also submitted that the B4U,
MCM etc. were erroneously assumed to be the agents but not dependent on
the assessee. Alternatively, they have also been erroneously held to be paying
the remuneration at arm’s length. All this has been assumed by the Tribunal
though there was no relevant material. The AO had rightly held that the payment
made towards purchase of films for which no details were submitted as to what
are the costs incurred were treated as royalties. The exhibition and telecast
price were intangible and could not be termed as goods and merchandise in respect of export of advertisement films.

The Hon. High Court noted that the details filed by the
assessee revealed that there is a general permission granted by the Reserve
Bank of India to act as advertisement collecting agents of the assessee. The
permissions were granted to M/s. B4U Multimedia International Limited and M/s.
B4U Broadband Limited. In the computation of income filed along with the
return, the assessee claimed that as it did not have a permanent establishment
in India, it is not liable to tax in India under Article 7 of the DTAA between
India and Mauritius. The argument further was that the agents of the assessee
have marked the ad-time slots of the channels broadcasted by the assessee for
which they have received remuneration on arm’s length basis. Thus, in the light
of the CBDT Circular No.23 of 1969, the income of the assessee is not taxable
in India. The conditions of Circular 23 are fulfilled. Therefore, Explanation
(a) to section 9(1)(i) of the IT Act will have no application.

The Hon. High Court further observed that the Tribunal had
recorded a finding that the assessee carries out the entire activities from
Mauritius and all the contracts were concluded in Mauritius. The only activity
which is carried out in India is incidental or auxiliary / preparatory in
nature which is carried out in a routine manner as per the direction of the
principal without application of mind and hence, B4U is not an dependent agent.
Nearly 4.69% of the total income of B4U India is commission / service income
received from the assessee company and, therefore, also it cannot be termed as
a dependent agent.

The Hon. High Court further observed that the Supreme Court
judgment in the case of Morgan Stanley & Co. (supra) held
that there is no need for attribution of further profits to the permanent
establishment of the foreign company where the transaction between the two was
held to be at arm’s length but this was only provided that the associate
enterprise was remunerated at arm’s length basis taking into account all the
risk taking functions of the multinational enterprise.

Thus the Tribunal, rightly concluded that the judgment of the
Hon’ble Supreme Court in Morgan Stanley & Co. and the principle
therein would apply. Also relied on the Division Bench judgment in the case of Set
Satellite (Singapore) Pte. Ltd. vs. Deputy Director of Income Tax (IT) &
Anr. (2008) 307 ITR 265 on this aspect. The Revenue Appeal was dismissed.

Against the aforesaid Bombay High Court decision the Revenue
filed SLP before Supreme Court, which was granted.

2.       Penalty
u/s. 271(1)(c) – the assessee had agreed to be assessed on 11% of the gross
receipts – on the condition that no inference of concealment of income would be
drawn from such concession – Penalty confirmed by High Court – SLP granted

Kalindee Rail Nirman (Engineers) Ltd vs. CIT-;
S.L.P.(C).No.20662 of 2014. [ (2016) 386 ITR (Statutes) 2]

[CIT vs. Kalindee Rail Nirman Engg. Ltd, [ (2014) 365 ITR
304 (Del)(HC)]

The assessee, a contractor undertaking projects of Indian
Railways on turnkey basis, filed its return of income for the AY 1995-96 on
29.11.1995 declaring a total income of Rs.88,91,700/-. On the basis of the
materials gathered by the income tax authorities in the course of a search
carried out in the assessee’s premises on 14.03.1995 as well as in the premises
of the directors and trusted persons, the AO referred the matter to a special
audit in terms of Section 142(2A) of the Act. The assessee was supplied
photocopies of the seized records. Despite such opportunity, no convincing
reason was given by the assessee to the query of the AO as to why the results
declared by the books of accounts could not be rejected and the profit from the
contracts be not estimated at a rate exceeding 11% of the gross receipts. Not
convinced by the assessee’s explanation to the show-cause notice, the AO
proceeded to estimate the net profit of the assessee at 11% of the gross
receipts from the contracts amounting to Rs.20,30,74,024/-, which came to
Rs.2,23,38,143/-. The AO also found that some income from business activities
was not included in the aforesaid receipts and the profit from such activity
was taken at Rs.13,34,308/-. The total business income was thus taken at
Rs.2,36,72,451/-.

The assessee carried the matter in appeal to the Tribunal
where the income was reduced by adopting the profit rate of 8% on the gross
receipts subject to allowance of depreciation and interest. The separate
addition of Rs.13,34,308/- was deleted.

Penalty proceedings were initiated by the AO for concealment
of income and after rejecting the assessee’s explanation, a minimum penalty of
Rs.24,00,977/- was imposed for concealment of income u/s. 271(1)(c) of the Act.
The CIT (A) deleted the penalty . The revenue’s appeal to the Tribunal was
dismissed,

It is in further appeal
before the High Court the revenue assailed the order of the Tribunal on the
ground that after the judgment of the Supreme Court in the case of MAK Ltd.
Data P. Ltd. vs. CIT, (2013) 358 ITR 593, there is no question of the
assessee offering income “to buy peace” and that in any case the seized
material and the special audit report disclosed several discrepancies, to cover
which a higher estimate of the profits was resorted to. The assessee vehemently
contended that the Tribunal committed no error in upholding the order passed by
the CIT (A) cancelling the penalty. It was contended that it was a mere case of
different estimates of income being adopted by different authorities which
itself would show that there is no merit in the charge of concealment of
income. He also emphasised that the assessee had agreed to be assessed on 11%
of the gross receipts only on the condition that no inference of concealment of
income would be drawn from such concession and in such circumstances, where the
offer was conditional and to buy peace, there can be no levy of penalty for
alleged concealment of income.

The High Court held that the penalty proceedings were
justified. The High Court held that number of discrepancies and irregularities
listed by the special auditor in his report which are reproduced in the
assessment order bear testimony to the fact that the books of accounts
maintained by the assessee were wholly unreliable. If they were so, there can be
no sanctity attached to the figure of gross contract receipts of
Rs.20,30,74,024/- on which the assessee estimated 3% as its income. It is true
that the AO did not enhance the figure of gross receipts but that is not
because he gave a clean chit to the books of accounts allegedly maintained by
the assessee; he could not have given a clean chit in the face of the defects,
discrepancies and irregularities reported by the special auditor. In order to
take care of those discrepancies he resorted to a much higher estimate of the
profits by adopting 11% on the gross contract receipts. In these circumstances,
the mere fact that the estimate was reduced by the Tribunal to 8% would in no
way take away the guilt of the assessee or explain its failure to prove that the
failure to return the correct income did not arise from any fraud or any gross
or wilful neglect on its part. The Court observed that the assessee was taking
a chance sitting on the fence despite the fact that there was a search towards
the close of the relevant accounting year in the course of which incriminating
documents were found. The plea accepted by the Tribunal that the assessee
agreed to be assessed at 11% of the gross receipts only “to buy peace” and
“avoid litigation” cannot be accepted in view of the judgment of the Supreme
Court in MAK Data P. Ltd. (supra). The High Court accordingly
decided against the assessee and in favour of the revenue. 

The Assessee filed SLP before Hon. Supreme Court which was
Granted.

3.       Interest
payable – Non renewal of the deposits, Kishan Vikas Patras etc. Seized
and retained by department even after conclusion of the assessment proceeding –
Revenue must compensate for pecuniary loss due to non renewal – the same is not
payment of interest on interest.

CIT vs Chander Prakash Jain-;S.L.P.(C).No.23467 of 2016.
[(2016) 386 ITR (Statutes) 14]

[CIT vs Chander Prakash, [Writ Tax No. 566 of 2011 dt
:28/04/2015 (All)(HC)]

On 16th November, 1994, a search u/s. 132 (1) of
the Act, 1961 was conducted at the residential premises of the assessee. Again
on 22nd November, 1994 a search was made at Bank of the assessee
where some cash along with certificates of investments/deposits worth Rs. 3,45,997/- were seized u/s. 132 (1) (iii) of the Act. An order u/s. 132 (5)
of the Act was passed by the AO for retaining the aforesaid assets on 13th
March, 1995.

In response to the notice u/s. 148 of the Act return of
income showing an income of Rs. 3,466/- was filed. Assessment order was made
u/s. 143/148 of the Act, income was determined at Rs. 84,959/- under the head
income from other sources and Rs. 16,50,000/- under the head of long term
capital gains. No credit was given to the assessee by the AO for the money
retained u/s. 132 (5) of the Act, 1961. Assessee filed an appeal before the
CIT(A), which was allowed and the demand was reduced to nil. The department
being not satisfied with the order of the appellate authority, filed an appeal
before the Tribunal. The appeal was partly allowed by the Tribunal.

On 18th January, 2007, an intimation was given by
the AO about the seized money. Assessee also made an application before the
CIT, Meerut for release of the seized assets, with a further prayer that the
assessee be compensated for pecuniary loss due to non renewal of the deposits
and interest u/s. 132B (4) of Act, 1961. Since the said application was not
considered, assessee filed a Writ Petition.

The High Court disposed of the writ petition with a direction
upon AO to decide the application of the assessee within the time permitted by
the High Court. The AO has refused to release the seized assets and to make
payment of the interest as claimed by the assessee. Not being satisfied, the
assessee again approached the Court by filing a writ petition. The High Court
after hearing the learned counsel for the parties recorded that prima facie
there is no justification for seized assets being not released. The High Court
recorded the statement of the department that the department is ready to
release the seized assets and assessee may collect the same. It is not in
dispute that the assets have been released in favour of the assessee, which
include the Kishan Vikas Patras, Indira Vikas Patras, Bank Fixed Deposit
Receipts, etc., these could not be encashed by the assessee as the
maturity date had expired and the value has been transferred to unclaimed
account. However, there is no issue in that regard before this Court as the
department has assured the petitioner to do the needful so that certificates
are encashed.

The dispute between the parties before the High Court is
confined to the payment of interest on the money seized on 22nd November,
1994 till the date the tax liability of capital gains of Rs. 3,71,653 for the
A.Y. 1992-1993 was adjusted and on the remaining assets till the date they were
released. In the alternative, the assessee has prayed for a direction for
renewal of seized investments in shape of Indira Vikas Patras and Kishan Vikas
Patras and deposits with the banks with interest on the prevailing rates on the
maturity value till the assets were appropriated/released.

It is the case of the assessee that during all these period,
the money would have augmented by nearly four times of its value in the year
1994. The assessee submitted that as per the order of retention u/s. 132 (5) of
Act, 1961, the seized assets comprise of cash, Indira Vikas Patras, Kishan
Vikas Patras etc. of Rs. 3,45,997/-, they were retained against the
liability of Rs. 5,81,133/- treating them as undisclosed income and Rs.
67,038/- against existing liability.

The retention of seized assets beyond the date of regular
assessment is without authority of law. The Revenue has retained the assets for
more than 19 years without authority of law, therefore, the assessee must be
compensated for loss of interest. In the alternative, it is submitted that the
Revenue could have appropriated the seized amount in April, 1996 against the demand
notice dated 29th March, 1996, no interest u/s. 220 (2) of Act, 1961
could have been levied. The Revenue is liable to pay statutory interest under
Sections 132B (4) and 244A of the Act, 1961. He explained that the Revenue
cannot indirectly keep the money on the plea that there will be a demand and
therefore, the money should be allowed to be kept with the Revenue. It is
further explained that due to failure of the Revenue either to release the
seized assets retained without authority of law/ failure to get the Indira
Vikas Patras, Kishan Vikas Patras etc. renewed on the date of maturity
in the year 1999, the assessee suffered pecuniary loss.

The asssessee has relied upon the judgment of the Apex Court
in the case of Chironjilal Sharma Huf vs. Union of India & Others reported
in (2014) 360 ITR 237 (SC) for the proposition that liability as
per the order of the AO on being overturned by the Tribunal, the assessee
becomes entitled to interest for pre-assessment period also u/s. 132B (4) (b)
of Act, 1961. It has also been explained that interest on post assessment
period is to be dealt with in accordance with Section 240 or Section 244A of
Act, 1961. Reference has also been made to the judgment of the Apex Court in
the case of Sandvik Asia Ltd. vs. Commissioner of Income Tax, Pune &
Others reported in (2006) 2 SCC 508, wherein it has been
held that if a person can be taxed in accordance with law and hence, where
excess amount is collected or any amounts are withheld wrongfully, the revenue
must compensate the assessee and any amount becoming due to the assessee u/s.
240 of the Act, 1961 would encompass interest also.

Revenue disputed the correctness of the stand so taken on
behalf of the assessee. It is submitted that no interest is payable to the
assessee in respect of the assets not sold or converted into money and that the
cash which was seized from the assessee, has already been utilised, hence there
is no cash, is lying unutilised in the P.D. Account. It is further stated that
interest has been charged strictly as per the order of the CIT, therefore, the
relief for refund of the same, as prayed, appears to be misconceived.

The High Court said that, it is not in dispute nor any
explanation from the side of the department as to why these Kishan Vikas Patras,
Indira Vikas Patras, Fixed Deposit Receipts etc. were retained by the
department even after the assessment proceedings had been completed in the year
1996 and as to why the same were not encashed/renewed. According to the Court,
the money invested in the shape of Kishan Vikas Patras, Indira Vikas Patras etc.
continued to be the money available with the Union of India all along. This
money was utilised by the Government for its own purposes, which fact can be
inferred as the Vikas Patras etc. were never encashed. The issue as to
whether the assessee is to suffer in respect of loss of interest on these
Kishan Vikas Patras, Indira Vikas Patras etc. for the inaction on the
part of the department especially when the money lay with the Union of India
itself. According to the Court the facts of this case are more or less
identical to those in the case of Chironjilal Sharma Huf , Sandvik Asia
Ltd. (supras) and Commissioner of Income-Tax vs. Gujarat Fluoro Chemical (2013)
358 ITR 291 (SC). In the case of South Eastern Coalfields Ltd. vs.
State of M.P. & Others reported in (2003) 8 SCC 648,
the Apex Court has laid down as follows: “Once the doctrine of restitution
is attracted, the interest is often a normal relief given in restitution. Such
interest is not controlled by the provisions of the Interest Act of 1839 or
1978.”

Thus it was held that the order of the ACIT refusing to make
payment of interest u/s. 132B of the Act, 1961 on the ground that Kishan Vikas
Patras, Indira Vikas Patras, Fixed Deposit Receipts etc. had not been
encashed, cannot be legally sustained and was quashed. The ACIT was directed to
redetermine the interest in light of the judgment of the Apex Court in the
cases of Chironjilal Sharma Huf, Sandvik Asia Ltd. (Supras) strictly
in accordance with the provisions of the Act.

The Revenue filed SLP before Supreme Court which was
dismissed.

4.       Book
profit – Accounts prepared in accordance with the provisions of part II and III
of Schedule VI to the Companies Act – it was not open to the AO to embark upon
a fresh inquiry in regard to the entries made in the books of account of the
company.: U/s. 115J

IT. vs. M/s J.K.Synthetics Ltd. Kamla Tower, (2016)
S.L.P.No.23617 of 2016 ; [ (2016) 387 ITR(Statutes) 2 ]

CIT. vs. M/s J.K.Synthetics Ltd. Kamla Tower, [ ITA No 451
of 2009 dt :01/10/2015 (All)(HC).]

The assessee is a public limited company engaged in the
manufacture of synthetic yarn and cement. For the AY: 1988-89, the assessee
filed a return declaring a loss. The assessee claimed depreciation after
revaluing its fixed assets. The AO found that as per section 115J of the Act,
net profit shown in the profit & loss account was in accordance with the
provisions of part II and III of Schedule VI to the Companies Act, 1956. The AO
however, was of the opinion that the method of computation of profit & loss
was not in consonance with the provisions of section 350 of the Companies Act,
and, consequently, disallowed the excess depreciation and added that amount in
the profit & loss account.

The AO passed an assessment order u/s. 143(3) of the Act
after making certain additions and disallowances under various heads.

Being aggrieved, the assessee filed an appeal, which was
partly allowed. The matter was taken to the Tribunal. The Tribunal allowed the
appeal against which the Department filed the appeal before High Court.

The assessee’s appeal was accepted by the Tribunal relying
upon the decision of the Supreme Court in the case of Apollo Tyres Ltd.
vs. Commissioner of 3 Income-Tax, (2002) 255 ITR 273 (SC). The Tribunal
held as under: “We have considered the rival submission and the decisions
relied upon by the ld. A.R. Since the Revenue has not brought to our notice any
other decision contrary to the decisions relied upon by the led. Counsel, we
decide this issue in assessee’s favour as covered by the decision of the
Hon’ble Supreme Court in the case of Apollo Tyres Ltd. (supra). This ground of
the assessee is allowed.”

Before the High Court, the Department submitted that since
the profit & loss account was not prepared in accordance with the
provisions of part II and III of Schedule-VI to the Companies Act, the AO was
justified in revising the net profit u/s.115J of the Act.

The Supreme Court in Apollo Tyres (Supra) considered
the question as to whether the AO while assessing a Company for income-tax
u/s.115J of the Income-tax Act could question the correctness of the profit and
loss account prepared by the assessee and certified by the statutory auditors
of the company as having been prepared in accordance with the requirements of
Parts II and III of Schedule VI to the Companies Act. The Supreme Court held
that the AO was bound to rely upon the authentic statement of accounts of the
company and had to accept the authenticity of the accounts with reference to
the provisions of the Companies Act, which obligates the company to maintain
its account in a manner provided by the Companies Act.

The Supreme Court had held that the AO while computing the
income u/s. 115J had only the power of examining whether the books of account
were certified by the authorities under the Companies Act as having been
properly maintained in accordance with the Companies Act. The AO thereafter had
a limited power of making increases or reductions as provided for in the
Explanation to the said Section. The Supreme Court, consequently, held that the
AO did not have the jurisdiction to go behind the net profit shown in the
profit and loss account except to the extent provided in the Explanation to
Section 115J. The said decision was reiterated by the Supreme Court in Malayala
Manorama Co. Ltd. vs. Commissioner of Income-tax, (2008) 300 ITR 251 (SC).

Once the finding has been given, the AO could not go behind
the net profit shown in the profit and loss account except to the extent
provided in the Explanation to section 115J of the Act. The High Court held
that the provision of section 115J does not empower the AO to embark upon a
fresh inquiry in regard to the entries made in the books of account of the
company.

The High Court dismissed the revenue’s appeal.

The Revenue filed SLP before Supreme Court which was
dismissed.

5.       Depreciation
– on the fixed assets acquired by considering the present-day value of gratuity
as well as the leave salary liability – as forming part of the cost of these
assets. – SLP Granted

CIT vs. Hooghly Mills Ltd, S.L.P.No.16674 of 2015; [
(2016) 387 ITR (Statutes) 22]

(Hooghly Mills Ltd vs. CIT [ ITA no. 120 of 2000 ; dt
:09/02/2015(Cal)(HC))

The assessee acquired fixed assets like land, building and
also plant & machinery, for which the price had to be paid partly in cash
and partly by way of taking over the accrued liability in respect of the gratuity
and leave salary payable to the workers. For the purpose of computing the cost
of the assets, only the present-day value of these accrued liabilities was
taken into consideration by the assessee. Tribunal reversed the orders of the
lower authorities and directed the AO to allow the claim of the assessee
towards depreciation on the fixed assets acquired by it by considering the
present-day value of the gratuity as well as the leave salary liability as
forming part of the cost of these assets.

Aggrieved by the order of the Tribunal the Revenue filed an
appeal before High court . Revenue submitted that the question is no longer res
integra since the point has already been decided in favour of the Revenue
by the Supreme Court in the case of the assessee itself in the case of Commissioner
of Income Tax vs. Hooghly Mills Co. Ltd. reported in (2006) 287
ITR 333 (SC) wherein it was held that the expenditure on taking over
the gratuity liability is a capital expenditure, yet no depreciation is
allowable on the same because section 32 of the Income-tax Act states that
depreciation is allowable only in respect of buildings, machinery, plant or
furniture, being tangible assets, and know how patents, copyrights, trade
marks, licences, franchises or other business or commercial rights of similar
nature being intangible assets. The gratuity liability taken over by the
company does not fall under any of those categories specified in section 32. No
depreciation can be claimed in respect of the gratuity liability even if it is
regarded as capital expenditure. The gratuity liability is neither a building
machinery, plant or furniture nor is it an intangible asset of the kind
mentioned in section 32(1)(ii). Had it been a case where the agreement of sale
mentioned the entire sale price without separately mentioning the value of the
land, building or machinery, we would have remitted the matter to the Tribunal
to calculate the separate value of the items mentioned in section 32 and grant
depreciation only on these items. Hence, it was held that no depreciation can
be granted on the gratuity liability taken over by the assessee.

The assessee has submitted that the Apex Court was
considering the matter in the light of the agreement dated 24th
March, 1988 entered into between the assessee and M/s. Fort Gloster Industries
Ltd. whereas the case before us arose out of an agreement dated 30th August,
1994 entered into between the assessee and India Jute & Industries Ltd.
Assessee added that the present agreement contained a stipulation which was
conspicuous by its absence in the earlier agreement. The following lines
appearing in clause 2 of the agreement “at or for the price of Rs. 410.-
lakhs only free from all encumbrances and liens and liability save and except
those which have been assumed and taken over by the purchaser as hereinafter
mentioned and subject to the terms and conditions hereinafter appearing.”

Assessee has contended that this stipulation was not there in
the agreement dated 1988. Therefore, the facts and circumstances of the case
are different. The clause 4 of the agreement which shows that money
consideration has also been differently apportioned than what was in the
earlier agreement. Assessee has contended that when the facts and circumstances
are different, the question of the application of the judgment of the Supreme
Court to the case in hand, does not arise.

Assessee further contended that in any case there can be no
denial of the fact that the cost of acquisition of the assets is both money
paid and money promised. Assessee has submitted that neither principle nor law
can assist the revenue in contending that they shall permit depreciation only so
far as the money paid is concerned, but omit to do so with respect to the money
promised. The assets were purchased at a price which is aggregate of the amount
paid and promised. Therefore, the depreciation shall take place of the combined
value of the assets and not in respect of the money paid only. Assessee
submitted that the Hon’ble Apex Court’s attention was not drawn to the fact
that liability on account of gratuity taken over by the purchaser lost the
character of outstanding gratuity and partook the character of consideration in
the hands of the assessee. Once it partook the character of consideration,
there is no reason why the depreciation should not be allowed. The liability on
account of gratuity was in the hands of the seller. The buyer did not enjoy any
service of the employee nor could have been in law liable for payment of any
gratuity to the employees of the seller. The buyer became liable because the
buyer undertook to pay the debt due by the seller. Therefore, the liability is
on account of consideration. Assessee submitted that the case is illustrated by
sub-section 2 of section 43 which provides that paid means, actually paid or
incurred according to the method of accounting. Assessee contended that there
cannot be any dispute that the liability was incurred and it was incurred on
account of acquisition of the assets.

The High Court said that they were bound by the views
expressed by the Apex Court. Therefore, re-consideration, if any, can only be
by Supreme Court and not by the High Court. However the court felt that the
matter needs re-consideration by Supreme Court.

The Assessee filed SLP before Supreme Court
which was granted.

22. Revision – Section 263 – A. Y. 2007-08 – Assessee changing method of accounting in accordance with accounting standard 7 – Known and recognised method of accounting and approved as proper – Not erroneous and prejudicial to Revenue – Revision not warranted

Princ. CIT vs. A2Z Maintenance and Engineering Services
Ltd.; 392 ITR 273(Del):

The assessee was engaged in the construction business. For
the A. Y. 2007-08, the transactions in its return were accepted in the scrutiny
assessment u/s. 143(3) of the Act. The Assessing Officer noted that the
assessee provided maintenance services such as housekeeping and security
services and accepted the returned income without any disallowance. The
Commissioner issued notice u/s. 263 of the Act taking the view that Rs. 11.98
crore shown as deferred revenue income by changing the method of accounting in
accordance with Accounting Standard (AS)-7 resulted in lowering of profit. The
Commissioner finally made the order revising the assessment as erroneous and
prejudicial to the Revenue and remitted the matter for consideration to the
Assessing Officer. The Tribunal set aside the order of the Commissioner.

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

“i)  The ruling of the Tribunal is largely based
upon the recognition of Accounting Standard-7 in the given facts and
circumstances of the case and that in fact the matter had received scrutiny by
the Assessing Officer at the stage of original assessment. Besides this method
was a known and recognised method of accounting and approved as a proper one.

ii)   Therefore,
the Tribunal was right in holding that the exercise of power u/s. 263 of the
Act was not warranted.”

21. Transfer pricing – A. Y. 2006-07 – International transaction – Arm’s length price – Selection of comparables – Company outsourcing major parts of its business cannot be taken as comparable for company not outsourcing major part of its business

Princ. CIT vs. IHG IT Services (India) P. Ltd.; 392 ITR 77
(P&H):

For the A. Y.  2006-07,
the Tribunal excluded the companies N and G from the list of comparables on the
ground that a substantial part of their business was outsourced and outsourcing
exceeded 40%, which was not so in the case of the assessee. In the case of N,
the Tribunal held that it was not a valid comparable also on the ground that
another company had been merged into it.

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

“i)  Both the companies were not appropriate
comparables, since a major part of their business was outsourced, whereas the
major part of the assessee’s business was not outsourced.

ii)  Moreover, the company V had a low employee
cost of Rs. 1.25% of operating revenue. The assessee’s wages to sales was 53%
which was not comparable to V. Thus the exclusion of N and V was justified.”

20. Return – Belated revised return for claiming exemption in terms of Supreme Court decision and CBDT circular – High Court has power to direct condonation of delay and granting of exemption

S. Sevugan Chettiar vs. Princ. CIT; 392 ITR 63 (Mad):

The assessee, an employee of ICICI Bank, retired under the
Early Retirement Option Scheme, 2003. For the year of retirement the assesee
filed the return of income and the assessment was finalised. Subsequently, the
assessee came to know that the Supreme Court, in the case of S. Palaniappan
vs. ITO (2015) 5 ITR-OL 275 (SC) 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) of the Act. Following the decision, the CBDT
issued a circular dated 13/04/2016 stating that the judgment of the 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. On coming to know of this, the assessee filed a
revised return claiming the benefit u/s. 10(10C) of the Act, referring to the
said decision and the circular. The Assessing Officer rejected the claim on the
ground that the revised return was filed beyond the time stipulated u/s. 139(5)
of the Act.

The Madras High Court allowed the assesee’s writ petition and
held as under:

“i)  Clause (c) of sub-section (2) of section 119
of the Income-tax Act, 1961 states that the CBDT may, if it considers as
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. 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
u/s. 226 of the Constitution of India, would also be entitled to consider
whether the assessee’s case would fall within one of the conditions stipulated
u/s. 119(2)(c).

ii)  The Board issued a circular on 13/04/2016 with
a view to grant relief to retirees of the ICICI Bank under the Early Retirement
Option Scheme. The circular issued by the CBDT was in exercise of powers
conferred u/s. 119.

iii)  The assesee being a senior citizen could not
be denied the benefit of exemption u/s. 10(10C) of the Act and the financial
benefit that had accrued to him, which would be more than a lakh of rupees. The
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.”

19. Penalty – Concealment of income – Sections 92CA and 271(1)(c) – Recomputation of arm’s length price of specified domestic transaction not carried out at arm’s length – Transactional net margin method or comparable uncontrolled price method – difference in method leading to rejection of loss claimed in respect of genuine new line of business – Penalty cannot be imposed –

CIT vs. Mitsui Prime Advanced Composites India Pvt. Ltd.;
392 ITR 280 (Del):

Based upon the Transfer Pricing Officer’s Determination of
the arm’s length price, the Assessing Officer rejected the assessee’s claim
that the transactional net margin method was applicable and adopted the
comparable uncontrolled price method u/s. 92CA of the Act, where the difference
in the method led to the rejection by the Assessing Officer of the losses
claimed by the Assessee. The assessee did not appeal as it had consistently
incurred losses. The Assessing Officer initiated penalty proceedings on the
ground that an adverse order u/s. 92C attracted the Explanation 7 to section
271(1)(c). The Assessing Officer was of the opinion that the explanation
offered by the assessee was not satisfactory and did not display good faith,
which was a prerequisite under Explanation 7. He therefore imposed penalty u/s.
271(1)(c) of the Act. The Tribunal found that the assessee had acquired
business from one GSC for supply of products as well as availing the
engineering services to set up a plant for manufacturing the designated
products which included the manufacturing facility and resulted in the sale of
goods and which indicated the benefit derived by the assessee from the three
international transactions with its associate enterprises. The Appellate
Tribunal held that to say that the assessee did not avail of any services at
all was incorrect. It also held that the assessee had not only acquired the new
business but also had availed of the services to set up a plant, the details of
which were disclosed to the Transfer Pricing Officer by a letter, which was
sufficient elaboration of the nature of services availed of by the assessee
under the three international transactions. It also held that since no
manufacturing activity was done by the assessee, in the past as it was simply a
trader, acquiring of “business” and availing of the services under the three
agreements with its associated enterprises could not be characterised as
duplication of services. The Tribunal deleted the penalty.

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

“i)  The Appellate Tribunal did not in any manner
deviate from Explanation 7 to section 271(1)(c) of the Act. Furthermore having
regard to the fact that the assessee’s claim was in respect of a new line of
business of manufacturing introduced for the first time in the given year, its
failure per se could not have trigged the automatic presumptive
application of Explanation 7 of section 271(1)(c) as perceived by the
authorities.

ii) The
application of the exception had to be based on the facts of each case and no
generalisation could be made. The Appellate Tribunal had elaborately dealt with
the rationale in rejecting the imposition of penalty by the Assessing Officer
and had not committed any error of law.”

18. Co-operative society – Deduction u/s. 80P(2)(a)(i) – Society providing credit facilities to members – Finding that assessee not a co-operative bank and its activities confined to its enrolled members in particular area – Class B members enrolled for purpose of availing of loans and not participating in administration are also members – Benefit of exemption cannot be denied to assessee

CIT vs. S-1308 Ammapet Primary Agricultural Co-operative
Bank Ltd; 392 ITR 55 (Mad):

The assessee was a co-operative society involved in banking
and trading activities. It filed a Nil return after claiming deduction u/s.
80P(2)(a)(i) of the Act. The Assessing Officer disallowed the claim of the
assessee on the ground that the assessee had lent monies to the members, who had
undertaken non-agricultural/non-farm activities and had received commercial
interest, that since interest was received, the non-farm sector loans did not
qualify for deduction u/s. 80P(2)(a)(i), that the activity of the assessee was
in the nature of commercial banking activity, that u/s. 80P(2)(a)(i), deduction
was available only if primary agricultural credit societies were engaged with
the primary object of providing financial assistance to its members for
agricultural activities. The Commissioner (Appeals) allowed the assessee’s
claim. The Tribunal perceived that in the definition of “member” u/s. 2(16) of
the Co-operative Societies Act, 1983, the associate member under clause 2(6)
was also included. It held, that therefore, the enrolled class B members who
had availed of loans from the assessee could not be treated as non-members and
consequently held that the assessee was entitled to deduction u/s. 80P(2)(a)(i)
of the Act.

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

“i)  The appellate authorities had clearly
perceived that the assessee was not a co-operative bank and that the activities
of the assessee were not in the nature of accepting the deposits, advancing
loans, etc., but was confined to its members only and that too in a
particular geographical area.

ii)  Exemption u/s. 80P(2)(a)(i) could not be
denied on the ground that the members of the assessee society were not entitled
to receive any dividend or have any voting right or right to participate in the
general administration or to attend any meeting etc., because they were
admitted as associate members for availing of loans only and were also charged
a higher rate of interest.

iii)   The
assessee society was entitled to deduction u/s. 80P(2)(a)(i) of the Act.”

17. Charitable purpose – Registration u/s. 12AA – A. Y. 2009-10 – Cancellation of registration- Assessee a housing development authority constituted under Act of Legislature – No activity demonstrating that assessee not genuine trust – No material indicating that assessee or its affairs not carried out in accordance with object of trust – Registration cannot be cancelled

DIT(E) vs. Maharashtra Housing and Area Development
Authority; 392 ITR 240 (Bom)

The assessee is a housing development authority registered
u/s. 12AA of the Act. The Director of Income-tax (Exemption) received a
proposal from the Assistant Director stating that the assessee had been
carrying on activities in the nature of trade, commerce or business, and had
gross receipts therefrom in excess of Rs. 10 lakh and that the proviso
to section 2(15) of the Act, would be attracted and therefore requested to
consider the withdrawal of registration. The Director referred to the details
of income in income and expenditure account and profit of Rs. 114.48 crore out
of sale of housing and income by way of lease rent, tenancy deposits, and based
on that issued a show cause notice to the assessee. The assessee pointed out
that its activities were in furtherance of the Maharashtra Housing and Area
Development Act, 1976, it had no profit motive, far from indulging in any trade
or commerce and it gave houses to middle class families at affordable rents,
that the income was on account of sale of housing stock and not from a
systematic commerce and business activities. The Director (Exemption) cancelled
the registration. The Tribunal held that the assessee was entitled to
registration and set aside the order of cancellation of registration.

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

“i)  There was nothing referred to by the Director
(Exemption) which could show that the assessee was undertaking any activity
which would demonstrate that it was not a genuine trust or institution. There
was no material which would indicate that the assessee or its affairs were not
being carried out in accordance with the object of the trust or institution.

ii)  These
two aspects referred to in subsection(3) of section 12AA of the Act, and the
materials in that behalf were completely lacking. Therefore, there was no
reason for the Director (exemption) to exercise the power which he purported to
exercise.”

16. Capital gain – Exemption u/s. 54F – Investment of capital gain in purchase of residential house outside India before amendment by Finance No. 2 Act, 2014 – Assessee entitled to exemption u/s. 54F

Leena Jugalkishor Shah vs. 392 ITR 18 (Guj):

The assessee, a non-resident Indian, disposed of property
situated in India and purchased a residential house in United States. The
assessee claimed exemption u/s. 54F of the Act, in respect of the investment of
capital gain in the residential house in United States. The Assessing Officer
held that the residential house purchased outside India was not subject to tax
in India within the meaning of section 54F of the Act, and thus disallowed the
claim for exemption u/s. 54F of the Act. The Tribunal confirmed the
disallowance.

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

“i)  The assessee had purchased a residential house
in the United States out of the capital gains on sale of plot in India and thus
she had fulfilled the conditions stipulated in section 54F of the Act. The
assessee invested the capital gains in a residential house within the
stipulated time.

ii)  There was no condition in section 54F of the
Act at the relevant time that the capital gains arising out of transfer of
capital asset should be invested in a residential house situated in India. The
language of section 54F of the Act before its amendment was that the assessee
should invest capital gains in a residential house. It was only after the
amendment to section 54F of the Act, by the finance (No. 2) Act, 2014, which
came into force w.e.f. April 1, 2015 that the assessee should invest the sale
proceeds arising out of sale of capital asset in a residential house situated
in India within the stipulated period.

iii)  When section 54F was clear and unambiguous,
there was no scope for importing into the statutes words which were not there.
Moreover, when the language of a taxing provision was ambiguous or capable of
more meanings than one, then the court had to adopt the interpretation which
favoured the assessee.

iv)   The
benefit of section 54F before its amendment could be extended to a residential
house purchased outside India and hence the claim of exemption was to be
allowed.”

15. Appellate Tribunal – Order to be passed within 90 days – Section 254(1) and ITAT Rules 34(5)(c) and 34(8) – A. Y. 2009-10 – Rule requiring order to be pronounced within 90 days of conclusion of hearing – Tribunal passing order beyond period of 90 days – Assessee applying rectification on ground delay operated to its prejudice – Rejection not justified – Tribunal to consider rectification application afresh

Otters Club vs. DIT(Exemption); 392 ITR 244 (Bom):

The Tribunal passed the order dated 03/02/2016 u/s. 254(1) of
the Income-tax Act, (hereinafter for the sake of brevity referred to as the
“Act”) 1961 beyond the period of 90 days from the date of conclusion
of its hearing on 22/09/2015 for the A. Y. 2009-10. The assessee’s application
for rectification of the order on the ground that this delay resulted in
prejudice to the parties as binding decisions of co-ordinate Benches though
referred to were ignored, was dismissed.

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

“i)  The Tribunal while rejecting the rectification
application did not dispute the fact that the order dated 03/02/2016 was passed
beyond the period of 90 days from the date of conclusion of its hearing.
However, it recorded that administrative clearance had been taken to pass such
an order beyond the period of 90 days.

ii)  The meaning of “administrative clearance” was
not clear in the face of rule 34(5)(c) read with rule 34(8) of the
Income-tax(Appellate Tribunal) Rules, 1963. The provisions mandated the
Tribunal to pronounce its order at the very latest on or before the 90th day,
after the conclusion of the hearing. Therefore, the order was not sustainable.

iii)  The
Tribunal was to consider the rectification application afresh.”

Sections 22 and 24(a) – Where in terms of lease deed, lessee on expiry of lease term; is required to handover land and building as then standing free from any lien or encumbrance back to the lessor (assessee), then income from leasing of land with a building constructed thereon is chargeable to income tax under the head “Income from house property” and assessee is entitled to claim deduction u/s. 24(a) even if lessee demolishes old building and constructs a new building thereon.

5. [2017] 162 ITD 45 (Chandigarh – Trib.)

Premier Electrical Industries vs. JCIT

A.Y.: 2011-12 Date of Order: 3rd October, 2016

FACTS

The assessee had leased out its land along with building
constructed thereon to ‘S’ Ltd. for a period of 50 years. The lessee had
demolished the whole of old structure and constructed a hotel building on said
land.

The assessee had declared the amount received from lessee
under the head ‘Income from house property’ and had claimed deduction of 30 %
of the said amount u/s. 24(a).

The AO analysed lease deed and inferred that right to
construct on the plot was with ‘S’ Ltd. and so the assessee was not eligible for
deduction u/s. 24(a) of the Act.

The Ld. CIT-(A) also noted that the construction done by
lessee did not belong to the assessee as the lessee was claiming depreciation
on the hotel constructed by it. The Ld. CIT-(A) therefore concluded that rental
income received by the assessee was for leasing out of the land and hence the
same was to be assessed as ‘income from other sources’ and not ‘Income from
House Property’.

On appeal by the assessee before the Tribunal:

HELD

The fact that the assessee had let out the property is not in
dispute. It has been specifically mentioned in the Schedule-1 of lease deed
that land along with building constructed thereon has been let out to the
lessee.

According to the lease deed, the lessee/tenant was at liberty
to raise any type of construction in the property. However, in case lease was
not renewed after 50 years or lease was terminated, the lessee was required to
handover land and building as then standing free from any lien or encumbrance,
back to the lessor (assessee) within one month of expiry of lease period and
lessee would be free to move its movable asset from the hotel structure or any
structure constructed on the land.

It therefore, clearly proves that the assessee had let out
land and building to the lessee along with superstructure and at the time of
vacating the property in question, the assessee would be entitled for
restoration of land/building with superstructure from the lessee. The balance
sheet of the assessee also shows that in earlier year, demised property was
land and building. Therefore, the rental income received out of letting out the
demised property shall be taxable in the nature of income from house property.
Merely because lessee had raised some construction over the demised property,
the assessee would not be disentitled from claiming deduction u/s. 24(a). The
assessee would always be deemed to be owner of land and buildings so let out.

Even if the lessee is claiming deduction of depreciation on
their constructed building, there is nothing to bar the assessee from claiming
deduction u/s. 24(a) of the Act. Further, the authorities below denied claim of
deduction u/s. 24(a) of the Act on the reason that the same is allowed to the
owner of building so that he could carry out requisite repairs to building.
These findings of the authorities below are against the provisions of section
24(a) of the Act, because it is a statutory deduction and would not depend upon
carrying out of any repair in the building. A sum equal to 30% of the annual
value is allowable as a deduction without proving or giving any evidence of any
repair etc.

On the basis of aforesaid discussion, the rental income is
clearly chargeable to tax under the head ‘income from house property’ and the
assessee is entitled to claim deduction u/s. 24(a).

6. Jurisdiction to initiate proceedings u/s. 153C of the Act – the seized document must belong to the assessee is a jurisdictional issue – non satisfaction thereof – would make the entire proceedings taken there under null and void.

Commissioner of Income
Tax III, vs. Arpit Land Pvt. Ltd. and M/s. Ambit Realty Pvt. Ltd. [ Income tax
Appeal no 83 of 2014 and 150 of 2014 dated : 07/02/2017 (Bombay High Court)].

[Arpit Land Pvt. Ltd,
vs. ACIT, and M/s. Ambit Realty Pvt. Ltd. [dated 22/03/2013 ; Mum.ITAT]

In search and seizure
action u/s. 132 of the Act carried out in case of Jay Corporation group. Mr.
Dilip Dherai was managing and handling land acquisition on behalf of Jay
Corporation group. During the course of search, certain documents were found in
possession of Mr. Dilip Dherai on the basis of which the AO after recording
satisfaction u/s. 153C of the Act proceeded to initiate proceedings in respect
of both the assessees.

The Tribunal found that
the documents seized from possession of Mr. Dilip Dherai did not belong to the
assessee. Consequently, it held that the AO did not have jurisdiction to
initiate proceedings u/s. 153C of the Act, as at the relevant time jurisdiction
of AO to proceed consequent to the search is only when money, bullion,
jewellery or other valuable article or thing or books of accounts or documents
seized or requisitioned belongs or belonged to a person other than the person
who has been searched, then the AO having jurisdiction over such person on
being handed over seized document etc could proceed against such other person
by recording satisfaction and issuing a notice in accordance with the
provisions of the Act.

The Tribunal recorded the
fact that the documents seized from the possession of Mr.Dilip Dherai do not
belong to any of two assessees, consequently, the AO did not have jurisdiction
u/s. 153C of the Act to issue notice to the assessee’s.

The Tribunal also held
that satisfaction recorded by the AO before initiating assessment proceedings
in respect of two assessees were also not sustainable. In the above view, the
Tribunal held that the AO did not have jurisdiction to initiate proceedings
u/s. 153C of the Act on the two assessee’s before the high Court .

The Revenue submitted that
the assessees and Mr.Dilip Dherai are all hand-in- glove working in tandem to
acquire land. Therefore, in the above facts the impugned notice under Section
153C of the Act and also satisfaction note recorded by the AO cannot be found
fault with. Thus the impugned order of the Tribunal calls for interference and
these appeals be admitted.

The Hon. High Court noted
that in terms of Section 153C of the Act at the relevant time i.e. prior to 1st
June, 2015 the proceedings u/s. 153C of the Act could only be
initiated/proceeded against a party – assessee if the document seized during
the search and seizure proceedings of another person belonged to the party –
assessee concerned. The impugned order recorded a finding of fact that the
seized documents which formed the basis of initiation of proceedings against
the assessees do not belong to it. This finding of fact has not been shown to
be incorrect.

The High Court also
referred to a similar view taken in CIT vs. Sinhgad Technical Education
Society (2015) 378 ITR 84.

The court observed that, the
requirement of section 153C of the Act cannot be ignored at the altar of
suspicion. The Revenue has to strictly comply with section 153C of the Act. The
seized document must belong to the assessee is a jurisdictional issue and non
satisfaction thereof would make the entire proceedings taken there under null
and void. The issue of section 69C of the Act can only arise for consideration
if the proceedings u/s. 153C of the Act are upheld. Therefore, in the present
facts, the issue of section 69C of the Act is academic. In view of the above,
the revenue Appeal was dismissed.

5. Section 50C is part of Chapter IV-E of the Act – only for purpose of computing the income chargeable under the head ‘Capital gains’ – Cannot be applied in determining income under Chapter IV-D of the Act under the head ‘Profits and gains of business or profession.

CIT – 5 vs. M/s.
Neelkamal Realtors and Erectors India Pvt. Ltd. [Income tax Appeal no 1549 of
2014, dated: 28/02/2017 (Bombay High Court)].

[M/s. Neelkamal Realtors
and Erectors India Pvt Ltd vs. DCIT. [ITA NO. 1143/Mum/2013; Bench : F ; dated
16/08/2013; A Y:2009-10 . Mum. ITAT]

The assessee is a
builder/developer following the project completion method of accounting. During
the previous year relevant to the AY the assessee offered net profit of Rs.
3.63 crore on completion of a project called ‘Orchid Towers’. During the
assessment proceedings, the assesses was asked to furnish party-wise details of
flats sold with details of name and addresses of the buyers, area of flat sold,
total sale consideration, date of agreement, date of receipt of first payment etc.
On the perusal of details as furnished, the AO concluded that there were
variations in prices charged by the assessee to different customers. Therefore,
AO made addition of Rs.15.22 lakh on the basis of difference between the rates
charged in respect of similar flats. Thereafter as a consequence to
rectification application made by the assessee, the AO reduced the addition of
Rs.4.45 crore.

Being aggrieved the
assessee filed an appeal to the CIT (A). The CIT (A) sustained the addition to
Rs.8.53 crore. This on completely new ground, namely, value of the flats had to
be considered not on the basis of consideration received but on application of
the provisions of section 50C as well as section 56(2)(vii)(b)(ii) of the Act.

Being aggrieved, the
assessee filed a further appeal to the Tribunal. The Tribunal held that section
50C of the Act which has been invoked by the CIT (A) would have no application
in the facts of the present case. This in view of the fact that section 50C is
part of Chapter IV-E of the Act dealing with the head ‘Capital gains’. The
aforesaid provision is applicable only for purpose of computing the income
chargeable under the head ‘Capital gains’. It would have no application in
determining income under Chapter IV-D of the Act under the head ‘Profits and
gains of business or profession. Further, the impugned order holds that section
56(2)(vii)(b)(ii) of the Act would have no application as it applies to an
individual or Hindu Undivided Family (HUF). The Assessee here is neither an
individual or HUF. The Tribunal further held that section 56(2)(vii)(b)(ii) of
the Act seeks to levy tax in the hands of the transferee of the flat i.e.
purchase of flat without consideration or for consideration which is less than
stamp duty value of the property in excess of Rs.50,000/-.In this case, section
56(2)(vii)(b)(ii) of the Act is sought to be applied admittedly to a
transferor. The Tribunal further records the fact that section 56 of the Act
which refers to income from other source i.e. not chargeable under other heads
of income. In the present facts, the consideration received on sale of flats
was offered as income under the head ‘Profits and gains of business or
profession’. Further, the Tribunal also holds that the AO without giving any
reason did not accept the explanation offered by the assessee for difference in
consideration received from different customers with regard to sale of flats in
“Orchid Towers” and allowed the appeal of the assessee.

Being aggrieved, the
Revenue filed an appeal to the High Court. The High Court observed that so far
application of section 56(2)(vii)(b)(ii) of the Act is concerned, it is self
evident that it only applies to individuals and Hindu Undivided Family.
Moreover, it seeks to tax the transferee of the property for having given
consideration for which is less than the stamp value by Rs.50,000/- or more for
purchase of the property. Lastly, the finding of Tribunal that the AO did not
deal with explanation offered by the assessee justifying the difference in
prices of similar flats, is a finding of fact. This has not been shown to be
perverse. In the above view, appeal was dismissed.

4.. Service of notice u/s. 143(2) – not served at correct address – the Assessment Order will not be saved by Section 292BB of the Act – Section 27 of the General Clauses Act

CIT vs. M/s. Abacus
Distribution Systems (India) Pvt. Ltd. [ Income tax Appeal No. 1382 of 2014,
dated : 07/02/2017; AY: 2006-07 (Bombay High Court)].

[M/s. Abacus
Distribution Systems (India) Pvt. Ltd. 
vs. DCIT. [ITA No. 8226/MUM/2010 ; Bench : K ; dated:06/12/2013 ; A Y:
2006-07 . MUM. ITAT ]

The assessee filed its
return of income on 20th November, 2006 wherein its address is
mentioned at Nariman Point, Mumbai 400 021.” On 23rd November, 2006,
the assessee filed a communication to the AO intimating him that the address of
the assessee had now changed and its new address was intimated at Dadar (W),
Mumbai – 400 028.”

On 28th
November, 2007 a notice u/s. 143(2) of the Act was issued by the AO to the
assessee at its original address of Nariman Point, Mumbai. On 29th
November, 2007 Income Tax Inspector filed a report stating that he had visited
the office premises of Nariman Point, Mumbai to serve the notice u/s. 143(2) of
the Act, but no such company was found in occupation of the address as
communicated in the return of income.

On 30th
November, 2007, the AO handed over the notice u/s. 143(2) of the Act to the
Post Office for service of the notice addressed to the erstwhile office of
Nariman Point, Mumbai of the assessee.

On 11th
December, 2007, the AO once again sent a notice u/s. 143(2) by post to the
assessee. However, this time it was addressed to the new office premises of the
assessee at Dadar, Mumbai.

On 12th
December, 2007 a notice was served upon the assessee fixing the hearing for the
subject assessment year on 17th December, 2007. Immediately on
receipt of the above notice the assessee on 13th December, 2007 had
objected to the assessment proceedings for the subject AY on the ground that no
notice u/s. 143(2) of the Act has been served within the statutory period of 12
months as provided in proviso to section 143(2) of the Act.
Notwithstanding the above, on 9th September, 2010 the AO consequent
to the directions of the Dispute Resolution Panel passed an Assessment Order
u/s. 143(3) r.w.s. 144C(13) of the Act.

Being aggrieved with the
order, the assessee filed an appeal to the Tribunal. The Tribunal allowed the
assessee’s appeal holding that in terms of section 143(2) of the Act, it is
mandatory for the AO to serve a notice u/s. 143(2) of the Act before the expiry
of 12 months from the end of the month in which the return is furnished. It is
undisputed position that the assessee had informed the AO as far back as 23rd
November, 2006 of the change in its address from Nariman Point, Mumbai to
Dadar(W), Mumbai. Notwithstanding the above, on 30th November, 2007
the AO sent a notice u/s. 143(2) by post at the old address. It was only later
on 11th December, 2007 that the AO sent a notice u/s. 143(2) to the
assessee at its new address. Taking into account the fact that the assessee had
objected at the very first instance to the assessment being taken up for
completion, in the absence of the mandatory requirement of section 143(2) of
the Act being satisfied i.e. service thereof within one year from the end of
the month in which the return is filed. The Tribunal held that the assessment
order dated 9th September, 2010 for the subject AY to be null and
void.

Being aggrieved, the
Revenue carried the issue in appeal to the High Court. The Hon. High Court
observed that the notice u/s. 143(2) of the Act which was handed over to the
post office on 30th November, 2007 was incorrectly addressed. In
terms of section 282 of the Act as existing in 2007, a notice may be served on
the person named therein either by post or as if it were a summons issued by
the Court under the Code of Civil Procedure. Section 27 of the General Clauses
Act provides that where any Central Act requires a document to be served by
post where the expression “serve” or “given” or “sent” shall be deemed to have
been effected by properly addressing, prepaying and posting. In such cases,
unless the contrary is proved which would be deemed to have been served at the
time when the letter would be delivered in the ordinary course of post to the
addressee. In this case admittedly the envelope containing the notice was
wrongly addressed. Thus the presumption u/s. 27 of the General Clauses Act
cannot be invoked. It is very pertinent to note that subsequently i.e. on 11th
December, 2007 the AO served the notice upon the correct address of the
assessee. This posting to the correct address was on the basis of the record
which was already available with the AO by virtue of letter dated 23rd November,
2006 addressed by the assessee to the AO. Moreover, as the objection to the
Assessment proceeding was taken much before the Assessment proceedings were
completed on the basis of no service of notice before the expiry of the period,
the Assessment Order will not be saved by section 292BB of the Act.

In the above view, the
Tribunal correctly held the notice u/s. 143(2) has not been served at the
correct address on or before 30th November, 2007. Accordingly,
Appeal was dismissed.

14. Penalty: Section 271(1)(c) – A. Ys. 2003-04 to 2006-07- Assessing Officer initiating penalty proceedings for furnishing of inaccurate particulars of income and imposing penalty for concealment of income- Order imposing penalty to be made only on ground on which penalty proceedings initiated and not on fresh ground of which assessee had no notice- Penalty to be deleted

CIT vs. Samson
Perinchery; 392 ITR 4 (Bom):

The Assessing Officer
issued notice for penalty u/s. 271(1)(c) of the Act, 1961 on the ground of
furnishing inaccurate particulars of income. However, he passed order imposing
penalty on the ground of concealment of income. The Tribunal deleted the
penalty on the ground that the initiation of penalty by the Assessing Officer was
for furnishing inaccurate particulars of income while the order imposing
penalty was for concealment of income and it could not be that the initiation
would be only on one limb, i.e. for furnishing inaccurate particulars of income
while imposition of penalty on the other limb, i.e. concealment of income.

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

“i)  The
satisfaction of the Assessing Officer with regard to only one of the two
breaches u/s. 271(1)(c) of the Act, for initiation of penalty proceedings would
not permit penalty being imposed for the other breach. Thus, the order imposing
penalty was to be made only on the ground on which the penalty proceedings were
initiated and it could not be on a fresh ground of which the assessee had no
notice.

    

ii)  The Tribunal rightly deleted the penalty. The appeals are
dismissed.”

13. Income – Assessability – Land purchased for company by its director – Land shown as stock-in-trade of company – sale of land also shown in books of company and gains offered for tax – gains not assessable in hands of director

CIT vs. Atma Ram Gupta;
392 ITR 12(Raj):

The assessee was a
director of a company engaged in real estate business. In the course of
business, the company purchased land in the name of the director and duly
accounted for it in the books of the company. The sale proceeds of the land at
Rs. 1,51,80,000/- were duly recorded in the books of account of the company and
business profits were offered to tax in the case of the company. However, the
Assessing Officer was of the opinion that the resultant gain being short term capital
gains amounting to Rs. 1,23,47,880/- is liable to be taxed as short term
capital gains in the hands of the assessee. The Tribunal set aside the
assessment.

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

“i)  The
material placed by the assessee and considered by both the appellate
authorities, clearly proved that the assessee being a director executed title
deeds for and on behalf of the company and the beneficial owner for all
practical purposes was the limited company which had even paid due taxes later
on at the time when the property was sold.

ii)            The finding by the appellate Tribunal was essentially a
finding of fact based on the material on record after appreciation of evidence
and no question of law much less a substantial question of law could be said to
arise out of the order passed by the Tribunal and there was no perversity in
the order impugned so as to call for interference of the court. The amount was
not assessable in the hands of the assessee.“

12. Educational Institution – Exemption u/s. 10(23C)(vi) – A. Ys. 2008-09 and 2009-10 – CBDT Circular to the effect that approval granted on or after 01/12/2006 to operate in perpetuity till withdrawn – Assessee seeking exemption for A. Y. 2008-09 but withdrawing it pursuant to CBDT Circular – Order of Commissioner holding application delayed and denying exemption – Contrary to law – Assessee entitled to exemption – Directions to Commissioner to pass fresh orders

Param Hans Swami Uma
Bharti Mission vs. CCIT; 391 ITR 131 (P&H):

The assessee, an
educational institution, was granted exemption u/s. 10(23C)(vi) of the Act,
1961 for the A. Y. 2007-08 by the Chief Commissioner. The Assessee filed an
application seeking exemption for the A. Y. 2008-09, but was served with a
notice u/s. 147 on the premise that no exemption order was passed u/s.
10(23C)(vi). The Assessing Officer dropped the reassessment proceedings in view
of the Circular No. 7 dated 27/10/2010, issued by CBDT which clarified that the
approval issued once is perpetual till it was withdrawn. The assessee filed an
application to withdraw the application for exemption. The Chief Commissioner
ignoring the Circular dismissed the applications as barred by time and held the
assessee disentitled to exemption for the A. Ys. 2008-09 and 2009-10.

The assessee filed writ
petition challenging the said order. The Punjab and Haryana High Court allowed
the writ petition and held as under:

“i)  As
clause (4) of the CBDT Circular No. 7 of 2010 provided that an exemption once
granted operated in perpetuity till it is withdrawn, the orders passed by the
Department ignoring the circular were contrary to law and liable to be set
aside.

       

ii)  The Commissioner was to pass fresh order on the
application considering the relevant      clause of the circular.”

11. Disallowance of expenditure – Exempt income – Section 14A – A. Y. 2011-12 – Section 14A cannot be invoked where no exempt income was earned by assessee in relevant assessment year

CIT vs. Chettinad
Logistics (P.) Ltd.; [2017] 80 taxmann.com 221 (Mad)

The assessee was engaged
in the business of trading, clearing and forwarding. The Assessing Officer had
added certain amount by disallowing expenditure u/s. 14A of the Act, 1961. The
Commissioner (Appeals) deleted the addition. During the course of arguments
before the Tribunal, the assessee advanced a submission, that in cases, where
investments were made in sister concern (s) out of interest free funds, for
strategic purposes, the provisions of section 14A could not be invoked. The
Tribunal remanded the matter to the Assessing Officer so as to reach a
conclusion as to whether investments had been actually made in sister concerns
of the assessee, out of interest free funds

On appeal by the Revenue,
the Madras High Court held as under:

“i)  This
exercise, in the given facts which emerge from the record, was clearly
unnecessary, as the Commissioner (Appeals) had returned the finding of fact
that no dividend had been earned in the relevant assessment year. Section 14A,
can only be triggered, if, the assessee seeks to square off expenditure against
income which does not form part of the total income under the Act.

ii)  The
Legislature, in order to do away with the pernicious practice adopted by the
assessees, to claim expenditure, against income exempt from tax, introduced the
said provision. In the instant case, there is no dispute that no income i.e.,
dividend, which did not form part of total income of the Assessee was earned in
the relevant assessment year. Therefore, the addition made by the Assessing Officer
by relying upon section 14A, was completely contrary to the provisions of the
said section.

iii)  The
revenue submitted that it could disallow the expenditure even in such a
circumstance by taking recourse to Rule 8D. Rule 8D only provides for a method
to determine the amount of expenditure incurred in relation to income, which
does not form part of the total income of the assessee. Rule 8D cannot go
beyond what is provided in section 14A. Therefore, rule 8D cannot come to the
rescue of the revenue.

iv)           In any event, the Tribunal, via, the impugned judgment has
remitted the matter to the Assessing Officer. Therefore, for the foregoing
reasons, no interference is called for qua the impugned judgment.”

10. Capital asset – Agricultural land – Sections 2(1A) and 2(14) – A. Y. 2007-08 – Where assessee sold a piece of land in view of fact that assessee had planted various fruit bearing trees on land and produce was being used for personal consumption and, moreover, assessee had not filed an application for conversion of land for non-agricultural propose, it was not a ‘capital asset’ u/s. 2(14) and, thus, gain arising from sale of it was exempt from tax

Shankar Dalal vs. CIT;
[2017] 80 taxmann.com 41 (Bom):

The assessee was
individual deriving income from salaries and income from other source (interest
income). He was also co-owner of an ancestral agricultural land along with
other family members. The land was situated within the limits of village
Panchayat. During relevant year, i.e. A. Y. 2007-08, assessee sold said land.
He claimed gain on sale of agricultural land as exempt since the land did not
constitute ‘Capital Assets’ as defined u/s. 2(14). The Assessing Officer
rejected assessee’s claim holding that the land did not constitute agricultural
land since no agricultural operations were carried out regularly and same was
sold to a company engaged in the business of development of infrastructure
activity. The Tribunal upheld the order of Assessing Officer.

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

“i)  The
impugned order and the whole action of the department proceeds on the
foundation that the land in question so transferred is a “non-agricultural
land” and falls within the ambit of “non-agricultural land”
because of use and/or non-use and/or stated to be unused for specific
agricultural purpose for want of labour and no-agricultural operations and/or
no specific regular income continuously for three years, as required and many
other such facets.

ii)  For the
purposes of such transfer of land, one has to consider the provisions of the
Goa, Daman and Diu Land Revenue Code, 1968. (Code) and the Rules made
thereunder and so also the definition so provided to deal with the concept of
“agricultural land”. Under the Code, there was no bar that an
agriculturist and/or one who possesses agricultural land cannot transfer such
land to any third party who is not agriculturist. Nothing contrary has been
pointed out and/or placed on record that any permission and/or formalities are
required to be completed before transfer of such lands. Under the Code, a transfer
could be made to a non-agriculturist and/or to a person whose activities are
not related to agricultural project or purpose

iii)  The
assessee had received the consideration. Admittedly, the property was not
divided and/or sub-divided. Admittedly, before transfer of the property, the
parties were fully aware about the nature of the land which includes rocky
area, used and usable area for agricultural, number of trees, plants growing or
in existence for so many years, apart from certain plantations. Being the
ancestral agricultural property, the families were using the agricultural
produce for their own consumption.

iv) Here, at
this stage, it is relevant to note the definition of the term
“agriculture”. This definition, ought not to have been overlooked,
while taking any action against the assessee. The definition itself provides
that expression “agriculture” means raising of useful or valuable
products which derive nutriment from the soil with the aid of human labour.
This inclusive definition, no where provides and/or takes away rights of the
assessee to treat such land as an agricultural land which they had been using
before transfer and/or till the date it came to be transferred as an
“agricultural land”

v)  The
definition of “agriculture” itself permitted, such unused land to be
used and utilised even for grazing, horticulture, dairy farming, stock
breeding. This is clear terms of the law and so also the intent of the Code
which governs such agriculture land and its transfer. The report so submitted
and/or referred to by the department against the assessee, is unsustainable,
unacceptable and contrary to the specific provisions of the Code. All the
“agriculture” activities so defined covers the agriculture land in
question. Therefore, exemption from the capital gain is the only option, on
fact and the law.

vi) The whole
approach of the Tribunal and the Assessing Officer is incorrect and
unsustainable in law. Section 105 of the Code further clarifies the position
with regard to presumption of correctness of entries in the record of rights
and register of mutations. It provides that an entry in the record of rights,
and certified entry in the register of mutation shall be presumed to be true
and until the contrary is proved or a new entry is lawfully substituted
therefor. The assessee has placed on record material to justify their claim.
There is no issue with regard to assessee’s ownership, title and the name
recorded in the land records at the relvant time. Even, otherwise, in view of
settled position of law, all concerned are bound by the entries, unless contra
material is placed on record. On the contrary, adverse findings are given by
the department solely based upon the so called inspection initially taken at
the stage of assessment by the concerned officer and later on by the Tribunal
Members. But the fact is that this inspection reports, in no way, has
considered the purpose and object of the Code and the definition of
‘agriculture’ so liberally mentioned.

vii) The
finding of facts recorded by the Tribunal itself confirms the position that the
case of the assessee falls within the ambit of definition of
“agriculture” as defined under the Code. The property requires to be
treated as agricultural land and its ‘activities are “agricultural”
in nature. In view of above, it is held that the property in question cannot be
treated as “capital asset” as contemplated u/s. 2(14)(iii). It is
wrong to hold, in view of the facts and circumstances and the nature of
agricultural land because of peculiar situation of the land near the sea side
or stony side of the sea, that assessees are not doing any regular agriculture
operation, this is also on the ground that they never showed agriculture income
out of it. Any agriculture produce and products can be for personal use also.

viii)In the result, the
impugned order of the Tribunal is set aside and assessee’s appeal is allowed.”

9. Capital gain or business income- A. Y. 2006-07 – Where assessee converted the stock-in-trade of shares into investments and sold the same at a later stage, profit arising from sale of shares shall be deemed to be capital gains and not business income -Since shares were held as long-term capital asset, profit arising from sale of share shall be exempt from tax u/s. 10(38)

Deeplok Financial
Services Ltd. vs. CIT; [2017] 80 taxmann.com 51 (Cal):

The assessee was a company
which was engaged in the business of leasing, finance and investment. On 1st
April, 2004, i.e. during the previous assessment year 2005-06 the
assessee transferred certain shares from its trading stock into investments. In
the A. Y. 2005-06, the assessee sold some of those shares and some more shares
were sold in the A. Y. 2006-07, the relevant year. The assessee claimed the
profit as capital gain and for the A. Y. 2006-07 claimed exemption u/s. 10(38)
of the Act, 1961 as long term capital gain. In the assessment u/s. 143(3) of
the Act, for the A. Y. 2005-06, the Assessing Officer did not accept the
assessee’s claim for conversion of shares from stock-in-trade into investment.
That decision was appealed against and carried up to the Tribunal which
confirmed the same. The assessee though preferred a delayed appeal to the High
Court but was unsuccessful in having the delay condoned and thereby lost that
right of appeal. For the assessment year under consideration i.e. A. Y.
2006-07, the Assessing Officer following the assessment order of the previous
year held accordingly on this claim of conversion by the assessee. The CIT(A)
allowed the assessee’s appeal but the Tribunal upheld the decision of the
Assessing Officer following its order for the A. Y. 2005-06.

The assessee filed appeal
before the Calcutta High Court and raised the following substantial question of
law:

     “Whether
on the facts and circumstances of the case the Tribunal erred in affirming the
order of the AO disregarding the conversion of the trading shares into
investment shares and treating the long term capital gain of Rs.22,27,819/-
arising from the sale of those shares as profit of trading in shares and
bringing the same to tax?”

The High Court formulated
another substantial question of law as under:

     “Whether
the Tribunal was correct in holding that the profit arising from the sale of
the said shares is chargeable to tax in the hands of the assessee as its
business income and not long term capital gain since in the assessee’s own case
in the previous assessment year the conversion of the shares was not accepted
by the Tribunal?”

The High Court decided to
answer both the questions. The High Court held as under:

“i)  A person
cannot transact with himself. It is only after the asset is dealt with to a
third party can a profit or loss be ascertained on the basis thereon. There was
no bar imposed by the Income Tax Act, 1961 on an assessee from converting its
stock-in-trade into investment. That conversion could not be deemed to be a
transaction but when the asset is dealt with, the profit or loss is to be
ascertained and in the case of capital asset, if there is profit then to be
assessed as capital gain. That if shares be disposed of at a value other than
the value at which it was transferred from the business stock, the question of
capital loss or capital gain would arise.

ii)  In
Dhanuka & Sons(1980) 124 ITR 24 (Cal), the same situation was contemplated
where on stock transferred in investment account, the question of capital loss
or capital gain, was held, would arise if such shares be disposed of at a value
other than the value at which it was transferred from the business stock. We,
on noticing that the Tribunal did not really hold otherwise but had held
against the assessee on the point of res judicata, had formulated the
above question. Nevertheless for the reasons aforesaid we answer the question
suggested by the assessee in the affirmative and in its favour. In that regard
the said circular dated 29th February, 2016 has no application
because the assessee’s stand was not accepted by the Revenue.

iii)  So far
as the formulated question relating to res judicata is concerned, in
answering the same reference may be had to the decision in Amalgamated
Coalfields Ltd. & Anr. vs. Janapada Sabha Chhindwara; AIR (1964) SC 1013
in which the Supreme Court, inter alia, held that generally, questions
of liability to pay tax are determined by Tribunals with limited jurisdiction
and so, it would not be inappropriate to assume that if they decide any other
questions incidental to the determination of the liability for the specific
period, the decisions of those incidental questions need not create a bar of res
judicata while similar questions of liability for subsequent years are
being examined.

iv) This
assessee lost its right of appeal to this Court on the question arising in the
previous assessment year on account of delay in preferring the same. There was
no adjudication on merits, of its claim of conversion, on appeal to the High
Court. The only reason given by the Tribunal in rejecting the claim of the
assessee for the previous assessment year, as would appear from its order dated
13th May, 2011, is that to the Tribunal it appeared there is no
provision in the Act in respect of conversion of stock-in-trade into investment
and its treatment. Hence, it held that the lower authorities rightly made the
addition as there was understatement of income by analysing the assessee’s
trading and investment account in shares. Thus, before us there is no
impediment for the assessee to seek adjudication on the point. The question
formulated is answered accordingly and in favour of the assessee.”

8. Business expenditure – Deduction on actual payment – Sections 37 and 43B – A. Y. 2007-08 – Export and import business – Misdeclaration- Evasion of customs duty – Search and arrest – Bail order by court on condition assessee’s deposit amount to be appropriated towards differential liability by custom authorities – Recovery of customs duty from amount deposited by assessee evident from order of Principal Commissioner of Customs. Allowable expenses

Princ. CIT vs.
Praveen Saxena; 391 ITR 365 (Del):

The assessee was a
proprietor of a concern doing export and import business. A search was
conducted by the customs authorities in the premises. The assessee was arrested
subsequently by the Directorate of Revenue Intelligence on the suspicion of
evasion of payment of duties. In the course of the court proceedings, the
customs authorities had contended that bail could be granted to the assessee
only if a substantial amount of the customs duty and penalty levied was
deposited. Therefore, the court directed the assessee to deposit the amount
which was to be appropriated by the customs authorities. In addition the
assessee was also directed to furnish an adequate security amount. For the A.
Y. 2007-08, the assessee claimed that the amount of deposit had to be allowed
u/s. 43B of the Income-tax Act,(hereinafter for the sake of brevity referred to
as the “Act”) 1961. The Assessing Officer disallowed the expenses on
the grounds that the amount was a penalty and consequently, even otherwise, in
the absence of an adjudication order, no amount was payable. The Commissioner
(Appeals) and 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)  It was
evident from the order of the Principal Commissioner of Customs that the duty
element and the identical amount of penalty had been determined. If there was
no misdeclaration by assessee to the customs authority and consequential
differential liability towards differential duty, the Department could not have
contended that the amount duly paid constituted allowable expenditure on
account of statutory liability u/s. 43B of the Act. The assessee did not do so
but was rightly made to do so did not in any manner detract its basic liability
which it always had to satisfy.

ii)  Therefore,
the contentions of the Department were misconceived and were rejected. The
deposit amounts paid were expenses and within the ambit of section 43B. The
appeal is dismissed.”

7. ALP – International transaction – Sections 92 and 92C – R. 10B of I. T. Rules 1962 – A. Y. 2008-09 – Comparables accepted for earlier years excluded – Onus on Department to justify exclusion –

CIT vs. Welspun Zucchi
Textiles Ltd.; 391 ITR 211 (Bom):

The assessee was in export
business and entered into international transactions with its associated
enterprises. The assessee determined arm’s length price of exports to its
associated enterprises for the  A. Y.
2008-09, by benchmarking the price of exports of comparable companies, SEL and
VTI which had been accepted as comparables for the earlier assessment years.
Accordingly, no transfer pricing adjustment was made by the assessee. The
Transfer Pricing Officer while determining arm’s length price excluded two
companies SEL and VTI without assigning any reasons and enhanced the price of
exports made by the assessee to its associated enterprises. The Assessing
Officer in terms of the order of the Transfer Pricing Officer enhanced the
income on account of international transactions and passed an order. The
Tribunal held that the exclusion of the two companies was not justified.

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

“i) If the
Department was of the view that only because of the losses of the assessment
year in question the two companies were not comparable, further examination or
enquiry ought to have been done by it to find out whether loss was a symptom of
the reference points in Rule 10B(2) of the Rules making them non-comparable. It
was more so as the Department did not dispute that otherwise the two companies
were comparables to the assessee even on the parameters laid down in Rule
10B(2).

ii)  Therefore,
if the Department sought to discard the two companies SEL and VTI from the
comparables for the assessment year in question, the onus was upon the
Department to justify it. A finding has been recorded that the Department had
not shown that the two companies were consistently loss making companies, which
required examination to ascertain if it was hit by one of the reference points
mentioned in Rule 10B(2).

iii)  The
Department itself has accepted the companies SEL and VTI as comparables for the
earlier assessment years. The appeal is dismissed.”

Expenditure by Pharmaceutical Companies On Doctors

Issue for Consideration

Explanation 1 to section 37(1) declares, for the removal of
doubts, that any expenditure incurred for a 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 shall be allowed for such an
expenditure.

It is the usual industry practice for companies, engaged in
the business of manufacturing pharmaceutical products, to distribute their
products amongst the medical practitioners by way of free samples and gift
articles; to conduct and sponsor seminars and lectures in and outside India; to
hold dinner and parties; to sponsor holidays and pay for travel and
accommodation of doctors and their spouses and incur such other expenses.

The expenditures so incurred is usually classified as the
advertisement and sales promotion expenses and is claimed as a business
expenditure. The validity of such claim is examined by the Supreme Court in the
case of Eskayef Pharmaceuticals Ltd, 245 ITR 116 (SC), in the context of section
37(3A), now omitted. A controversy has arisen, on account of the
conflicting decisions of the Tribunal, in the recent years, on the subject of
allowance or otherwise of the deduction of such expenditure, post issue of a
circular No.5 dt. 1.08.2012 by the CBDT in pursuance of the amendments of 2009
in the Indian Medical Council (Professional Conduct, Etiquette & Ethics)
Regulations, 2002 ( ‘Regulations’).

Liva Healthcare Ltd’s case.

The issue had first arisen in the case of Liva Healthcare
Ltd. vs. DCIT, 161 ITD 63. In the said case, the company for assessment
year 2009-10 had incurred expenditure on travel and accommodation of doctors
and their spouses to Istanbul and Hongkong and towards distribution of free
samples to the physicians. The tours were conducted to promote the products and
samples were distributed free of cost as a necessity of business requirement of
the assessee. The company had submitted before the AO that the expenditures
were incurred, including on samples given free of cost to doctors, to obtain
information regarding efficacy of the medicine and for the purposes of
advertisement, publicity and sales promotion; that samples were given free of
cost to the doctors so that they could try the same on patients and inform the
medical representative of the assessee about their results and their
experiences; that the nature of the product sought to be sold was such that it
could be done through the doctors alone and as such promoted sales also; that
when such expenditure was incurred on doctors and samples were given to
doctors, certain amount of good relationship was created with them who might
then buy or prescribe those medicines in preference to other similar products.
In a nutshell, it was explained that the twin purpose of such expenditures was
to test the efficacy of the products as well as for advertisement, publicity or
sales promotion. It was also submitted that the samples were manufactured as
“physician samples not for sale” and the suppliers invoices were
marked as “physician samples” only. The assessee relied upon a few
decisions including the decision in the case of Eskayef Pharmaceuticals
(India) Ltd., (supra) :

In assessing the total income, the A.O. disallowed the
expenditure incurred on travel and accommodation in full and also disallowed
25% of the expenditure claimed on distribution of free samples by applying
Explanation 1 to section 37(1) of the Act. The CIT(A) upheld the
disallowance of the travel and accommodation expenditure but deleted the
addition on account of disallowance of the expenditure in part of distribution
of the free samples by allowing the appeal of the assessee company, in part.

In cross appeals to the Tribunal, the revenue relied upon the
order of the A.O. while the assessee company reiterated its stand taken before
the A.O. Significantly, it brought to the notice of the Tribunal the order
passed by the Tribunal in its own case for assessment year 2008-09. The
Tribunal examined the provisions of the said Regulations of 2002 and in
particular clauses 6.4 and 6.8 as also the then newly amended clause
6.8. It also took into consideration the decision of the Himachal Pradesh
High Court in the case of the Confederation of Pharmaceutical Industry vs.
CBDT, 355 ITR 388 wherein validity of the said CBDT circular No. 5 of
2012 and the said Regulations of 2002 governing professional ethics
of doctors was challenged and was found by the court to be as per the law and
salutary and issued in the interest of public and patients. The Tribunal also
took note of the decision of the Punjab and Haryana High Court in the case of CIT
vs. Kap Scan and Diagnostic Centre (P.) Ltd., 344 ITR 478, wherein the
court had confirmed the disallowance of commission paid to the doctors, as not
allowable u/s. 37(1) of the Act, being against public policy and
prohibited by law.

The Tribunal at the outset expressed their agreement, in
principle, with its decision in assessee’s own case for assessment year
2008-09, so far as the expenditure incurred on distributing free samples to
test the efficacy of the pharmaceutical products, in accordance with the ratio
of the case of Eskayef Pharmaceuticals (India) Ltd. (supra), at the
initial stage of introduction of the products to get the feedback of the users
and held that such expenses could be said to be incurred wholly and exclusively
for the purposes of business satisfying the mandate of section 37 of the Act.
The Tribunal held that the physicians’ samples were necessary to ascertain the
efficacy of the medicine and for introduction of a new product in the market,
it was only by distributing the free samples that the purpose was achieved.

The Tribunal however proceeded to hold that where a
particular medicine had already been introduced into the market, in the past,
and its uses were established, giving of free samples could only be as a
measure of sales promotion and advertisement and that the ratio of the said
decision in the case of Eskayef Pharmaceuticals (India) Ltd.(supra),
delivered in the context of section 37(3A) of the Act, did not apply due to the
fact that the Finance Act, 1998 had thereafter, introduced an Explanation to
section 37(1) of the Act which required that an expenditure, the purposes
which was an offence or prohibited under the law, was disallowed.

The Tribunal noted that the purpose for incorporation of the
said Explanation to section 37(1) had been explained by the CBDT in Circular
No. 772, dated December 23, 1998. It further noted that the said Regulations
of 2002 prohibited, vide regulation 6.4.1, a physician from receiving any
gifts, gratuity, commission or bonus in consideration or return for referring
the patients for medical, surgical or other treatment.

It held that once the pharmaceutical products were
distributed after the products were introduced in the market and its uses were
established, giving of free samples to doctors and physicians would be a measure
of sales promotion which would be hit by regulation 6.4.1 of the said Regulations
of 2002. It further held that the said regulation had a force of law and
the receipt of free samples amounted to receipt in consideration of or return
for referring patients and that such receipts were prohibited under regulation
6.4.1 of the said Regulations of 2002 inasmuch as the stated
objective of giving free samples to the doctors and physicians was to induce
them to write prescriptions of the said pharmaceutical products. It held that
the expenses could not be allowed as deduction while computing income from
business or profession.

The Tribunal drew support from the decision in the case of Eskayef
Pharmaceuticals (India) Ltd. (supra) to hold that the test laid down by the
court, read in conjunction with Explanation to section 37 of the Act and
regulation 6.4.1. of the said Regulations of 2002, made it clear
that the expenditure on such free samples was hit by the Explanation to
section 37 of the Act and was not allowable as deduction.

In conclusion, the Tribunal held that the expenditure on
foreign travel and accommodation of doctors and their spouses was incurred with
the intent and the objective of profiting from the distribution and
entertainment and had a direct nexus with promoting the sales and
profitability, all of which made such expenditure violate the provisions of the
said Regulations of 2002. It held that the expenditure was incurred to
seek favours from the doctors by way of recommendation of the company’s
products which was an illegal gratification, was against public policy, was
unethical and was prohibited by law. Accordingly, the expenditure in question
was liable for disallowance in full as was held by the A.O. and the CIT(A).

PHL Pharma (P) Ltd.

The issue had again arisen in the case of PHL Pharma (P)
Ltd. vs. ACIT, 163 ITD 10(Mum. ). In this case, the assessee company had
debited an amount aggregating to Rs. 83.93 crore to the Profit & Loss
Account towards advertisement and sales promotional expenses, for the year
ending on 31.03.2010. The said expenditure included expenses on distribution of
free samples and gift articles to medical practitioners and doctors, besides
the expenditures on conducting seminar and lecture meetings, journals and
books, travel and accommodation and such other items and things. The A.O.
disallowed an amount of Rs. 23 crore being that part of the expenditure that
was incurred on or after 10.12.2009, i.e. the date of notification of the said
amendments in the said Regulations of 2002. On appeal, the CIT(A) agreed
with the case of the assessee company and allowed the appeal.

On appeal by the Income tax Department to the Tribunal, it
was held as under:

–   The said Regulations of 2002 dealt
with the professional conduct, etiquette and ethics for the registered medical
practitioners, only; it requires that they shall not aid or abet or commit any
of the prescribed unethical acts; it laid down the code of conduct for doctors
in their relationship with pharmaceutical and allied health sector industry.

–   The CBDT Circular No. 5 of 2012 had
heavily relied upon the said Regulations of 2002.

–   The code of conduct has meant to be followed
and adhered to by the medical practitioners and doctors alone and did not apply
any manner to pharmaceutical companies and the Delhi High Court in the case of Max
Hospitals vs. MCI had confirmed this position in WPC 1334 of 2013 dt.
10.01.2014.

–   The Indian Medical Council did not have any
jurisdiction nor had any authority upon the pharmaceutical companies and could
not have prohibited such companies in conduct of their business.

–   As far as the company was concerned, there
was no violation of any law or regulation. The provisions of section 37(1)
applied to a company claiming the expenditure and the violation of section
37(1) was to be examined w.r.t the company incurring the expenditure and not
the doctors who were the beneficiary of the expenditure. Even the additional
prohibition prescribed on 01.12.2016 applied only to the medical practitioners
and not to the pharmaceutical companies .

–   The punishments or penalties prescribed in
the said Regulations applied only to the medical practitioners and not to the
companies.

–   The CBDT in issuing the said circular No.
5 had enlarged the scope of the said Regulations by applying it to
the pharmaceutical companies without any enabling provisions to do so. It had
no power to create a new impairment adverse to an assesee or a class of
assessees, without any sanction of law. The circular issued should have
confirmed with the tax laws and should not have created a new burden by
enlarging the scope of a different regulation.

–   The circular in any case could not be
reckoned retrospectively i.e., it could not be applied before the date of its
issue on 01.08.2012.

–   The expenditure incurred by the assessee
company was in the nature of sales and business promotion and was to be
allowed; the gift articles bore the logo of the assessee and could not be held
to the freebies; the free samples proved the efficacy of the products of the
company and again were not in violation of the said Regulations framed
by the Medical Council of India.

–   The decision in the case of Confederation
of Indian Pharmaceutical Industry (supra) upheld the validity of the said
circular with a rider that no disallowance should take place where the assessee
satisfied the authority that the expenditure was not in violation of the Regulations
framed by the Medical Council of India.

–    The assesseee company, in the opinion of the
CIT(A),  in the case had proved that the
expenditure were not in violation of the said Regulations.

–   The action of the CIT (A) was upheld and the
expenditure claimed was allowed by the Tribunal.

Observations

The conflicting decisions have brought out a very interesting
issue wherein all the sections of the society are required to address a few
pertinent questions; whether one can participate in an offence, even trigger
it, and still not be accused of the offence? For example, can one give a bribe
to a government official and still plead that he cannot be punished or can one
pay a ransom and plead that he cannot be punished? Can one be a party to illcit
activities and plead that not him but the other person be punished for the
crime? Can one be an abettor or instigator of a crime or an offence and plead
innocence?

It may be possible to legally resolve the controversy by
holding, that in the absence of a provision of law that expressly provides for
the conviction, in explicit words, of both the parties to an offence, one of
the parties to an offence, though found to be abetting the offence, will go
scot free. The apparently simple answer may not remain so when the facts are
tested on the touchstone of public policy and ethics and importantly the
questions raised. In our view, these are the questions and the factors that
were relevant for deciding an issue of allowance of an expenditure even before
the Explanation to section 37 was issued in the year 1998. The courts, in scores
of the decisions, had occasion to address this issue even before the issuance
of the said Explanation and had largely held that an expenditure that was
against the public policy was not deductible. It is this aspect of the issue
that was partly touched in Liva Healthcare’s case and with
respect could have been explored in depth in the PHL Pharma’s case.

Medical Council of India is constituted under the Medical
Council Act, 1956 with the object of governing and regulating the practice of
medicines in India. It has been empowered to formulate rules and regulations
for effectively carrying out its objectives. The said council, empowered under
the said Act, has formulated The Indian Medical Council (Professional
Conduct, Etiquette and Ethics) Regulations, 2002 which was amended in 2009
and the amendment was notified on 10-12-2009 by the council. The said Regulations
vide amended clauses 6.4 and 6.8 provide for rules that prohibit receipt of the
freebies and many related acts and items and things by the medical
practitioners. Vide regulation 6.4.1, a physician is prohibited to
receive any gifts, gratuity, commission or bonus in consideration or return for
referring the patients for medical, surgical or other treatment. It reads as:
“6.4 Rebates and Commission: 6.4.1 A physician shall not give, solicit, or
receive nor shall he offer to give solicit or receive, any gift, gratuity,
commission or bonus in consideration of or return for the referring,
recommending or procuring of any patient for medical, surgical or other
treatment. A physician shall not directly or indirectly, participate in or be a
party to act of division, transference, assignment, subordination, rebating,
splitting or refunding of any fee for medical, surgical or other
treatment.”

Subsequent to the
notification of the said regulations, the CBDT has issued the Circular No. 5
dated 1-8-2012 directing the Income-tax authorities to disallow the expenditure
incurred on distribution of freebies on application of Explanation 1 to section
37(1) of the Income-tax Act. The relevant part reads as under; “It has been
brought to the notice of the Board that some pharmaceutical and allied health
sector Industries are providing freebees (freebies) to medical practitioners
and their professional associations in violation of the regulations issued by
Medical Council of India (the ‘Council’) which is a regulatory body constituted
under the Medical Council Act, 1956. 2. The council in exercise of its
statutory powers amended the Indian Medical Council (Professional Conduct,
Etiquette and Ethics) Regulations, 2002 (the regulations) on 10-12-2009
imposing a prohibition on the medical practitioner and their professional
associations from taking any Gift, Travel facility, Hospitality, Cash or
monetary grant from the pharmaceutical and allied health sector Industries. 3.
Section 37(1) of Income Tax Act provides for deduction of any revenue
expenditure (other than those failing under sections 30 to 36) from the
business Income if such expense is laid out/expended wholly or exclusively for
the purpose of business or profession. However, the explanation appended to
this sub-section denies claim of any such expense, if the same has been
incurred for a purpose which is either an offence or prohibited by law. Thus,
the claim of any expense incurred in providing above mentioned or similar
freebees in violation of the provisions of Indian Medical Council (Professional
Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under
section 37(1) of the Income Tax Act being an expense prohibited by the law.
This disallowance shall be made in the hands of such pharmaceutical or allied
health sector Industries or other assessee which has provided aforesaid
freebees and claimed it as a deductable expense in its accounts against
income.”

The validity of the said circular has been examined by the
Himachal Pradesh High Court in the case of Confederation of Indian
Pharmaceutical Industries, 353 ITR 388. The Punjab and Haryana High Court
in the case of KAP Scan and Diagnostics, 343 ITR 476 has examined the
issue of allowance of expenditure incurred on payment of commission to the doctors
by the diagnostic company. Recently, the Chennai Tribunal examined the issue of
allowance of deduction of an expenditure incurred by the pharmaceutical
manufacturers on distribution of freebies to the medical practitioners in the
case of Apex Laboratories (P) Ltd, 164 ITD 81 to hold that such an
expenditure was not allowable as deduction in view of the said Regulations of
2002 issued by the MCI.

 The same CBDT circular
had come up for consideration in the case of Syncom Formulations (I) Ltd. IT
Appeal Nos. 6429 & 6428 (Mum.) of 2012, dated 23-12-2015, wherein the
Tribunal held that CBDT circular was not be applicable in the A.Ys. 2010-11 and
2011-12 as it was introduced w.e.f. 1.8.2012. Similar issue of allowance of
such expenditure in the case of pharmaceutical companies had been decided in
favour of the assessee, in the case of UCB India (P.) Ltd. v. ITO, IT Appeal
No. 6681 (Mum.) of 2013, dated 13-05-2016, wherein it was held that the
CBDT circular could not have a retrospective effect.

The question is, can a person participating in an act, which
is considered as an offence in the hands of other party, be held to have not
offended the law? Can he not be said to have abetted an offence? Can he be
treated as a conspirator? Can he be said to have triggered the offence? Can he
not be punished for exploiting the weakness of the week? The answers in our
opinion may or may not be available in the express provisions of a statute but
will have to be found from the understanding of the public policy which is one
of the important pillars of the jurisprudence, civil or criminal. It may be
simple to hold that once an act is an offence for one party it shall equally be
an offence for anothers party whether expressly provided for in a statute or
not and the other party shall not be allowed to reap the benefits of such an
act, however, this apparently simple solution in our opinion, may not really
hold water in all cases and may not even be judicious. For example, in cases
involving ransom or protection money. The issue requires an in-depth debate
involving conscience of the society and perhaps cannot be adjudicated by only
interpreting one of the provisions of a statute in isolation.

Interestingly, the said circular vide paragraph
4 encourages the AO to tax the sum equivalent to value of freebees enjoyed by
the medical practitioner as business income or income from other sources as the
case may be depending on the facts of each case. The AO of such medical
practitioner or professional associations are directed to examine the facts and
take an appropriate action.

17. Quick Flight Ltd. vs. ITO (International Taxation)(Ahd) Members: R. P. Tolani (JM) and Manish Borad (AM) ITA No. 1204/Ahd/2014 A.Y.: 2011-12. Date of Order: 4th January, 2017. Counsel for assessee / revenue: Urvashi Shodhan / Rakesh Jha

Sections 115A(1)(b), 206AA – Provisions of
section 206AA cannot be invoked in a case where the payment has been made to
deductees, not having PAN, on the strength of beneficial provisions of section
115A(1)(b).

FACTS  

The assessee company, engaged in the
business of chartering, hiring and leasing aircraft made payment of fees for
technical services to a non-resident viz. M/s Honeywell, USA, not having
PAN.  Tax was deducted at source @ 10%
plus applicable surcharge and cess as per provisions of section 115A of the
Act.  The Assessing Officer (AO) alleged
that tax was required to be deducted @ 20% in view of the provisions of section
206AA of the Act as the assessee was not having PAN and accordingly raised
demand of Rs. 30,250 towards short deduction and Rs. 5,750 towards interest on
short deduction.

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 similar issue on
almost identical facts came up before the co-ordinate Bench in the case of Alembic
Ltd. vs. ITO (ITA No. 1202/Ahd/2014) wherein the co-ordinate Bench observed
that the issue is squarely covered by the decisions of Uniphos Envirotronic
Pvt. Ltd. vs. DCIT (ITA No. 1974/Ahd/2015 
for AY 2014-15) and the decision of Pune Bench of the Tribunal in the
case of DCIT vs. Serum Institute of India Ltd. and decided the appeal in
favor of the assessee.  The Bench has in
the case of Alembic Ltd. (supra) held that in case where payments have
been made to the deductees on the strength of the beneficial provisions of
section 115A(1)(b) of the Act or as per DTAA rates r.w.s. 90(2) of the Act,
then provisions of section 206AA cannot be invoked by the AO insisting to
deduct tax @ 20% for non-availability of  PAN.

The Tribunal following the decision of the
co-ordinate Bench in the case of Alembic Ltd. (supra) held that in the
present case as well, payment was made towards fees for technical services to a
non-resident through banking channel as approved by RBI and payment is well
covered u/s. 115A(1)(b) of the Act and therefore, special rate of TDS i.e.
11.33% was applicable and was rightly deducted and deposited by the assessee
and the provisions of section 206AA of the Act cannot be made applicable to
this payment.  The Tribunal set aside the
order of CIT(A) and deleted the claim of Rs. 30,250 towards short deduction.

The Tribunal allowed the appeal filed by the
assessee.

16. Gamzen Plast Pvt. Ltd. vs. ITO (Mum) Members: R. C. Sharma (AM) and Pawan Singh (JM) ITA No. 7449/Mum/2014 A.Y.: 2010-11 Date of Order: 28th October, 2016 Counsel for assessee / revenue: B. V. Jhaveri / Jeevanlal Lavedia

Section 80IC – Losses of the eligible unit
which have been fully set off in earlier years against profits of non-eligible
unit cannot be artificially carried forward.

FACTS  

The assessee company, engaged in the
business of manufacturing, assembling and repairing construction machinery and
piling equipments, started an additional unit in Uttarakhand in the previous
year relevant to AY 2008-09. Since the said unit was located in a declared
backward area it was entitled to Excise Duty exemption for 10 years and also
income-tax exemption u/s. 80IC(3)(ii) of the Act. The production in Uttarakhand
unit commenced in AY 2008-09.

In respect of the eligible unit at
Uttarakhand, the assessee incurred a loss of Rs. 51,55,665 in AY 2008-09 and a
loss of Rs. 2,38,08,961 in AY 2009-10. 
These losses were set off against the profits of non-eligible unit at
Mumbai in AY 2008-09 and AY 2009-10 respectively. Therefore, these losses were
not available to be carried forward and set off in AY 2010-11. However, the
Assessing Officer (AO) while completing the assessment of AY 2010-11 notionally
carried forward the losses of AY 2008-09 and 2009-10 which were already set off
against the profit of non-eligible unit at Mumbai and again set them off
against the profit of Rs. 4,48,33,073 of the eligible unit at Uttarakhand for
AY 2010-11 and allowed only the balance of Rs. 1,58,68,447 as deduction u/s.
80IC of the Act.  Thus, he reduced the
claim of deduction u/s. 80IC by Rs. 2,89,64,626.

Aggrieved, the assessee preferred an appeal
to the CIT(A) who held that assessee was not correct in setting off loss of
earlier years in the eligible unit against profit of non-eligible unit.  He upheld the action of the AO.

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

i)   Velayudhaswamy Spinning
Mills Pvt. Ltd. vs. ACIT (340 ITR 477)(Mad);

ii)  ACIT vs. Hamilton
Houseware Pvt. Ltd. (ITA No. 988/Ahm/2009 dated 9.6.2015);

iii)  ACIT vs. Sanjeev Auto
Parts Manufacturers Pvt. Ltd. (ITA No. 1387/PN/2014 for AY 2011-12; dated
17.2.2016);

iv) DCIT vs. Bajaj
Electricals (ITA No. 909/Mum/2011; AY 2006-07; Order dated 15.5.2015).

HELD  

The undisputed
facts are that losses of AYs 2008-09 and 2009-10 have already been set off
against the income of unit at Mumbai. The said losses were not available to be
carried forward and set off during the year under consideration i.e. AY 2010-11
under these facts and circumstances, applying the legal propositions discussed
above as referred by learned AR, we do not find any merit in the action of
lower authorities for notionally carry forward and set off of losses which have
already been set off in the earlier years against the profit of eligible unit
during AY 2010-11 under consideration. 
The Tribunal also observed that the decisions relied upon by the CIT(A)
were rendered prior to the decision of Madras High Court in the case of Velayudhswamy
Spinning Mills Pvt. Ltd. vs. ACIT (supra). 
It also observed that the decision of ACIT vs. Goldmine Shares &
Finance Pvt. Ltd. (113 ITD 209)(Ahd SB) has been overruled by the Madras
High Court in the case of Velayudhswamy Spinning Mills Pvt. Ltd. (supra).

This ground of appeal filed by the assessee
was allowed.

20. Assessment – Transfer pricing – DRP is superior to AO- AO is bound by decision of DRP – ESPN Star Sports Mauritius

S. N.
C. ET Compagnie vs. UOI; 388 ITR 383 (Delhi):

In this
case, the DRP declared that the Assessing Officer lacked jurisdiction to deal
with an issue. However, the Assessing Officer passed a final assessment order
ignoring the order of the DRP.  

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

“i)  The
language used by the Assessing Officer while disagreeing with the binding order
of the DRP was wholly unacceptable.

ii)  The
draft assessment order dated 28/03/2014 and the final assessment order dated
28/01/2015, passed by the Assessing Officer were void ab initio and
liable to be quashed on that basis.”

52. Notice – Validity- Service of notice- Reassessment- Sections 148 and 282 – A. Y. 1996-97- Service of notice on accountant of assessee company- Power of attorney given to accountant to conduct assessment proceedings does not include authority to accept any fresh notice- Notice not validly served on assessee- Reassessment proceedings vitiated

CIT vs. Kanpur Plastipack Ltd.; 390 ITR 381 (All):

The managing director of the assessee company had executed a
power of attorney in favour of the company’s accountant to represent the
company in the assessment proceedings. Notice u/s. 148 of the Act, was served
on him. The Appellate Tribunal held that the assessment proceedings were
invalid and quashed the assessment order on the ground that the notice u/s. 148
was not validly served on the assessee.

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

“i)   The power of attorney had confined the
authority to representation to conduct the case. It did not include in it any
authority to accept any fresh notice.

ii)   The
person on whom the notice u/s. 148 of the Act was served was not the principal
officer of the assessee nor was there any material to show that he had been
authorized by the assessee to accept any notice. The Appellate Tribunal was
correct in concluding that the reassessment proceedings, which were initiated
on the basis of the notice u/s. 148 dated 28/05/2002 were vitiated.”

51. Income- Transport subsidy – whether income or capital- A. Y. 2001-02 – Transport subsidy to stimulate industrial activity in backward region is capital receipt and not income

Shiv Shakti Floor Mills P. Ltd. vs CIT; 390 ITR 346
(Gauhati):

For the A. Y 2001-02, the assessee had claimed the transport
subsidy received by it to stimulate industrial activity in backward region to
be capital receipt and not income. The Assessing Officer treated the subsidy as
income and made addition to the total income. The Tribunal upheld the addition.

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

“The transport subsidy received by the assessee was intended
to stimulate industrial activity in the backward region, to generate employment
opportunities and bring about development in the North Eastern States and it
was not meant to provide higher profit for the entrepreneur. It was intended to
encourage investment in difficult and far flung states and the sum received as
subsidy could not be treated as revenue receipt.”

50. DTAA between India and Singapore- Shipping corporation in Singapore earning income from operations in India – Article 8 of DTAA stating that such income would be taxable in Singapore-Article 24 of DTAA stating that if income were taxed by contracting state on basis of remittance clause 8 would not apply – Certificate by Internal Revenue of Singapore that income accrued and was taxable in Singapore – Fact that freight receipts were remitted to UK not relevant – Income not taxable in India

M. T. Maersk Mikage vs. DIT( Int. Taxation); 390 ITR 427
(Guj):

ST was a shipping and transport company based in Singapore.
It was taxed as a resident of Singapore. During the period relevant to the A.
Y. 2011-12, ST had through ships owned or chartered by it, undertaken voyages
from various Indian ports and earned income from exporters and out of other
such business. ST through the assessee, filed return of income u/s. 172(3) of
the Act, declaring the gross profit calculations, but claiming Nil income
relying on article 8 of the DTAA between India and Singapore. According to ST
such income was taxable only in Singapore and therefore, was exempt from tax
under the Indian Income-tax Act. It produced a certificate issued by the
Internal Revenue Authority of Singapore dated 09/01/2013 which stated that the
income in question derived by ST would be considered as income accruing in or
derived from the business carried on in Singapore and such income therefore,
would be assessable in Singapore on accrual basis. The Assessing Officer held
that ST was not entitled to the benefit of article 8 of the DTAA by virtue of
the provisions contained in article 24 therein. He noted that the freight
receipts were remitted to London and not to Singapore. The assessee filed a
revision petition u/s. 264 of the Act which was rejected.

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

“i)   Article 8 of the DTAA between India and
Singapore states that with reference to shipping and air transport profits
derived by an enterprise of a contracting state from the operation of ships or
aircraft in international traffic shall be taxable only in that state. Article
24 of the Agreement pertains to limitation of relief. The essence of article
24.1 is that in case certain income is taxed by a contracting state not on the
basis of accrual, but on the basis of remittance, the applicability of article
8 would be ousted to the extent such income is not remitted. This clause does
not provide that in every case of non-remittance of income to the contracting
state, article 8 would not apply irrespective of tax treatment of such income
is given.

ii)   In the absence of any rebuttal material
produced by the Revenue, one would certainly be guided by the factual
declaration made by the Internal Revenue Authority of Singapore in the
certificate and this declaration was that the income would be charged at
Singapore considering it as an income accruing or derived from business carried
on in Singapore. In other words, the full income would be assessable to tax on
the basis of accrual and not on the basis of remittance. The amount was not
taxable in India.”